Severance agreements are most often associated with larger Fortune 500 type companies. We have all heard in the news folks like Goldman Sachs, Hewlett-Packard and the like paying massive “severance” amounts to their departing executives. But sometimes even rank and file employees might be offered a severance “package” upon termination of their employment, most often either as part of a layoff or perhaps under a company defined benefit plan.

For small/medium business (SMB) a separation agreement is more likely used in “red-flag” employment terminations. By red-flag we mean either that the employer suspects the employee is sue-happy or the employer is terminating under difficult or risky circumstances that may give rise to liability if sued by the former employee.

How a Separation/Severance Agreement Works

The typical separation agreement boils down to this: employer pays extra money to the former employee. In return, employee releases all legal claims against the employer and promises not to sue the employer in court. This is all done in writing – a contract.

For employees over 40 years of age or older, special language must be included in the separation/severance agreement in order to make release of age related discrimination claims valid. Further such employees have 21 days to consider the agreement/release and then have 7 days after they sign the agreement to revoke it.

Using Separation/Severance Agreements

Whether to use a separation agreement is more of an art than a science. There are pros and cons. Use of such agreements may not be appropriate given the particular circumstances. At Vision Law we help employers evaluate whether to use a separation/severance agreement taking into consideration your company’s facts unique to the employee in question.

Part of the reason for the requested increase in budget? So they can bust your company for misclassifying, according to them, “employees” as “independent contractors.” To the DOL, the purpose is noble: “To meet the challenge of ensuring “good jobs for everyone” (not that the actual dollars change whether we label it “jobs” or “contract work”). And to do this, they deem it necessary to “Ensur[e] that the most vulnerable workers are employed in compliance with wage and hour laws.”

To us at Vision Law this paternalistic view is a tad aggravating. What if these “vulnerable workers” want to have the flexibility of self employment and the independence of free lancing? No, our tax dollars are spent on our elected officials telling us we need them to protect us and tell us what is in our best interests. Never mind that in “this economy” putting anyone to work might be a good thing.

What Does This Mean For Businesses?

Increased burden, increased taxes and penalties. With a 25% increase in budget, $12 million and 90 new FTE’s (full time equivalents) of which are slated for a “new multi-agency Misclassification Initiative,” if your business uses “independent contractors” to perform its core business functions, then you might want to consider whether the risk of treating them as independent contractors is worth risking hassles from the federal government (and state government bodies as well).

Further, if your “independent contractor” worker files for unemployment insurance when the job is done or files a wage claim or for missed rest or meal periods, then what? The DOL will “strengthen and coordinate” the friendly state of California’s “efforts to enforce labor violations.” Notice “labor violations” is a foregone conclusion.

How To Avoid The Initiative

As entrepreneurs ourselves, we understand risk. We understand reward. If you, a fellow entrepreneur or successful smaller business, use independent contractors to perform your core business function, then you might consider the risk of a “misclassification audit” or class action lawsuit brought by one of your “independent contractors” claiming to be an employee instead. Contact us for more information.

DOL’s 2010/2011 budget: http://www.dol.gov/dol/budget/2011/bib.htm#whd

However, if employers are not careful, they can create “contracts” of employment.  In the employment setting such contracts include:

• An express contract not to terminate the employment except for “good cause” or to keep the employee employed for a certain period of time;
• Implied contract to the same effect;

Breach of an express contract

As CEO you promise your employee they have a job until they are 65 in return for their performing their job in an adequate manner. Contrary to popular belief, this express contract need not be in writing.  If the employee can prove an oral contract for that express promise, that will suffice.

Breach of implied contract

This is a little trickier, but applies the same concept, only now you don’t have to expressly say or write it.  If your or your manager’s conduct or actions (including failure to act) “imply” other than “at-will” employment, then your business can be held to that implied promise.

An example might help.  You have a 15 year employee.  He/she has had annual performance reviews all positive (even though you and your managers have had challenges with this employee’s attitude and attendance).  Periodically the employee has received pay raises.  Employee has been with employer and helped “grow” the business from nothing to a substantial local presence in the market.

One day management decides they are tired of the absences or tardy appearances at work along with the surly attitude.  Worse, employee’s immediate supervisor told employee off and on during his/her employment they were doing “fantastic” and “keep up the great work and you’ll have a long career with us . . . .”  Management abruptly terminates employee’s employment “at will” with no notice and no advance warning whatsoever.

This is a potential breach of implied contract under California law.  Under California law, factors apart from express contract terms may be used to ascertain the existence and content of an employment agreement, including the personnel policies or practices of the employer, the employee’s longevity of service, actions or communications by the employer reflecting assurances of continued employment, and the practices of the industry in which the employee is engaged.

Therefore, employers:

• Watch what you say or write to your employees.  Avoid promises, verbal or written, concerning length of employment, conditions under which employment may or may not be terminated and other employment terms and conditions.
• Confirm in writing (job applications, offer letters, handbooks, handbook acknowledgements, etc.) that employment is at-will.
• Most critically, use integrated at-will language – this certainly does not mean you can make any kind of promise you like and not deliver.  Nor does it guaranty you can defense any kind of breach of contract claim or fraudulent inducement action.  However, it is a preventive measure that your employment litigation counsel, should the need arise, will be very grateful to have in defending your company.

California small-medium businesses (SMB’s) can impose mandatory arbitration agreements on employees to arbitrate employment related disputes, but must pay for all costs associated with the arbitration.

Mandatory binding arbitration removes the case from a jury and requires the plaintiff employee to sue your business before a neutral arbitrator, usually an experienced former judge. This reduces the likelihood of a “runaway jury verdict” based on passion or prejudice and increases the likelihood of a rational decision based on an experienced judge’s judgment. Since a “jury of your peers” for a business is generally not the case – a jury is more likely to be made up of the peers of your employee/former employee – arbitration is a powerful tool in the event an employee sues your company.

Post-Armendariz, there is a significant cost to enforcing binding mandatory arbitration agreements. Under the law, the employer must pay for all costs unique to arbitration. This means the employer must pay for all fees the plaintiff/employee would not otherwise have to incur in court. In court, all of our tax dollars pay for the judge and the court system. In private binding arbitration, although there may be some minor filing fees associated with the arbitration, the primary cost is the hired arbitrator’s time.

A good arbitrator can cost anywhere from $400-$1,000/hour. If an arbitrator is $500/hr and the arbitration is 5 days at 8 hours a day, the fee for the arbitrator’s time will be $20,000 (5 days x 8 hours per day x $500/hr). And that does not include any other time spent on discovery issues or ruling on other pre-arbitration matters. The total cost for the arbitrator could easily be $20k-$50k or more. Yes, believe it or not, that makes our fees look “cheap.”

In addition to the company paying for all arbitration fees, other requirements must be met to have a valid arbitration agreement: 1) the plaintiff is entitled to the same remedies/damages that would be available to them in court, 2) their must be an opportunity for discovery (i.e. where each side can learn about the facts from the other side before the arbitration), and 3) the arbitrator must issue a written decision setting forth the essential findings and conclusions upon which his/her decision is based.

The good news is if sent to binding arbitration, the arbitrator’s decision is generally final and the plaintiff/employee’s ability to appeal the arbitrator’s decision is extremely limited, almost impossible. For all intents and purposes the arbitration decision will be final for both sides.

Contracts can be oral or written. They can be express or implied. What this means for employers is watch what you say and what you do (or don’t do) because your words and your actions/non-actions can create contracts between you and your employees.

In our experience, most employment positions are not set forth in a written “employment agreement.” When they are, for example high level management or sales positions, this is called an express written contract. While express written contracts can be breached, it’s the more insidious oral and implied contracts that can create unexpected obligations and liability for employers.

Example 1:

If you have an orientation meeting and tell your new employees if they no show, no call once they will be terminated, does this imply you won’t fire them for other reasons?

Example 2:

If your company’s employee handbook states employees will get a verbal warning and then two write-ups before the company will terminate their employment, what happens if the company terminates on the first offense? Is there an obligation to give the verbal warning and two write-ups first?

Example 3:

If the Company president writes a memo to an employee telling them they will get 20% bonuses and raises every year if they continue to keep up the “great work,” have you now created an obligation (i.e. “contract”) to do so so long as your employee keeps up their end of the bargain?

Example 4:

If your business has a 15 year employee who has received excellent performance reviews coupled with a raises every year, have you created an implied contract not to terminate this employee except for “good cause?”

The above are all examples of potential oral and/or implied contracts. To avoid creating oral or implied contracts, consistently preserve your “at-will” employment rights by stating that right in key employee documents, such as its employee handbook, offer letters, policy memos, etc. We also recommend using “at-will” language with an “integration clause” in your employee handbook.

Vision Law Corporation® believes employers can save time, money, and unnecessary disruption to their business through effective, proactive efforts. That is why we have created our innovative fee programs for businesses. We invite you to consider how cost-effective representation could save your company millions, or simply save your company. Then contact us for an initial consultation about your employment and labor law needs. Download our complimentary report: The Top Ten Employee Lawsuits and How to Avoid Them.

Contact Us

For a consultation with a California employment lawyer at Vision Law Corporation®, call 916-780-1920, or contact us online.

Since 2000, “exempt” employee status in California has been tied to the minimum wage. In other words, one of the required factors to maintain “exempt” employee status is that the exempt employee must be paid a “salary” that is at least twice the minimum wage.

If the minimum wage goes up, guess, what? Right, the minimum salary to maintain exempt status also goes up. You may have to give your salaried exempt employees a raise!

Why Do We Care?

The line of demarcation between “exempt” and “non-exempt” though often  ambiguous is huge – legally and from a cost standpoint.

Exempt employees are not subject to overtime pay. They can work 100 hours a week, but they still get paid the same.

Not true for non-exempt employees. As the name implies, non-exempt employees are benefactors of the overtime law – they get paid “OT,” as it is fondly called. All non-exempt employees must be paid 1.5 hours for every hour worked beyond 8 hours in a workday and 40 hours in a workweek. Other premiums apply for hours worked in excess of 12 hours in a workday and after the first 8 hours worked on the seventh day worked in any workweek.

Other pros include exemptions from rest and meal period laws and from having to maintain detailed time records for working time (the burden of which is on the employer for non-exempt employees). Moreover, while working “off the clock” is often the basis for non-exempt employee wage and hour lawsuits, no such claim applies to exempt folks since the “clock” is irrelevant to them.

Potential Liability Is Significant

Now, we suspect the majority of your exempt employees would never even think of filing a wage and hour claim based on the mere fact that their salary was not increased with the minimum wage. Most times exempt employees are in positions where naturally they are more loyal to the company.

However, even one disgruntled current or former manager can wreak havoc with your bottom line. Just think of the overtime that might be due for an otherwise exempt employee who works just 50 hours a week. Based on a $30,000/year salary, the weekly overtime number could easily be $216.30 (14.42 x 10 OT hours x 1.5) or approximately $938.74/ month and $11,247.60/year. And this does not include rest/meal period penalties or Labor Code section 203 penalties, which are one hour per workday and up to 30 days wages, respectively. These would not be small numbers.

The Easy Fix!

Make sure all of your exempt employees are being paid on a salary basis at a rate that is at least twice the minimum wage.

For more information on exempt versus non-exempt status, independent contractor status, wage and hour rules, and more, download Vision Law Corporation®’s complimentary report: “Avoid Wiping Out Your Business From A Wage & Hour Class Action Lawsuit”.

The Crackdown

The EDD and the federal Department of Labor in particular, seem to be on a mission to convert all so called independent contractors into employees. This of course is for the sake of the poor contractor that needs to be protected. In the meantime they’ll readily send you assessments in the six figures for personal income tax, state disability income, unemployment insurance and employment training taxes and overtime.

The Misconceptions

The distinction between an independent contractor and employee as ultra critical for all of the above mentioned reasons. Many misconceptions can cause problems:

• My workers come and go as they please so they must be independent contractors;
• I send them a 1099, not a W2 at the end of the year (this is the consequence of having true IC’s, but it is not the legal analysis);
• They have other businesses or work for others on the side.

Unfortunately, the legal analysis is more complex than that, very fact intensive and very gray. All this means is whoever is deciding the facts can twist them to achieve the desired result, usually employee not independent contractor status. While the “right to control” the manner, means, method and mode of performing the details of the work is the key test, there are many other “factors” all of which are designed to see if the worker truly has their own independent business from yours.

Also See:

• Independent Contractors

• Fear of an employee lawsuit or retaliation
• Business disruption and downtime if person is fired
• Lack of qualified replacements
• Feelings of guilt
• Feelings of friendship/soft heartedness
• Inertia, lack of time to think and act
• General uncertainty

The Longer They Stay, The Harder To Let Go

At Vision, our philosophy is set high expectations, hire the best you can, train, guide, motivate and give all the support and tools needed to succeed. Take corrective measures when necessary and realign expectations. But for those who cannot or do not fit the position, the team or the organization, figure that out quickly and terminate the employment relationship.

Letting Them Hang On

• Is draining on you and your other employees
• Hurts morale
• Sends the wrong message
• Hampers your business goals and objectives
• Allows the employee time to become a member of a protected class that could make firing risky
• Establishes a precedent of tolerating poor work performance or behaviors that can create legal issues when you’ve had the “last straw” and terminate
• Escalates tension because the longer the relationship lasts, the more the attachment and potential for an emotional response

If our expectations and objectives are clear, most of us know fairly early on when there is a fit or not. Procrastinating in the key area of employee relations only opens the door for potential liability.

We are in the information age where the “knowledge worker” is king. More and more workers wish to operate as “free agents”—independent contractors. The problem is the federal and state government haven’t quite figured that out yet. The hot topic for them is “reclassifying” free agent independent contractors to employees whenever possible, with devastating results from the business’ perspective. After all, they want their taxes.

The threshold and critical question

When someone performs work for your business, there really are only two ways to treat them under the law: as an employee or an independent contractor. The difference in the eyes of the law is critical and substantial. Most business owners know that employees trigger a host of administrative requirements such as having to provide workers’ compensation insurance, withholding federal and state taxes, and paying the employers portion of taxes. All laws governing the “employment relationship” kick in, such as wage and hour laws, discrimination laws, and wrongful termination laws. For independent contractors, none of this applies.

So how does management tell the difference?

Although a different test for independent contractor v. employee status applies depending on the circumstances, all of them boil to down to the “right to control the details” of the work, i.e. controlling the manner, mode, method or means of performing the work. For an independent contractor, the business pays for the result and exercises no (or little) control of how the contractor gets there. If you tell the worker where to go, when, how to get the job done, and provide the tools and equipment, then you probably have an employee. If management has the right to terminate the relationship “at will” then under most tests, the worker will be an employee.

At Vision Law our attorneys deal with independent contractor v. employee issues regularily.

Vision Law Corporation® believes employers can save time, money, and unnecessary disruption to their business through effective, proactive efforts. That is why we have created our innovative fee programs for businesses. We invite you to consider how cost-effective representation could save your company millions, or simply save your company.

Also See:

• Beware of Independent Contractor Status

Contact Us

For a consultation with a California employment lawyer at Vision Law Corporation®, call 916-780-1920, or contact us online.

Many business owners and entrepreneurs tell us that dealing with employment law matters ranks among their least favorite management activities, while also being one of their greatest concerns. Understandably, they wish to focus their efforts on activities which generate revenue and which keep their customers happy and their employees busy.

For a growing business however, a simple employment law matter can grow into a major headache. At Vision Law Corporation®, our attorneys provide legal advice to businesses to help prevent the emergence of employment law problems. We know that preventing problems from occurring is smart business.

We help our clients avoid problems in many ways: by formulating and implementing employment policies and procedures, consultation on termination/disciplinary action and leaves, proper classification of independent contractors, exempt and non-exempt employees, sexual harassment prevention training seminars, and all other employment law matters.

A Problem Can Arise From Anywhere

An employee who feels he was wrongfully discharged may feel justified in walking off with a customer list. The repeated use of colorful language can gradually lead to the creation of a hostile work environment. The misclassification of a class of non-exempt employees as exempt can lead to a bill for overtime pay of hundreds of thousands of dollars.

These and other serious employment law problems can all be prevented through the proactive implementation of sound employment law practices and procedures. That’s why we created our innovative business legal programs. At Vision Law Corporation®, our attorneys have extensive experience in these and other employment law issues. We work closely with our clients to put in place the tools and procedures by which they can comply with California and federal employment law and prevent employment law violations and lawsuits.

When a serious problem does occur, our lawyers vigorously defend our clients’ interests through litigation. Even in this situation, having put in place policies and procedures of prevention can help the employer by putting them in a better position to win in litigation. Download our complimentary report “Top Ten Employee Lawsuits and How to Prevent Them.”

Contact Us

For a consultation with a business consulting services lawyer at Vision Law Corporation®, call 916-780-1920, or contact us online.