Discouraging Employee Departures

Because employers invest money in hiring, training and developing their employees, they would like their employees to remain in their employ. You know how it goes. You spend time and money on recruiting the best candidates. Then, you teach the ones you hire how to do their jobs. Just as the best one of the bunch gets to the point where she is ready to contribute to the enterprise, she up and leaves to join the competition. What does the law allow employers to do to retain employees?

The best way to retain employees is to offer competitive pay and benefits, an enjoyable working environment, and a job that matches the employees skills. So as long as you do not discriminate on the basis of a prohibited characteristic, the law allows you to offer whatever incentives you like to encourage employees to stay. This how-to guide from The Wall Street Journal has some ideas about how to hang on to your employees.

Disincentives are another story. For example, California law is quite clear that you may not require an employee to sign a non-compete clause that bars her from quitting to join the competition. Business and Professions Code section 16600 provides that, with few exceptions, "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

Although you might be tempted to charge departing employees for the investment you made, there are restrictions on that, too. Labor Code section 2802 requires employers to absorb all the regular costs of doing business, including recruiting and training employees to do their jobs. If the employer pays for voluntary training or education that is not required for the job, the employer may charge that back to the employees. For discussions of the distinction, see USS-Posco Industries v. Case (2016) 244 Cal.App.4th 197 and In re Acknowledgment Cases (2015) 239 Cal.App.4th 1498. To implement such a program, you will need a written agreement that the employee signs before receiving the training.

There is also room within the law for tying some aspects of compensation to a commitment to sticking with the employer. In Schachter v. Citigroup, Inc. (2009) 47 Cal.4th 610, the Supreme Court upheld an incentive plan that allowed employees to receive part of their compensation in the form of discounted restricted stock, which had a two-year vesting period. If an employee voluntarily terminated employment or was terminated for cause before the end of the two-year period, the restricted stock would be forfeited. That same concept can be applied to payment of relocation expenses, and signing bonuses. The idea is that the employee has not earned the payment, until she has worked the specified amount of time for the employer. Keep in mind that the Schachter case involved only a two-year delay in receiving the compensation. Imposing a requirement that the employee remain employed for an extended length of time might render the plan unlawful.

Which Law Tells Employers How To Treat Their Employees?

Recent news reports about labor law violations at plants operated by one of Apple's contractors in China prompt consideration of who may regulate an employer's relationships with its workers. An employer based in California may have employees in other states, and in other countries. Employers in other states and countries may have employees in California. Which rules must the employers in such situations follow?

Within the United States

Within the United States, the Constitution requires each state to give "full faith and credit" to "public Acts, Records, and judicial Proceedings of every other State." But, the Due Process Clause bars a state from applying its law to a dispute unless it has a significant contact or significant aggregation of contacts, creating state interests, such that choice of its law is neither arbitrary nor fundamentally unfair. Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985). A state may enforce its own law over another state's law if it has a materially greater interest.

Here are some specific applications of those principles:

Although any state that has sufficient contacts with the parties and the dispute may apply its workers compensation law, once a state has made a final award under its workers compensation law, other states are barred by the full faith and credit clause from awarding the worker additional compensation for the same injury. Magnolia Petroleum Co. v. Hunt, 320 U.S. 430 (1943).

California has a strong policy against enforcement of non compete clauses under Business and Professions Code section 16600. Therefore, a California court should enforce that policy in a dispute over the employment of a non-California worker who had agreed not to compete with his former Maryland-based employer, where it would bar a California company from hiring the worker. Application Group, Inc. v. Hunter Group, Inc., 61 Cal.App.4th 881, 72 Cal.Rptr.2d 73 (1998).

California's Fair Employment and Housing Act does not apply to the relationship between a California company and its employees based on other states. Campbell v. Arco Marine, Inc., 42 Cal.App.4th 1850, 50 Cal.Rptr.2d 626 (1996).

California's wage and hour laws apply to work performed by out-of-state residents in California for California employers, but not to work performed by those employees in other states. Sullivan v. Oracle Corp., 51 Cal.4th 1191, 254 P.3d 237 (2011).

Outside the United States

When an employer based in the United States has employees in another country, it must comply with that country's laws, but the United States may also regulate the employment relationship. For example, Congress has expressly extended the reach of federal anti-discrimination protections to a U.S. citizen working in a foreign country for a United States employer, unless compliance would violate the law of the foreign country. See Public Law No. 102-166. Although it is generally assumed that Congress could constitutionally extend other employment laws to the operations of American companies overseas, it has declined to do so.

California law recognizes that an employer who complies with a foreign government's wishes may lack the discriminatory intent to violate the Fair Employment and Housing Act. In West v. Bechtel Corp., 96 Cal.App.4th 966, 117 Cal.Rptr.2d 647 (2002), an arm of the Saudi government contracted with a Bechtel entity for services on a project in Saudi Arabia. Bechtel terminated the plaintiff's involvement in the project after the Saudi entity objected to his employment because he was over 50. Because the Bechtel manager who terminated the plaintiff's involvement in the project lacked personal animus based on age, the claim for age discrimination lacked merit.

Foreign employers with employees in the United States must abide by the laws of  the United States and the laws of the states in which they have employees, unless the employee works for a foreign government on a diplomatic mission. In that case, the Foreign Sovereign Immunities Act bars liability.

Noncompetes Invalid In California

The California Supreme Court has conclusively ruled that non competition agreements with employees are invalid in California. The August 7, 2008 decision in Edwards v. Arthur Andersen LLP put to rest the notion that there might be a narrow restraint exception to the bar contained in Business and Professions Code section 16600, as suggested by the Ninth Circuit in Campbell v. Trustees of Leland Stanford Jr. Univ, 817 F.2d 299 (9th Cir. 1987).

Section 16600 provides: "Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." Other sections provide statutory exceptions for agreements in the sale or dissolution of corporations (16601), partnerships (16602) and limited liability corporations (16602.5).

Some have argued that section 16600 is the statutory embodiment of common law, and must include the common law's rule of reasonableness. (For an exposition on the rule of reason, see the New York Court of Appeals decision in BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (1999).) Such arguments led the Ninth Circuit to conclude that California courts would recognize an exception to section 16600, as explained in the Campbell case and more recently in IBM v. Bajorek, 191 F. 3d1033 (9th Cir. 1999). The Supreme Court firmly rejected that notion: "We reject Andersen’s contention that we should adopt a narrow-restraint exception to section 16600 and leave it to the Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under section 16600."

The agreement at issue in the Edwards case barred an Arthur Andersen accountant from performing accounting services for any Arthur Andersen client on whose account he had worked for 18 months after termination of employment, and from soliciting work from any Arthur Andersen client for a year. According to the Supreme Court, that restricted Edwards's ability to practice his accounting profession, and was, therefore, invalid.

The Supreme Court expressly declined to address a possible exception to section 16600 for agreements designed to protect an employer's trade secrets. A 1965 Supreme Court decision said that non competition agreements were invalid, "unless they are necessary to protect the employer's trade secrets." Muggill v. Reuben H. Donnelley Corp., 62 Cal.2d 239, 242 (1965). Court of Appeal decisions have upheld restraints on employees narrowly drawn to protect trade secrets. See, e.g., Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal. App. 4th 853 (1994). It remains to be seen whether those decisions will survive the Edwards decision.