Dealing with Employees: Features of U.S. Law and Practice

An Expert's View about Employees in the United States

Posted on: 1 Jun 2010

Dealing with Employees: Features of U.S. Law and Practice

By Aaron N. Wise, Attorney at Law © 2009


This subject if treated in detail could occupy many pages. There are a great many aspects and each of them has many different features and ramifications. Only one of the reasons for that is that employment law is, in part, state law and thus will in some respects vary considerably from state to state.


In this Chapter we do not treat the subject of dealing with U.S. labor unions and U.S. federal law applicable thereto, which falls under the general rubric “labor law”. Rather, we focus on a few key aspects of U.S. employment law and practice.


Employment Contracts; Employee Secrecy and Non-Competition Agreements. It is normally advisable to conclude written employment contracts, American style, with key employees of your U.S. subsidiary or JV company, such as its executives, officers and key technical managers. One reason is obvious: to define the terms and conditions applicable to their employment; and often, to limit their capacity to act and bind the employer, e.g., without the prior written approval of the employer’s board of directors or owners. Another important reason is to protect the U.S. company and its foreign parent company against claims by the employee, for example, claims of improper termination when the employment relationship ceases. Claims and lawsuits concerning “improper termination” of employees, based on one legal theory or another, are relatively common in the USA. With a good employment contract prepared by experienced U.S. counsel and proper conduct by the employer, it will usually be possible to avoid or at least substantially reduce the risks of such claims. From the company-employer’s standpoint, it is normally preferable that only the U.S. subsidiary or JV company (the employer) sign and be legally bound by thereby---not the parent company or JV company’s owners; and that the employment contract so state. Sometimes, however, the employee will insist on the written guaranty of the parent company or JV owners of the U.S. subsidiary’s or JV company’s obligations under the employment agreement. And sometimes the parent or JV owners will not mind at all guaranteeing said obligations. In the employment contract, the law of the particular U.S. state where the employee will primarily perform his/her services should usually be specified as applicable, unless that law is particularly unfavorable to the employer, in which case, to the extent legally possible (and in many instances, it may not be possible for purposes of the desired effect), the law of another, more favorable U.S. state should be specified.


The employment contract should contain either an arbitration clause providing for arbitration in the USA (typically, under the American Arbitration Association’s pertinent rules) or a clause specifying a particular U.S. court to resolve disputes and claims. Some U.S. states’ laws will not permit arbitration of certain employment disputes, and a point to be checked before preparing the agreement.


The preceding remarks should be read together with the following points.


• Termination Without Cause; Termination for Cause. Some U.S. states, perhaps the majority, follow the common law “at will” rule that absent an agreement to the contrary, an employee can be terminated at will by the employer without cause without liability for improper termination. For example, New York State falls in that category. However, even U.S. states in the “at will” category have fairly recently developed exceptions to that norm. For example, if there is some company handbook stating or policy or practice to the effect, that employees will not be terminated without cause or only upon a certain minimum notice period, a court may apply that even if a written employment contract stating otherwise exists. Some U.S. states go to the extent of virtually prohibiting an employee from terminating an employee without cause except where parties reaching written agreement at the time of termination or thereafter on additional compensation to the employee.


The employment agreement should state the grounds for termination for cause, which can also include events like the closing of the U.S. company, its sale etc.


The main point is that prior to concluding any employment contract with a key employee, the employment law of the particular U.S. state(s) concerned must be taken into account for purposes of how the agreement should be drafted. Moreover, prior to the employer’s termination contemplated termination of any employee, with or without cause, U.S. counsel should be consulted. The same applies where the employee quits of his/her volition or terminates.


• Employee Confidentiality and Employee Invention Agreements. The U.S. employer company should seriously consider having essentially all of its officers and employees, not only key ones, sign secrecy agreements. They would typically contain non-disclosure and non-use obligations on the employee with respect to the secret and otherwise proprietary data (technical, commercial, client lists etc.) of the U.S. company and its parent or JV owner(s), return or destruction of all company files and materials, etc. It might also contain provisions dealing with inventions, discoveries, improvements and the like developed by the employee while employed and possibly even a certain period thereafter (ownership thereof, patent and other rights, whether the employee is entitled to any additional compensation). If written employment contracts are concluded with particular employees can be built into them. If no employment contract will be concluded, then a secrecy/invention type agreement might well be in order.


• Post-Employment Non-Compete Clauses. Most employment contracts with employees will prohibit the employee from working for any other person or firm while in the employer’s employ (sometimes, there are exceptions made, e.g., where the employee is not full time in which case normally, the employee will be prohibited from working for a competitor of the employer). Normally, such clauses will pose no significant legal problem. Much more tricky, and problematic, are “post-employment non-compete clauses”----that is, a prohibition upon the employee, once his/her employment ends, from working in a particular field whether for a third party or for his/her own account. The enforceability of post-employment non-compete clauses will vary from U.S. state to state. In some U.S. states, it will be very difficult if not impossible to enforce them. In other states, they will have to be very carefully, precisely and narrowly drafted to stand a reasonable chance of being enforceable (e.g., by way of injunction, damages for breach): they will have to be reasonable in time, scope, geography and not unduly restrict the ex-employee’s ability to earn a living in his field.


• Discrimination and other Unlawful Acts by Employer. U.S. state and federal law prohibit essentially any form of discrimination by the employer against the employee. That includes discrimination based on race, color, national origin, religion, age, gender, disability, marital and veteran status. Also prohibited more or less throughout the USA are sexual harassment in the workplace; and retaliatory firing or demotion by the employer where, for example, the employee blows the whistle or threatens to do so regarding some illegal action by the employer. There is American legislation requiring the employer to retain a woman’s job while she is on maternity leave, and while a person is serving in the military. There are many different types of employer acts which U.S. law will regard as unlawful or which an employer must comply with which cannot be mentioned in this Guide.


• Employer Retaliation against Employee(s) Wishing to Unionize. Not only can employer retaliation of this sort violate state law, but it may well constitute an “unfair labor practice” under U.S. federal labor law.


• Employee Claims and Lawsuits Among the Top Types. Claims made and lawsuits (or arbitrations) brought by employees against their employers or former employers are among the the most prevalent types in the USA----maybe number one. Your U.S. lawyers should counsel you from the beginning and regularly as to the “dos” and “don’ts” and “cans” and “cannots” with regard to interviewing prospective employees, hiring practices, dealing with them while employed by your company, and upon their dismissal or departure, and sometimes, thereafter.


• Employer Handbook or Similar Document. It is generally a good procedure for the U.S. subsidiary or JV corporation to have an employee handbook or similar document stating its policies and procedures applicable to employees and employment; and to update it regularly. Competent U.S. counsel can assist in preparing it.


• Proper Payment of U.S. Taxes and Other Witholdings; Workers Compensation Insurance. The employer should be sure that all amounts required to be paid to the U.S. tax authorities by the employer (e.g., by way of withholding) are paid in on time. In a small U.S. operation one should not leave it to the employee to see that that is done; rather, a bookkeeper for the U.S, company or a commercial payroll company should take care of that. Often, the best choice is a payroll company.


Workers compensation insurance is mandatory. It insures the employer from its employee’s claims for job related injury and illness. In some U.S. states, short term disability insurance for employees is mandatory. You can use your lawyer, accountant or insurance broker to contract the required insurances, or have your payroll company do it. However, your lawyer should be involved for several reasons, one being to be sure that the scope of workers compensation coverage and other mandatory and non-mandatory insurances are what you need.


• Employee Pensions and Profit Sharing Plans; Certain Other Employee Benefits and Incentives. U.S. law does not require enterprises to offer pension plans, profit sharing plans, medical, disability or life insurance coverage to employees. Often, the employer will want to obtain and establish various one or more of such benefits, and/or others, for its employees. For newcomers to the US market, particularly smaller companies, this can be a difficult and time-consuming exercise. See the bullet point below.


On occasion, the employer offers a particular employee the opportunity to acquire or purchase shares of stock or ownership interest in the U.S. company. In such case, written agreements are necessary regarding such acquisition or purchase, including provisions on restriction on the employee’s transfer of shares, cash-out or buyout provisions and a plethora of others.


• Getting Into Place the Employee Benefits Package and Commercial Insurance: Start Early. Quite often, getting the employee benefits package like various insurances, pension or profit sharing plan, and other benefits, as well as contracting a payroll company and coordinating the payroll with the company’s bank account, plus deciding on and obtaining the desired commercial insurance are not easy tasks and require time. Your author has found that working and coordinating with a good, efficient insurance brokerage firm is frequently the best solution. This process should normally start before a new U.S. enterprise is set up, as it takes times to decide on what the benefits package and commercial insurance should be (type, scope of coverage, etc.), to obtain quotations, evaluate the coverage and cost, and set them up.


• Agent, Consultant or Independent Contractor: Is He or She Really an Employee? It frequently occurs that a particular enterprise will engage an individual as its sales (or other agent, a consultant or as an independent service-rendering contractor. At least that is the intention. However, it can easily occur that such person, from a tax and/or legal perspective, really meets the requirements of an “employee” and will be so treated. Most commonly, that occurs once the relationship is cut with that person. He/she will claim to be an employee for federal and/or state unemployment compensation, social security, workers compensation or other purposes, and claim that the employer, e.g., did not make the required payments and owes the employee money. Or, the federal or state authority will make such claim. Prior to engaging such person, competent advice should be sought.


• Employees of the Foreign Parent or Foreign JV Owner(s) Working in the USA. For legal and tax reasons, foreigners, that is, foreign companies and individuals, should, as a rule, not have employees of their own working in the United States. There may be some valid exceptions to this general rule, where such employees function in the USA for a short time on a project basis, or perform limited services.


• Smaller U.S. Operations of Foreign Companies: Proper Controls and Monitoring. It occurs not too infrequently that a foreign company places one, perhaps two persons, in charge of running its U.S. subsidiary. But, it does not maintain proper control over or monitor those persons’ acts. Such persons might be American, or might be brought in from abroad. There are either no proper contracts with such persons or poor and incomplete ones. The persons are not required to report and account on a regular basis to the company’s Board or owners, financially or otherwise; and may not do so. Sometimes, they are ----wrongly---permitted to hire U.S. company’s legal counsel, accountants and other experts, or the foreign parent accedes to those persons’ recommended experts being hired. Whereas, the foreign parent should select them, and they should be totally independent and loyal to the foreign parent, not to the U.S. company or any of its employees. Those experts should be eyes and ears of majority owner. Runaway employees can wreck a small U.S. operation. Your American lawyer-author has seen it happen more than once. Once such a problem presents itself, the foreign owner is typically in a bind: it is reluctant to dismiss the runaway employee because it has no one else to run the U.S. operation and finding someone is difficult and will take time. It will try to bring the runaway into line, but not infrequently, it does not succeed but allows the situation to continue until it is forced to shut down the U.S. company. The risks of this occurring are reduced by proper planning and action from the start.


Posted: 01 June 2010

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