First, I think that it’s a novel concept to equate employees as being the same as “property,” especially in the context of criminally convicting someone for “wire fraud.”   However, in the criminal law context, I don’t think that rusing is the same as wire fraud, unless a company can make a really strong case that an employee is company property and can be barred from going from one employer to another because a recruiter tricked them into leaving, and that the criminal justice system needs to imprison the recruiters perpetrating that fraud in order to prevent them or others from doing the same thing.

Let’s get real about this.  A recruiter who ruses to get past a gatekeeper in order to reach a real decision maker or information holder isn’t committing a federal crime.

But, in answer to the writer who asked if there’s a point where rusing could become illegal the answer is yes.  This will occur when rusing has been clearly indicated as being either criminally or civilly liable conduct.  This can occur via legislation or court decision.  But it hasn’t happened yet.  In the civil law context, liability (money damages or equitable relief) may occur if an enforceable contract or agreement has been violated.

The fact is no one is really sure how, when or if this new Act will be enforced. And, there aren’t any interpretive regulations yet (there are proposed rules available in PDF format at this link; if the link is expired, then search Google). The law basically provides more narrow but explicit definitions of what an independent contractor is, and it only applies to the construction, trucking, landscaping and related trades.

For my client, a trucking company, it’s not a big deal because the independent contractor agreement that I drafted for them months ago is already compliant with the new law. In fact, as long as a business’ independent contractor agreement strictly complies with federal and most states’ laws regarding independent contractors, that business will probably already be compliant. It’s a good idea for any affected business to audit their independent contractor agreements for compliance with this law–better safe than sorry (it’s also cheaper!).

The Act is enforced by the Illinois Department of Labor, one of our state’s more bureaucratic organizations (or as a colleague once said: “They screw everybody equally.”). The basic intent of the law is to prevent construction, landscaping, trucking and similar businesses from “misclassifying employees” as “independent contractors” in order to avoid paying payroll taxes, overtime, workers comp, insurance, etc.

So long as a business maintains strict adherence to the usual independent contractor rules of lack of control over the contractor, which includes hours, equipment, methods of work, etc., that business will probably be in compliance. Also, keep in mind that because the law is new and hasn’t been tested, the Illinois Department of Labor might go easy on businesses that, even though they may have violated the law, are acting in good faith. However, be mindful that the Internal Revenue Service, the Illinois Department of Employment Security, the Illinois Department of Revenue, and other business taxing agencies, might not take a lenient approach.

In short, don’t mess around with employee misclassification in any industry. Generally, the costs to clean up mistakes always exceed the costs to avoid them in the first place.

Hi Charles ,

Thanks for throwing light on this subject ! However, I have a few doubts and would appreciate if You could help resolve them:

1. What is the guarantee that the exiting employee would not reveal the secrets / sue the firm even after signing the severance agreement / taking the money ?

2. is this a common practice in US / other parts of the world?

3. If this is a common practice with the organizations in the US , most of the companies would end up busting their HR budgets by paying severance to the exiting employees and all working population must be aware of this .. your views ..

Regards

Ritu Anand

HR

GE – India

My response to Ritu follows:

Hi Ritu,

Thanks for your questions. They’re excellent and thoughtful. I’m going to post them and my responses to the HR Community’s list serve and on my website.

I’m answering your questions in the same order and number you asked them.

1. What is the guarantee that the exiting employee would not reveal the secrets/sue the firm even after signing the severance agreement/taking the money?

Answer: As a means to discouraging the employee conduct you refer to, all severance and separation agreements should permit the employer to recover damages, costs and expenses from the employee (assuming the legal system permits such recovery). This won’t absolutely prevent an exiting employee from talking, but it increases the likelihood that they won’t breach the agreement.

Even if a severance or separation agreement prohibits disclosure, if the ex-employee breaches, the employer still needs to take enforcement action. This does not necessarily mean that the employer has to sue the ex-employee. The employer can issue some type of warning (letter, phone call, etc.), or the employer can contact competitors and warn them about using such secrets. The latter action poses its own risks due to ethical concerns, antitrust, defamation, libel and slander concerns. Obviously, the most extreme action an employer can legally take is to actually sue the ex-employee for breaching the agreement. A lawsuit will cost the business time and money, even if they can recover damages, costs and expenses from the employee.

With respect to a lawsuit or some other sort of complaint by the ex-employee, this is easier to deal with. As long as the terms of the agreement’s confidentiality, nondisclosure and other prohibitions are legally compliant, no court or other sort of tribunal should adjudicate a lawsuit or complaint, and all costs, expenses and damages should be awarded to the employer.

2. Is this a common practice in US/other parts of the world?

Answer: Yes, this is a common practice in the U.S., and it has been increasing in popularity. These agreements used to be reserved for top executives and are now being used for employees at all levels. The confidentiality and noncompete aspects of these agreements are also commonly used for pre-employment agreements between employers and employees.

With respect to its popularity in other parts of the world, it depends on the nation’s, province’s or region’s legal system. Common law and “Westernized” legal systems are likely to uphold severance and separation agreements as they’re mutually agreed to contracts with valuable consideration exchanged between the parties. Additionally, more capitalistic economies ( e.g., former Soviet-bloc nations) might be more prone to honor such agreements as the protection of the employer’s property (capital) is paramount to innovation and profitability. However, these same legal systems will take measures to protect and ensure an individual’s ability to apply their skills, trade, knowledge and abilities in an unrestricted manner. After all, if individuals cannot freely earn a living, then they cannot consume the goods and services employers produce, and businesses will lose money.

3. If this is a common practice with the organizations in the US , most of the companies would end up busting their HR budgets by paying severance to the exiting employees and all working population must be aware of this .. your views ..

Answer: I briefly discussed your concern in my article. Excerpted below:

“Clients typically ask whether by offering an employee a severance, separation, or some hybrid agreement, they’re setting a legal precedent within their company or creating a feeling or belief of entitlement to such a benefit among employees. In short it’s not likely that the company will be legally obligated to offer the same to other employees. However, if other employees learn about such agreements, there’s a greater degree of possibility that a sense of entitlement will result. So, when deciding whether to use a separation or severance agreement, a business should consider the impact on employee morale, and to at least some extent consider the legal ramifications of using such an agreement.”

To expand further upon this, you might be right to say that “[i]f this is a common practice with the organizations in the US , most of the companies would end up busting their HR budgets by paying severance to the exiting employees.”

There are U.S. companies which have a reputation for caving in to exiting employee demands for large severances because they’re afraid of the public relations ramifications of lawsuits, complaints, ill-will, etc. Some companies just think it’s cheaper to offer money than to defend their record. But, as I indicated above, the likelihood of a legal precedent being set is minimal.

The concerns regarding employee morale and feelings of entitlement can be combated by offering severance and separation agreements infrequently or in extreme circumstances (e.g., in order to protect company confidentiality, capital, etc.), and making it clear to employees that they are at-will employees (if applicable). In other words, it’s relatively easy in an article like this to state in a generic and sterile manner what should or shouldn’t be done. It’s a completely different matter to actually draft and execute an agreement in a way that sufficiently communicates to a particular employee and the entire workforce that this is an isolated and unique circumstance, and a serious and binding agreement with provisions that must be honored. In short, how individual businesses and practitioners implement severance and separation agreements is crucial. Issues with execution are what leads to misunderstandings, disputes and your questions. I personally believe that many of the issues you allude to are avoidable and resolvable via a professionally drafted and executed severance or separation agreement and the advise of competent legal counsel.

Now, a few caveats. My original statement, as well as my response to your questions, are general statements and not intended as legal advice nor do my statements create any sort of attorney-client relationship. Moreover, as stated above, every circumstance is unique and might require its own unique agreement, contract and mode of execution. Again, consult competent legal counsel before taking any action.

I hope that this answers your questions. Feel free to ask for additional information or opinions. Moreover, thanks for taking the time to read the article.

My part of the panel discussion concerning legal, accounting and cultural considerations for international trade was a general overview and discussion of factors to consider for assessing the legal and cultural environments of countries, regions, provinces, etc.

Presentation Handout: Legal & Cultural Considerations for International Trade (PowerPoint)

Due Diligence (DD) is Key to Addressing Legal & Cultural Considerations

• No matter which resources you use, whether people or documents, verify credibility.

• Create an alliance or relationship with a trustworthy foreign based contact or contacts
  • Do due diligence on those contacts
    • Invest at least 1-3 hours of research on each contact
    • Research name, addresses, legal actions, property ownership, how many other people have that name in that nation, region, province, city, etc., talk to references and ask those references for additional references
    • Use Lexis/Nexis, Westlaw, ProQuest, Factiva, FirstSearch, ERIC, any other legal, news, property databases.

• If possible, meet contacts in person

• But, conducting DD doesn’t always mean hours spent researching & analyzing

• More specifically, if you have a trusted resource that makes recommendations for you, then that could = DD
  • Use the WTCs, chambers of commerce, government agency or private company resources, matchmakers, databases, etc.
  • Let others conduct the DD for you

• Do DD on contractors & subcontractors

Legal & Business Climate

• Must understand the differences in their legal system versus ours
  • Is it a common law nation?
  • Do they have a uniform code of commercial
  • Do they respect property rights/ownership?
    • Real property
    • Intellectual property
  • If you use overseas human resources/human capital then what laws apply to your treatment of them?
  • Does our system of business entity designation mean the same there as is does here?
    • I.e., is a corporation, partnership, trust, etc., treated the same there as here
  • Does the country, state, region or province honor/uphold/enforce contracts between individuals or businesses?
    • How are contracts or agreements honored, upheld, enforced or terminated?

Government Structure

• Must understand the differences in their government structure and bureaucracies
  • How long does it take to obtain the needed recognition or licensing to legally conduct business?
  • What agencies/bureaus license?
  • What licenses, certifications, etc. are required?
  • What are the fees? When are fees due?
  • What paperwork is required?
  • What are the penalties for mistakes, unethical or illegal conduct?
  • Are bribes necessary?

Protect Yourself in Writing-If Possible

• It’s impossible to document everything

• There’s no such thing as an impenetrable contract or agreement

• But, IF POSSIBLE you want to capture your intentions is as much detail as possible
  • And you want the other party to acknowledge your intentions in writing too–initialize, signature, notarized (increasingly becoming antiquated), signed agreements, side agreements, etc.

• IF POSSIBLE, include language for exiting or terminating the agreement or contract

• IF POSSIBLE means does that country, province, region, state, etc., treat oral agreements or contracts the same as written agreements; what takes priority?

END

Generally, severance refers to giving an exiting employee a monetary bonus or settlement above and beyond their regular compensation. A separation agreement usually refers to an agreement wherein the exiting employee promises not to sue, file a regulatory agency complaint, take business or information with them, or compete with their former employer. In return, the employer gives the employee something of value (usually money).

So, a business could give an exiting employee severance without a severance or separation agreement, but usually doesn’t use a separation agreement without awarding some form of severance (i.e., consideration). If this is confusing, the below will hopefully clarify my point.

Recently, a client asked me about a separation agreement for an employee over the age of 40. This makes an interesting topic for a blog post (at least for a labor & employment law related blog :-) ).

Relative to dealing with an employee who’s 40 or older, if the employer is seeking a release of all claims pursuant to the Age Discrimination in Employment Act (ADEA), there’s a 21/7 rule that applies. Under the rule, which is actually contained in Section 201 of the Older Workers Benefit Protection Act, a release of claims under the ADEA is only valid if the employee’s release is “knowing and voluntary.” More specifically, in order to be “knowing and voluntary,” the exiting employee has 21 days to review the agreement, with or without legal counsel, and has an additional seven days in which to revoke their signature (beyond the initial 21 day review period). Other requirements may apply given certain considerations. In short, depending on the nature of the separation agreement, the 40 and older employee might have rights not afforded to younger employees.

Regardless of the exiting employee’s age, a separation or severance agreement that’s intended to release the employer from all known or unknown claims is essentially the employer’s purchase of the employee’s agreement not to sue or file a complaint with a government agency, not to take business or information to a competitor, or sometimes, to not even work for a competitor.

When I’m initially contacted about this type of employment agreement, I ask the client why they think they need such an agreement. More specifically, what are your goals/purposes: to reward an exiting employee for tenure and/or quality of service, to prevent a lawsuit or complaint from being filed, to protect the confidentiality of company secrets and information, to prevent an employee from competing with them, or a combination of the aforementioned?

Businesses often ask:

• Should we offer severance to an exiting employee?
• When should we offer it?
• How much should we offer?
• Are the terms negotiable?
• Should we ask an exiting employee to sign a separation agreement that includes noncompete and confidentiality clauses?
• What about protected class considerations (e.g., race, sex, age, disability, etc.)?
• What will my other employees or competitors think if they find out that an employee signed such an agreement or received severance?

In order to help the employer focus on what issues they need to resolve, a business should analyze whether the exiting employee has been contentious or dropped hints of a lawsuit or complaint, or commented about the competition or competing with the employer. In order to help focus the employer on what issues they need to resolve, a business should analyze whether the exiting employee has been contentious or dropped hints of a lawsuit or complaint, or commented about the competition or competing with the employer. If an employer believes that an employee will sue or complain to a regulatory agency, then a separation or separation agreement should be strongly considered. If a lawsuit, complaint or any other factors of the employee’s exit isn’t a concern, then a severance or even no action might be appropriate.

Keep in mind, that unless there’s a contract or agreement to the contrary, or obligations under the Worker Adjustment Retraining & Notification Act (WARN), severance isn’t necessarily required, and in many instances an employee can just leave.

Clients typically ask whether by offering an employee a severance, separation, or some hybrid agreement, they’re setting a legal precedent within their company or creating a feeling or belief of entitlement to such a benefit among employees. In short it’s not likely that the company will be legally obligated to offer the same to other employees. However, if other employees learn about such agreements, there’s a greater degree of possibility that a sense of entitlement will result. So, when deciding whether to use a separation or severance agreement, a business should consider the impact on employee morale, and to at least some extent consider the legal ramifications of using such an agreement.

One way of reaching a bottom line for these agreements is that an employer should not enter into an agreement with an employee, and have to engage an attorney, unless the employer is reasonably sure that they’ll obtain a benefit from the transaction that they wouldn’t get in the normal course of business. Ultimately, as with most business decisions, whether to utilize an agreement or not is a cost versus benefit analysis.

Consistent with my Disclaimer the above is a general discussion–i.e., every specific issue or case leads to its own specific resolution and should be handled accordingly.