Labor & Employment Update: May/June 1998

In this issue:

• Employee Benefit Plan Administrators Must Act Now To Address Year 2000 Problem
  
• Employer Considerations In Addressing Year 2000 Problems
  

U.S. Department of Labor Warning To Employee Benefit Plan Administrators
In a February 9, 1998, press release, the U.S. Department of Labor ("DOL"), Pension and Welfare Benefits Administration, warned employee benefit plan administrators that because of the Year 2000 problem, any computerized tasks requiring date-dependent computations or comparisons, such as computing interest, determining length of service, or calculating retirement benefits, may be affected. The DOL warned that the Year 2000 problem may affect not only pension plan record-keeping systems, but also employer payroll systems that interface with plans, whose performance can be essential to plan operation.
The press release stressed that plan administrators must act now, especially considering the fact that they have a fiduciary duty to see that any Year 2000 problem that will affect the operation of the plan is addressed. Olena Berg, Assistant Secretary of Pension and Welfare Benefits Administration, noted that plan administrators should immediately take steps to identify the computer systems needed for plan operations, determine who is responsible for those systems, and establish procedures for assuring that workable strategies are in place to address the Year 2000 problem. Secretary Berg also stated that it is the plan administrators' responsibility to be certain that their service providers, who will have legal responsibility under existing licenses, maintenance contracts or agreements, are aware of and willing to participate in solving the problem.

Employee Benefit Plan Administrator's Fiduciary Obligations
Employers administering benefit plans under the Employee Retirement Income Security Act ("ERISA") are legally responsible, as fiduciaries, for administering their plans prudently. A failure to prepare for Year 2000 difficulties could cause plan fiduciaries and their employers to be held liable to the plan, to their employees, to beneficiaries, and for any resulting losses. Plan sponsors may be held liable for computer problems experienced by investment managers, record-keepers, third-party administrators, actuaries, insurers, managed care companies, and outsourcing and payroll firms. Furthermore, plans could also be forced to pay government fines if employer computer problems cause lapses in qualification, reporting and disclosure requirements, as well as violations of tax regulations.
Plan administrators may wish, in furtherance of their fiduciary duty, to contact their service providers in writing and ask them if their systems are Year 2000 compliant, and request that they provide some sort of written guarantee to that effect. Getting service providers to provide such a guarantee, however, may be difficult.

Employers should be aware that even written guarantees do not eliminate administrators' responsibilities and fiduciary duties. Administrators must take the necessary steps to ensure that their own systems are prepared to handle the Year 2000 problems by assessing the systems they use and how they will need to be adapted. Administrators should consider what liabilities and exposures they will be subject to if the problem is not solved. Administrators should also check their fiduciary insurance policies and make sure to file a "Notice of Circumstances," concerning Year 2000 related issues, to ensure that coverage will be extended for resulting problems as the year changes to 2000. Finally, administrators should remember the importance of keeping plan participants informed, by providing advanced written notice of potential problems expected to be encountered.

"Year 1999" Problem For Employee Benefit Plan Administrators
Some plan administrators reportedly may face computer problems as early as September 9, 1999. The date 9/9/99 often is keyed in when those working on computer systems do not know a pension plan participants' date of birth or some other relevant date. Resolving this problem may require work in addition to any Year 2000 solution.

Employer Considerations In Addressing Year 2000 Problems
Employer's Dilemma: Paying In-House Technology Staff To Handle And Solve Year 2000 Problems, Hiring New Employees, Or Hiring Outside Consultants.
An employer may decide to enlist its in-house technology department employees to resolve its Year 2000 problem. Entrusting current employees appears to be a good strategy, because current employees are familiar with the employer's computer systems, the employer's functional needs, and its problems concerning the Year 2000 problem.

Some skilled employees, however, may not wish to be reassigned to a project that is short term. While such employees may be induced to work on Year 2000 problems through bonuses and other compensation arrangements, issues may arise regarding the employee's status when the Year 2000 project comes to an end. Companies must be aware that any inducements or assurances given to employees reassigned to work on the Year 2000 issues could create contractual claims or even claims for fraud, and employers should be both cautious and specific as to what an employee can expect after the Year 2000 project is completed.

If the current in-house technology staff does not possess the skill needed to address the Year 2000 problem, compensating in-house employees may not be the most cost-effective strategy for the employer. To use in-house resources, an employer will have to incur the costs to train and assist its staff in gaining the necessary expertise to handle the Year 2000 problem. Training in-house personnel may require the employer to send its staff to outside seminars and conferences so they can learn techniques necessary to resolve the problems. There are other con-cerns, which will be discussed next, that deal with the employee taking skills learned at the employer's expense and utilizing those skills to assist a competitor solve its Year 2000 problems.

Non-competition agreements can be used to prohibit a current employee from performing any work for a competitor during his or her term of employment. Performing work for a competitor would violate the employee's duty of loyalty. Additionally, employers can reasonably restrict an employee from working elsewhere while employed by the employer. Employers have the right to require its current employees to notify them and obtain written permission from them before working for any other company.

Non-competition agreements, however, that restrict a person's ability to hold other employment after they have been terminated, are generally not permissible under California law. An employer may be able to effectively preclude a key employee from working for a competitor by negotiating a consulting agreement which precludes competition. In the event the employee breaches such an agreement, a court may award damages, and the employee would lose his right to payments under the agreement.

Hiring New Employees To Handle The Year 2000 Problem
Hiring new employees to address an employer's Year 2000 problem can be costly, because there is understandably a great demand for highly skilled programmers. Because demand is high, there is also a concern that new employees may be enticed to terminate employment for more lucrative offers from other companies.

In light of this problem, employers may wish to consider negotiating fixed-term employment agreements with new employees to combat offers of high bonuses and salaries from competitors. Such an agreement may effectively prohibit certain employees from working for a competitor, if the employer can show that the employee's services are of such a "special, unique, unusual, extraordinary or intellectual character" that loss of the employee's services cannot be adequately compensated by money damages.
Such agreements, however, may also limit an employer's right to terminate the employee's employment prior to the end of the fixed term. In addition, employers cannot force employees to work for the company during the contract's term. Employees may always quit the employment. If an employee quits, however, he may be in breach of contract, and subject to a monetary damage award.
Locating skilled employees may also be difficult because skilled programmers are scarce. Employers should be aware of the fact that they can solicit a competitor's employees, as well as have their own employees solicited by other companies. Employers may solicit and hire a competitor's employees subject to a few exceptions: (1) if the employee you seek to hire is already employed by another company under a fixed-term employment agreement, employers may be liable for inducing an employee to breach a contractual obligation, if you solicit and then employ that person; (2) if an employer raids a competitor by hiring its employees in an attempt to injure the competitor's ability to compete, the employer may be subject to liability based on unfair competition; (3) employers may not interfere with a Proprietary Information Agreement that a prospective employee has signed with another employer; (4) an employer may not exploit an employee who has specific knowledge or information "not generally known or readily available," which the employee obtained while working for a former employer; and (5) if hiring a competitor's employee, particularly a technical specialist, in the same capacity, will result in "inevitable disclosure" and use of the former employer's trade secrets. Under the "Inevitable Disclosure Doctrine," a competitor may pursue litigation to prohibit competitive employment where the wrongful use of trade secrets seems inevitable.

The Inevitable Disclosure Doctrine has not been explicitly recognized in California. In general, California Courts, by statutory proscription, will not enforce covenants not to compete (as opposed to fixed-term employment contracts) when they apply to California employees or employers. Therefore, other employers may aggressively search the California markets for the most skilled employees to handle the Year 2000 problem and not face liability for interference with contractual relationships.

California employers may be able to take advantage of the prohibition against non-compete agreements, may aggressively search the national markets for skilled personnel and not be subject to liability. Recently, in The Application Group, Inc. v. The Hunter Group, Inc., 61 Cal. App. 4th 881 (1998), a California appeals court held that covenants not to compete, drafted by non-California corporations, and intended to protect employees that neither reside nor work in California, are unlawful, and cannot be enforced against California-based companies. California employers may, based on the Hunter decision, hire out-of-state employees, who otherwise are subject to covenants not to compete which are enforceable in their respective states. In soliciting other employees, employers must still be careful not to interfere with enforceable contracts, or to violate proscriptions against unfair competition.

Hiring Outside Consultants And Programmers
Employers may decide to hire outside consultants and programmers to perform the specific task of solving their Year 2000 problems. This measure can be very costly, as the demand for consultants and programmers is high.

Employers may want to consider negotiating fixed-term employment agreements with consultants to combat offers of high bonuses and salaries from competitors. A fixed-term contract is also a wise strategy for employers, because it may deter consultants from leaving before the task is completed. Many consultants, however, will not want to be bound by a contract, as they may want to consult more than one company on their Year 2000 problem. As an incentive, employers may have to offer high salaries to these consultants, or high bonuses upon completion of the specific task. Companies must ensure that their benefit plans are drafted to avoid inclusion of such consultants, in the event of a determination that they are common law employees. In such a case, companies should ensure the proper withholdings and/or statutory contributions are made on behalf of such individuals to avoid IRS penalties.

Protecting Proprietary Information
Employers always run the risk of having proprietary information disclosed to their competitors by former employees, outside consultants, or even current employees. In order to protect their proprietary information, employers should implement procedures to safeguard against such disclosure.

The following is a list of examples of proprietary information that might be classified as worthy of protection: marketing forecasts; formulae; plans and drawings; processes, methods and techniques; know-how; cost and pricing information; business strategies; employee salaries; employee duties and performance levels; and Year 2000 problem solutions.

Periodically, employers should identify specific information considered confidential to the company and should notify its employees, both verbally and in writing, that such information is confidential and should not be disclosed. Additionally, access to and circulation of protected proprietary information should be limited to those employees with a legitimate need to know. Secret passwords or employee numbers should also be issued for access into the computer systems.

Additionally, employers should require their employees, whether new or temporary, to sign a proprietary information agreement. A clause should be added to an employer's offer letter explicitly stating that the offer of employment is contingent on execution of the employer's standard proprietary information agreement. Furthermore, employers should require that employees execute the offer letter and the proprietary information agreement before starting work. By obtaining such an agreement, the employer will clarify the employee's obligation to the company, and identify and safeguard proprietary information.

Upon the termination of employment, employer's should conduct an exit interview, reminding each employee of his or her obligations under the Proprietary Information Agreement and the obligation not to disclose protected information. This meeting should be confirmed in writing, and acknowledged, in writing, by the employee. The employer should also give a copy of the agreement to the employee.