|As of September 1, 2008,Vincent DiCarlo
is no longer engaged in the private practice of law.
and is provided for historical purposes. See disclaimer below.
APPENDIX 2--TERMINATION LETTER
GENERAL STRATEGIES FOR AVOIDING LITIGATION
Sooner or later, most businesses will be sued by one of their employees. Most of these suits would not be brought without two essential ingredients--a motivated employee and a triable case.
In order to avoid lawsuits, you systematically look at each of the areas that most often cause problems and implement practices that are designed to avoid motivating the employee and to make the case against you untriable by establishing and documenting your defenses. Problem areas that should be examined include claims for wrongful discharge, unpaid leave or overtime, defamation, and discrimination or sexual harassment.
1. How to Avoid Motivating the Potential Litigant.
Many people live their entire lives without ever suing anybody. When an employee goes to see a lawyer, it generally means that the litigant is truly angry, or has dollar signs in his eyes, or both. Therefore, by treating your employees fairly and with respect, and by implementing sound procedures that will keep you from presenting a tempting target, you can avoid many potential lawsuits. The specific ways that you do this are covered below in connection with each of type of claim.
2. How to Discourage a Plaintiff's Lawyer
People generally do not bring their own lawsuits. Nor will most of your employees have enough money to pay a lawyer $100 to $200 per hour to prosecute their claims through the courts. This means that the vast majority claims that are brought against employers are being brought by lawyers who have agreed to take the case for a contingent fee.
Lawyers generally are not willing to invest the time necessary to pursue a case for a contingent fee unless they think they have a good chance of winning and the prospective damages are substantial. Therefore, if you can make the potential cases against you look like losers to a plaintiff's lawyer, you can usually avoid a lawsuit.
3. How to Preserve and Document Your Defenses
You make the case against you look like a loser by preserving and documenting your defenses. Below we will explain how to do this in the context of some of the most common claims. However, there are some general principles that may be helpful.
Everyone will tell you to have thorough documentation. However, this advice will not help you with the two really tough issues: what to document and how much documentation is needed.
4. What to Document
Documentation is a two edged sword. It is common knowledge that your own documents can be the most damaging evidence against you in a lawsuit. There is no way to avoid the chance that one of your documents will end up hurting you. However, you can minimize this risk by knowing what to document.
You document your defenses, that is, the facts that show that, in each case, you acted fairly and properly. For example, you would document the fact that you gave a warning, that you specified consequences for noncompliance, that you did not make any promises, that you made an accommodation for a disabled employee, that harassment is forbidden in your company, that you did an investigation of a complaint, and that you had a good reason for discharging an employee.
While you do not create records that are misleading by omission, you need not and should not go out of your way to document obviously adverse facts. You should most especially not document your unspoken fears, conjectures, speculations, and doubts.
For example, if you are at a meeting at which a problem is being discussed, do not record what was said by the participants. And most especially do not record your concerns. You would be amazed at how many people take notes, which will probably have to be given to opposing counsel, that say things like "uh oh, we may have a problem here" or "could be a disaster." With documentation like that, it probably will be.
However, if your company is following sound procedures, it is best to assume that documentation is desirable, unless that is obviously not the case.
5. How Much Documentation is Needed
Once you have decided that a fact should be documented, you have to decide how much documentation is enough. To do that you use DiCarlo's law of documentation, which states that the amount of documentation that is needed for any fact is in direct proportion to the amount of danger inherent in being unable to prove that fact. In other words, the more risk, the more documentation.
The lowest level of documentation is internal memoranda, records, or notes. These may be sufficient for many routine purposes, such as a first warning to an employee about a tasteless joke.
Higher risk means more documentation. The second level of documentation is a document that you give to the employee, like a letter or a memorandum to the employee confirming your warning about a more serious problem.
High risk requires a high degree of documentation. The third level
documentation is a document that the employee signs, like an employment
agreement, an annual acknowledgment, an evaluation, or a memorandum
a situation that may result in discharge or disciplinary action. For
kinds of meetings, you will want to have a second manager present as an
Your instincts, if you learn to pay attention to them, will usually be a good guide to when you are dealing with a risky situation.
HOW NOT TO GET SUED BY AN EMPLOYEE
1. The Four Most Common Ways to Get Sued
The four most common kinds of claims by employees are for wrongful discharge, claims for unpaid leave and overtime, defamation, and discrimination and sexual harassment. We will examine each one in turn below.
2. Your Friend the Annual Acknowledgment
The most useful single document for avoiding a lawsuit by one of your employees is an annual written acknowledgment.(2) Plaintiffs' lawyers hate employee's acknowledgments, and with good reason. A good recent acknowledgment cuts off many of their favorite theories at the knees, and can prevent them from even taking a case, let alone filing a suit. It can also give you grounds to win the case before trial by a motion for summary judgment. Haggard v. Kimberly Quality Care, Inc., 39 Cal.App.4th 508 (1995).
A good acknowledgment should have a preamble and should cover at least the following areas: receipt of the employee manual, the at-will employment relationship, the lack of any promises of tenure or advancement, the lack of uncompensated overtime, the amount of any accumulated leave, and the lack of any discrimination or harassment.
The preamble should say that the employee need not and should not sign the form unless the statements in it are completely true and accurate. It should instruct the employee to talk to certain specified officials of the company before signing the acknowledgment if any changes or corrections are necessary to make it completely accurate.
After the preamble, the employee acknowledges that he has received the office manual effective as of a certain date, and that he understands that it is his responsibility to familiarize myself with the information, procedures, and policies described in that manual. The employee agrees to abide by the principles and practices explained in the manual, and to contact certain specified officials of the company if he has any questions about its contents. The employee acknowledges that the policies and procedures contained in the manual are subject to change, and that the manual is not intended to be and does not constitute a contract of employment.
The employee then acknowledges that no promises or assurances of any kind were made to him to accept or to continue his employment, that he knows that no one is authorized to make any such promises, and that any such promises could not reasonably be relied upon.
Next, the acknowledgment says that the employee understands and agrees that his employment is "at will," which means that either the Company or the employee may terminate the employment at any time that either of them desires it, with or without any reason, and that no written or oral promises, assurances, or representations to the contrary, whether express or implied, have been made to him at any time, whether before or during his employment.
Overtime and leave come next. The employee warrants and represents that, since he was first employed by the company, he has not worked any overtime that he has not reported in writing to certain designated officials of the company and that, as of the date of the acknowledgment, he has not worked any overtime, holidays, or other time in addition to normal office hours for which he have not already been properly compensated at the proper overtime rates. He states the number of hours of untaken leave he has accumulated as of the end of the last completed pay period.
Finally, the acknowledgment deals with discrimination and harassment. The employee warrants and represents that, since he or she was first employed by the company, he or she has not been the victim of, or witnessed any evidence or indication of, any form of harassment or discrimination at or by the company based upon race, color, religious creed, sex (including gender harassment, and harassment due to pregnancy, childbirth, or related medical conditions), marital status, age, national origin, physical or mental disability, or ancestry, other than any incident that he or she may already have reported in writing to certain designated officials of the company. As to any incident that the employee may have reported, and of which the employee may have been the victim, the employee acknowledges that he or she has been informed of the outcome of the company's investigation into the matter.
The acknowledgment should be signed by the employee and a supervisor, who will then be able, if necessary, to testify to its due execution, and should be kept in the personnel file for at least four years after the employee leaves the company.
You should have your lawyer prepare or review your form acknowledgment to make sure that it is complete and does not contain anything that can be used against you.
No document, and no other preventive measures, can completely eliminate the risk of getting sued. However, if you take the time to prepare a thorough employee acknowledgment, use it consistently, and keep the executed copies in a safe place, it can be the cheapest and most effective lawsuit repellent that you ever obtain.
If you are sued by an employee or ex-employee, you can be sure that his lawyer will not be so casual about what you have put down in black and white. Now is your chance to make sure that the hostile lawyer won't like what he sees! If you follow a few simple rules below for improving your policy manual now, you may be able to avoid a lawsuit entirely, or at least substantially strengthen your position in case you are sued.
Every employee manual should include a prominent disclaimer saying that it is not and does not constitute a contract of employment. Many a lawsuit is brought by an ex-employee who claims that some provision or other in an employee policy manual constituted a binding commitment that was breached by the company.
Then, go through the manual and systematically strengthen the documentation of your at-will employment relationship. The at-will relationship is your first line of defense in any wrongful termination lawsuit, and you should bolster it wherever and whenever you can.
Start by including a general section affirming the right of both the employer and the employee to terminate the employment at will either with or without notice, and the employer's right to change the conditions of employment at will. Add a statement that no one in your company is authorized to represent anything to the contrary, except in a formal written contract of employment that is signed by a designated officer. Finally, require employees to report any instances of unauthorized promises or representations to the contrary.
Repeat the at-will affirmations in connection with each specific area in which there is a danger of drawing an inference of anything but a pure at-will relationship. For example, if you have grievance procedures, include a statement that those procedures are subordinate to both parties' right to terminate with or without notice and with or without cause. If you have lists of prohibited activities or activities that may lead to specific disciplinary actions, say that those consequences are neither exclusive nor meant to preclude other or more drastic action.
Don't stop yet. If you have probation provisions, say that completing probation does not alter the at-will relationship. If you have lists of factors that may be considered in decisions about promotions, say that the listed factors are given as examples only, are not mandatory or exclusive, and are not meant to constitute a promise of promotion or continued employment. Keep going through the manual until you have identified and neutralized all similar potential problem areas.
Next, start at the beginning and go through the entire manual again looking for and eliminating anything that is superfluous or unnecessary. There is always a chance that even the most seemingly vacuous drivel will come back to bite you, so don't say anything without a good reason. As you go through the manual, look for phrases like "employer shall" and "employer will." Change all the "shalls" and "wills" to "mays." Look for any language that could be tortured and twisted by an crafty plaintiff's lawyer into a promise or commitment and take it out.
Once you have given your manual a thorough going over, there are still a few more necessary tasks to complete. Many businesses with perfectly adequate policy manuals run into a buzz saw because they fail consistently to implement these three simple but essential followups.
First, you should carefully review and update your employee manual at least once a year. Second, you must be have records that will enable you to determine and produce a copy of the exact version of the manual was in effect at any given time. Therefore, you the cover of each manual should include an effective date and you should keep each succeeding version of the manual in a chronological file.
Third, you should distribute the manual to all your employees and get an signed acknowledgment from each of them at least once a year. The acknowledgment should say that the employee has received and read the policy manual effective as of the date on the cover, that the employee understands that it is his responsibility to familiarize himself with the information, procedures, and policies described in that manual, and that the employee agrees to abide by the principles and practices explained in the manual.
The acknowledgment should go on to say that the employee understands that he should contact certain designated officers of your company if he should have any questions or need clarification as to the content or interpretation of the policy manual. Finally, the acknowledgment should say that the employee understands that the policies and procedures contained in the employee manual are subject to change, and that the manual is neither intended to be, nor does it constitute, a contract of employment.
By the way, the annual written acknowledgment can and should do a lot more than bulletproof your policy manual, and a future column will be devoted entirely to how to make the most of such one. Nothing you do can eliminate all risk of being sued. However, if you carefully follow the steps above, you can at least be confident that you will not ambushed by your own policy manual.
5. How to Hire
It should be obvious that the better you hire, the fewer problems you are going to have. Therefore, one of the most important ways you can avoid being sued by an employee is to hire good employees. Do not be seduced by the availability of probation periods to hire marginal persons in the fond hope that it things might work out. Remember the rule that more than 90% of all mistakes in judgment are due to wishful thinking.
When you hire you should always use an employee application and all job references. You also should check litigation databases to see whether the employee has sued his previous employers! Now that you can get this information on the internet in five minutes either cheap or for free, there is simply no excuse not to do so. If you don't know how, ask your lawyer. If he doesn't know how, get another lawyer.
While it is important to gather relevant and proper information about prospective new hires, it is equally important to avoid inquiring into protected status issues. Don't ask about an applicant's marital status, health, or childcare arrangements.
If you want to do drug testing, you should consult your lawyer. Such testing is sometimes permissible, and sometimes impermissible depending on the circumstances and the nature of the job. Also, the law in this area is developing. However, in general, it is easier to justify pre-employment testing than post-employment testing. Loder v. City of Glendale, 14 Cal.4th 846 (1997).
6. Avoid Procrastination
Someone who has been working for you for a long time is much more likely to sue you for being terminated. Usually, the problem employee realizes that he or she is in disfavor, and procrastination causes a buildup of resentment. Longevity is also, a factor that can be used by a court or a jury as a basis for finding that an implied in fact contract. Moreover, procrastination gives you more time to make a mistake, and it carries with it a risk of enhanced damages for emotional distress.
By far, the best time to terminate is during the initial probationary period right after hiring. Therefore, you should not extend the probationary period without a really good reason and you should not keep a questionable employee past the initial probationary period in the hope that he or she will improve. If, after the initial probationary period, and after a fair warning, the employee fails to bring his or her performance up to a specific standard, end the employment. Do not let a bad situation drag on for months and years while the employee rankles and dreams of sweet revenge.
7. How to Conduct a Safe and Effective Exit Interview
Exit interviews are useful, and should be done whenever an employee leaves your company, whether voluntarily or not. They are also dangerous. It is therefore important that the managers who are responsible for conducting your exit interviews have a clear idea of the matters that need to be covered, the things that it is ok to say, and the things that, if said, may get you into a lawsuit.
Because they are the most troublesome, we will focus on exit interviews of employees who you have discharged. It is best to have at least two managers present at such an interview in case there is a dispute about what went on in it.
First, tell the departing employee that the company has decided to terminate his employment due to unsatisfactory performance, tardiness, failure to follow instructions, reduction in force, or other specified reasons that have been preapproved by your lawyer. You should always have, and be able to document, a factually solid, sensible reason for terminating an employee, regardless of whether or not the employment was at will.
Even if you don't consult your lawyer every time that you discharge an employee, you should ask him about any reason that you may have that is not on the list above. You need to be sure that you don't fire someone for a reason that is improper or that can easily be made to look suspect.
Remind the departing employee of your previous discussions, if any, with him concerning the problems for which he is being terminated. Tell him, if applicable, that, as a result of the lack of sufficient improvement in the relevant areas, you cannot continue his employment.
If, as you should, you are offering the employee a severance package that contains releases of liability, tell him that you are willing to offer him a severance agreement that would give him certain benefits. Then give the employee your standard termination letter,(3) the severance agreement, and an extra copy of the usual COBRA notices. The COBRA notice must also be sent by mail within 14 days.
Give the employee the booklet from the California's Employment Development Department concerning unemployment benefits. If you don't have this, you can get it from EDD or your lawyer.
Listen carefully and patiently to what the employee has to say, especially including any complaints he may have. If he expresses disagreement with the reasons for his termination, ask him why he thinks that, and later consider what response may be appropriate, perhaps in consultation with your lawyer. Do not argue with him. Simply say that you are sorry that you do not agree with him and are surprised at any untrue statements that he may make.
Ask the departing employee whether he has any documents or records belonging to the company, including lists of clients, and arrange for their return. Remind the employee that he has a continuing obligation to maintain the confidentiality of the company's business after his departure. Make arrangements for the employee to remove his personal belongings at your mutual convenience.
Ask whether the employee's records relating to compensation are up to date. These might include records relating to sales or leave taken. Tender the employee a check for all accrued compensation, including any accrued salary, leave time, vacation time, commissions, or other amounts that may be due. If there is any disagreement about compensation, tender the amount that you believe you owe, and offer to get back to the employee as to any disputed amount.
There are certain things that, while not necessary, probably won't get you in trouble. For example, It is ok to express your regret that things did not work out well enough for you to continue the employment of departing employee. It is also ok to remind him of any efforts that you made to help him to meet your requirements. You may wish him good luck.
Other things are not ok, and may be expose you to litigation. Do not argue with the employee. It is useless, creates bad feelings, and may cause you to say something that you will heartily regret hearing repeated in court.
Do not tell the departing employee or suggest to him in any way that he is incompetent or dishonest. This is important since such statements may form a basis for tort liability for defamation. Do not suggest that the amount or timing of payment for accrued compensation depends on whether he signs the severance agreement.
Do not promise the employee anything that is not described above, for example, a good recommendation or help in getting another job. Recommendations or references can be a thorny area that involves potential liability to suit, so if someone asks for one you should consult with your lawyer about what your policy should be on the subject. Randi W. v. Muroc Joint Unified School Dist., 14 Cal.4th 1066 (1997) (former employer held liable for negligent recommendation where teacher sexually molests student at new job); Jensen v. Hewlett-Packard Co., 14 Cal.App.4th 958, 965, 18 Cal.Rptr.2d 83 (1993) (libel action may be based on false accusations in employee evaluation form of criminal conduct, dishonesty, incompetence, or reprehensible personal characteristics or behavior); Marshall v. Brown, 141 Cal.App.3d 408, 412, 190 Cal.Rptr. 392 (1983) (wrongful interference liability based on negative comments in former employer's evaluation letter).
Do not give a false reason for the termination, or deny the true reasons. People sometimes are tempted to do this out of a misguided desire to avoid hurting the departing employee's feelings. You should resist that temptation.
If anything unanticipated or troublesome comes up, or the employee accuses you or a fellow employee of some kind of improper behavior, such as improper discrimination or harassment, postpone any response until you have had a chance to carefully consider the information, perhaps in consultation with your lawyer. Don't try to improvise a response.
A carefully structured, well thought out exit interview can ensure that you carry out necessary transitional tasks, end the employment relationship without unnecessary hard feelings, and help to keep you out of court. It should be part of every employer's regular practice.
CLAIMS FOR WRONGFUL TERMINATION AND HOW TO AVOID THEM
As with all claims, you avoid claims for wrongful discharge by not motivating the employee and by making the case untriable. For wrongful termination, you do this by preserving and documenting the "at will" relationship, by using the probationary period to discharge employees who are not fully satisfactory, by documenting the existence of good cause for any adverse personnel action, by documenting the lack of bad cause, and by getting a release if you can.
A case for wrongful discharge can be brought under many different legal theories, and the usual complaint contains at least several of such theories. The usual ones are Formerly, punitive damages were available. Foley eliminated punitive damages for claims for breach of contract, making this these claims attractive to plaintiffs. However, compensatory damages are still available under the contract theories, and punitive damages are still available for many of the noncontractual theories. Damages for emotional distress are also available under certain theories.
The most common legal theories are breach of express contract, breach of implied contract, breach of the covenant of good faith and fair dealing, negligent or intentional infliction of emotional distress, fraud, and defamation.
Claims for breach of express contract may be oral or written, and may be based on personnel manuals or memoranda or a job application.
Claims for breach of implied contract may be brought where the circumstances give rise to reasonable expectation of tenure on good behavior. Implied contract theories are strongest where the employee has been working for the company for a number of years, though long service is not a prerequisite.
The covenant of good faith and fair dealing is implied in law into every oral and written contract in California. Claims for its breach are therefore a species of claim for breach of contract. The main significance of this covenant is that, until recently, breaches of this particular covenant, unlike the others in the contract, was considered to be grounds for punitive and other tort damages. The covenant of good faith and fair dealing does not convert an at will employment relationship to employment on good behavior.
Negligent or intentional infliction of emotional distress can be based on virtually any kind of behavior that is considered to be unkind or improper. Therefore, avoiding this claim is usually a matter of not doing something that will be seen as cruel or oppressive by a judge or jury.
Fraud usually comes into complaints for wrongful discharge in the context of allegedly untrue statements or insincere promises that were made to the employee in connection with his employment. A plaintiff's lawyer will often stretch to bring in a claim for fraud because, it carries with it the possibility of both punitive damages and damages for emotional distress.
Until recently, defamation claims were fairly common in complaints for wrongful discharge. There were two common kinds of defamation theories. One was that, in the course of deciding to fire the plaintiff, his supervisors talked about him to each other and to the other employees about the cause for the discharge, thereby defaming him. This theory is no longer as common because of recent appellate cases that say that such internal statements are privileged where they are limited to persons who have responsibility for making the personnel decision and there is no evidence of bad faith. See, e.g., Cuenca v. Safeway San Francisco Employees Fed. Credit Union, 180 Cal.App.3d 985 (1986).
The second common defamation theory was based on unfavorable statements made by the former employer when it was called by potential new employers. While there have been some legal inroads into this theory, it is still alive and well. Robomatic, Inc., v. Vetco Offshore, 225 Cal.App.3d 270 (1990). Therefore, when called by a potential new employer about a former employee, the safest course is, as a uniform matter of policy, only to confirm the position or positions held and the dates of service.
Luckily, you don't need to know all of the details of each legal theory that may be used by a potential litigant in order to take sensible and effective steps to avoid being sued. Likewise, we will not belabor the obvious, by dwelling on the need to tell the truth in your business dealings. Nor will we assume that you have nothing else to do in your business than try to avoid litigation. Rather, we will discuss practical and nonobvious measures that can really do you some good, without absorbing an unreasonable amount of time and effort.
We have already talked about how to avoid motivating the employee by not hiring people that you will be likely to have to fire, by not surprising your employees, and by avoiding procrastination when disciplinary action becomes necessary. Now we will talk about how to make the former employee's case untriable, beginning with conduct of the internal investigation.
to Conduct an Internal Investigation that Won't Backfire
There are many circumstances in which your business may need to conduct an internal investigation. Since one of the most common such situations is the an investigation of a complaint of sexual harassment, we will use that as an example.
You should consider involving your legal counsel at an early stage of any internal investigation where there is an indication of a serious problem. This can be important if there is a later lawsuit.
If your internal investigation is properly conducted by a lawyer or under his supervision, some or all of the written materials and communications related to the investigation may be protected from future disclosure to parties adverse to you by attorney-client privilege, the attorney work product rules, or both.
Communications between your lawyer and an agent of the company may be subject to attorney-client privilege. This privilege is, in some respects, narrower than work product protection. However, it is absolute: if it exists and is not waived, an adverse party cannot get the substance of the communication no matter how great its alleged need for the information. In order to avoid waiving the privilege, the privileged communication must not be disclosed to anyone other than the attorney and the client. In the case of a corporation, this means that only the corporate agents responsible for seeking advice from the lawyer should be privy to their communications.
Second, communications between the company and the lawyer should be segregated from other material that may not be privileged or whose attorney-client privilege may later be waived.
Other material that is developed in the investigation, because it is being done by your lawyer or under his supervision, and in contemplation of possible litigation, may enjoy limited protection as attorney's work product. Examples would be notes of interviews with witnesses. This information could be obtained later in litigation by order of a judge under certain circumstances.
In order to maintain these privileges, you should segregate any notes or other documents that you generate in the course of this investigation in a separate file. Mark each document that was prepared specifically for the lawyer's review "Privileged and confidential communication for legal counsel only." Keep communications to the lawyer separate from other material, such as your notes, that may enjoy only work product protection.
You should do your best to maintain all applicable privileges. However, it is best to assume that there is some possibility that anything that you write down will eventually fall into the hands of any eventual opponents. Therefore, it is important to make records only of matters that are necessary and pertinent. Please do not record your mental impressions, guesses, opinions, conclusions, and so on.
The goal of, say, an investigation of a complaint of sexual harassment is to conduct a fair, thorough, and expeditious inquiry into the complaint, to determine whether anyone involved has been guilty of any misconduct, and to determine any additional facts that may be relevant to your determination of what action is necessary or desirable with respect to any of your employees.
In order to respect the privacy of the parties, and to ensure a timely completion of the investigation, it is important to attempt to avoid straying from issues that are relevant to these goals. In particular, you should avoid any unnecessary inquiry into anyone's religious beliefs or theories, private sexual practices or activities, or other personal business. You should make your desire to avoid unnecessary prying clear to the witnesses who are interviewed and try to keep our interviews focused on the issues. Because of the nature of the issues that have been raised, this will require tact and judgment.
Two officials of the company should be present for each interview. One of them should conduct the interview and the other should take careful notes, which should not be shown to anyone but responsible officials of the company and your lawyer. In order to avoid the appearance of ganging up on the interviewee, the note taker should not ask questions. If the note taker thinks of a question that should be asked, she should make a note of it and discuss it with the questioner during a break.
If a witness expresses a desire to leave, or declines to answer certain questions, you should tell him that, while you cannot require him to cooperate, to the extent that he does not cooperate you may be forced to make whatever decisions are necessary without the information that you are unable to obtain from him. If the witness wants to take a short break, you should of course comply. It is important to be polite and tactful, regardless of any provocation, so that the interview process itself does not become part of someone's complaint.
In an investigation like this, there is a danger of making yourself subject to a claim for defamation. Therefore, it is important not to repeat charges that may have been made against a person or unfavorable facts about him to anyone other than the person himself. If you're interviewing a witness about the possible misconduct of another person, just find out what the witness knows, don't repeat what you may have learned from another source.
You should go into any interview of a witness with an outline of the questions that you intend to ask. However, the outline should not be taken as exhaustive. You will have to follow up on the answers and pursue any relevant further lines of inquiry that become apparent.
If you ask about documents, show them to the witness, then mark the copies that you used so that we will have a record of what you showed her. In addition, after you review these questions, let me know if you have any questions, additions, or suggestions related to them. Try to let your lawyer know ahead of time when you will be conducting each interview so that he can try to be available by telephone in case any questions or problems come up while it is going on.
Usually, it is best to interview the complainant first. Then, you should prepare an outline of questions for the second witness. Try to be alert to any indications of other possible witnesses who can be interviewed.
d. Closing the Investigation
When your investigation is done, tell the complainant your conclusions and the action, if any, that you took as a result, but do not convey the substance of the statements of any of the other witnesses. If you are not sure whether you might be facing potential trouble, call your lawyer.
2. How to Nail Down the "At Will" Relationship
In California, all employment is presumed to be "at will," unless there is an agreement to the contrary. Labor Code Section 2922. This means that, in theory, an employer does not need to show that he or she has a good reason to discharge an employee. Mallard v Boring, 182 Cal.App. 2d 390 (1960). However, even where employment is at will, certain bad reasons, like age discrimination, will subject you to liability.
The at will presumption may be rebutted by evidence of any agreement, whether express or implied, and whether written or oral. Pugh v. See's Candies, Inc., 116 Cal.App.3d 311 (1981). You need to preserve and document the at will relationship so that your reasons for discharging an employee will not be second-guessed by a judge or a jury. You do this by, first, watching what you say and what you write. For example, praising an employee where it is deserved is good management; vague promises of reciprocal loyalty or future rewards are asking for trouble.
You should also carefully review your policy manual and personnel memoranda. Any vague promises or assurances should be eliminated. If the policy manual contains any specific causes for discipline or discharge, there should be a disclaimer in the same section clearly reaffirming that, notwithstanding the causes listed, continued employment is at will and can be terminated with or without cause by either the employer or the employee.
You should also get periodic written acknowledgments of the at will relationship. These acknowledgments should be contained in the job application, the policy manual, the periodic written reviews, and in an acknowledgment that each employee should sign at least annually.
This annual signed acknowledgment is one of your most powerful tools. It should be reviewed by your lawyer and should contain a clear acknowledgment and agreement that the employment will continue only so long as both employer and employee wish, that termination may be for any reason or for no reason, and that no contrary promises or statements have been made.
3. Establishing Termination for Good Cause
Once you have done everything possible to establish and maintain an "at will" employment relationship, it does not mean that you can neglect to have and document good cause for any discharge or other adverse action. You must always have and document good cause and warnings, even though they may not theoretically be necessary.
There are several good reasons for this. The first is that, if you don't have a good reason for what you do, people will be ready to believe that you had a bad reason. Even in an "at will" employment, you cannot fire someone for a reason that is "contrary to public policy" or that is specifically forbidden by a multitude of laws and rules.
Second, no matter who hard you have tried to establish and maintain at will employment, there is no guarantee that you will prevail on this issue at trial. Therefore, it is essential to establish a backup defense of good cause.
When it comes to establishing the factual basis of good cause, such as, say, the fact that the employee was harassing a coworker, you do not have to prove that you were right. Of course, you should always try to make sure that you are right. However, there are cases that hold that a reasonable belief may be good enough. Hicks v. Pacific Bell (Second Dist. 2/5/97). If you have conducted a fair and thorough investigation using the methods described elsewhere in this manual, you should be able to establish your good faith belief in the truth of your facts.
Some specific causes for discharge that have been upheld by the courts are failure to perform, reduction in force, misbehavior, and failure to follow proper instructions. This list is not exclusive.
These are considered good cause for employment at will or for an indefinite term. The list of causes for terminating an employment contract for a definite term before its expiration is shorter, and is given in Section 2924 of the Labor Code.
In order to strengthen your hand in establishing the validity of your usual reasons for termination, you should include a nonexclusive list of causes for termination in your policy manual.
In addition to documenting your good cause, you should take equal care to document a lack of bad causes. An employee often claims bad motive on the part of one or more of the managers who were involved in his termination. Therefore, it is a good idea to anticipate this possibility by involving more than one manager in every discharge.
Where there is a specific anticipated complaint, involve someone who is immune from that complaint in the process. For example, where you anticipate complaint based on gender or race, involve a manager of the employee's gender or race. Where you anticipate a complaint based upon personal conflict, make sure that all of the evidence is considered by and the ultimate decision is made by a person or persons who have not been involved in the alleged personal conflicts.
4. Avoiding the Defamation Theory
Defamation includes libel and slander. Oral defamation is called slander. Written defamation is called libel. A claim for defamation often accompanies claims for wrongful discharge or be an independent suit.
The elements of a claim for defamation are a false, unprivileged, statement to a third party that causes damage to reputation. You make this case untriable by avoiding and documenting the avoidance of each of the five elements of the claim.
In order to have a defamation you have to make a statement, whether orally or in writing. Therefore, it is a good idea not to say anything about an employee that you don't need to say.
The prime example of where making unnecessary statements is in connection with job references. The safest policy about job references is, as a matter of uniform policy, to confirm the positions held and the dates of employment, and to say or confirm nothing else.
Saying anything else is risky, whether regardless of whether the reference is a good one or a bad one. If you give a bad reference you risk a claim for defamation or interference with prospective economic advantage. Jensen v. Hewlett-Packard Co., 14 Cal.App.4th 958, 965, 18 Cal.Rptr.2d 83 (1993) (libel action may be based on false accusations in employee evaluation form of criminal conduct, dishonesty, incompetence, or reprehensible personal characteristics or behavior); Marshall v. Brown, 141 Cal.App.3d 408, 412, 190 Cal.Rptr. 392 (1983) (wrongful interference liability based on negative comments in former employer's evaluation letter). If you give a good reference, and the employee does something awful when working for the new employer, you could be held responsible for giving a false or negligent reference. Randi W. v. Muroc Joint Unified School Dist., 14 Cal.4th 1066 (1997) (former employer held liable for negligent recommendation where teacher sexually molests student at new job).
In order to be guilty of defamation, your statement must be false. To use the common expression, in defamation cases "truth is a defense." Therefore, when you must say something bad about an employee, or anyone else for that matter, make sure that you can prove that it is true.
Defamation is defined as an "unprivileged" statement. Two of the most important of these privileges are contained in Section 47 of the Civil Code.
The first of these is the privilege for statements made in a judicial proceeding. Civil Code Section 47(b). This privilege is absolute, and applies to defamation actions, as well as other kinds of claims. The practical consequence of the litigation privilege is the following rule: if you've got to say something bad about someone, say it in litigation.
The second most significant privilege in Section 47 is the privilege for statements made in good faith by one person who has a legitimate interest in the subject of the communication to another person who also has such a legitimate interest. This privilege should protect statements like job references and internal deliberations about personnel actions. Cuenca v. Safeway San Francisco Employees Fed. Credit Union, 180 Cal.App.3d 985 (1986).
However, the problem is that this privilege, unlike the litigation privilege, is not absolute. The plaintiff can defeat it by showing bad faith. Robomatic, Inc., v. Vetco Offshore, 225 Cal.App.3d 270 (1990). Usually, the plaintiff does this by alleging that the statement was made with the intent to harm him.
Notwithstanding the fact that the legitimate interest privilege requires good faith, it is worth having. The practical consequence of this privilege is that, if you must say something bad about someone, and you cannot say it in litigation, say it only to someone with a legitimate interest in the information.
d. Third Party
Defamation requires a that a statement be made to a third party. Therefore, if you have something critical to say about an employee, say it to the employee, not his co-workers, your customers, or other persons. This is especially important to remember when you are doing an internal investigation. When you are interviewing a witness, don't tell him the bad things that other witnesses have said about anyone.
A defamation claim requires that the plaintiff prove that he was harmed by the statement. Certain kinds of statements are especially risky and considered damaging as a matter of law without proof. Examples of these are allegations of dishonesty and incompetence. Therefore, if you can reasonably formulate your reasons for a discharge without using alleging dishonesty and incompetence, you should do so. For example, instead of saying that the employee stole the company's money, you can usually say that he was unable satisfactorily to account for it. Instead of saying that the employee is a liar, you can usually say that some specific statement appeared to be inaccurate.
CLAIMS FOR HARASSMENT AND DISCRIMINATION
1. A Practical Approach to Avoiding Litigation
You, as an owner or manager of a business, will never be able to learn all of the laws and rules relating to workplace discrimination and harassment. They are numerous, byzantine, sometimes contradictory, unpredictable, and constantly changing. What you can and should do is take practical steps that have a good chance of keeping you out of trouble.
Among the many protected classes these days are race, color, religion, sex, gender, pregnancy, childbirth, marital status, age, national origin, physical or mental disability, medical condition, ancestry, and, in some places, sexual orientation.
Luckily, preventing harassment and discrimination and avoiding liability for what you can't prevent require roughly the methods. Here's how to protect your business without becoming obsessed about it.
First, have an anti-discrimination and anti-harassment policy and put it in your written policy manual. The manual should set clear procedures for reporting problems, with plenty of alternative options, so that there will be ways to get around alleged perpetrators in the chain of command.
Require all employees to report all cases of harassment or discrimination of which they are not themselves the victim. Encourage victims to do the same.
Document every complaint that you get. Investigate every complaint thoroughly and involve legal counsel where appropriate. Involving your lawyer at an early stage where there is an indication of a serious problem can be important if there is a later lawsuit.
If your internal investigation is properly conducted by a lawyer or under his supervision, it may be possible to shield damaging documents that are created as part of your investigation from disclosure in any later lawsuit. This protection is called the "work product" doctrine and, while the protection is not absolute, it is well worth preserving. When your investigation is done, tell the complainant your conclusions and the action, if any, that you took as a result, but do not convey the substance of the statements of any of the other witnesses.
If you are regularly using the all-important employee's annual acknowledgment (and you should!), it should cover the area of harassment and discrimination. This section of the acknowledgment should list all the forbidden kinds of conduct. It should then contain a statement by the employee that, since first being employed by the company, he has neither been the victim of, nor witnessed, any incident of such conduct, other than any incident that he may already have reported in writing to specified company officials.
Whenever you must take action adverse to a member of a protected class (or any other employee, for that matter), always document your reasons. Where possible, involve other members of the protected class in the disciplinary process. If it becomes necessary to discharge a member of a protected class, it can be harder for the discharged employee to make a case against you if you replace him with another member of the same protected class.
There are also many positive things that managers can do to promote a workplace that is free of discrimination and harassment. One of the most effective is for you, as a manager, to model the behavior you seek to establish.
Managers should always treat every employee politely and with respect. They should always strive to see employees as people, not as representatives of a class. Managers should always avoid crude jokes, and comments or nicknames that may be seen as pejorative. In fact, managers should always avoid any references at all to age, gender, ethnicity, or membership in any protected class, unless they are clearly necessary and appropriate.
You should never indulge in or tolerate pejorative talk or conduct on the grounds that it is "all in fun," that the butt of the comments was responding in kind, that they "build camaraderie," or the like. Believe it or not, many people will try to defend their abuse by saying things like "he knows I only say things like that to people I really like." Such excuses sound really lame in court.
These things may seem obvious, but you would be surprised at what some otherwise intelligent managers will say to a group of employees at, say, the company Christmas party.
Often, a person who has made a thoughtless comment will respond to a tactful conversation with a supervisor. For example, an employee who habitually refers to another employee as the "old man" might simply be asked whether he has thought about how his conduct might hurt the other employee's feelings, and reminded that, in any event, it is inconsistent with the company's policy of showing respect for coworkers.
A manager or other employee should not be allowed to laugh off unacceptable behavior. If the conduct is sufficiently egregious, or does not respond to correction, you should clearly explain to the offender that, if he will not change his conduct, you will be forced to discharge him. Failure to do so could put your entire business needlessly at risk.
The bottom line is that you should not be tempted to become cynical or careless about matters of harassment or discrimination. Yes, the laws sometimes seem contradictory. Yes, there is no way to be sure of being completely safe. However, if you follow the rules above, your chances of falling victim to a lawsuit over these issues can be greatly diminished, and you will have created a healthier, more productive working environment.
2. Persons with Disabilities
The Americans with Disabilities Act opened up a broad new field for discrimination claims. ADA is so broad and so vague that no one knows its exact limits, including the courts. If you think you may have an ADA situation, you should talk to your lawyer to see what the law is on that particular day in your judicial district.
There are, however, some simple rules that will help you stay in the clear. First, make and document reasonable accommodations of persons who arguably have a handicap. Second, if you need to take adverse action against a person with an arguable handicap, document either 1) his inability to do his job, even after reasonable accommodation, or 2) a reason for action unrelated to handicap.
CLAIMS FOR UNPAID OVERTIME, LEAVE, AND OTHER COMPENSATION
One of the most galling surprises in business occurs when a marginal employee leaves after many years of mediocre performance and then, of the blue, the employer gets slapped with a huge claim for unpaid overtime and leave. Such parting shots are common and can result in payments of tens of thousands of dollars.
If you become the victim of such a claim, perhaps the worst part of it is the knowledge that the whole problem might have been avoided if you had followed a simple procedures.
1. Who Can and Cannot be Treated as an Exempt Employee
Businesses in California are required to pay time and a half to all nonexempt employees who work either more than 40 hours in one week or more than 8 hours in one day. This makes flexible responses to changing workloads and flextime arrangements, such as four day weeks, expensive for the employer. Tracking hours worked and properly adjusting paychecks is also an administrative burden.
As a result, many employers fall victim to wishful thinking by improperly attempting to categorize some or all of their employees as exempt from the overtime rules.
The overtime laws exempt executive, administrative, or professional employees, outside salespeople, and certain members of the employer's family. The terms "executive" and "professional" have been subjected to such abuse these days that it would appear that they could refer to almost anybody. After all, inside salespeople are routinely called "account executives." We are sold "executive" pencil sets, "executive" briefcases, and "executive" clothing.
And isn't everyone who does something for money a "professional" of one kind or another? The people who clear your sewage lines, keep your books, exterminate your cockroaches, fix your car, clean your teeth, and trim your trees all consider themselves "professionals."
However, the courts and the government agencies that enforce the overtime rules do no take such a loose view. If anything, many employees, such as certified paralegals working in a law office, who would probably be called "professionals" in common parlance are not exempt. Likewise, the government often takes issue with a business's attempts to categorize a salesperson as "outside."
2. Claims for Unpaid Overtime
Above, we discussed the proper categorization of persons as exempt versus nonexempt and employees versus independent contractors. Once you realize that you are dealing with nonexempt employees, you must make sure that you properly track and pay for their time.
Just because you don't ask your employees to work overtime it doesn't mean that you can dispense with monitoring their working hours. Employees are not permitted to volunteer, and managers must not permit them to work early, late, through lunch, or on weekends without compensation. Most overtime claims are based on such "unrequested" overtime.
Finally, you must document overtime or, just as importantly, the lack of overtime. Timesheets are a good tool for this. They should be signed by the employee and kept in a file for at least four years.
The acknowledgment on the timesheet above the employees signature should include a disclaimer of any hours other than the ones shown, not just a statement that the hours shown are accurate. It should also say that the employee has not worked any overtime, other than what may be shown on the sheet, for which he has not already been paid at applicable overtime rates. Even for employees who are not supposed to be working overtime, and have regular hours, a time sheet can be helpful in documenting proper payment.
You should also put provisions in your policy manual clearly saying that no employee is permitted to work overtime, work outside of the office, or work outside of regular hours without advance written approval from specific persons. The policy manual should also say that no employee is permitted to work overtime without being paid for it a the proper rate.
If you follow these steps consistently, you will greatly reduce your chances of getting a post-departure surprise from an employee who claims to have spent more hours toiling without compensation than you ever dreamed, thereby piling up a tidy little severance package for himself.
3. Claims for Unpaid Vacation Time
Most businesses give their full time employees paid vacation time, which usually accrues at a rate of so much vacation leave per week, month, or other period worked. Failing to handle such vacation time properly can result in the buildup, over a period of years, of substantial liabilities, and in large claims by departing employees for unpaid vacation time.
The main problems with vacation leave are unenforceable policies that result in invalid forfeitures, failure to track and document usage, and failure consider how vacation policies may apply to top management.
Because most businesses have learned that vacation time, if untaken, can slowly build to staggering proportions, most of them make some attempt to limit the amount of that obligation in some way, often by limiting the amount of vacation leave that can accrue or be carried forward from year to year. However, in doing so, many such businesses inadvertently creating unenforceable forfeiture provisions that will not prevent the buildup enormous obligations.
The important thing to remember is that vacation time, once accrued, cannot be forfeited and cannot be waived. Once accrued, it must be used or paid. Therefore, "use it or lose it" provisions will not be enforced. On the other hand, caps on accruals will.
What's the difference between an invalid forfeiture and a valid limitation on accruals? Consider a leave policy that says that "any accrued vacation time in excess of two weeks will be lost if it is not used by the end of each calendar year." It will be unenforceable because, as written, it calls for the loss of a portion of the vacation time that has already accrued. Likewise, a leave policy that says "no more than two weeks of vacation leave may be carried from one calendar year to the next" will also be invalid, because what is not carried forward is lost.
On the other hand, a leave policy that says that "once an employee has accrued a total of two weeks of vacation time no additional time will be earned" can be valid, because it stops leave from accruing, rather than causing it to be lost after it is earned. Sophistry? Maybe. Is it the law? Yes.
The second common problem with leave is the failure to track and document its usage. This happens for several reasons. First, while tracking accruals is easy, tracking usage is not. Since leave usually accrues at a regular rate, all you have to do to calculate accruals is to multiply the time on the job by the accrual rate.
On the other hand, usage is usually irregular. The disparity in the relative ease of tracking accruals and usage is exacerbated by the fact that, in any dispute, the burden of proving that accrued overtime has been taken is on the employer.
Moreover, once a dispute arises, I sometimes find that a business has unintentionally generated inaccurate computer-generated records, such as computer-generated pay stubs. Each pay period, the computer, like the enchanted broom in the "Sorcerer's Apprentice," mindlessly keeps adding leave time at the programmed rate to the running total on the pay stub, and if the usage has not been carefully entered into the computer by hand each time it occurred the resulting erroneous documents can be dangerous weapons in the hands of a hostile lawyer.
In order to protect yourself from recordkeeping problems, it is a good idea to include the issue of accumulated leave in your annual employee acknowledgment. The leave and overtime section of the acknowledgment should say how much unpaid leave the employee has accumulated and the language should make it clear that the employee is vouching for the accuracy of the figure.
Finally, in tracking leave time, many businesses overlook their top management and professional employees. These businesses mistakenly assume that such persons, who may be exempt from wage and overtime laws, and who may set their own hours and take time off at their own discretion, will not make any claims for accrued leave.
The fact is that, unless applicable written leave policies or employment agreements explicitly exclude such persons, the presumption is that they accrue leave like everyone else. It may seem silly to track the leave of a company's founder and CEO, but failing to do so has more than once resulted in a claim for years of accumulated leave at a fancy rate.
To summarize, you can avoid most claims for unpaid leave by taking the following simple steps: Make sure your policy manual clearly articulates a valid cap on accruals and not an invalid forfeiture. Record all usage of vacation time. Don't forget the managers and professionals. Get periodic acknowledgments of amount of leave taken and balance left. And be sure to check those pesky pay stubs!
AVOIDING LIABILITY FOR INDEPENDENT CONTRACTORS
The taxing authorities aren't the only potential adversaries interested in treating people as employees rather than independent contractors. A business's customers and others may also be affected.
If someone is an employee rather than independent contractors, it is more likely that a business will be liable to others for their mistakes or misconduct. In general, it is unlikely that a business will be liable on a no-fault theory for the acts of an independent contractor, even though it would be liable on such a theory for an employee.
1. Two Different Kinds of Liability--direct and Vicarious
Direct liability is liability for one's own acts or omissions. In the context of a corporation, these require involvement by persons whose acts are considered to be the acts of the corporation itself, for example, officers and branch managers. Usually, direct liability requires a showing of fault, though there are some no-fault forms of direct liability.
Vicarious liability is liability for the acts or omissions of others. Businesses are often held vicariously liable without requiring the plaintiff to show any fault or wrongdoing on their part.
2. Theories of Direct Liability
There are two common theories of direct liability. First, a corporation, partnership, or limited liability company is responsible when its officers or managers directly participate in the wrongful act or omission.
Second, entities are sometimes directly responsible for their negligent supervision of a person for under their control.
3. Theories of Vicarious Liability
The most common theories of vicarious liability are aiding and abetting, ratification, and respondeat superior. Because it is so broad and does not require any fault on the part of upper management, by far the most dangerous of these theories of vicarious liability is respondeat superior.
In general, a person, including a corporate person, who aids wrongdoing with the knowledge of the facts is responsible for it. Since this is a fault theory, whether the primary wrongdoer is an independent contractor or an employee, will not make any difference.
When a person or organization knowingly accepts the benefits of wrongdoing it is said to ratify the wrongdoing and becomes liable. Since this is a fault theory, whether the primary wrongdoer is an independent contractor or an employee, will not make any difference.
6. Respondeat Superior
Under the doctrine of respondeat superior, an employer is responsible for the wrongdoing of its employee within the scope of the employment. This is a no-fault theory, and depends upon the existence of an employee-employer relationship. It is not available where the wrongdoer is an independent contractor.
Whether an investor can recover from a broker-dealer on most of these theories will not be affected by whether the registered representative is an independent contractor or and employee. However, the broadest and most generally applicable theory--respondeat superior--does depend on whether the registered representative is or is not an employee.
7. Limitations on Direct Theories of Liability
Direct theories of liability have certain important limitations on them that make them less dangerous than respondeat superior. Direct participation requires that responsible persons of the entity actually participate in the wrongful acts or omissions. This is not common in the usual case of misconduct by a lower level employee. Usually, the supervisors of the employee are unaware of the problem until after it occurs.
Negligent supervision is more common than direct participation, but the plaintiff still has to prove negligence and a duty of care. Negligence is not a no fault theory, and, to win on this theory, a plaintiff must show that reasonably prudent supervision would have avoided the harm.
In order to establish a duty of care a plaintiff has to prove that there was a duty to him to supervise the activity involved. Your company may not have a duty to supervise activities of an independent contractor for activities that are not performed in connection with the business of your company.
8. Limitations on Vicarious Theories of Liability
Most theories of vicarious liability other than respondeat superior also have important limitations that make them less dangerous than respondeat superior.
Aiding and abetting requires knowing help in the wrongdoing. This is unusual in the usual corporate context. Ratification usually involves knowing acceptance of the benefits of wrongdoing. This also is comparatively unusual.
9. Respondeat Superior Has Few Limitations
Respondeat superior is no fault liability that covers all activity within the scope of employment. The scope of employment is often interpreted very broadly. Therefore, respondeat superior liability can be breathtakingly broad.
When you properly use independent contractors rather than employees, respondeat superior liability is eliminated. This can substantially reduce the risk of legal liability for the acts of the persons involved.
10. Other Issues Affected by Whether Contractor or Employee
Employers have an obligation to indemnify employees for the results of own misconduct under Section 2802 of the Labor Code. You don't have to buy worker's compensation insurance for contractors. When you properly use independent contractors, you don't have to worry about overtime and other provisions regulating the hours and conditions of work.
HOW TO REDUCE THE HIGH COST OF UNAVOIDABLE LITIGATION
1. The Use of Customized Arbitration Clauses
A contractual arbitration clause is one of the most powerful ways that a business has to try to control its exposure to costly and dangerous lawsuits. Arbitration, mediation, and other methods of resolving conflicts outside of court are sometimes collectively referred to as alternative dispute resolution, or "ADR."
By the careful use of an arbitration or other ADR clause in its contracts, a business can dramatically affect how disputes with its employees, customers, vendors, and others with whom it does business are resolved, discourage claims from being brought, and limit its exposure to large damage awards. On the other hand, an arbitration clause that is carelessly drafted or slanted in favor of the other party to an agreement can be a serious disadvantage in the event of a dispute.
When parties agree to arbitration, they make a binding determination that some or all of their disputes will be resolved outside of court by one or more persons called arbitrators, rather than in court by a judge or jury. In recent years, courts have allowed the contracting parties broad discretion to make up any rules they wish concerning who will hear the dispute and what rules will govern the outcome.
Arbitration clauses can specify simplified procedures both before and trial. For example, they can limit or eliminate the depositions, interrogatories, document requests, and pretrial motions that are responsible for much of the sometimes crushing expense of litigation. The procedures at the arbitration hearing, which takes the place of a trial in court, can be simpler and less time consuming than those for a jury trial. Arbitration clauses can also set short mandatory schedules for resolution of a problem before both the problem and the business involved in it become ancient history.
In addition to reducing litigation expenses and speeding the resolution of disputes, arbitration clauses can discourage or prevent claims from being made in the first place. For example, a contract can provide that claims that are not brought by certain deadlines are barred altogether. Such provisions, which create shortened statutes of limitations for the parties, will be enforced by the courts if they are found to be reasonable. Other provisions can require that, before making a demand for arbitration, the claimant must first try in good faith to negotiate a resolution either with or without the help of a trained mediator.
Provisions that require the party demanding the arbitration to advance the arbitrator's fees, which can be substantial, can deter groundless claims. So can provisions requiring the loser to pay the winner's attorneys' fees.
Arbitration clauses, and other contract clauses, can limit the type of damages or other relief that may be sought by a claimant. For example, the courts often uphold agreements that prevent the parties from seeking punitive damages, specific performance, or injunctive relief. A contract can also attempt to limit any award to actual economic out of pocket damages, thereby reducing or preventing exposure to claims for lost profits, pain and suffering, mental distress, and consequential or special damages. These kinds of limitations on damages not only reduce the amount of potential awards, they discourage potential claimants, and their lawyers, from making claims in the first place.
There are a wide variety of organizations and individuals that, for a fee, administer arbitrations. Some of them, like the American Arbitration Association, have procedural rules for dealing with issues that may not be covered in the contract. Arbitration provisions can incorporate these rules into a contract, and vary any of them that the parties wish. If no rules are specified in the contract, California law supplies rules that will apply by default.
Because of the power and flexibility of arbitration clauses, failing to include one in a contract or choosing one poorly can actually determine whether a business will survive a major dispute. As a result, no business should ever sign a contract or enter into a significant transaction or relationship without first considering what kind of arbitration clause or agreement could reduce its exposure in the event of a later lawsuit.
2. The Three Most Common Litigation Traps and How to Avoid Them
If you are trying to control the cost of litigation, it is helpful to distinguish between strategies for reduction of costs and boondoggles. Strategies involve choices requiring thought and the weighing of risks against savings. Therefore, after considering them, you may decide that the a particular economy is not worth the increased risk. Boondoggles are work that usually has insignificant value compared to the expense. You always want to avoid them.
The three most common litigation boondoggles are wasteful staffing practices, the digesting of deposition transcripts, and the failure to attempt to settle.
a. Wasteful Staffing
Wasteful staffing practices consist of excessive staffing, changes in staffing, and excessive delegation to junior lawyers. If you have more than one lawyer and one paralegal regularly working on your case, and the litigation is unlikely to result in a judgment of more than a half a million dollars, you should ask your lawyer about staffing.
b. Digesting Transcripts of Depositions
The routine digesting transcripts of depositions is one of those fine old traditions that law firms have been practicing for ages and that, as far as I can tell, produce only useless paper and increased billings for paralegals and junior lawyers. I have never, I repeat, never, found a deposition digest to be at all helpful in a case. Now that you can get your depositions on a computer disk and search do instant text searches on them, I believe that any law firm that is charging you for deposition transcripts is, at best, clueless.
c. Failure to Attempt Settlement
The most effective way to control litigation costs is to settle early. Sometimes this is not possible. However, it should be attempted in every case.
Your lawyer may be reluctant to get the ball rolling on settlement because he thinks it make him look like a wimp, so unless you have an unusually secure lawyer, it may be up to you to raise the subject. This does not mean that you should appear weak to your opponents. The idea is to talk softly, but keep whacking the bad guys with a big stick until they come to the table.
3. How to Help Your Lawyer Reduce His Fees
a. Have a strategy
You can't control your fees if you don't have a strategy. Flailing around at a couple of hundred dollars per hours gets expensive fast.
b. Talk to Your Lawyer
Ask your lawyer about his overall strategy for the case. What kinds of motions does he think may be cost effective? What does he think about the prospects of an early settlement? How are you going to try to win the case? Is a demurrer worth the money? Is it realistic to try to win on summary judgment?
Make sure you talk to your lawyer early about settlement. You should do this even where early settlement is not likely. Many lawyers don't like to bring this up.
Discuss each motion or other significant decision with the lawyer in terms of cost-benefit. Get estimates for specific activities that are under consideration. No lawyer can reliably estimate the cost of an entire lawsuit, but he should be able to do a reasonable estimate for a particular motion. Ask what benefit can reasonably be expected from the motion or other tactic being considered. Ask what alternatives exist for that tactic and what they would cost.
c. Determine What the Case is Worth
Estimate both trial value and settlement value. Settlement value is much higher than trial value because of the staggering costs of litigation. At best, such an evaluation is a guess, but must be done in order to make rational decisions about strategy.
If you are a plaintiff, ask yourself
If you are a defendant, you should make same kind of calculation. The results will be equally sobering, I assure you.
d. Consider Strategies for Cost Reduction That May Involve Some Risk
The following options each involve some risk, and are not appropriate in every case. But you should consider them with your lawyer in each case.
(1) Forego Certain Parties
You should consider not suing parties against whom you only have a slim chance of prevailing and peripheral parties who have no money.
(2) Dispense With Exotic Claims
Anyone who has gone to law school can spin a virtually unlimited number of exotic theories involving an unlimited number of defendants. Consider dispensing with theories that don't add anything significant to the case.
(3) Avoid Factually Complicated Claims
Sometimes you have a strong claim that can probably be decided in summary judgment and a weak claim that will require a long and expensive trial. When this happens, consider not bringing the factually complicated claim.
e. Your Invoice Is Your Friend
Your invoice is one of your best tools for reducing your costs. You should always read it, and ask questions if you have them. If the invoice is not detailed enough for you to understand what you're paying for, ask for more detail.
f. Don't Let, or Make, Your Lawyer Do the Grunt Work
You can save a lot of money if you will do as much of the necessary but routine tasks involved in litigation yourself. For example, it will cost you a lot less to pay your own clerical personnel to locate and organize your own documents than to pay your lawyer to drag them out of you and then sort through them.
Other things you can do to help keep the costs down are to prepare a written chronology summarizing the relevant facts and evidence in the case, help with the investigation by locating witnesses and obtaining necessary documents in the hands of cooperative third parties, crunch your own numbers, prepare any necessary financial schedules and exhibits.
4. Avoid the Attitude Traps
Certain statements that are often heard in law offices are often the prelude to an sad lesson in the high cost of litigation. If you are tempted to say any of the following to your lawyer, watch out!
"Can you just take a quick look at this?" Ask yourself, is it possible to sort out the relevant facts in the time that you are allowing?
"I want a "junk-yard dog" litigator." Remember that over 90% of all disputes are settled before a court battle. If you hire a mad dog, you will probably get bitten. You don't want mindless aggression. You want rational aggression.
"Its the principal of the thing." Usually, after the first $15,000 or so, the principal seems to get less important.
"Money is no object." This is almost never true. The only question is, how much is it worth.
"I'd rather pay you than him." This usually indicates that you have an irrational certainty in your chances of winning.
RECEIPT OF OFFICE MANUAL AND ACKNOWLEDGMENTS
IMPORTANT: You need not and should not sign this form unless
the statements in it are completely true and accurate. If any
or change is needed to this form before it is completely accurate,
discuss them with the Office Manager or the President so that those
can be made before you sign it.
1. I, , acknowledge I have received the Office Manual for [Company]
("the Company") adopted as of _______________. I understand that it is
my responsibility to familiarize myself with the information,
and policies described in that manual. I agree to abide by the
and practices explained in the manual, and to contact my Supervisor or
the Administrator if I should have any questions or need clarification
as to its content or interpretation. I understand that the policies and
procedures contained in the manual are subject to change, and I will be
notified of such changes. However, this manual is neither intended to
nor does it constitute, a contract of employment.
2. I warrant and represent that no written or oral promises,
or representations whatever, whether express or implied, have been made
to me in order to induce me to accept employment from the Company. I
that no one at the Company was or is authorized to make any such
assurances, or representations and that any such unauthorized promise,
assurance, or representation could not and cannot be relied upon.
3. I understand and agree that my employment is "at will," which
that either the Company or I may terminate my employment at any time
of us desires with or without any reason and I warrant and represent
no written or oral promises, assurances, or representations, whether
or implied, to the contrary have been made to me at any time whether
or during my employment.
4. I warrant and represent that, since I was first employed by the
I have not worked any overtime that has not been reported in writing to
the Administrator or the President. I represent that, as of this date,
I have not worked any overtime, holidays, or other time in addition to
normal office hours for which I have not already been properly
at either one and a half or two times my normal hourly pay.
5. As of the end of last pay period completed as of the end of
I have accumulated a total of ____ hours of leave time that I have
but have not yet used.
6. I warrant and represent that, since I was first employed by the
I have not been the victim of, or witnessed any evidence or indication
of, any form of harassment or discrimination at or by the Company based
upon race, color, religious creed, sex (including gender harassment,
harassment due to pregnancy, childbirth, or related medical
marital status, sexual orientation, age, national origin, physical or
disability, medical condition, or ancestry, other than any incident
I may have already reported in writing to the Office Manager or the
As to any such incident that I may already have reported to the Office
Manager or the President and of which I may have been the victim, I
been informed of the outcome of the Company's investigation into the
Copyright 1997 Vincent DiCarlo
Social Security # ---
Re: Offer of Severance Agreement
We regret to inform you that your employment with this company is
terminated effective [date] for reasons that we have discussed with
As you know, your employment with this company was at will and the
has no formal severance package. Accordingly, we are not obligated to
any severance benefit and are only obligated to pay compensation that
However, we are willing to offer you the written severance agreement
that we are giving you with this letter for your review and
The agreement provides, among other things, for a continuation of your
full salary payments for [period], for [period] of continued medical
and for [any other benefit]. If you wish to accept this offer, you must
sign and return the agreement to us on or before [date].
Of course, we will pay you any leave or other compensation that you have accrued as of your termination date regardless of whether or not you accept our severance offer.
Very truly yours,
[Personnel Officer Conducting
2. A sample of such a footnote can be found in Appendix 1.
3. A example of a termination letter is in Appendix 2.
DISCLAIMER: I have entered
government service and, as of September 1, 2008, am no longer engaged
in the private practice of law. Therefore, this site is no longer
being maintained, may not be accurate, and should not be relied
upon. It is not now and was not ever intended as legal
advice. It is being provided for historical purposes, and for the
benefit of those lawyers who are capable of independently verifying the
information and judging the opinions in it, and then reaching their own
conclusions. You are strongly advised to consult qualified legal
before adopting any of the ideas or suggestions in this material, which
may or may not be applicable in your jurisdiction or to your specific
situation, and may no longer be accurate or prudent in any case.
The opinions and statements at this site were solely my own. They
were not and are not those of, nor were they nor are they made on
behalf of, any agency of government or anyone else.
Copyright © 1998-2008 Vincent DiCarlo