In Deere Employees Credit Union v. Smith, an Illinois court recently refused to enforce a restrictive covenant in an employment agreement, finding that it was overly broad. Reference to the terms of that agreement and the court’s finding offer reminders of traps to be mindful of in drafting restrictive covenants, as well as in evaluating restrictions and exposure presented by potential new hires. 

In Deere Employees Credit Union, the plaintiff credit union hired the defendant to provide investment information to its members in his capacity as a member of its in-house investment division. The Deere Employees Credit Union (DECU) employment contract contained the following non-competition and non-solicitation clauses:

Representative agrees that for the two (2) year period immediately following the termination of this Contract, Representative shall not for any reason directly or indirectly, by any means or device whatsoever, for himself/herself or on behalf of or in conjunction with any person partnership corporation or association, market to, sell to, or solicit for the purpose of selling to or marketing to any of DECU’s clients and members which Representative served while employed by DECU within the twenty-four (24) month period immediately preceding the termination of this Contract, any insurance product, annuity, mutual fund, securities brokerage product or service or any other financial product or service that is similar to any product or service marketed through the MEMBERS Financial Services program. As used in this Section Q1, DECU’s clients shall include a) any person who has purchased a product or service or established a securities brokerage account through the MEMBERS Financial Services program (whether sold or established by Representative or by another representative); and b) any person who within the thirty (30) day period immediately preceding the termination of this Contract had contact with Representative having as its purpose (or one of its purposes) the discussion of products and/or services (including but not limited to securities brokerage services) offered through the MEMBERS Financial Services program.

Representative further agrees that for the two (2) year period immediately following the termination of this Contract, Representative shall not target members of DECU at which Representative was located or whose members Representative served while employed by DECU within the twenty-four (24) month period immediately preceding the termination of this Contract for the purpose of selling to or marketing to such DECU members any insurance product, annuity, mutual fund or securities brokerage service or other financial product or service that is similar to any product or service marketed through the MEMBERS Financial Services program. (Emphasis added).

After working for DECU for approximately six years, the defendant resigned. At that time, he was DECU’s senior financial advisor and managed approximately 73 percent of the plaintiff’s investment accounts, valued at $110 million, serving about 468 of DECU’s members. The defendant immediately began working for another financial services company after his resignation and departure from DECU. To market his services on behalf of his new employer, he sent letters to 200 to 250 of DECU’s members he had served during his time there, notifying his former clients of his new employment situation and contact information.

Less than two weeks after the defendant’s resignation, DECU filed a complaint seeking certain injunctive relief to stop him from violating his restrictive covenants. DECU’s lawsuit pointed to the defendant’s solicitation of his former clients as well as his attempt to raid his former employer. DECU sought an injunction prohibiting the defendant from soliciting or selling to any of DECU’s clients and members, including those he served in the 24 months before his resignation.

The trial court found that “there is no question that the restrictive covenant is impermissibly overly board, imposes undue hardship upon Smith and impairs the public’s interest in an efficient marketplace, which makes it patently unreasonable and therefore unenforceable.” However, based on equitable considerations, the trial court entered an order that enjoined the defendant from marketing to or soliciting a narrower category of people, i.e., those of DECU’s clients and members that he served while employed by DECU.

The appellate court found that DECU had a “protectable interest to maintain goodwill, continue ongoing investment relationships with existing DECU members, and to facilitate the confidentiality of their clients’ investment preferences.” But the appellate court found that the restrictive covenant was overly broad because it prevented DECU members without any prior professional relationship with the defendant from choosing him as their investment advisor and negatively impacted the defendant’s ability to engage in his profession by accepting past or current DECU members to whom he had never provided services.

The appellate court found that the language in the restrictive covenant that is underlined above had the “intent to discourage, if not prevent, Smith from targeting any, and therefore every, DECU member affiliated with the Moline main branch regardless of whether Smith had any contact with those members.” In addition, the court found that DECU’s definition of clients to include “any person who had purchased a product or service or established a securities brokerage account … (whether sold or established by Representative or by another representative)” was not limited to the smallest group of people the defendant serviced in the 24 months before his resignation.

Therefore, the appellate court found that the defendant’s contract and the restrictions within it were unenforceable because the covenants foreclosed any of the plaintiff’s members and clients, including those without any previous professional relationship with the defendant, from choosing him as their investment advisor. Further, the covenants prevented the defendant from accepting new customers who may have been current or past clients or members of DECU, even if the defendant had not provided services to those individuals within the last 24 months of his employment there.

In addition, the appellate court vacated the injunctive relief that had been entered against the defendant. The court found that because the contract did not contain severability language, otherwise enforceable portions of the contract could not be salvaged where, as here, select provisions were found to be unenforceable. Finally, the appellate court found that the overly broad restrictive language could not be modified by the court because it “would give employers an incentive to draft restrictive covenants as broadly as possible, since the courts would automatically amend and enforce them to the extent that they were reasonable in the particular circumstances of each case.”

This case is another example of a company mistakenly believing that the company is better protected with broader restrictions. As a result, there are several enterprise risk management points companies can take away from this decision:

1. Review the restrictive covenants in your agreements to make sure they are appropriately tailored to that employee’s employment situation. In this case, if the restrictions had been narrowed to those clients the defendant had actually served and or from whom he had gained confidential information in the 24 months prior to his resignation, there is a much greater likelihood the court would have enforced the restrictions.
2. If the restrictive covenants are not appropriately tailored, consult with your attorney to draft new tailored restrictions and devise a plan to get your employees to sign new agreements containing these new restrictions. There is nothing wrong with restricting employees from competing against you or from soliciting your clients, but the restrictions need to be narrowly tailored to apply only to activities that threaten the company’s interest and are reasonably related to the company’s interest in protecting customer relationships the employee developed while employed.
3. Make sure your agreements, even if they are not employment agreements, contain severability clauses. That way, if a portion of the agreement is found to be unenforceable, you are in a better position to enforce the remainder of the agreement.

The “bright line” rule for the adequacy of non-compete agreements in Illinois first announced in Fifield v. Premier Dealer Servs., Inc., just became a bit hazier for parties evaluating the enforceability of their restrictive covenants.

Last week, a federal district court judge applying Illinois law declined to void a non-compete agreement on the basis that the at-will employment relationship that was the consideration for the restrictive covenant lasted less than two years. Adopting the reasoning of three of the four federal court judges in the Northern District of Illinois that have addressed the issue, the court, in R.J. O’Brien & Associates v. Williamson,¹ concluded that the Illinois Supreme Court would reject a two-year bright line rule for the adequacy of consideration required for a non-compete agreement to be enforceable.

In R.J. O’Brien & Associates, the plaintiff employer was a large independent futures brokerage and clearing firm. It offered the defendant a position on a team that executes trades on behalf of commodity funds and other brokers. The defendant was offered an at-will position contingent on the execution of an agreement that included non-solicitation and non-compete restrictions.

About a year after accepting employment including the restrictive covenants, the defendant quit and immediately violated those restrictions, allegedly soliciting the plaintiff’s employees and customers. The defendant moved for summary judgment asserting that under Illinois law, restrictive covenants in at-will employment relationships are unenforceable when the consideration for them is employment for fewer than two years.

Rejecting the employee’s argument, the court concluded that the Illinois Supreme Court would not adopt a bright-line rule but instead is likely to adopt a fact-specific test in evaluating the sufficiency of consideration for restrictive covenants. The court noted that the plaintiff employer did not do anything to alter the terms of the defendant’s employment. Instead, the defendant simply opted for what he perceived to be greener pastures. While employed, the defendant received the commissions due to him under his agreement and received a “generous” salary. Further, the court noted that the employer was subjected to potential liability for rules violations and trading errors during the course of the employment relationship.

Finally, in evaluating the adequacy of the consideration, the court concluded that the nature of the remedy sought by the employer was also significant. In particular, the court noted that the employer was seeking damages rather than injunctive relief. The court held that where a party seeks damages rather than equitable relief, the adequacy of consideration required to support the contract is minimal.

Restrictive covenants, properly drafted, can be effective tools in an enterprise’s risk management portfolio. However, the adequacy of consideration required to support a non-compete is an open question in Illinois and will remain so until addressed by the Illinois Supreme Court. But R.J. O’Brien & Associates identifies factors, in addition to duration of employment, that should be considered when evaluating the adequacy of the consideration including:

• the facts and circumstances resulting in the termination of employment (voluntary or involuntary);
• whether there were changed circumstances in the employment relationship;
• whether the employer had met its obligations;
• what potential liabilities to third parties the employer assumed through the employment;
• what protectable interests the agreement was designed to address (are the restrictions tailored to the employee’s position); and
• whether the remedy sought for breach was tied to the damages flowing from a breach.

Additionally, because damages from a breach of a non-compete can be challenging to establish, one thing employers should consider is incorporating a provision that provides a formula that approximates the consequences of a breach  Employers (and employees considering a move) should consider revisiting their restrictive covenants with these factors in mind.

¹R.J. O’Brien & Associates v. Williamson, Case No. 14-cv-2715 (N.D. Ill. March 10, 2016).

Arbitration agreement is unenforceable where a party retains the right to make unilateral modifications effective upon notice to the other party.

“You can’t always get what you want … but if you try sometimes, you just might find you get what you need.” This wisdom, courtesy of The Rolling Stones, is good advice when drafting contracts as part of an enterprise risk management strategy. 

A starting point is to identify the transactional risks to be addressed in the contract and the entity’s needs that must be achieved. Often, drafters opt for a “belt and suspenders” approach, which is not only a terrible fashion faux pas but may result in an overreach nullifying the effectiveness of the risk management strategy.

An example of the danger of how an attempt by an employer to get what it wanted in excess of what it needed is presented in Nelson v. Watch House Int’l, LLC, ___ F.3d ___ (5th Cir. March 2, 2016). Watch House Int’l is a March 2016 Fifth Circuit decision based on Texas law holding that the arbitration provision incorporated in a pre-employment agreement rested on illusory consideration.

In Watch House Int’l, the employer sought to require arbitration of all employment-related disputes. The agreement incorporating the arbitration provision gave the employer unilateral authority to modify the agreement, providing that any changes would be effective only upon notice to the employee. Further, modifications applied solely to prospective claims. To the extent that the employer decided to terminate the requirement that employment-related disputes be submitted to arbitration, the modification would not apply retroactively to disputes that arose before the modification.

Many courts have found that mutuality of obligation to arbitrate disputes is sufficient consideration to make an arbitration provision enforceable. In Watch House Int’l, the trial court found that the arbitration provision was enforceable because there was a mutuality of obligation to submit employment-related claims to arbitration even though the employer retained the unilateral right to modify the arbitration provision. However, the trial court noted that the employer’s modifications were not effective until the employee received notice of those changes and only applied to prospective claims. The modifications did not apply retroactively to disputes arising before an employee received notice of the changes. Consequently, the trial court concluded that the consideration offered by the employer for the arbitration provision — the obligation to submit employment-related disputes to arbitration — was not illusory because the employee would have an opportunity to arbitrate disputes that arose prior to the employer’s termination of the arbitration provision.

However, the Fifth Circuit reversed, recognizing that since the termination of the provision was effective upon notification to the employee, as a practical matter, it gave the employer the opportunity to deprive employees the benefit of the consideration – the right to compel arbitration. Consequently, the Fifth Circuit found that the consideration supporting the arbitration provision was illusory.

The Fifth Circuit distinguished this case from others where the changes imposed unilaterally by the employer were not effective until some period of time after notice was given. Under those circumstances, employees were in a position to avail themselves of the agreements, as they accepted them before the changes being effective. However, the Fifth Circuit held that since any changes imposed unilaterally by the employer in Watch House Int’l were effective on notice, the consideration for the arbitration agreement — mutuality of obligation to arbitrate disputes — was illusory.

As a consequence, in Watch House Int’l, even though the employer had not actually modified the arbitration provision, the Fifth Circuit found that the employer’s retention of the right to unilaterally eliminate the arbitration provision with the changes to be effective on notice made the arbitration provision unenforceable. The employer could have gotten the benefit it sought — requiring all employment disputes to be arbitrated until such time as arbitration did not meet its needs — if it built in some buffer zone of protection for the employee’s reciprocal right. Through its overreach, however, it lost any right to require arbitration.

The takeaway: Watch House Int’l is a prime example of a case in which the employer failed to achieve its objective by overreaching. It could have achieved its objective — compelling arbitration of employment-related disputes — by narrowly scaling back its own ability to opt out of arbitration. But by purporting to hold complete control in a way that effectively had the potential to negate the consideration it gave, the employer lost all control over its choice of dispute resolution mechanisms. This lesson is not limited to the issue of arbitration provisions but has application to contracts, generally.

A recent decision from the Illinois Appellate Court for the First District reminds employers of the need to act quickly and thoroughly in investigating potential breaches of employee restrictive covenants and in taking actions to enforce their rights under those agreements.

In Bridgeview Bank Group v. Meyer, 2016 IL App (1^st) 160042, the court affirmed the trial court’s denial of an employer’s petition for a temporary restraining order against a former employee. Bridgeview Bank had employed Thomas Meyer as a senior vice president. The bank entered into an employment agreement incorporating non-compete, non-solicitation and non-disclosure provisions at the beginning of the employment relationship. 

The bank subsequently terminated Meyer’s employment and entered into a severance agreement that waived Meyer’s non-compete obligations but kept his non-solicitation and non-disclosure obligations in place. After terminating Meyer, the bank found emails Meyer had sent himself containing 2015 income statements, usernames and passwords, and a list of contacts, including Meyer’s personal contacts, Bridgeview personnel and third-party business contacts (including some Bridgeview customers).

On Dec. 8, 2015, more than four months after Meyer was terminated, Bridgeview filed a complaint against Meyer alleging breach of contract (for violations of the employment and severance agreements), breach of fiduciary duty, tortious interference with business relationships and violation of the Illinois Trade Secrets Act. Two weeks later, Bridgeview filed a motion for a temporary restraining order. Rather than file and present it as an emergency motion, Bridgeview waited to present its motion on the court’s regular motion call on Jan. 4, 2016.

In considering the trial court’s denial of Bridgeview’s petition, the appellate court first noted that the bank’s complaint did not contain any allegations of specific facts regarding Meyer’s conduct. Rather, it only contained conclusory allegations that Meyer had contacted Bridgeview’s customers, divulged confidential information and interfered with Bridgeview’s contractual or prospective relationships with customers and prospective customers. The court held that these allegations were insufficient to establish that Bridgeview was entitled to temporary injunctive relief under Illinois law.

With respect to Bridgeview’s allegations that Meyer took confidential customer contact information, the court noted that “while certain information on the list may be ‘confidential’ in the sense that it was unknown outside the bank, Bridgeview made no preliminary showing that the information was of any particular value to Meyer or his current employer.” The court further explained that “while, under appropriate circumstances, a customer list can qualify as a trade secret, there is no per se rule affording it such status.”

The court further held that Bridgeview failed to present any evidence that it had longstanding relationships with its customers or expended significant time and money developing its customers and thus “made no showing that it had a protectable interest in its SBA customer base.”

The court affirmed the trial court’s finding that Bridgeview failed to establish a likelihood of success on the merits based upon the bank’s failure to allege specific facts in its pleadings and questions about whether Bridgeview had a protectable interest in the information Meyer took.

As for Bridgeview’s allegation that it would suffer irreparable harm absent a temporary restraining order, the court noted that Bridgeview presented no evidence that Meyer was likely to continue to use or disclose the confidential information in the future. The court also noted that Bridgeview waited several months before bringing suit and then several weeks before presenting its motion for a temporary restraining order. Based upon the lack of specific facts in the record, the lack of evidence of future harm and Bridgeview’s delay in bringing the action, the court affirmed the trial court’s finding that Bridgeview had failed to establish that it would suffer irreparable harm in the absence of a temporary restraining order.

The Bridgeview opinion provides some valuable reminders for employers seeking to protect confidential information from post-employment misuse. If an employer suspects a former or current employee breached a restrictive covenant, it should investigate that breach thoroughly and quickly — and if it decides to bring a lawsuit, it should identify specific facts supporting its claims rather than simply alleging “misappropriation” and misuse generically. By being specific, the employer highlights to the court that its lawsuit is not simply a kneejerk reaction but that it has investigated and has a concrete basis for its concern. Generic allegations untethered to concrete facts are less likely to resonate with a court than facts tied to the specific facts of a case. Although employers need to thoroughly investigate their claims, they also need to do so quickly.

And finally, employers should be aware that customer contact information alone is not necessarily protectable under a non-disclosure agreement or as a trade secret under Illinois law. Best practices for enterprise risk management dictate that employers take reasonable steps to secure their confidential information from theft in the first place.

Thirty years ago, recognizing that comprehensive general liability (CGL) insurance policies were “tailor made” to provide coverage for most pollution-related injuries, insurers added an exclusion to CGL policies in an attempt to avoid coverage for such claims.¹

Depending on how the pollution exclusion is read, its breadth may effectively render the insurance coverage under CGL policies illusory. In 1997, the Illinois Supreme Court first construed the standard pollution exclusion and found that its reach is limited to “traditional environmental contamination.” However, the Illinois Supreme Court left the question of what constitutes “traditional environmental contamination” to future courts for determination on a case-specific basis. 

The 20 years since the Illinois Supreme Court first addressed the pollution exclusion have yielded a host of different conclusions as to what constitutes “traditional environmental contamination.” In the most recent foray into this subject, Country Mutual Insurance Company v. Bible Pork, Inc., an Illinois appellate court², construing the pollution exclusion, posed a question that may open the door to a significant expansion of the defense obligation owed by insurers under CGL policies in the context of environmental claims. The court suggested that the question, whether permitted emissions may constitute traditional environmental pollution that is excluded, raises an ambiguity in the exclusion and offers an additional weapon to the enterprise risk management arsenal of policyholders seeking coverage for the expense associated with defending against environmental claims.

Injunctive relief may constitute ‘damages’

Bible Pork also discusses another issue insurers frequently invoke as a basis to deny insurance coverage for environmental claims. Bible Pork addresses whether a lawsuit seeking injunctive relief may constitute a claim for “damages” for the purposes of the insurer’s duty to defend. Many environmental claims are tied to governmental demands for the remediation of sites owned by the policyholder.

For example, a policyholder may receive a notice from a governmental agency identifying it as a potentially responsible party (PRP) in connection with environmental conditions found at a site owned by it. The notice from the governmental entity will commonly demand action by the landowner as opposed to making what may traditionally be labeled a claim for “damages.” Under such circumstances, the insurer is likely to assert that the government’s notice is not a claim encompassed by the CGL policy because there is no claim for damages and deny coverage. But Bible Pork offers two approaches to supporting a claim for a defense in response to the notice.

Bible Pork arose from a policyholder’s tender of the defense of a lawsuit by adjacent property owners seeking to enjoin the use of a property as a hog factory. The property owners filed suit seeking a declaration that the proposed use would constitute public and private nuisances interfering with the use and enjoyment of their properties. In addition to the declaration, the complaints sought “such other relief as deemed appropriate.” The Bible Pork court found that the use of the phrase “such other relief as deemed appropriate” in the complaint’s prayer for relief had the potential to make the claim by the property owners into a claim for money damages.

But the Bible Pork decision also supports a claim for defense coverage in response to pre-suit PRP demands from governmental entities to policyholders. Specifically, the court noted that an order requiring remediation is, in effect, a claim for money damages because the insured is required to expend funds to accomplish the remediation. The court found that “damages,” as referred to in a CGL policy, “covers money one must expend to remedy an injury for which he or she is responsible, whether such expenditure is compelled by a court of law or by way of compensatory damages or by a court of equity by way of compliance with a mandatory injunction.”

Consequently, a demand from a governmental entity for action by a policyholder, including for environmental testing and investigation, inherently bears the risk of expense and, as such, is “damages” even if it is not expressly a demand for a sum certain.

Evading the pollution exclusion in CGL policies

A finding that a claim for remediation is potentially within the coverage of a CGL policy as a claim for “damages” does not end the inquiry. However, it shifts the burden from the policyholder showing that its claim is potentially within the coverage of the policy to the insurer to establish that it actually within an exclusion to coverage. The Bible Pork court found that the wastes and nuisances associated with the operation of a hog confinement facility do not qualify as “traditional environmental pollution” and so were not excluded from coverage. Bible Pork also offers a path to coverage well beyond the question of whether the nuisances associated with the operation of a hog confinement operation are “traditional environmental pollution.”

Alluding to the ambiguity caused by the breadth of the standard CGL policy’s pollution exclusion, Bible Pork went a step further in a direction that arguably provides coverage even in circumstances involving “traditional environmental pollution.” Specifically, the court noted that since the policyholder had obtained permits from the applicable regulatory agencies for the proposed use, and the emissions at issue were those addressed in the permits, it was unclear whether permitted emissions constitute “traditional environmental pollution.” Consequently, the court found that the pollution exclusion did not apply to “permitted” emissions.

The takeaway

The insured in Bible Pork successfully defended against the lawsuit that sought to enjoin its proposed use of its property. The cost of the litigation was substantial. Insurance coverage for defense of claims related to its proposed use to the property was an issue that should have been addressed as part of the entity’s enterprise risk management. The policyholder chose not to purchase insurance coverage specific to “pollution” claims. But as a consequence of the policyholder’s prompt tender of the claim and its aggressive response to the insurer’s denial of the claim, the policyholder was able to harvest the value of its CGL policy to fund its defense. 

¹American States Ins. Co. v. Koloms, 177 Ill. 2d 473, 490 (1997).
²Country Mutual Insurance Company v. Bible Pork, Inc., 2015 IL App (5th) 140211.

With the rise in GPS technology, employers have unprecedented access to their employees’ whereabouts. For several years, employers have been able to track their field or mobile employees’ locations through GPS devices in vehicles. With more recent technology, employers are able to track locations through GPS apps in employees’ smartphones. But tracking presents risks employers need to understand so they can evaluate whether the potential benefits outweigh the significant risks.

Tracking employees’ locations and activity through GPS can have many benefits for a business, including:

• Fostering increased efficiency through streamlined travel for delivery or other mobile employees.
• Monitoring overtime and compliance with labor laws.
• Ensuring compliance with safety regulations by confirming that employees are not speeding or otherwise violating traffic laws.
• Verifying that time records are accurate, company policies are followed and employees are engaging in safe behavior. Moreover, if an employee is suspected of wrongdoing, an employer can use GPS tracking as part of its internal investigation of the employee.

However, before an employer begins using GPS to monitor employees, it should consider the related legal ramifications and employee privacy issues. Employers should also implement best practices for complying with the law and ensuring that employee trust is not breached.

Monitoring employee vehicles

First, an employer should consider any state laws applicable to GPS tracking of individuals. For example, an Illinois statute enacted in 2014 makes it a criminal misdemeanor to use GPS tracking to monitor the location of a vehicle without the vehicle owner’s consent, unless the tracking is lawfully done by a law enforcement agency. See 720 ILCS 5/21-2.5.

An employer does not violate this law by tracking the location of a company-owned vehicle used by its employees, because the employer (the vehicle’s owner) consents to the tracking. However, an employer is not permitted to install a GPS tracking device in an employee-owned vehicle without the employee’s consent. Other states, including California, Connecticut, Delaware and Texas, also have laws that specifically apply to GPS tracking.

Second, an employer should consider state tort laws that it may violate if it tracks employees without their knowledge or consent, such as invasion of privacy. Several courts have held that where an employer attaches a GPS tracking device to an employer-owned vehicle, an employee driving that vehicle is not able to state a claim for invasion of privacy when the employer tracks the whereabouts of the vehicle. See, e.g., Elgin v. Coco-Cola Bottling Co., 2005 WL 3050633 (E.D. Mo. 2005); Tubbs v. Wynne Transport, 2007 WL 1189640 (S.D. Texas, 2007). These cases track the Illinois statute, which allows an employer to install a GPS tracking device in a vehicle owned by the business. But one thing an employer may consider is giving notice to employees that it might use GPS monitoring in connection with employee use of company equipment.

The law is less clear, however, when an employer wishes to track employees who use their personal vehicles for company business. For example, a New York state court held that installing a GPS device on a vehicle personally owned by a state employee suspected of falsifying time records was an unreasonable search. Cunningham v. New York State Dept. of Labor, 21 N.Y.3d 515 (NY Ct. App., 2013). The court found that if the state had monitored the employee only during business hours, the search would have likely been lawful, but because the state monitored the employee during and after work hours, the entire search was unreasonable and unconstitutional. On the other hand, other courts have found that taxi drivers in New York City did not have an expectation of privacy in GPS data gathered from a tracking system that state regulatory authorities required to be installed in all cabs, even though the taxi drivers personally owned their vehicles. See, e.g., El-Nahal v. Yassky, 993 F.Supp.2d 460, 466 (S.D.N.Y., 2014).

Smartphone tracking

There is even less clarity in the law when it comes to tracking employees’ locations through smartphones.

In May 2015, a woman sued her employer after she was terminated for uninstalling a GPS tracking app from a company-issued smartphone. Arias v. Intermex Wire Transfer, 15-cv-01101 (E.D. CA, 2015). While the case settled out of court in November 2015, it implicates several issues faced by employers wishing to track employees through company-issued GPS-enabled smartphones. Specifically, the plaintiff alleged that the employer required employees to leave their smartphones turned on at all times, and the employer allegedly told employees it would monitor their off-duty activity. Eventually, the plaintiff was terminated after she disabled the GPS tracking from her smartphone in order to protect her privacy. She filed suit claiming wrongful termination, invasion of privacy, unfair business practices, retaliation and other claims, seeking over $500,000 in damages for lost wages.

Best practices for tracking

If a business owner wishes to employ GPS tracking to monitor employees, whether to maximize efficiency, ensure compliance with safety and traffic laws or to perform an investigation upon suspicion of wrongdoing, the employer should consider implementing the following best practices first.

• Become familiar with any laws applicable to privacy expectations and GPS tracking of vehicles and/or devices in the state where you wish to engage in GPS tracking.
• Only use GPS tracking in employer-owned vehicles or devices. The case law and statutes show that generally, tracking an employee using company-owned property is permissible, especially when the employee is aware of the GPS monitoring. Tracking employees using their personally owned property is still a legal gray area.
• Only monitor employees to the extent that it is justified by a business need. There are risks associated with tracking employees via GPS, namely that an employee will feel his or her privacy has been violated and commence litigation. Therefore, an employer should only consider engaging in monitoring to the extent that risk is offset by a business need.
• Make sure you have a written GPS tracking policy. It should outline the business reasons for using GPS tracking, when and how employees should expect to be monitored and how the employer will use and safeguard data collected. If an employee will be disciplined for disabling a GPS device without the employer’s permission, the GPS tracking policy should also notify the employees of those consequences in advance. Be sure to communicate the policy to all employees, and ask that employees acknowledge their receipt and understanding of the policy.
• Finally, be responsible and considerate. Only monitor employee activity during work hours, and only monitor the employees’ location for a specific business purpose in compliance with your GPS tracking policy. Finally, make sure that you store any GPS-related data securely.

Employers have greater access to their employees today than ever before. While there are many legitimate business reasons that an employer may wish to monitor employees through GPS technology, companies are encouraged to take steps to ensure that GPS monitoring activities do not violate applicable laws or employees’ trust. 

The Department of Labor’s new guidance about what constitutes a “joint employer” should cause businesses that use staffing agencies or other indirect “employment” structures or relationships to carefully review these arrangements.

Specifically, on Jan. 20, 2016, in a departure from what had been somewhat settled, the DOL issued guidance interpreting “joint employer” expansively, making clear that a business may be held liable for Fair Labor Standards Act (FLSA) and Migrant & Seasonal Agricultural Worker Protection Act (MSPA) violations committed by a “joint employer.”

FLSA and MSPA

Most employers should already be familiar with FLSA (29 U.S.C. §201 et seq.). FLSA establishes minimum wage, overtime pay, recordkeeping and youth employment standards for employers who engage in business in interstate commerce (most businesses today) or whose annual sales total more than $500,000. Lawsuits, including class action litigation, alleging wage and hour violations are commonly brought under FLSA.

The MSPA (29 U.S.C. §1801 et seq.) is the main federal law that protects farmworkers in the United States. The MSPA provides federal labor protections in the areas of labor contracting and recruitment, payment of wages, recordkeeping, housing, transportation and working conditions.

What is joint employment?

The new guidance describes two types of joint employment — horizontal and vertical. Horizontal joint employment occurs when two employers share employees. The focus of a horizontal joint employment analysis is on the relationship between the two employers. The DOL identifies several factors to consider when determining whether horizontal joint employment exists:

• Common ownership/management;
• Shared control over hiring and firing;
• Coordination of hours and scheduling;
• Joint supervision of employees; and
• Use of the same payroll systems.

For example, horizontal joint employment may be found where Erica, a bartender, works at Bar A for 30 hours during one week and at Bar B for 15 hours during the same week. If Bar A and Bar B are found to be joint employers (e.g. they share common management and coordinate employee schedules), Erica’s hours for that week may be combined, and Bar A and Bar B may be held jointly and severally liable for failing to pay Erica overtime compensation.

The DOL describes vertical joint employment as occurring when an employee of one employer (the “intermediary employer”) is economically dependent on another employer (the “potential joint employer”). The focus in determining whether vertical joint employment exists is on the economic realities of the relationship between the employee and the potential joint employer. Some factors that may be considered in determining whether vertical joint employment exists include:

• The potential joint employer’s degree of control and supervision over the work performed;
• The potential joint employer’s control of employment conditions, e.g., whether the potential joint employer has the power to hire or fire the employee, to modify employment conditions, and/or to determine the rate or method of pay;
• The permanency and duration of the employment relationship;
• The repetitive and rote nature of the work performed;
• Whether the employee’s work is an integral part of the potential joint employer’s business;
• Whether the employee performed work on the potential joint employer’s premises; and
• The performance of administrative functions commonly performed by employers.

For example, vertical joint employment may occur when a hospital hires nurses employed by a staffing agency. If the economic realities suggest that the hospital employs the nurses, e.g., if the hospital controls the nurses’ job performances, the nurses work for the hospital for long periods of time, and the hospital performs administrative functions for the nurses, the hospital may be found to be a joint employer, and thus jointly and severally liable for any FLSA violations committed by the staffing agency.

Who may be affected?

The new guidance will likely impact large and small businesses. The new guidance suggests that larger businesses (potentially with deep pockets) cannot escape liability for FLSA violations by hiring workers through smaller intermediary businesses or entering into arrangements to share employees with other businesses. Conversely, it also suggests that some small employers who would not normally be subject to FLSA may be deemed covered employers (and thus subject to FLSA) if they are found to be joint employers with another covered employer.

The new guidance affects all industries. The DOL predicts that businesses that frequently use workers hired through intermediary businesses, including those in the construction, medical, agricultural, janitorial, manufacturing, staffing and hospitality industries, will be especially affected.

What should businesses do?

Businesses that use these types of employment relationships should be mindful of this new guidance to evaluate their exposure and make necessary adjustments to avoid exposure for liability arising from these relationships, including liability caused by the joint employer’s conduct. Businesses should evaluate the risks and benefits of hiring employees through intermediary businesses or sharing employees and the terms and conditions of the agreements through which they engage in these arrangements.

Among the issues to be considered are indemnification and risk shifting or sharing of risk through insurance. Additionally, businesses need to consider taking steps to evaluate the measures undertaken by the potential “joint employer” to comply with applicable state and federal laws and regulations. After all, critical to managing the risk inherent in an employment relationship is developing an understanding of that risk. 

To some it may seem obvious, but before a business can take reasonable steps to protect its trade secrets, it must be able to identify which of its intellectual assets are protectable as trade secrets. A business may not differentiate between trade secrets and confidential information, but there is a difference and a business should differentiate between the two (see our previous post on the differences here). A business may believe that whatever steps it takes to protect its confidential information will be sufficient to protect all of its trade secrets. However, that approach can prove harmful in practice, as the practical measures to protect the intellectual assets may differ depending on the nature of the assets. 

First, there is a difference between what information courts determine to be a trade secret and what information courts determine to be confidential information. A trade secret is a subset of the information that falls under the umbrella of confidential information and requires heightened protection. Second, if a business protects its trade secret information as it protects its other confidential information, then the business may be vulnerable to losing trade secrets either through theft or through a judicial finding that the information is not a trade secret because the business did not take reasonable efforts to maintain the secrecy or confidentiality of the information.

Under the Uniform Trade Secrets Act, which has been adopted in 47 states, to qualify as a trade secret, information must meet two requirements:

1. The information must be sufficiently secret to derive economic value from not being generally known to others who can obtain value from its disclosure or use; and
2. The information must be subject to efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality.

With regard to the first requirement, a business should consider creating a master list of the information it believes to be a trade secret. This master list may contain general categories of information or specific information. The more specific a business can be in identifying the information it believes to be its trade secrets, the more likely it is the business will be able to put in place measures to protect the information from disclosure and use by third parties under the act.

Once a business has identified the information it believes to constitute its trade secrets, the business should identify where that information is located within the business and who has access to that information, internally and externally. Is the information something that can be accessed in only one place and only a few people have access to it? Is access limited to those who have a need to know or access the information to perform their business functions? Is the information something that is located in more than one place and can be accessed in several different ways by many people in the organization? Is this information shared with business partners outside the business?

Once a business has identified the information it believes to be its trade secrets, where that information is kept and who has access to that information, the business can evaluate the appropriate measures to protect the secrecy and confidentiality of the information. The threshold is that the business must put in place protections that are “reasonable under the circumstances” to maintain the secrecy and confidentiality of the information. What is “reasonable under the circumstances” will depend on the nature of the information, where the information is located, who has access to the information and how it is used.

A non-exhaustive checklist of steps a business might take to protect information it considers to be a trade secret can be found here. However, it is highly recommended that a business consult with an attorney familiar with litigating trade secret matters to develop a robust plan to protect its trade secrets.