Delaware Employment Law Blog

What the Delaware Charge Statistics Mean for Employers

2010-03-09T22:26:56Z

Delaware Department of Labor (DDOL) Office of Anti-Discrimination recently released its fiscal-year statistics relating to the charges filed and resolved in FY2009. I posted previously about the stats, including some (hopefully) helpful charts that show the trends over time.

Since the statistics were released, I've had some time to process the data and focus more on what is most relevant to Delaware employers.

Charges, Charges, Charges

If you are an employer who received a Notice of Charge of Discrimination for the first time in 2009, you are not alone. There were more charges filed with the DDOL last year than any other year for which the statistics are published. In FY2009, the DDOL accepted 728 charges—an increase of nearly 20% over FY2008.

Retaliation Claims Continue to Reign as Enemy #1

It may not come as a surprise that the most-often filed charge was a retaliation charge. Charges of discrimination alleging retaliation constituted more than 70% of the charges filed last year. One reason for such a high number is that retaliation is often added as a second allegation in charges alleging other types of discrimination. Also, once a charge has been filed, it can be amended to add other claims. So, if an employee files a charge alleging gender discrimination and is subsequently terminated, she is likely to amend her charge with an additional charge of retaliation.

The increase in the number of charges filed that contain a retaliation claim is staggering. In FY2008, approximately 30% of all charges filed with the DDOL contained a retaliation claim—even less in FY2005-2007. Those numbers went up by 130% over the last fiscal year. It is fair to say that retaliation claims are, by any measure, an employer’s number one biggest threat in the context of discrimination claims.

Race- and gender-based claims enjoyed equal growth over last year—both accounting for an additional 40% of all claims filed. After retaliation, race (56.9%), and gender (46.4%) discrimination ranked as the second and third most commonly filed claims.

Defining “Success”—Reasonable Cause Findings Issued in FY2009

There is some good news for employers among these statistics. Overall, there number of reasonable cause findings issued by the DDOL remains small. On average, only 1.5% of all claims filed resulted in a cause finding. The DDOL’s long investigation periods, though, may skew these numbers. Because the average processing time for a charge is nearly a year, the reasonable-cause findings issued in FY2009 were likely issued for charges filed in FY2008.

The most successful claims in FY2009 were those based on age—reasonable cause was found in just less than 4% of all age claims filed. National origin was the second-most successful, with reasonable cause findings issued in 2.5% of those claims.

No reasonable cause findings were issued in three types of claims: (1) gender discrimination claims filed by males; (2) Asian-race claims; and (3) religious-discrimination claims.

Looking Ahead

The lesson to be learned from this data for Delaware employers is this:

The increased likelihood that your organization will be named in a charge means that you must be ever diligent in documenting the events of the workplace and being on high alert for potential issues as they arise and, especially, when dealing with an employee who complains of discrimination or harassment (formally or informally).

Also see:

2009 Stats on Delaware Charges of Discrimination

Is Your Qualified Plan (Adequately) Bonded?*

2010-03-06T02:30:18Z

The IRS recently announced the results of two special audit programs it conducted. The first program involved audits of approximately 50 Form 5500 filings for defined contribution plans with asset values greater than $100,000 but less than $250,000. The second program audited 50 401(k) plans covering three to eight participants. Surprisingly (maybe not, given our experience), the most common error revealed by both projects was the failure to have the plan adequately bonded as required by ERISA section 412.

The amount of bond required by ERISA is 10% of the assets in the plan but not less than $1,000 and but not more than $500,000 ($1,000,000 for plans that hold employer securities). The bond must cover all persons, including fiduciaries, who handle funds or other property of an employee benefit plan. The purpose of the bond is to protect the employee benefit plan from risk of loss due to fraud or dishonesty on the part of persons who handle plan funds. The United States Department of Labor’s Field Assistance Bulletin No. 2008-04 discusses the bonding requirements in an FAQ format.

Note that an ERISA fidelity bond, which is required, is not the same as fiduciary liability insurance, which is not required. Fiduciary liability insurance covers the fiduciaries of the employee benefit plan in the event of a breach their fiduciary duties, which may involve imprudence but may not rise to the level of fraud or dishonesty. If there is no bond available when a defalcation occurs, those responsible for obtaining the bond could be liable to the plan for its losses. An ERISA bond can usually be obtained through your property and casualty insurance broker.

*This post was written by guest blogger, Timothy J. Snyder, Esq. Tim is the Chair of Young Conaway’s Tax, Trusts and Estates, and Employee Benefits Sections. His primary area of practice is employee benefits, which involves both the benefit provisions of provisions of the Internal Revenue Service and ERISA. He represents business and professionals in establishing, monitoring, and administering employee-benefit plans, new comparability retirement plans, non-qualified deferred-compensation plans, health, disability and life benefits, COBRA, HIPAA, ADA and ADEA.

If You Don’t Ask for Feedback, How Do You Know How You’re Doing?

2010-03-01T06:57:39Z

Ahh, feedback. It’s a tricky pill to swallow, isn’t it? When performance-review time comes around and you’re making a list of all of the areas in which you want your employees to improve, maybe you should ask yourself a few questions first. Have you really done everything that you can to address problems as they arise? Or have you waited until formal reviews to bring up those little problems that have become bigger problems?

The best leaders know that regular feedback is essential to an effective working relationship.

If you are looking for a creative way to get and receive feedback, there’s a website for you. BetterMe gives users a way to give “private, anonymous feedback.” You can give feedback to anyone—even if they’re not registered with the site. You can also ask for feedback from others. Good idea? Well, an interesting one, indeed.

Sloan Work and Family Top 10

2010-02-26T06:04:24Z

Sloan Work and Family Network published a list of the Top 10 Posts from its blog for 2009 and I am so honored that my post, The Four-Day Workweek and the Death of the Flexible-Workplace Initiative, ranked #1! The four-day workweek got a lot of publicity in the latter half of 2008 and early 2009 but lost its fizzle as the economy continued to worsen. Although the concept was touted by advocates as a way to promote a flexible work schedule, I argued that it served the exact opposite purpose and served to create an inflexible workplace.

Have a look at the Four-Day Workweek post, along with the other excellent articles that combine to form the 10 most popular blog posts of the year at the Sloan Work and Family Network Blog.

GINA and Social Media

2010-02-25T16:58:29Z

GINA, the Genetic Information Nondiscrimination Law of 2009, is the first new federal discrimination law in decades.

Although EEOC regulations are promised (the proposed regulations were published back in March 2009 and the comment period has been closed since May 2009) , they have yet to issue, leaving employers on their own to interpret this brand new statute.

One area which presents an interesting question is the role of social media in GINA. Unlike other discrimination laws, GINA makes illegal the mere acquisition of genetic information, which is defined broadly to include, among other things, information about manifested diseases of family members. There are many exceptions to this rule, including “commercially and publicly available information,” such as newspapers, magazines, periodicals, and books. The EEOC specifically invited public comment on whether “commercially and publicly available information” should include personal Web sites or social networking sites.

If these are NOT included within the exclusions, it would mean that if an employer reviews an applicant or employee’s Facebook or MySpace page, and learns genetic information in the process, it is in violation of GINA. Given GINA’s broad definition of “genetic information,” this could easily occur. For instance, discovering on Facebook that an employee marched in a Susan G. Komen Race for the Cure on behalf of her mother would reveal genetic information.

If this advertent act (review of Facebook, Google name search, etc.) inadvertently produced genetic information – the employer would still be on the hook unless social media is included within the “publicly available” exclusion. Therefore, if information obtained from social media is NOT considered to be “publicly available,” employers will have to reconsider how they conduct background checks, since even the most rudimentary background checks currently include a “Google” search and review of any online information it turns up.

Even if the regulations specify that social media is excluded from the acquisition portion of the statute, the thornier issue is what happens after an employer has this information, whether deemed advertent or inadvertent under the statute. As a result of GINA, any adverse employment action which occurs after an employer has such information may be suspect. Just like any other discrimination, timing and stray comments may each play a role in developing causation between the membership in a protected class and the adverse employment action. As discussed in my previous post, Pink Ribbons and Yellow Bracelets, “genetic information” is everywhere. It will be hard for employers NOT to learn this type of information about their employees.

Thus, employers and their managers must understand the significance once this type of information is learned by the employer. It does not mean that the employee has to be treated better than other employers. It does mean, however, that employers need to be on alert once genetic information is learned about an employee. Like any other protected class, employers need to be cognizant of suspicious timing and mindful that documentation regarding any legitimate performance issues is in order, before taking any adverse employment action.

Want to learn more about GINA and its implications for employers? There are many opportunities: I will be presenting on GINA at the CUPA/SHRM conference on March 2; in an audioconference on May 4, sponsored by M. Lee Smith; and at the Annual Seminar on Employment Law hosted by the Delaware State Bar Association on May 11. Stay tuned for more details on the audioconference and DSBA event.

Until then, learn more about GINA with these earlier posts:

The GINA's Out of the Bottle--And It's a New Weapon in the Work-Family Arsenal

GINA's Application to Caregiver Scenarios

GINA's Implication on Employers: Pink Ribbons and Yellow Bracelets

GINA Presentation to Delaware SHRM

Genetic Information Nondiscrimination Act Update

And, for more about the impact of social media on the workplace:

Social Media & HR Primer: 3 Key Tools

5 Non-Negotiable Provisions for Your Social-Media Policy

The 3 Principles for Social Media: How to Be a Good Online Citizen

Sample Social-Media Guidelines

Social Media Is Here to Stay: Time to Start that Workplace Policy

Sample Social-Media Policy Ideas

Social Media Policies: What about my “friends”?

Friends Without Borders: State Off-Duty Conduct Laws and Facebook-Friending Policies

Will There Be an End-Run Around the EFCA?

2010-02-23T19:08:41Z

After months of moribundity, the Employee Free Choice Act (“EFCA”) is showing signs of life. Or at least alternative means of imposing some of the major changes included in EFCA, such as greatly decreasing the time of an election campaign and limiting employers’ ability to actively participate in union elections, are being considered. It all depends on the possible confirmation of Craig Becker, whose nomination to the NLRB has been stalled in the Senate but was recently voted out of committee on a party line vote.

The theory goes that if Becker, who is currently Associate General Counsel of the SEIU, is confirmed by the full Senate, giving former union lawyers a 3-2 majority on the Board, strange (and bad) things may occur. Becker’s past published writings include such one-sided suggestions as excluding employers from participating in pre-election hearings to determine an appropriate bargaining unit, preventing employers from alleging that union campaign conduct coerced employees, and prohibiting employers from conducting mandatory meetings of employees at any time during the campaign (instead of only during the 24 hours before the election, as at present).

Given Becker’s extreme views, the theory goes, new NLRB Chairperson Wilma Liebman should have no trouble getting the majority of the Board to agree to embark on expanded rulemaking and in that fashion, impose many of the EFCA changes indirectly. Liebman has made no secret of her interest in having the Board expand its rulemaking activity, instead of limiting itself to ruling on cases presented to it.

Mar. 2: CUPA-HR and Del. SHRM Spring Meeting

2010-02-19T16:24:16Z

CUPA-HR Eastern Pennsylvania and Delaware Spring Chapter Meeting

March 2, 2010 | 9:00 a.m.-3:00 p.m.
Registration Opens at 8 a.m.
Wilmington University
Doberstein Academic Center
320 N. DuPont Highway, New Castle, Delaware 19720

The Eastern Pennsylvania CUPA-HR chapter invites you to join us for our annual Spring Meeting on March 2, 2010. For the first time, the Eastern Pennsylvania CUPA-HR chapter is partnering with the Delaware Chapter of the Society of Human Resource Management(SHRM).

Our topics will be related to Employment Law updates as well as other legal issues. Topics will include: Social Networking and the Workplace, Retaliation & Whistleblower Claims, FMLA/ADA Update, Avoiding Wage and Hour Claims, Getting to Know GINA. The discussions will be led by employment-law attorneys from Young, Conaway, Stargatt & Taylor.

Cost:
CUPA-HR Eastern Pennsylvania Members: Free
CUPA-HR National Members: $15. Non-CUPA-HR Members: $30.
Cost includes continental breakfast, lunch and handouts.

Please RSVP to Vicki Stewart at vstewart [at] ycp.edu by February 20, 2010.

2009 Stats on Delaware Charges of Discrimination

2010-02-19T13:02:03Z

Delaware Department of Labor (DDOL), has published its yearly statistics for FY2009 relating to the charges of discrimination filed with its Office of Anti-Discrimination. Here are some highlights:

It may not come as a surprise that the most-often filed charge was a retaliation charge, making up just over 70% of all charges filed. Where a charge alleges more than one basis, each basis was counted separately, which explains why the total is higher than 100%. It also indicates that retaliation is very often added as a second basis to a charge that alleges other types of discrimination.

Again, not surprisingly, DDOL had a very busy year, with intakes at a five-year high.

I Always Feel Like, the School Is Watching Me: Electronic Monitoring Gone Wrong?

2010-02-18T20:02:45Z

Electronic monitoring is a very hot topic in employment law these days. But what about other types of electronic monitoring by employers? A case filed in the U.S. District Court for the Eastern District of Pennsylvania alleges a much more unusual sort of electronic monitoring. The suit alleges that Lower Marion School District distributed over 1,800 laptops to its students. So far, so good.

But, according to the Complaint (via Above the Law), the laptops were equipped with webcams.

How could this not end badly?

The suit alleges that school administrators remotely activated the webcams. One is alleged to have gone so far as to discipline a student for “improper behavior in his home." Funny, I've never seen that one in a student code of conduct. It is also alleged that the District was also tracking all the students' online activity.

Employers commonly provide employees with laptops for business-related use. If your organization is one such employer, maybe consider skipping the upgrade to the models with webcams.

Delaware Employers, What’s the Problem?

2010-02-17T14:57:42Z

Delaware employees are not very satisfied with their work. In fact, according to the results of a recent Gallup poll, Delaware workers are the least satisfied in the entire country. When Delaware reporter Eric Ruth alerted me to the poll results I was, admittedly, stunned. I never would have guessed that the employers in our State are failing so badly to keep their workforce engaged. Being a self-proclaimed evangelist for the workplace-engagement initiative, I feel compelled to do whatever I can to improve Delaware’s wretched statistics. But where to start? How about with the basics.

Employee engagement can be difficult to define. I’d suggest that it consists of two types of passion. The first passion is felt towards the employer; the second is towards the work. For example, a nurse may love her work (i.e., providing health care to those in need) but may detest her employer. A disengaged employee, on the other hand, also is passionate about his employer and about his work. The difference, though, is that the passion he feels is a negative one. In the worst case scenario, the disengaged employee is passionate about sabotaging his employer and its efforts.

OFCCP Decision Issued 16 Years After Audit

2010-02-15T23:16:54Z

As noted by Michael Fox in a recent post on his Employer's Lawyer blog,, an OFCCP Administrative Law Judge (ALJ) just released a 66-page decision in a case that began with an audit notice in 1993. The case was bogged down in large part due to the bank’s contention that it was not selected for audit in accordance with its constitutional right under the Fourth Amendment to be free from unreasonable searches and seizures. That claim was ultimately unsuccessful. As a result of the delay, though, the bank found itself litigating claims about hiring practices dating back to 1993. Not surprisingly, the recollections of key witnesses such as the recruiters were foggy on some points.

But, in essence, the trial boiled down to a battle of the experts, who each advocated his or her own method of statistically analyzing the hiring data. The analysis of the OFCCP’s labor economist/statistician disregarded several of the bank’s legitimate business reasons for rejecting applicants because of evidence provided by the recruiters regarding how they coded applicants.

For each applicant, the recruiters were to use a code to indicate the outcome of the application. For example, they used a certain code to indicate that the applicant was not interested in working the hours that were available, and another code to indicate that the applicant had failed the credit check. Unfortunately, the recruiters testified that they did not use the code consistently.

If someone told the recruiter that her or she was not interested in the hours and/or the wages being offered, the recruiters sometimes used the code for “no position available” rather than the code used to indicate that the hours or wages were not acceptable to the applicant. To the OFCCP’s expert, this justified treating the hours code as entirely unreliable.

He also disregarded the code the recruiters used to indicate that the applicant was rejected based on his or her credit report for several reasons: (1) the recruiters did not have a consistent system for screening based on a credit report, (2) there was no evidence validating the use of credit reports as a test for success in the job, (3) the bank stopped using credit reports in 1994, and (4) the use of credit reports as a screening device adversely impacted African-Americans. The bank had not retained copies of the credit reports, so it was not possible to determine whether the recruiters used the credit reports in a consistent way as between white and African-American applicants.

When the employer’s expert analyzed the hiring decisions and excluded the people who had been rejected based on hours preferences or the credit check, the outcome was that there was no statistically significant evidence of discrimination. When the OFCCP’s expert analyzed the same hiring decisions but included the applicants who had been rejected based on the hours and credit check results, there was strong statistical evidence of discrimination.

The ALJ also rejected the bank’s expert’s opinion that the bank had hired more African-Americans for the jobs in question than would be predicted if the analysis had been based on the overall availability statistics for the Charlotte metropolitan statistical area for 1993. The ALJ wrote that “it is well established that the applicant flow data, which documents the actual labor pool relevant to the hiring decisions at issue, is ‘highly relevant evidence of an employer’s labor market.’”

This proposition is one that, in my experience, is theoretically appealing but completely out of sync with reality. The reality is that applicants’ self-identification of race and gender by applicants is voluntary, and a large number of them do not self-identify. Consequently, the employer, the courts and labor economists running statistical analyses will never have an accurate picture of the racial characteristics of the “applicant pool” from which the hires were made. Given that the information about the race and gender of the “applicant pool” is always incomplete and inaccurate, it is difficult to understand how applicant flow data can be more relevant and reliable than census data.

Anyway, this case still is not over. The ALJ has to decide what the damages number will be, and after that, if the case does not settle, appeals seem likely.

Good Reads for Human Resources Professionals

2010-02-15T17:38:10Z

The February 2010 issue of Law Practice Today, the webzine published by the ABA's Law Practice Management section, is now available and can be read in its entirety at the Law Practice Management section's website. I was the issue editor for this edition, which focuses on the Human Resources side of management. The articles are great and offer lessons that apply to all industries. They include:

Managing Your Relationships With Your Staff

Avoiding Retaliation Liability

Fostering an Entrepreneurial Spirit in Associates

Taking a Break From the Professional Hurricane

How Law Firms Can Use an Ombudsman to Resolve Conflicts

Appreciating the Difficulty Involved in HR Issues

Important Keys to Practice Success

Outsourcing Legal Support Services

Hardcore Scanning for Law Offices of Any Size

Women Rainmakers: Wanji J. Walcott, American Express

28th Edition: What's Hot in Technology for 2010 (Podcast)

All of the articles are excellent but I want to give an extra-loud "thanks" to fellow employment-law bloggers, Jon Hyman of the Ohio Employment Law Blog, and Phil Miles of Lawffice Space, who each wrote features for the webzine. John authored Avoiding Retaliation Liability, which deals with the hottest topic in employment litigation these days and gives great advice on how not to become a defendant in a retaliation lawsuit. And Phil wrote Fostering an Entrepreneurial Spirit in Associates, which reminds us of the undeniable link between engagement, motivation, and success.

Will "Misclassification Initiatives" Reduce Employers' Use of Independent Contractors?

2010-02-12T23:00:09Z

Employers' use of independent contractors instead of traditional employees has been on a steady incline over the past 20 years. Some employers feel that they can save money by using independent contractors instead of full-time employees. The contractors themselves may value the autonomy and economic perks that the status provides. Also, the specific skills and knowledge that independent contractors can bring to a short-term project can be critical and, therefore, worth a premium but not sustainable in the long term. But the use of independent contractors is not as perfect as these mutually beneficial points may seem.

A report prepared by the U.S. Government Accountability Office (GAO) in the Fall of 2009 concluded that employee misclassification is a “significant problem” with “adverse consequences” because it reduces tax revenues flowing to the government. In fact, the misclassification of employees as contractors is estimated to cost the Treasury Department over $7 billion in lost payroll tax revenue over the next ten years.

So the theory goes, since independent contractors are, by definition, self-employed, they are not considered “employees” and thus not covered by various tax withholding laws. Independent contractors also are not subject to most employment laws, so in addition to avoiding taxes, some employers may reclassify employees as independent contractors in order to avoid payment of overtime and benefits, and workers’ compensation liability.

And, thus, the crackdown on the misclassification of employees as independent contractors began. he U.S. Department of Labor (DOL) has made the proper classification of employees and independent contractors one of its "top priorities." The agency’s 2011 budget includes an additional $25 million for what it calls the “Misclassification Initiative” designed to target misclassification of independent contractors. Approximately 100 additional DOL enforcement personnel will be added to investigate employers.

The Internal Revenue Service (IRS) is in the middle of a similar misclassification crackdown. Beginning in February 2010, the IRS will commence intensive audits of randomly selected employers. One of the focal points of the audits is whether the employers are improperly misclassifying workers as independent contractors to save on taxes and employee benefits.

There’s also new federal legislation on the horizon. Congress is expected to take up legislation that will penalize employers for employee misclassification. One proposed piece of legislation, known as the Independent Contractor Proper Classification Act, was sponsored by President Obama when he was a member of the U.S. Senate.

States are getting into the enforcement act as well. New York and Massachusetts have created task forces to locate employees who are misclassified. Other states such as Maryland and Colorado have enacted new laws that impose harsh penalties on employers who misclassify employees as independent contractors.

Here in Delaware, the General Assembly passed its own law last year imposing stiff penalties on construction industry employers who improperly classify employees as independent contractors to save on business costs and avoid paying appropriate taxes. In addition to penalties of $1,000-$5,000 per misclassified employee, employers who fail to produce requested records can be issued a stop-work order by the Delaware Department of Labor and fined up to $500 per day for each day during which the requested records are not produced.

Compliance, though, presents its own difficulties. The tests used to determine whether someone is an independent contractor or an employee are fact intensive and differ among government agencies. In addition, each state may have its own unique test to determine a worker’s proper status.

Still, the penalties for non-compliance make this a treacherous area for the unwary employer. In addition to federal and state governments seeking unpaid payroll taxes and associated penalties, employment lawsuits in this area are becoming increasingly common. Claims from misclassified workers range from those seeking unpaid wages and overtime, to multi-million dollar class actions lawsuits. Misclassified employees have also successfully recovered retirement benefits, medical coverage for injuries they sustained on the company’s property, and rights to employee stock options and bonuses.

Given the increased attention to this area, the time to act is now. An internal review and audit of worker classifications should be a crucial component for any company that currently employs independent contractors.

Can a State of Emergency Result in Legal Liability for Employers?

2010-02-12T12:57:16Z

Delaware Governor Jack Markell declared a state of emergency and instituted a driving ban limiting driving to emergency vehicles only as a result of the record-setting snow storms that hit the Northeast this week. While State government strongly urged employers to consider their employees’ safety and close their businesses for the duration of the state of emergency, nothing prohibited employers from opening for operation during the storm.

But employers should consider more than employee safety when choosing to open their businesses during a state of emergency. At least one case, decided by the Delaware Superior Court after the blizzard of 1996, noted that an employer could be liable for an employee’s injuries if the employee was called in to work during a state of emergency.

While the general rule is that an employer is not responsible for an employee’s injuries if those injuries are sustained outside of the employer’s property, there are exceptions. One such exception is that an employer may be liable for an employee’s injuries, sustained while travelling to the employer’s property, if the employee is called to work when he was not otherwise expected at work. This exception has not yet been applied to a case where an employee is injured coming into work during a state of emergency.

In the end, while it may be financially costly, employers will garner employee good will and avoid liability for employee injuries by closing during a state of emergency.

Garrison v. State, No. 96A-05-004, 1996 Del. Super. LEXIS 443 (Del. Super. Ct. Oct. 8, 1996).

Delaware Court Rules that Covenants Not to Compete May Be Assigned

2010-02-10T18:23:12Z

Restrictive covenants include agreements by an employee not to compete, not to disclose confidential information, and not to solicit an employer’s clients. Based on a recent decision from Delaware’s Court of Chancery, these agreements are more valuable than ever. Deciding a novel issue in Delaware, the Court held that, absent a provision to the contrary, restrictive are assignable from one employer to another, so long as both employers are engaged in the same business. This means that when businesses merge, employees who are already subject to restrictive covenants with the acquired business do not have to execute new agreements with the acquiring business. In addition, the Court reminds us that contracts defining the employer-employee relationship, are the only way to prevent a competitor from poaching employees in an at-will employment state, like Delaware.

Facts

The background in Great American Opportunities, Inc. v. Cherrydale Fundraising, LLC, is one that will be familiar to many employers. Three businesses were competing in the surprisingly cut-throat world of third-party fundraising (selling fundraising materials to non-profit organizations such as schools and churches, who then sell the materials to their communities to raise money). Two of the businesses, Great American Opportunities, Inc. (GAO) and Kathryn Beich, Inc. (KB) merged, leaving GAO as the surviving business. At the same time, the third business, Cherrydale Fundraising, saw an opportunity to expand its market presence by hiring away several of KB’s sales representatives. GAO discovered what was going on shortly after the merger.

To KB’s credit, it had been a careful employer and almost all of its employees were subject to the trifecta of restrictive covenants: non-competition, non-disclosure, and non-solicitation contracts. However, GAO was not a party to any of these contracts. Faced with a complicated situation, GAO filed a lawsuit alleging that Cherrydale tortiously interfered with the contractual relationship between GAO and its employees, leaving the Court to sort out the details.

Discussion

Before it could address Cherrydale’s activities in poaching KB’s employees, the Court had to decide if there was any formal relationship between GAO and KB’s employees as a result of their merger. Cherrydale argued that Delaware’s doctrine of at-will employment prohibits a claim of tortious interference with a contractual relationship. But KB’s employees were subject to a contract, as they had signed non-competition, non-disclosure, and non-solicitation contracts. Thus, Cherrydale’s first argument was unsuccessful.

The Court next had to determine whether KB could lawfully assign its rights under the employees’ restrictive covenants to GAO, in conjunction with the sale of a business. Surprisingly, this was an issue that had not been thoroughly analyzed under Delaware law. Adapting the general rule that contract rights may be assigned absent a provision prohibiting assignment, the Court held that an employer’s rights under a restrictive covenant may be assigned, in conjunction with the sale of a business, so long as the former employer and the current employer engage in the same type business.

Bottom Line

For employers who have workers with specialized skills, restrictive covenants, including non-competition, non-disclosure, and non-solicitation contracts, are as important as ever. In Delaware and other at-will states, such contracts are the only thing preventing your competitors from poaching your employees and their valuable know-how. But restrictive covenants are now more valuable because they can be assigned from one employer to another in a merger or asset sale. So if your employees are not subject to restrictive covenants, now is a better time than ever to consider whether they may be right for your business’s circumstances.

Great American Opportunities, Inc. v. Cherrydale Fundraising, LLC, C.A. No. 3718-VCP (Del. Ch. Ct. Jan. 29, 2010)