April 21, 2009

SPEAKERS:
Peter Altieri, Member of the Firm, Litigation and Labor and Employment Practice, Epstein Becker & Green, P.C.
John Kosciusko, Vice President, Sales and Marketing, New York Region, Sumitomo Life Insurance Agency America, Inc.
William Milani, Member of the Firm, Labor and Employment Practice, Epstein Becker & Green, P.C.

PRESENTER & MODERATOR:
Michael Levine, Member of the Firm; Head of CSR/Sustainability Practice, Epstein Becker & Green P.C.
A distinguished panel of specialists in employment law and employee benefits discussed the challenges that companies face in cutting staff costs during an era of economic turmoil.
Many companies hope to avoid outright layoffs by implementing voluntary retirement programs, which are lawful in the U.S. provided they are truly voluntary, commented panelist Bill Milani of Epstein Becker & Green. U.S. law permits companies to offer different benefits to various classes of employees, as long as the basis for the differences in treatment is a neutral factor, such as years of service or job classification, that doesn't discriminate based on membership in a protected class such as race or gender. Employers are allowed for example to give more generous incentive offers to employees who are in management-level jobs exempt from wage and hour regulations than to those in nonexempt jobs.
There's great flexibility in the kinds of incentives that employers can offer, from severance pay, health care subsidies and outplacement assistance to service credits for pensions, Mr. Milani said. In structuring health care-related incentives, however, firms do need to be careful to observe the terms of their group health plans, which often don't allow employees to be kept on active status if they're no longer actually working at the company.
But are voluntary reduction-in-force programs really a good idea? The picture is mixed, in Mr. Milani's view. They're good for morale: workers feel less distressed when they have a choice as to whether to accept a termination package. If the programs are truly voluntary, they reduce the risk that affected employees will file discrimination claims. However, there are significant risks. One is timing: 'you have to be patient in giving somebody review periods to consider whether to sign up or not.' Firms can't know which employees will accept the offers, or how many will accept. Voluntary termination packages may have to be more generous, or they won't be effective incentives. 'On balance, frankly, to be the Grinch here, my experience has been that most often it simply makes sense to jump in with the involuntary if there is a need to do it,' he said.
Employers planning for involuntary reductions in force need to review not only contractual commitments such as collective bargaining agreements but also statutory requirements under the WARN Act, the Worker Adjustment and Retraining Notification Act, Mr. Milani pointed out. State WARN laws may give more generous protections than does federal law; New York State's statute, for example, requires 90 days' notice and is triggered by the termination of just 25 employees.
It's important to document the need for terminations, whether saving costs or changing corporate goals and strategies, and the criteria for selecting which employees are to be let go, he said. If RIF decisions are performance based, 'be sure that the performance appraisals are consistent with the decisions you are making.' Firms need to gather statistics in advance to see whether there will be an adverse impact based on age, race or sex; 'you want to know first before the decisions are rolled out so that a plaintiff's lawyer doesn't surprise you with a claim that suggests you terminated statistically significant numbers of women or older workers and you face a class-wide claim' of discrimination. Companies also need to be mindful of the risks of public statements about the future: 'We have seen employers get into trouble when, whether it's to the public, or whether it's to the surviving employees, we say great news, we've done our RIF, you're all safe, nothing more is going to happen. And unfortunately a week or a month later more does happen. Those employees potentially relying on those promises have claims.'
Salary reductions on a prospective basis are a lawful cost-cutting measure, Mr. Milani noted. The federal minimum wage sets a floor on wage reductions for nonexempt workers. For exempt workers, meaning executive, administrative and professional staff who are paid on a 'salary basis,' salaries can't be reduced below $455 a week, or the exemption will be lost and the employee will become overtime eligible. Moreover, exempt workers who do any work at all during a given week must be paid their full salary for that week. Thus an exempt worker can be required to take an entire week off--a furlough, as opposed to a salary reduction--but 'if you're going to take that approach, take that BlackBerry away--because if that person is responding to e-mails, you're likely going to have to pay them for that week.'
When employees do leave a company, they take with them information about the company and its business, and this poses a significant risk that the company's trade secrets may be misused, said panelist Peter Altieri, a partner of Mr. Milani's at Epstein Becker & Green.
Losses due to the theft of trade secrets--broadly speaking, information that can be used in the operation of a business or other enterprise that 'is sufficiently valuable and secret to afford an actual or potential economic advantage over others'--cost businesses $1 trillion in the past year, Mr. Altieri said, citing a McAfee Research report. Whether a court will agree that a given item of information is indeed a trade secret is determined case by case. The analysis addresses six factors, including 'the extent to which the information is known outside of the owner's business; the extent to which the information is known by employees and others involved in the owner's business; the extent of measures taken by the owner to guard the secrecy of the information; ... the value of the information to the owner and the competitor; the amount of effort or money expended by the owner in developing the information; and finally, the ease or difficulty with which the information could properly be acquired or duplicated by others.'
To protect trade secrets, it's important for companies to do periodic inventories that identify which items of information, including customer lists and financial data, are truly sensitive and critical to the business, he emphasized. Firms need to label this information as confidential and secret; safeguard electronic documents by using cryptography and computer password systems; and put confidential physical documents in locked file cabinets. Staff members should be trained not to forward confidential information outside the company; there's a risk that when people hit the reply-all button in their e-mail program, they won't realize that they're sharing that information with people outside the company.
There are several traps for the unwary that call for special attention, Mr. Altieri indicated. Company websites are one: if you put your client list on your website, it's tough to claim that that information is a proprietary trade secret. Bid proposals are another. When bidding on government contracts, companies should mark sensitive information with a legend to help protect it from disclosure under freedom of information laws.
Confidentiality agreements are essential to a good trade-secret protection program, and should be set up not just with employees, both regular and temporary, but also with suppliers, manufacturers and deal partners, he said. Work-for-hire agreements need to make clear that the company, and not the staff member, owns what's created on the job. Noncompetition agreements and agreements not to solicit or recruit employees 'are generally enforceable to the extent necessary to protect a legitimate business interest,' though some states, including California, give effect to noncompetes only in very limited circumstances.
When employees leave, it's important for managers to let the IT department know, so that computer access rights can be terminated immediately, and to retrieve keycards, cancel credit cards and PIN numbers, and take back laptops, PDAs, cell phones, BlackBerry devices and other company-owned equipment, he commented.
When employees leave, companies should remind them about their obligations during exit interviews. Indeed, 'you want to notify the new employers' about the confidentiality and other restrictions that are in place. 'In these harder times, employees are desperate to get a job' and to succeed; putting the new employer on notice may help protect company information from misuse.
'In a struggling economy, you are going to have stressed workers whether your company is stressed or not,' said John Kosciusko of Sumitomo Life. Stressed workers get sick more often, which means increased costs for employers that provide health benefits. Companies can rely on their insurance providers for help with many of these problems, ranging from wellness programs and family education to biometric and other types of screenings that assess risk for various diseases, he said. Some firms ask employees who engage in unhealthy behaviors to pay a bigger share of their monthly health care insurance premiums, though it's not yet clear in his view how much such negative reinforcement techniques actually reduce claims in the long term.
Exposure to stress contributes to higher rates of depression, obesity and anxiety, which may lead in turn to productivity declines, he continued. Presenteeism--where employees 'are physically at work, but not mentally at work'--is a real risk to the quantity and quality of the work that gets done. Company health fairs and the like can help reassure employees that there's no stigma to getting help with mental health issues. 'Communicate to the employees that these issues may be manifesting themselves in themselves and in their families. Give positive messages. Yes, the economy is horrible, but there are things you can do for yourself. Make sure you continue to take care of yourself. Continue the appropriate diet and exercise.'
Economic turmoil also means a greater need for eligibility audits, as people try to keep their dependents on in company benefit programs for which they're no longer eligible, Mr. Kosciusko said. COBRA participation is increasing, as COBRA subsidies in the stimulus plan encourage more people to opt in to COBRA coverage and laid-off workers take longer to find new jobs. All of this means more paperwork and a greater risk of expensive errors; companies that don't comply with COBRA rules can be fined $100 per incident per day, which can add up quickly.
Cost-cutting measures are challenges for risk management across the board, nowhere more so than in the financial services industry, suggested Michael Levine of Epstein Becker & Green. In December 2008, the SEC's director of compliance, inspections and examination sent an open letter to the CEOs of broker-dealers, investment advisers and other SEC-registered firms underscoring the importance of the compliance function. 'She said we know that you're trying to save money, but I remind you that you have a legal obligation' to have in place a compliance program reasonably designed to achieve compliance with the law.
'You are losing, for example, an in-house counsel in a business unit,' Mr. Levine continued. 'Well, who is doing that work then? Is it moving upward to a higher-level person who has tremendous responsibilities and who is also being asked to take on more responsibility?'
The Obama administration has promised more enforcement and more regulation from the outset, and bills are pending in Congress to hire more federal prosecutors and federal agents and to expand the SEC staff, he said. In this climate, companies planning cuts in their compliance departments need to consider the potential risks under a variety of whistleblowing statutes. A former Wal-Mart employee recently sued the company, claiming he was fired for reporting problems with the company's ethical sourcing program. Wal-Mart ultimately prevailed, but 'this is the type of battle with discovery that can be very public and very detrimental' to a company's reputation.
Cutting costs is one thing, but cutting corners is another, 'and if you're a global business with operations here in the United States, you can face investigation and prosecutions under the Foreign Corrupt Practices Act,' Mr. Levine commented. Thus Siemens paid over $1 billion in fines and disgorged profits following coordinated investigations of bribery by German and U.S. authorities, and was also required to engage an external monitor. 'You can save the money now, but you can face an absolutely crippling expense when things turn around. The sun will come out at some point. Maybe not tomorrow, but hopefully some time soon. Will your business be around if you have cut too deeply in these areas?'
Among the issues likely to receive greater attention from regulators are wage and hour violations and workplace safety enforcement, he said. Secretary of Labor Hilda Solis 'announced there is a new sheriff in town. As one of her deputies she brought New York State's former labor commissioner, who was very successful and very aggressive in enforcement efforts. These are changes that really matter to companies.'
Firms confront pressures from many other quarters as well, Mr. Levine concluded, including employees, unions, activists and shareholder groups, an example being the group that produced a shareholder resolution seeking a board-level human rights committee at Cisco. 'Or you will face legislation like in the drywall industry. Drywall made in China now--there are two bills proposed to completely pull all the Chinese-made drywall off the market' because of health and safety concerns raised by homeowners in recent years. 'That would be a complete loss of a market for those companies.'
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Questions from the audience followed.

On the idea of employers ranking their employees on healthy and unhealthy behaviors, wouldn't this create problems under human rights laws and the Americans with Disabilities Act?
'You're exactly right. Great care needs to be taken. These programs, voluntary wellness and the like, are lawful; they have passed muster with EEOC,' the Equal Employment Opportunity Commission, and other regulators, so long as they're truly voluntary and carefully designed to preserve the confidentiality of the information, Mr. Milani said. Thus data on participation in such programs has to be kept out of personnel files and can't be given to management or to the human resources department.

What are the ramifications of 'garden leave' and other extended relationships with employees who have been given notice of termination?

Garden leave is a term that's been imported from the UK, Mr. Altieri said. The employee is told to go home and tend to his garden; he's paid a full salary and is asked to make himself available to answer questions and serve as a resource for the employer. He is expected to observe a duty of loyalty to the employer and not to work for a competitor, sometimes for as long as six months.
These agreements can be easier to enforce than noncompetes, but eligibility for benefits depends on the specifics of the plan, he said. If the employee loses eligibility, whether because he no longer works enough hours in a week to qualify as a full-time equivalent or for other reasons, that may be a COBRA event requiring notice. There may be tax implications. And finally, an employee on garden leave may retain the right to sue for harassment or discrimination just as any other employee could do. 'It's certainly something to think about, but I think care must be taken in structuring' the relationship 'so that the employer is not surprised that it has continued exposure.'

How can companies minimize the distress that employees feel at the moment they get the news that they're being laid off?
There is no easy way to do this, Mr. Milani said. The general recommendation is to assign an HR staffer and a line manager for each conversation, do it all on a single day, and keep the communication brief and straightforward. 'Less is better. Don't try to explain or justify.' Give the employee a specific HR person to contact for follow-up questions and issues, and train the HR people in these positions so they can respond consistently to everyone.
'Once the decision is made and the employee is informed, the sooner you cut that cord, the better,' he added. 'And hopefully through the package you have provided--the severance, the benefit continuation, the outplacement--the employee will quickly shift focus to moving ahead rather than how angry they might be with the company.'
--Katherine Hyde