Hiring, Discipline and Termination

In Ohio, the default rule governing employment relationships is employment at-will. Absent a legally recognized exception, an employer can terminate the employment of an at-will employee for any lawful reason, without cause or notice, and not incur liability. One of the lesser-known exceptions to the rule of employment at-will relates to the termination of minority shareholders of close corporations who are also employees.

The Ohio Supreme Court has defined a “close corporation” as a corporation with few shareholders and whose shares are not generally traded on a national securities exchange or regularly quoted on an over-the-counter market. [1] Ohio courts have recognized that, given the nature of a close corporation, majority shareholders can easily abuse their corporate control to the disadvantage of the minority shareholders. Minority shareholders are not only vulnerable because they are small in number, but also because they have no readily available market for their stock.

To lessen the risk of abuse, Ohio courts have held that majority shareholders of a close corporation owe a heightened fiduciary duty (i.e., utmost good faith and loyalty) to their minority shareholders. A majority shareholder breaches this fiduciary duty when control of the close corporation is utilized to prevent the minority shareholder from having an equal opportunity in the corporation. In other words, control of a close corporation cannot be used to give the majority benefits that are not shared by the minority.

What if the minority shareholder is also an employee of the close corporation? Ohio courts have recognized that a minority shareholder’s employment “often constitutes the major return on the shareholder’s investment,” without which “the minority shareholder is denied an equal return on the investment.” [2] As a result, a majority shareholder in a close corporation cannot terminate the employment of a minority shareholder without “a legitimate business purpose.” [3]

As Aesop noted at the conclusion of “The Fox and the Lion,” familiarity can breed contempt. In the context of close corporations, contempt can lead majority shareholders, mistakenly relying on the rule of employment at-will, to terminate a minority shareholder without a legitimate business purpose. In doing so, the majority shareholder violates the heightened fiduciary duty owed to the close corporation’s minority shareholder.

Before terminating a minority shareholder, a majority shareholder should carefully scrutinize the business purpose behind the termination and consistently document the existence and legitimacy of that business purpose.

If you would like help evaluating minority shareholder issues facing your business, please contact Frantz Ward partner Tim Richards.

[1] Crosby v. Beam, 47 Ohio St.3d 105, 107 (Ohio 1989).
[2] Kirila v. Kirila Contrs., Inc., 2016-Ohio-5469, ¶33 (Ohio 11th Dist. Ct. App. 2016).
[3] Tablack v. Wellman, 2006-Ohio-4688, ¶122 (Ohio 7th Dist. Ct. App. 2006).

Federal law has long protected owners of patents, copyrights and trademarks from infringement of those intellectual property rights. Trade secret owners, however, traditionally had to rely on state law to protect their trade secrets from improper use or disclosure. Congress has now given trade secret owners an additional avenue for protecting their intellectual property: the Defend Trade Secrets Act of 2016 (the “DTSA”). The DTSA creates a civil cause of action under federal law for misappropriation of trade secrets.

Click here to read this Client Alert.

Based upon information received from a number of sources, it now appears that the Department of Labor’s controversial changes to the rules governing the white collar exemptions under the Fair Labor Standards Act will be finalized and published in the coming weeks – potentially as early as next week. Once published, it is expected that employers will have only 60 days before the new rules take effect.

Click here to read this Client Alert.

On June 30, 2015, the Department of Labor (DOL) issued proposed rules that will significantly increase the minimum salary threshold required for an employee to be classified as exempt for purposes of overtime pay under federal law. It is expected that nearly 5 million additional workers will become eligible for overtime pay within the first year of the rule’s implementation.

Under the Fair Labor Standards Act (FLSA), employers are not required to pay overtime to certain “exempt” categories of employees. One such category is “white collar” employees such as executive, administrative, professional, outside sales, and computer employees. To qualify for one of the so-called “white collar” exemptions, an employee must meet a minimum salary requirement of $455 per week (or $23,660 per year) and perform certain job duties. The proposed rules increase the salary threshold amount for “white collar” employees to $970 per week (or $50,440 per year) starting in 2016. In addition, the DOL has proposed that the salary level should increase every year automatically after 2016 based on nationwide earnings data. The precise method for calculating this annual salary increase has not yet been determined.

The proposed rules also would alter the requirements for “highly compensated employees”, who are also exempt from overtime. The salary threshold for highly compensated employees will be increased from $100,000 to $122,148, annually.  

Notably, the DOL did not propose rules revising the duties tests applicable to the white collar exemptions.  Instead, the DOL has asked for public comment on whether the current duties tests are working as intended to determine whether an employee is truly a white collar employee eligible for overtime-exempt status.

Interested parties will have the opportunity to submit comments on the proposed rules before the DOL issues final regulations, which are likely to go into effect in 2016. Although the final regulations have not taken effect yet, employers should assess employees’ salaries to determine how the rules will affect their operating costs when implemented. Reclassification of employees or updated policies on performing overtime work may be appropriate. Now is the time to develop a reclassification plan that ensures proper documentation and recordkeeping, as well as effective communication of the changes to employees.  

Following last year’s issuance by the EEOC of controversial criminal background check guidelines, the EEOC has filed a number of lawsuits attempting to enforce these guidelines.  Late last week, Judge Roger Titus, United States District Court District of Maryland, dismissed the lawsuit EEOC filed against Freeman, holding that the EEOC failed to present a prima facie case of disparate impact. See Article from Yahoo!Finance.

In the Opinion, the Judge is critical of the EEOC’s overbroad background check guidelines, and even more critical of the statistical evidence that the EEOC proffered in support of its claims.  The EEOC had argued that Freeman’s criminal background check and credit check policy had a disparate impact on African American males.

The Judge recognized that employers who use background checks “have a clear incentive to avoid hiring employees who have a proven tendency to defraud or steal from their employers, engage in workplace violence, or who otherwise appear to be untrustworthy and unreliable.”

The opinion contains a good summary and analysis of the disparate impact theory and the pitfalls of statistical evidence needed to support the theory.  In addition, the opinion provides a summary of the rather detailed process that this employer used in conducting background checks and determining whether offenses would disqualify employment.  The summary is helpful for employers to assess their own policies. 

Last week, the White House announced a new administrative policy deferring deportation of certain undocumented immigrants who had been brought to the United States before reaching adulthood. The announcement also indicated that these individuals could become lawfully employed. This has implications for small business, since many small businesses are hiring and would like to take advantage of potential new sources of legal workers. There are, however, a number of questions yet to be answered. One of the best brief explanations of the issue has been prepared by David Burton, the General Counsel of the National Small Business Association.  NSBA is the nation’s oldest small business advocacy association, and maintains a rigorous non-partisan position. We thank David and NSBA for permission to share this article.

Deferred Action
The White House and the Department of Homeland Security (DHS) have announced a new immigration policy called “deferred action.” Under this directive, individuals who demonstrate that they meet the indicated criteria will be eligible for an exercise of prosecutorial discretion, called deferred action, on a case by case basis. To be eligible, a person must apply and must:
1. Have come to the United States under the age of sixteen;
2. Have continuously resided in the United States for a least five years preceding June 15, 2012 and have been present in the United States on June 15, 2012;
3. Be currently in school, have graduated from high school, have obtained a general education development certificate, or have been honorably discharged from the Coast Guard or Armed Forces of the United States;
4. Have not been convicted of a felony offense, a significant misdemeanor offense, multiple misdemeanor offenses, or otherwise pose a threat to national security or public safety; and
5. Not be above the age of thirty.
The policy does not confer a path to citizenship or lawful permanent resident status.
Persons who meet these criteria are sometimes called “dreamers” by proponents of the policy because the proposed DREAM Act would provide lawful status to many of the same people.
According to DHS, individuals who receive deferred action may apply for and may obtain employment authorization from U.S. Citizenship and Immigration Services (USCIS) provided they can demonstrate an economic necessity for their employment under existing regulations. There are no additional details.
Presumably, DHS is referring to the ability to apply for an “Employment Authorization and Advance Parole Card for Adjustment of Status Applicants,” using Form I-485, which serves as an I-512 Advance Parole and an Employment Authorization Document (EAD).  This costs $1,070 and the person applying must have a basis for becoming a permanent resident.  The proposed policy does not appear to change what constitutes a basis for becoming a permanent resident or otherwise obtaining a work permit.  Thus, it is not clear that the new policy accomplishes anything for undocumented immigrants other than ensuring that they will not be deported for two years (upon application in a form to be determined within 60 days and at a cost to be determined).  If the new policy does not, as has been asserted by DHS, provide a “path to permanent residency,” then the EAD is not available under current law for persons who have entered the country illegally.

From an employer’s perspective there are many unanswered questions. They include:

1. Can those receiving deferred action be hired and, if so, what documents constitute proof that they are authorized to work?

2. What changes will be made to the I-9 employment verification process?

3. What does an employer do when a person who has received deferred action fails (as is likely) the E-verify verification process?

4. How long does a deferred action employment authorization last?  What must an employer do when it expires?  When are employers subject to civil or criminal penalties for retaining–or failing to retain–someone whose deferred action has expired?        

5. Is “economic necessity” based upon the prospective employee’s perspective, that of the “family” of the prospective employee, or that of the prospective employer?

6. When are employers subject to civil or criminal penalties for hiring someone who is eligible for or has received deferred action?

7. When are employers subject to civil or criminal penalties for failing to hire someone who is eligible for or has received deferred action?

8. Can an employer take into account the “temporary” nature of the work authorization when deciding among candidates?

To read the President’s remarks, click here.
To read Secretary of Homeland Security Janet Napolitano’s remarks and DHS’s Frequently Asked Questions, click here.
H2-B Visas
On January 19, 2011 the Department of Labor, Employment and Training Administration, issued a final rule regarding Wage Methodology for the Temporary Non-agricultural Employment H–2B Program. This rule would substantially increase the prevailing wage for purposes of the H-2B hiring process. To read this rule, click here.
Subsequently, Congress withheld funding for the implementation of this rule. Senator Richard Shelby (R-Ala.), Ranking Member of the Appropriations Subcommittee on Labor, Health and Human Services, Education, and Related Agencies (Labor/HHS), during full committee consideration of the FY 2013 Labor/HHS appropriations bill, offered an amendment to again prohibit funding for implementation of this rule. The amendment passed by a vote of 19-11. To read about this development, click here.

This post was co-authored by Inna Shelley.

Employers should have counsel review their non-compete agreements in order to ensure that a merger or other restructuring would not affect the successor company’s right to enforce the agreement.  On May 24, the Ohio Supreme Court decided Accordia of Ohio, LLC v. Fischel, a case in which four employees signed non-compete agreements promising not to compete with their employer for two years after leaving the company. The non-compete agreements lacked language addressing mergers, such as that the agreement extended to the company’s successors or assigns. After a merger, the contracting company ceased to exist because it was subsumed into the successor, and the four employees continued to work for the successor entity. These employees later quit and began competing with their former employer.

However, the Ohio Supreme Court held that the new entity could not enforce the non-compete agreements past the original 2-year period specified in the agreements. This 2-year period began to run after the employees stopped working for the original company when it ceased to exist in the merger. By the time the employees left the successor company, the 2-year non-compete period had expired.

The Ohio Supreme Court held that although non-compete agreements transfer as a matter of law to the successor entity in a merger between companies, they are enforceable only according to their terms. The successor will only receive the benefit of the bargain struck by the original contracting entity and nothing more. As a result, the Court concluded that enabling the successor employer to enforce the non-compete agreements would be against the agreements’ plain language, which stated that they applied only to the original company. While the successor obtained all the rights to the new contracts, it was unable to enforce them more than two years after the “old” employer disappeared in the merger.

The majority opinion insisted that the decision was consistent with long-established Ohio merger law providing that the successor company in a merger takes over all the previous company’s assets, property, and contacts. However, the dissenting justices believed that the decision departed from century-old precedent holding that a successor entity steps into the shoes of its predecessor and acquires the right to enforce agreements in its capacity as the successor. 

Employers can avoid the result in Accordia by ensuring that their non-compete agreements state that they are made between the employee and the company, plus the company’s successors and assigns. Non-compete agreements should also state that all of the company’s rights under the agreement also flow to the company’s successors and assigns and that the company’s successors and assigns may enforce the agreement.  Businesses contemplating acquisitions should review their agreements with key employees to make sure that they have appropriate language; if not, the employees can be asked to sign new agreements.  Continued employment is sufficient consideration in Ohio for non-compete agreements. 

Businesses that have made acquisitions in the past may also wish to review the covenants, representations, and warranties contained in their merger agreements to determine if they might have claims against the seller for transferring unenforceable agreements.

The U.S. Equal Employment Opportunity Commission (EEOC) has just issued new Guidelines on employers’ use of criminal records to make employment decisions.  Despite the opposition of employer groups, its guidelines represent a significant restriction upon what the EEOC thinks employers can do, and how employers can justify to the EEOC their use of criminal convictions in filling job openings.  The EEOC’s assumptions that criminal convictions represent, without individualized analysis by the employer, non-job-related criteria and that different conviction rates among different ethnic groups create disparate impacts in the job market are unsupported by logic or by empirical studies of the justice system.  A criminal conviction is not an immutable characteristic, nor is it a protected category under Title VII.  Every state has collateral sanctions attendant to criminal convictions, which are given short-shrift by these Guidelines.  Ohio, for example, has over 600 civil consequences for criminal convictions in areas of employment, civic participation, public benefits and so on.  The new Guidelines give deference only to Federal collateral sanctions. This kind of expansionist activity by a government agency only serves to reduce the level of respect accorded to it, and diverts it from its core mission.  Fortunately for employers, most of them can continue to do what they have been doing, and consider criminal convictions of job applicants in light of their own needs and the jobs in question, without engaging in expensive and superfluous analysis.  If the EEOC chooses to bring an action, this is one area where the right to a jury trial will put the advantage in the employer’s corner.

As was illustrated by a House Judiciary Committee Hearing on April 18, immigration enforcement is nowhere near consensus.  A bill introduced by Rep. Lamar Smith (R-Texas), HR 2885, would make use of E-Verify mandatory for all employers.  Rep. Smith regards the bill as a measure to stop identity theft, especially including theft of children’s identities by unauthorized workers. Such theft is often not uncovered for many years, by which time the futures of the children may be seriously impacted.  On the other hand, Rep. Zoe Lofgren (D-Cal) contended that the new law, if passed, would aggravate the problem while costing taxpayers billions.  Her position is that E-Verify cannot uncover identity theft, since it only matches social security numbers with names.  She noted that the real problem is with immigration.  Even Rep. Smith conceded that the underground market for false identity papers grew after the passage of the Immigration Reform and Control Act, which required employers to obtain documentation of identity and work eligibility for all new hires.  Other issues for E-Verify requirements include fair and efficient ways to deal with incorrect responses from the system.  With millions of people being hired at new jobs each year, even a low percentage of false replies on work eligibility means that thousands of eligible workers would be denied jobs for as long as it takes the government to correct the mistake.  The National Small Business Association (NSBA) has noted this problem as a major concern with mandatory E-Verify.  Members of both parties have spent enough time on this issue (the April 18th hearing was the sixth hearing in this Congress just on E-Verify) to know that comprehensive immigration reform is necessary.  E-Verify is just a tool, and doesn’t approach being a solution to the underlying problem.  Unless coupled with sensible changes in immigration policy, using it (and especially making it mandatory) is likely to do more harm than good.

With jobs the main focus of the Administration and Congress (other than re-election, of course), it is worth identifying why jobs are so hard to come by.  We have already mentioned the level of uncertainty in a previous post.  Now CBS News has done an excellent job of explaining how small businesses are being squeezed, because banks do not know how to react to 2011 circumstances under their 2006 rules of engagement.  The story, featuring a COSE member and my colleague from the NSBA, Marilyn Landis, is brief and accurate–well worth your time.