Winter 2011 Business Today Tom Pauken, Chairman Commissioner Representing Employers

Non-Competition Agreements: What's New and Are They Right For Your Business? l Poor Attitudes in the Workplace l Refusal to Sign Policies or Warnings l Texas Business Today Texas' economic success serves as blueprint for rest of country In a December 2010 report on the Texas economy, Comerica Bank Senior Vice-President and Chief Economist Dana Johnson said, “Looking ahead, I expect Texas to outperform the nation, as the state’s low unemployment rate, moderate taxes and welcoming business environment attracts companies and people from other parts of the country.” In an interview with Smart Business, he attributed Texas’ positive 2011 projection to a number of improving measures that include a strengthening manufacturing sector and a positive growth rate in private-sector jobs relative to the nation at large. Indeed, it is true. When it comes to job creation, Texas has outperformed the in nearly every sector as measured from peak levels before the recession. As I write this, the November year-over-year growth rate in Texas’ employment is more Chairman’s than twice the national rate. Additionally, unemployment Corner in Texas has consistently trended well below the national level, even with headwinds like the sharp influx of jobseekers into the state. In 2010, the manufacturing sector in Texas showed signs of vitality by nearly tripling the hiring rate of the nation which grew by less than 1 percent. In all goods- producing sectors in Texas, which include logging Texas Workforce Commission Chairman Tom Pauken and mining, construction, and manufacturing, payrolls speaks at the annual Texas Workforce Conference. Texas increased at a rate nearly nine times higher than that of Workforce Commission photo the entire U.S. Among the 10 largest states, Texas has the prolonged recession that lasted from 1990 to 2005. lowest unemployment rate and the highest level of new According to this view, the U.S. is already seeing job creation. signs of what he calls a “balance sheet recession”, i.e., But no matter how well we do in this state, the when high debt deflation triggers a prolonged period continued stagnation and decline of our national of deleveraging throughout the entire economy. This economy will continue to have a negative impact on explains why the Federal Reserve’s “Quantitative Texans -- particularly for those who have lost their jobs Easing” policies, which effectively amount to printing through no fault of their own. money, will do little to encourage capital investment or The problems facing our national economy didn’t hiring from the private sector. just appear overnight, but have been building for more Rather than continue the policies of attempting than a decade in the forms of excessive debt leverage, to have our government spend its way to recovery, a job outsourcing, and an unnecessary concentration truly long-term solution to high unemployment is to of governmental power in Washington. Instead of start growing the private sector again. I believe the addressing these issues head-on, our national leadership best approach to putting Americans back to work is continues to pursue the same monetary and fiscal to completely eliminate our onerous corporate tax “solutions” that have done little to positively affect high system and replace it with a revenue-neutral, business unemployment, credit availability, or the record-high consumption tax that would be border-adjusted. All national debt. goods and services coming into the U.S. would pay the This fall, the Federal Reserve Bank announced a 8 percent business consumption tax while all exports second round of government bond purchases to the tune would receive a tax credit. The 35 percent corporate of $600 billion in order to keep interest rates artificially tax rate would be eliminated as well as the 6.2 percent low. Richard Koo, chief economist of Nomura Research, employer portion of the payroll tax. Instead of punitively argues this approach was largely ineffective when tried taxing employment, savings and capital investment (as in Japan which is still suffering the aftereffects of a

2 Winter 2011

our current system does), this new approach to business boards. Working with our community colleges and Texas taxation would provide incentives to bring jobs home businesses, TWC helped provide for new and upgraded to America. Changing our tax policy would result in skills for Texas workers. leveling the playing field with our trading competitors. This is just one example of the Lone Star State’s It would help bring jobs home to America, get our efforts to ensure prosperity and economic sustainability economy moving again, and begin rebuilding our for future generations of Texans. I encourage our leaders manufacturing base. in Washington to learn from our example, so that we The crisis in unemployment is particularly worrisome as a country can move forward, confident about our for our younger generation of workers who just last children’s futures and America’s restored economic spring witnessed an unemployment rate of 19.5 percent. prominence. That’s twice the jobless rate of the general population, and the highest percentage of out-of-work young people Sincerely, ever recorded. Current levels have only marginally improved, largely on account of a falling participation rate among young people in the civilian labor force. By encouraging proficiency in skill sets where there is the highest demand, we can help our younger generation Tom Pauken, Chairman regain competitiveness, and more importantly, help Commissioner Representing Employers instill a heightened sense of self-worth as they develop the means to become self-sufficient, contributing members of society. The Texas Workforce Commission (TWC) has committed resources toward developing a workforce trained and knowledgeable in the most recent industry developments. Last year, more than 60,000 Texans received skills training in programs provided by the TWC and our partners in the 28 local workforce

Chairman’s Corner ...... 2

Poor Attitudes in the Workplace ...... 4

Refusal to Sign Policies or Warnings ...... 7

Legal Briefs...... 8

Non-Competition Agreements: What's New and Are They Right for Your Business? ...... 10

Business Briefs...... 13

Cover image: The skyline. Comstock / Thinkstock

3 Texas Business Today Taking steps to deal with poor attitudes in the workplace

Staff at the Texas Workforce “holiday gift card” back at the his head down on his folded Commission (TWC) are uniquely employer, saying “F*** you - I arms, for fifteen minutes. At his positioned to observe how don’t celebrate the holidays!” unemployment appeal hearing, unemployment claims are caused, two hours after receiving a the claimant explained that affected, and complicated by warning that his job was on he had not been sleeping, but the, shall we say, less than fully the line due to poor attitude, rather had been praying. desirable behavior of some insubordination, profanity, and Many of the above problems are employees. This article will not doing his job. in the category of poor attitude. As illustrate • An employee with similar it happens, one of the most common An how holiday spirit wadded up complaints from employers Overview that can her holiday bonus check concerns employees with terrible happen and handed it back to her attitudes. Poor attitudes manifest and supervisor, saying she was not themselves in different ways that will suggest ways to deal with the interested in anything from the are at the same time both interesting complications while dealing with company. and destructive. Literally hundreds the unemployment claim and appeal • A member of a resort’s of calls come in from employers process. about employees who are overheard First, let’s review the basics. groundskeeping crew, warned about excessive use of his cell telling coworkers something like “I Unemployment benefits are hope they fire me so I can collect for those who are unemployed phone and getting his duties done, used his company-issued unemployment.” Then there are the through no fault of their own. ones who exhibit passive-aggressive TWC must investigate each claim smart phone to post comments on his Facebook page about behavior that keeps them just short and determine whether the work of being fired, but constantly on separation was the claimant’s what a doofus his supervisor was and how boring a staff the manager’s list of things and fault. The burden of proof is individuals that make the job of always on the party that initiated meeting was while the meeting was in progress. managing less fun. Perhaps the the work separation. Thus, if a following statements are things you claimant quits, he or she will need • Many employees are afflicted have heard from your employees: to prove that a reasonable employee with Friday-Monday disease • would have quit for such a reason. and call in repeatedly on such That’s not in my job Conversely, if an employer fires days. description. an employee, the company will •  • Too many to count are the Why doesn’t Joe have to do have to prove that the discharge that? occurred for a specific final incident ones who use their work • of misconduct connected with the computers to search for other Why do you always ask me? work and that the claimant either jobs, send their résumés out to • That’s Linda’s job. knew or should have known that other companies, and arrange interviews, all on company • You told me to do the other discharge would occur for such an thing first. incident. time. A distressing number While the list of all the different of employees actually tell the • This is the worst company I’ve ways that employees start their coworkers they are doing that, worked for. bosses thinking about how the adding that they hope they get fired so they can “collect Poor attitude cases can be office would be without them very hard to deal with in an would be almost as long as a list of unemployment” (see below for more on this kind of behavior). unemployment claim, simply differences between human beings, because of the difficulty of proving the following real-life examples will • A security guard at an some kind of tangible final act illustrate the type of conduct we are industrial plant was observed of misconduct on the part of the discussing here: by his supervisor sitting in a claimant. Too often, an employer’s • An employee threw a $500 chair in the security booth, with attempt to convince a claim

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investigator or appeal hearing officer that the claimant had a bad attitude comes off sounding like a personality dispute between the employer and the claimant, and such cases rarely result in a favorable ruling for the employer. In general, it is best to avoid accusing the claimant of having a “bad attitude.” Rather, be specific about behavior or conduct that violated a rule or interfered with the work of others. Document the warnings that were given. Present firsthand testimony from those who were affected by the claimant’s attitude problems. Their testimony should clearly explain how the claimant’s poor attitude made it harder for them to do their jobs, adversely affected customer relations, or otherwise hurt the company. Specifics are extremely important. Depending upon the facts, if the employer explains the circumstances well, the TWC decisionmaker can independently arrive at the conclusion that the claimant had a bad attitude. Poor attitude cases can be very hard to deal with in an unemployment claim simply Steps to Take because of the difficulty of proving some kind of tangible final act of misconduct on the part of the claimant. Too often, an employer’s attempt to convince a claim No one magic solution exists for investigator or appeal hearing officer that the claimant had a bad attitude comes dealing with the myriad forms of off sounding like a personality dispute between the employer and the claimant, and such cases rarely result in a favorable ruling for the employer. Keith Brofsky/ undesirable conduct as noted above, Photodisc/ Thinkstock but here are some specific things to try for salvaging the situation: of a verified and provable final than half of what she had been • Persistent rule violations: incident. earning in regular employment; Document the problems • “I hope you/they fire that the benefits last for 10 to and make notes of available 26 weeks, and extensions under evidence, including potential me so that I can claim unemployment.”: It seems federal law are not at all a sure witnesses. Give appropriate thing; that claimants are under counseling, warnings, or other that the worse the economy gets, the more this kind of talk a host of stringent requirements forms of corrective action for maintaining their eligibility consistent with your company’s occurs. Those who utter such words usually have one or on a weekly basis, and many policy. Prior to discharge, give claimants complain about how the employee a clear written more misconceptions relating to the unemployment claim much trouble the system is; final warning letting the person that there are many claimants know that he or she is at the system. When not coupled with misconduct, it is an indication who would be eager to take the last step of the process, that no job she is treating so casually; further chances will be given, of growing discouragement that could be a precursor to that if she would like to work and that if the complained- somewhere else, it is much of conduct occurs again, the undesirable conduct. It may help bring the person back to easier to find a new job while employee will be subject to currently employed than while immediate discharge. This is reality to calmly explain some things she may not realize, such unemployed; and that if she not a casual step to take — do has any hope of improving her not give such a final warning as even if she manages to qualify for unemployment benefits, the career chances, she needs to until and unless the company is do whatever it takes to ensure truly ready to act in the event benefits are about half or less

5 Texas Business Today

that her past employers are able he ends such conduct, he will the employment of an otherwise and willing to give her good lose his job. Give him a copy qualified employee can be salvaged references. Tell her that before of a formal written warning to with such counseling and/or simple she continues thinking that an that effect. He does not have changes in the work environment, unemployment claim will be to sign it – what is important that would be a win-win proposition easy street, she needs to search is that you can explain that for all concerned. online forums frequented by he was given a copy of it. However, if reasonable claimants to obtain a realistic You can do that in front of a approaches do not produce the view of the kind of things she witness if needed (see also the desired effect, then a properly can expect. information in “Refusal to Sign documented and well-handled • “This company is so unfair Policies or Warnings” in this discharge could help the other and/or the boss is so bad issue). employees breathe a sigh of relief. – I wish they would just • “Monday/Friday disease”: The main things to remember are fire me.”: A slightly more As a practical matter, it is so to document the problems, give serious form of the type of difficult to prove misconduct appropriate warnings, and treat talk noted above, this is the in the case of an employee who the employee as fairly as possible. kind of thing most commonly habitually calls in “sick” and With documentation and firsthand shared with coworkers. Left ends up with more three- or witnesses on the company’s side, unaddressed, this can slowly four-day weekends than anyone the employer will do about the affect other employees and else. If pressed, such employees best it can to avoid an unmeritorius lead to unnecessary morale can usually manage to submit unemployment claim. problems. At some point, the a doctor’s note, making it company will need to confront even less likely that TWC William T. Simmons the employee about such would be able to find that the Legal Counsel for conduct and ensure that he employee’s persistent Monday/ Chairman Tom Pauken understands how it is placing Friday absences constituted his job in jeopardy. Have a list misconduct. If counseling fails prepared of the bad effects you to turn the situation around, have noticed. Discuss them and the company has to let with the employee and ask if he the employee go due to their understands how and why such unavailability for work, it is things are wrong. Remind the possible that such a layoff employee that he is wrong if could be seen as a medical he thinks his coworkers enjoy work separation, resulting in or appreciate hearing about chargeback protection for the his problems with his job and company. For more on this the company – in reality, the topic, see the article “Medical coworkers consider listening Absence Warnings” in the book to such things a burden; they Especially for Texas Employers do not enjoy anticipating online at http://www.twc. having him approach them state.tx.us/news/efte/medical_ with such dreary complaints; absence_warnings.html. between themselves, the coworkers are most likely No doubt about it – unhappy rolling their eyes when they employees seem to generate a talk about him distracting lot of tension for themselves, them that way; and in the their supervisors, and even their final analysis, the employee’s coworkers. While unemployment attempts to get others to share cases involving poor attitude and in his poor attitude probably undesirable conduct can be difficult succeed mostly in lowering to win, an employer’s chances their opinions of him. Remind of turning the situation around the employee he can turn with an unhappy employee are that around by stopping the increased if the supervisor can problem behavior. Conclude work with the employee one on by asking him for confirmation one to find out what the employee’s that he understands that unless underlying concerns might be. If

6 Winter 2011 How to deal with employees who refuse to sign policies or warnings One of the thorniest problems is will personally ensure that at an unemployment appeal that of the employee who refuses everyone gets a copy. hearing that they were never to sign anything, either out of fear f. Discuss the policy in as much told about a certain policy. that signing something will commit detail as is needed to get the 2. Publish new policies on them to it (in reality, under the ideas across. employees’ computers at log-in. employment at will rule in Texas, the Each employee must click on only thing an employee needs to do g. Distribute copies of receipt acknowledgement forms an acknowledgement and agree to be bound by a policy or warning button (something like “I have is stay with the company after being to everyone there and ask everyone to sign and leave read this policy and understand advised of the policy or warning – that it applies to me”) that appears (see TEC v. Hughes Drilling Fluids, them with a designated supervisor at the end of the only after the employee has 746 S.W.2d 796), or out of a general opened the policy document and lack of cooperation. Below are some meeting. Consistent with method 3 (shown below), scrolled down to the end. Doing methods that employers can try to that allows the employee’s regular deal with such “refuseniks”. those who refuse to sign the regular forms could be given a desktop screen to appear. Your IT staff should know how to code this 1. Hold a mandatory staff meeting – chance to sign a different form set-up; be sure to have the IT staff the following steps could help: indicating that they disagree with the new policies. Under maintain reliable documentation a. Everyone knows they the employment-at-will rule showing how each employee went have to be there or face noted above, staying with the through the process. the consequences of company after learning of the 3. On warning forms, have spaces an unexcused absence new policies will mean that for “I agree with the reason for (remember to count it as they are effectively bound by this warning” and “I disagree work time for wage and hour them. with the reason for this warning”. purposes). h. Collect the receipt Ask employees to choose one or b. Prior to the meeting, publish acknowledgement forms. the other and sign or initial their an agenda (e-mail; paper i. After the meeting, publish choice. Employees who would memo; supervisors distribute the minutes of the meeting, otherwise refuse to sign a warning individual copies to their with special attention to the at all might at least choose the employees and log who gets fact that the new policy issues option of disagreeing. If they copies) showing “distribution were discussed, that everyone do, they will be unable to make and discussion of new in attendance received a a credible claim that they never employee policy handbook / copy, and that everyone was saw the warning (for a sample new ______policy” asked to return a signed written warning, see item 12 in the as one of the items to be acknowledgement-of-receipt “Discipline” topic in Especially covered during the meeting. form. for Texas Employers at http:// c. Before the meeting begins, www.twc.state.tx.us/news/efte/ j. Keep a copy of the meeting discipline.html). have everyone there sign an notice, the agenda, the attendance log as proof they attendance log, the policy, and were present. Source: http://www.twc.state.tx.us/ the minutes of the meeting as news/efte/refusal_to_sign.html d. The manager who leads the documentation that specific meeting should follow the employees were given William T. Simmons agenda, especially the part reasonable notice of the new Legal Counsel for about the new policy issues. policy. Chairman Tom Pauken e. When the time comes to k. In the face of all that discuss the policy, distribute documentation, an ex- copies of the new policy to employee would be facing everyone in attendance and a real uphill battle for have people in charge who credibility if they try to claim

7 Texas Business Today Supreme Court to review Wal-Mart gender bias case The Supreme Court has decided to grant review of what is the largest employment discrimination lawsuit in American history, potentially involving many hundreds of thousands of female employees who allege that Wal-Mart stores follow discriminatory hiring, promotion, and pay practices. The 9th Circuit Court of Legal Appeals in San Briefs Francisco had ruled that the female employees could maintain a class-action lawsuit against the store chain. Wal-Mart appealed on the grounds that its stores are independently operated and that the plaintiffs’ individual situations were so different that it would not be appropriate to handle the matter as a class action, but rather as individual discrimination claims. If the Supreme Court upholds the class-action certification, the amount of back wages at stake in the case could potentially be in the billions of dollars.

Important Ruling in Workers’ Under Texas and federal law, an employer is not required to respond to calls for information about current or former employees. The only exception would be if Compensation Case the call comes from a law enforcement authority, in which case your company is In the case of Leordeanu v. American entitled to request proof that the caller is actually from that agency. Stockbyte/ Protection Insurance Company, No. Thinkstock 09-0330, the Texas Supreme Court dual-purpose personal/business travel route to the storage unit. The Texas held on December 3, 2010 that an that satisfies two tests: 1) it would Supreme Court, noting that the trip employee who was injured while have occurred even in the absence to the storage unit would have been traveling in her company car between of the personal reason for the travel, made even if the employee had not two business-related destinations and 2) it would not have occurred intended to return home thereafter, was injured in the “course and scope had there been no business reason held that the accident was work- of employment” and thus entitled for the travel. In the Leordeanu case, related and thus covered by workers’ to workers’ compensation benefits, the plaintiff was at the end of a long compensation. even though her ultimate destination workday, having started with business following the last business-related appointments, proceeded to a dinner National Labor Relations stop was her home at the end of with clients, and finished with a trip Board Proposes New her workday. With that holding, the to a company-provided storage unit court interpreted the so-called “dual- to unload business materials from her Workplace Poster purpose rule” which puts within the company car. The accident in which On December 22, 2010, the course and scope of employment any the employee was injured occurred en National Labor Relations Board

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(NLRB) published a new draft rule in the Federal Register under which both unionized and non-unionized employers would be required to post for their employees a notice of their rights under the National Labor Relations Act. Interested parties may file comments with the NLRB until February 22, 2011. As with most laws requiring workplace posters, the proposed rule provides various sanctions for non-compliance, including cease-and-desist orders, tolling of the statute of limitations for filing an unfair labor practice charge, and a finding that willful refusal to comply may be taken as evidence of an unlawful motive in an unfair labor practice case. Details are available at http://federalregister. gov/a/2010-32019. Under the Texas Payday Law, payouts of accrued leave are required only if a written policy or other form of agreement promises such a payment. Jupiterimages/ Requests for Job Polka Dot/ Thinkstock References: What’s an and dates of employment are 5. For detailed information Employer To Do? usually safe territory, and many concerning the legal issues Here in the Employer companies choose to release such involved with reference checks Commissioner’s Office, business information. and tips for handling calls, you owners and Human Resources 3. Since most of the time, you may visit: http://www.twc.state. managers frequently ask us what don’t know who is really tx.us/news/efte/references_ information a Texas employer calling, or why they’re really backgroundchecks.html and is required to disclose about a calling, you may wish to adopt a http://www.twc.state.tx.us/news/ previous employee when prospective uniform policy of non-release of efte/job_references.html. employers call. Many of you report information over the phone. You receiving repeated calls about can tell such callers something When Accrued Leave previous employees, with the caller along the lines of, “I’m sorry, but demanding all sorts of sensitive and we do not release information Payouts are Required sometimes confidential information about our current or former Under the Texas Payday Law, payouts about the former employee’s tenure employees over the phone. of accrued leave are required only with your company. However, we would be glad to if a written policy or other form of agreement promises such a payment. Here are some thoughts on those release any information that our If a policy is silent on that point, or if issues: former employee/your applicant authorizes us in writing to release the policy provides that unused leave is forfeited upon an employee’s work 1. Under Texas and federal law, to you. The other company could separation, no such payment will be an employer is not required to then have their applicant sign a due. Employers should take care that respond to calls for information form such as the one that can be their written policies express very about current or former found in our book, Especially clearly what employees can expect, employees. The only exception for Texas Employers: http:// and should enforce the policies would be if the call comes from www.twc.state.tx.us/news/ as consistently as possible. More a law enforcement authority, efte/authorization_ to_release_ commentary on this topic is available in which case your company is information.html. in Especially for Texas Employers entitled to request proof that the 4. Companies wanting usable job online at http://www.twc.state.tx.us/ caller is actually from that agency reference information should news/efte/accrued_leave_payouts. (example: ask for a call-back definitely have all of their html and http://www.twc.state.tx.us/ number and see who answers applicants sign such forms, since news/efte/vacation_and_sick_leave. when that number is called). it may make it easier to obtain html#accruedleave. 2. Confirmation of employment information beyond the usual.

9 Texas Business Today Non-competition agreements: What’s new and are they right for your business? It is fairly common to hear employ- to compete be “ancillary to or part in exchange for what the employer ers on our Employer Hotline tell us that of” a related or underlying contract wants the employee to promise (e.g., a valued employee has left the com- imposing binding obligations on the employee promises not to compete) pany and has now opened shop across employee and the employer. In other needs to be in the employer’s interest. town and is competing with the em- words, a covenant not to compete is For example, proprietary information ployer. The former employee has not “ancillary to or part of” an otherwise is consideration that, like the court only taken enforceable agreement if: 1) the in Light stated, “gives rise to the An the em- consideration given by the employer employer’s interest in restraining the ployer’s in that agreement gives rise to the employee from competing.” There- Overview customers, employer’s interest in restraining the fore, it is in the employer’s interest to but also employee from competing and 2) the keep the employee from competing his or her business. Many Texas em- covenant is designed to enforce the when it gives an employee propri- ployers who call our Employer Hotline employee’s consideration or return etary information. The court in Light often ask whether a non-competition promise in that agreement [see Light gave “business goodwill”, “propri- agreement can be enforced against v. Centel Cellular Co. 883 S.W.2d 642 etary information”, and “confidential such a former employee. Usually, the (Tex. 1994)]. I know, you are think- information” as examples of employ- answer is, “it depends,” and when it ing: can you please explain this to me er interests worthy of protection. comes down to non-competition agree- in plain English? You are probably thinking: What ments in Texas, it depends on various To begin, there has to be “con- is considered “proprietary informa- issues. In order to understand Texas’ sideration,” which in contract law is tion or confidential information?” In non-competition agreement laws, we generally anything of value promised a 2009 case called Gallagher Health must dissect the Texas statute that to another for signing a contract. For Insurance Services v. Vogelsang, 312 governs such agreements. In 1989, example, A signs a contract to buy S.W.3d 640 (Tex. App.-Houston [1st the enacted section a car from B for $5,000; A’s con- Dist.] August 21, 2009, pet. filed), 15.50(a) of the Texas Business & Com- sideration is $5,000 and B’s con- the court enforced a two-year non- merce Code which states the require- sideration is the car. Therefore, the compete agreement that Ms. Vogel- ments that make a non-competition employer cannot have the employee sang, an insurance broker, had signed agreement enforceable. sign a non-competition agreement acknowledging she would receive dif- and promise the employee additional ferent types of confidential informa- Legal Requirements for a compensation in return for a non- tion such as: confidential client infor- compete agreement because after mation, pricing of special insurance Non-Competition Agreement all, the employee, by working, will packages, and information concerning Section 15.50 of the Texas Busi- be compensated in any event. Texas the customers’ policies. Ms. Vogel- ness & Commerce Code requires that employers cannot “buy” a non-com- sang had left her position at Gallagher a non-competition covenant (1) be pete agreement [see Trilogy Software, Health Insurance Services (GHIS) to “ancillary to or part of an otherwise Inc., v. Callidus Software Inc., 143 work for a competitor and she argued enforceable agreement at the time S.W.3d 452 (Tex. App. - Austin 2004, that the information she had obtained the agreement is made;” (2) impose pet. filed)]. However, stay tuned to while working for GHIS was not “limitations as to the time, geographi- see what the Texas Supreme Court confidential information because it cal area, and scope of activity to be decides on Marsh USA, Inc. vs. Cook, could have been obtained from public restrained that are reasonable;” and because Marsh may allow employ- sources. The company argued that the (3) not “impose a greater restraint ers to give money in exchange for information took two years to acquire; than is necessary to protect the good- an agreement not to compete, which 2) was only shared with the compa- will or other business interest” of the may make such agreements easier ny’s employees and agents on a “need former employer. to enforce. In addition, the promise to know” basis; 3) was not “readily given in the underlying agreement ascertainable by competitors;” and 4) must give rise to the employer’s inter- gave the company a “valuable com- Ancillary To An Otherwise est in preventing the employee from petitive advantage in the insurance Enforceable Agreement competing. In other words, whatever brokerage industry.” The court found the employer promises to give to the that the not-to-compete covenant was The first part of the statute requires employee (e.g., employer promises enforceable because Ms. Vogelsang that the employee’s promise not employee proprietary information) had signed and agreed not to compete

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against GHIS in exchange for GHIS’s compete was unduly burdensome on competition agreement to contain a promise to provide her with confi- the employee, because, after all, the reasonable time limitation as to how dential information. However, Justice employer was preventing the employee long the employee is restrained from Jennings disagreed with the rest of the from having a livelihood. competing. Texas courts have upheld court, stating in the dissenting opinion While Texas courts look at whether two to five years as reasonable in a that just because GHIS’s informa- the customers’ identities are con- non-competition agreement [see Stone tion was only provided on a “need to fidential, they also seem to look at v. Griffin Comm. & Security Systems, know basis” did not make it worthy of the former employee’s position. For Inc., 53 S.W.3d 687 (Tex. App.-Tyler protection and GHIS did not dem- example, in M-I LLC v. Stelly, Civil 2001, no pet.)]. So, will the time onstrate that its customers’ identities Action No. 4:09-cv-1552, 2010 WL limitation be “reasonable” under the could not be easily obtained by others 3257972 (S.D. Tex. Aug. 17, 2010), law if an employer picks any number outside of GHIS. In other words, Jus- the court agreed with the employer’s between 2 and 5? No, not necessarily. tice Jennings believed GHIS failed to non-competition agreement, which The employer’s reason for the time show that its customers’ information prevented the employee from con- period will usually be balanced with was confidential, which brings us to tacting all of the former employer’s the hardship the employee has to face the next question: Can a non-compete customers, including the customers (i.e., not being able to work). For agreement be enforced when a former the employee dealt with while work- example, in Alex Sheshunoff Mgmt employee is taking his or her former ing for the former employer. One of Servs. L.P. v. Johnson 209 S.W.3d employer’s customers? The answer: the factors the court looked at when 644 (Tex. 2006), the Texas Supreme maybe. determining the enforceability of the Court held that the non-competition Texas courts focus on whether the agreement was the upper management agreement was reasonable in that identities of those customers are con- position held by the employee. The the employee could not contact any fidential. Whether customer identities employer provided evidence showing clients or prospective clients for one are confidential depends on whether that the employee was much “more year because he was a high-level their information can be easily found, than a manager and salesman.” For employee and could not have other- for example, in telephone books, or example, the employer proved that the wise capitalized on goodwill that he if the employer took reasonable steps employee had relationships with “ma- helped develop during his time with to keep the customers’ information jor international clients” and “partici- the former employer. Alex Sheshu- confidential. For example, in a Texas pated in the design of the employer’s noff Management Services, L.P., a Supreme Court case called DeSantis v. tools” and “formulated company company that provides consulting Wackenhut Corporation, 793 S.W.2d growth strategies and discussed prod- services to banks and other financial 670 (Tex. 1990), the court found that uct development with engineers.” The institutions, promoted Mr. Johnson the employer, a company that special- court also found that the employee did to director of its Affiliation Program ized in furnishing security guards have “sensitive information” and “in- where he was to maintain relation- for businesses throughout the United timate knowledge of tool designs and ships with current and prospective States, failed to prove that its “custom- functionality” which was an interest clients. Mr. Johnson left Sheshunoff ers could not readily be identified by worthy of protection and therefore, the to work for a competitor, and Shes- someone outside its employ, that such court enforced the non-compete agree- hunoff argued that Mr. Johnson had knowledge carried some competitive ment which restricted the employee been given confidential information advantage, or that its customers’ needs from all customer contact. Usually, and specialized training and in return could not be ascertained simply by in the context of sales employees, “a had promised (i.e., he signed the non- inquiry addressed to those custom- covenant not to compete that extends competition agreement) not to “solicit ers themselves.” The employer had to clients with whom a salesman had or aid any other party in soliciting tried to argue that it had provided Mr. no dealings” (i.e., customers the for- any affiliation member or previ- DeSantis confidential information (i.e., mer employee never dealt with while ously identified prospective client or identities of Wackenhut’s customers, working for the former employer) is affiliation member.” Sheshunoff pro- and the customers’ special needs and unenforceable (see Wright v. Sport vided evidence that Mr. Johnson had requirements); therefore, Mr. DeSantis Supply Group, Inc., 137 S.W. 3d 289 participated in confidential meetings should be prevented from competing – Tex. App.-Beaumont 2004, no pet.). regarding the company’s “plans to with the employer. However, the court It is evident that the enforcement of a introduce a bank overdraft protection thought otherwise. Arguably, the “he’s Texas non-competition agreement can product” and had received an “inter- stealing my customers” defense may vary from case to case. nal manual on this new product.” The not be an employer interest worthy court took into account the “amount of protection. In addition, the court Reasonable Time Limitations of information” Mr. Johnson received, in also opposed the employer because “its importance, its true degree of the employer’s need for protection Section 15.50 of the Texas Busi- confidentiality, and the time period” afforded by the agreement not to ness Code also requires a non- over which it was received. At the

11 Texas Business Today

end, the court found it reasonable to responsibilities, it was reasonable to requirements, this requirement is prevent Mr. Johnson from contacting keep the employee from working in enforceable if the court decides that Sheshunoff’s clients or prospective other oil and gas consulting firms in the restraint is tailored to match clients for one year, which meant that North America. In Curtis, the former the employer’s protectable inter- Mr. Johnson could not work for the employee worked as the Vice Presi- est. For example, in Sheshunoff, competitor that had hired him. As you dent of Pipelines and Energy Market- it was reasonable to restrain the can see the time limitation has to be ing, and the covenant not to compete former employee from contacting the reasonable, but what is “reasonable” barred the employee from participat- employer’s clients, since the former depends on all the facts and how the ing in competitive business in Canada employee did obtain sensitive infor- court analyzes those facts. However, or the United States. The court agreed mation which the court considered a an indefinite amount of time is un- with the employer in that it was rea- protectable employer interest, and the enforceable, so employers should be sonable to restrict the employee from information could affect the employer sure to insert a specific time limit in a working for 20 oil and gas consulting if obtained by a competitor. non-competition agreement. firms in North America (i.e., specific In all, enforcing a non-competition firms the employer listed). The court agreement is more difficult than one Reasonable Geographical stated that given the employee’s may think. For example, keep in high-ranking position and the unique mind that merely having the employ- Limitations aspects of the industry involved, just ee’s signature does not automatically In addition to a time limitation, a like we saw in M-I LCC v. Stelly, it enforce what is in the agreement. geographical limitation is required was reasonable to restrict the former One must seek legal representation in a non-competition agreement. employee from working for certain and have a court rule that the agree- A “reasonable geographic scope is companies in North America. ment is enforceable which takes time generally considered to be the terri- Therefore, it seems as though a and money. tory in which the employee worked Texas employer can have a non-com- Here are three basic points to for the employer.” [see Butler v. pete agreement that prevents a former consider when contemplating the Arrow Mirror and Glass, Inc. 51 employee from competing for certain creation of a non-competition agree- S.W.3d 787(Tex. App.-Houston [1st companies in North America. How- ment: Dist.] 2001, no pet.)]. However, just ever, does this mean you can restrict, 1. Reasonableness: Remember that because an employer may not want a for example, a former administrative the agreement has to protect former employee to work within, for assistant from working anywhere in a legitimate business interest example, a 20-mile radius, which the the United States? Probably not, but without unduly burdening the employer considers the territory the then again it depends on the facts of employee from finding a job. employee worked in, does not mean the case. 2. Exchange for Something: that such an agreement would be en- Consideration must be present forceable. Every case’s outcome will Reasonable Limitations on both sides. The employer depend on the facts. For example, in on Scope of Activity and employee have to “give up” Cukjati v. Burkett 772 S.W.2d,(Tex. something. App.- 1989, no writ), the court A reasonable restriction on the 3. Time, Geographic Limita- found that because most pet owners scope of activity can be a substitute tions, and Scope of Activity: travel a few miles to obtain veteri- for failing to include a geographi- Be specific and as reasonable nary services for their pets, a cove- cal restriction in a non-competition as possible when setting these nant not to compete which restrained agreement. For example, as we saw limitations. a former employee from practicing in Sheshunoff, the covenant prohib- For creating an enforceable non- anywhere within a 12-mile radius of ited the employee from providing competition agreement, it is always the employer’s veterinary hospital services to the employer’s clients for best to consult with an attorney. was considered unreasonable. a period of one year after the em- Texas courts also have refused to ployee separated from the employer. Marissa Marquez enforce non-competition agreements In other words, while the non-com- Legal Counsel for with nationwide limitations when the petition agreement did not include Chairman Tom Pauken employee did not have nationwide re- a geographical limitation (e.g., sponsibilities for the former employ- 20-mile radius), the court still found er. However, in a case called Curtis the agreement enforceable because v. Ziff Energy Group, Ltd., 12 S.W.3d it included a reasonable limit on the 114 (Tex. App-Houston [14th Dist.] former employee’s activities (i.e., the 1999, no pet.), the court agreed with former employee could not contact the employer in holding that based on any of the employer’s clients). the employee’s job description and Generally, like the previous two

12 Winter 2011 Federal income tax withholding: What's new in 2011 Employers will see changes when www.irs.gov. That publication will also CY 2011 is up from 1.74 percent in CY calculating Social Security taxes be available at IRS offices beginning in 2010. The new employer tax rate of on their employees’ January 2011 January 2011. 2.70 percent remains unchanged. paychecks due to the recently passed The components of the CY 2011 tax Tax Relief, Unemployment Insurance Employers to See Slightly rate are: Reauthorization, and Job Creation Act • The general tax rate – this is based of 2010. Higher Unemployment on claims against an employer’s This Act includes a new Social Insurance Tax Rate account. If TWC has paid benefits Security tax break for 2011 which may The standard minimum to former employees who were result in an increase in take-home pay Unemployment Insurance (UI) tax rate laid off or separated through no for employees. Through calendar year, paid by Texas employers in calendar fault of their own in the past three 2010, employees have paid 6.2 percent year (CY) 2011 will be 0.78 percent, years, then those employers will of their up from 0.72 percent in CY 2010, pay a general tax. Business eligible the Texas Workforce Commission • The replenishment tax rate – Briefs wages into (TWC) announced recently. The taxes charged to all employers to cover Social replenish the Texas Unemployment unemployment claims that are not Security. Compensation Trust Fund which charged to a specific employer. With the Social Security tax rate provides unemployment insurance This tax tends to rise following change, only 4.2 percent of employees’ for Texas workers who lose their jobs economic slowdowns when eligible wages will go to Social through no fault of their own. claims increase and businesses Security. The employer-paid portion of By utilizing a public bond sale close. 6.2 percent remains unchanged. strategy and suspending the deficit The 2011 Social Security wage base tax component of the tax rate, TWC • The employment training limit is $106,800, and the Medicare tax stabilized the CY 2011 employer tax assessment – charged to all rate is 1.45 percent for both employers rate increase, which was necessary to employers who are eligible for a and employees, unchanged from 2010. offset two years of higher UI benefit computed tax rate to finance the There is no wage base limit for the payments. Skills Development Fund and Medicare tax. The minimum tax rates are the Texas Enterprise Fund. The Another 2011 tax change that may paid by 213,000 or 63 percent of employment training assessment affect some employees’ pay is the end all experience-rated employers. calculation is a separate line item of the Advanced Earned Income Credit An employer paying the standard on the Employer’s Quarterly Tax (EIC). This advanced payment expired minimum tax will pay $70.20 in tax Report. on December 31, 2010; however, EIC per employee in CY 2011, compared • The obligation assessment eligible employees can still file for the with $64.80 in tax per employee in CY rate – collected to repay bond credit on their annual personal income 2010. obligations. It is experience-rated, tax returns. Texas employer UI taxes at the based on an employer’s 2010 tax According to the IRS, employers minimum rate remain lower than rate. should implement the 4.2 percent many other states. Alaska employers Texas law allows employers to employee Social Security tax rate as at its minimum tax rate pay $201 per “buy down” their 2011 tax rates soon as possible, but not later than employee; Arkansas employers at by reimbursing part or all of the January 31, 2011. After implementing its minimum tax rate pay $100 per chargebacks that affected their rates the new 4.2 percent rate, employers employee; and employers for the year. The deadline for making should make an offsetting adjustment at its minimum tax rate pay $89 per a voluntary contribution under that in a subsequent pay period to correct employee. program is the 60th calendar day any over-withholding of Social The maximum UI tax rate, paid by following the mailing of the C-22 tax Security tax as soon as possible, but 2.2 percent of Texas experience-rated rate notice (which happens in early not later than March 31, 2011. employers, is 8.25 percent, down from December of each year). Information To obtain Publication 15 (Circular a maximum rate of 8.60 percent in on the voluntary contribution program, E), Employer’s Tax Guide, that CY 2010. The average tax rate of 2.03 as well as a handy calculator for contains the Percentage Method Tables percent for CY 2011 is up from 1.83 estimating what amount of buy-down for Income Tax Withholding to be used percent in CY 2010, while the average is necessary to achieve a certain tax in 2011, please visit the IRS website, experience tax rate of 1.96 percent for

13 Texas Business Today

rate, is available on TWC’s Web org, has been rolled out to provide the following Texas cities in the top site at the following address: https:// Texas’ and America’s employers with ten spots for military retirees: Waco, services.twc.state.tx.us/UITAXSERV/ a direct link to some of the country’s first place; Austin/Round Rock, voluntaryContributionAnalysis.do. finest employees: service members and third place; College Station/Bryan, Source: Tax Department, Texas their families. The Partnership allows fourth place; and San Angelo, sixth Workforce Commission (December, veterans, reserve-component members, place. The rankings were based upon 2010) their families, and wounded warriors criteria such as proximity to a military to leverage their military training and base, VA hospitals or clinics, base Texas Population Grows experience for career opportunities amenities, state taxation on military in today’s civilian job market with pensions (Texas does not tax military to 25.1 Million national, regional, and local Employer pensions), employment and education According to 2010 Census figures Partners. The user-friendly tools will opportunities, and general quality of released in late December 2010, make it easier for both job-hunters and life issues. Interestingly, although Texas added 4,293,741 residents employers seeking their skills. San Antonio did not make the overall since 2000, a 20.6 percent increase The new portal simplifies the top 10 list, it was number 2 on the over the decade. By comparison, the job application process by allowing “military metro” list and number 8 on population of the United States grew users to set up a personal profile the “large metro” list. to 308,745,538, an increase of 9.7 and maintain a record of their job Sources: http://www.military.com/ percent in the same time period, and searches and search parameters, finance/usaa-best-places-to-retire/2010/ the slowest national growth rate since meaning users don’t have to start from and www.usaa.com the Great Depression. square one every time they enter the Percentage-wise, Texas’ growth system, saving them both time and Doing Business with was the fifth highest nationally, trailing inconvenience. behind Nevada (35.1 percent), Arizona In addition, a resume builder helps Public Sector Agencies (24.1 percent), Utah (23.8 percent), and users create a résumé and maintain In an example of how small- and Idaho (21.1 percent). it in the system. They can even set medium-size businesses can join , with 37,253,936 an alert function that notifies them together in an innovative way of doing residents, grew by 10 percent and when particular job announcements business, the Comptroller’s Office has remains the most populous state. are posted. The new portal will also awarded the state contract for delivery (However, its growth has slowed to be easier for the approximately 1,200 of office supplies and furniture to a the extent that for the first time in its employers already participating in the consortium, AHI Enterprises, LLC, history as a state, California will not program to use. They will now be able comprised of eight independent and gain a U.S. House seat after a census; to enter position vacancies directly into locally owned office supply stores by contrast, Texas will gain four new the system and track applications, as in Texas. Cities, counties, schools, Congressional seats). Texas is second, well as being able to tap into resumes and state agencies can order their followed by New York (19,378,102), already in the system and reach out office-related products through AHI, Florida (18,801,310), and Illinois directly to candidates who qualify for a certified Historically Underutilized (12,830,632). Michigan was the only their positions. Business (HUB). An interesting aspect state to lose population over the past The program continues to of this arrangement is that public decade. attract employer partners ranging funds spent for office necessities stay from Fortune 500 companies to with local vendors. Any public entity Texas’ Growth Trend Seen in metropolitan police departments to can use the AHI website at www. Four Parts of the State “mom-and-pop” businesses. If you’re ahitexas.com to order supplies in line interested in requesting membership with procurement rules. The site also The growth trend isn’t playing in the Employer Partnership for your offers customers 24/7 access to their out evenly across the state. Dallas- company, please visit the above- order and usage history, as well as to Fort Worth, Houston-Galveston, San referenced Web portal for details. inventory and price lists, with a Texas Antonio-Austin, and the Rio Grande SmartBuy interface that is consistent Valley account for approximately 90 Texas Cities Rank Tops with existing internal reporting percent of the change in the state’s systems. This kind of consortium may population. With Military Retirees be seen more in the future, as state and Speaking of veterans, Texas local governments attempt to stay in New Portal Helps Service cities rank at the very top of military compliance with purchasing guidelines Members, Employers Meet retirees’ preferences when it comes and try to keep their taxpayer money as to where to live after retirement. local as possible. A new, state-of-the-art Web portal, USAA and Military.com released http://www.EmployerPartnership. a survey in December 2010 listing

14 Winter 2011

Please join us for an informative, full-day conference Upcoming to help you avoid costly pitfalls when operating Texas Business your business and managing your employees. We have assembled our best speakers to discuss state Conferences and federal legislation, court cases, workforce development and other matters of ongoing concern to Texas employers. The Woodlands. . . . . March 25, 2011 Topics have been selected based on the hundreds Austin...... April 29, 2011 of employer inquiry calls we receive each week, and include such matters as the Urban Legends El Paso...... June 10, 2011 of Texas Employment Law and the Basics of Hiring, Texas and Federal Wage and Hour Laws, Fort Worth...... July 8, 2011 Employee Policy Handbooks: Creating Your Tyler...... July 22, 2011 (tentative) Human Resources Roadmap, Unemployment Insurance Hearings and Appeals, and Independent San Marcos...... Aug . 12, 2011 Contractors. The registration fee is $85.00 and is non-refundable. Seating is limited, so please South Padre. . . . .Aug . 26, 2011 (tentative) make your reservations early if you plan to attend. Houston. . . . .Sept . 8, 2011 (tentative) For more information, go to www.texas workforce.org/events.html Houston. . . . .Sept . 9, 2011 (tentative) Waco...... Sept . 16, 2011

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PRSRT STD Texas Workforce Commission US POSTAGE Tom Pauken, Chairman PAID Commissioner Representing Employers AUSTIN, TEXAS 101 East 15th Street, Room 630 PERMIT NO. 1144 Austin, Texas 78778-0001 ——————————————— OFFICIAL BUSINESS

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