When you start a business, you must decide

Fortunately, you can steer clear of most of the legal perils of hiring employees by understanding and following these sensible guidelines:

Section A of this chapter discusses these key principles—some of which apply throughout the employment relationship and are discussed elsewhere in this book as well.

A. Legal Guidelines for Hiring Employees

Most large companies maintain human resource departments and in-house lawyers to lead them through the intricacies of employment law.But if you run a small or mid-sized company, this is an unaffordable luxury.More likely, you keep a close eye on legal expenses and call a lawyer only when absolutely necessary.

The guidelines discussed here should reduce your need for outside legal help when hiring employees.

1. Avoiding Illegal Discrimination

Federal and state laws prohibit you from discriminating against an employee or applicant because of race, color, gender, religious beliefs, national origin, physical disability—or age if the person is at least 40 years old.Also, many states and cities have laws prohibiting employment discrimination based on marital status or sexual orientation.

These anti-discrimination laws apply to all stages of the employment process: preparing job descriptions, writing ads, conducting interviews, deciding whom to hire, setting salaries and job benefits, promoting employees, and disciplining and firing them.

A particular form of discrimination becomes illegal when Congress, a state legislature or a city council decides that a characteristic—race, for example—bears no legitimate relationship to employment decisions.A law or ordinance is then passed prohibiting workplace discrimination based on that characteristic.Courts get involved, too, by interpreting and applying anti-discrimination laws and ordinances.

Obviously, as an employer, you need to know the types of discrimination that are illegal.At the same time, be aware that anti-discrimination laws don’t dictate whom you must hire.You can exercise a wide range of discretion based on business considerations.You remain free, for example, to hire, promote, discipline and fire employees and to set their salaries based on their skills, experience, performance and reliability—factors that are logically tied to a valid business purpose.You only risk violating the law when you treat a person or a group differently for reasons that legislators and judges have decided don’t serve a valid business purpose.

Some illegal practices are obvious—such as advertising a job for people ages 20 to 30 in violation of age discrimination laws, or paying lower wages to women than men for the same work in violation of equal pay laws.

Other types of discrimination are more subtle, but just as illegal.Employment practices that have a disproportionate and discriminatory impact on certain groups are also barred by anti-discrimination laws.For example, if your main means of seeking job candidates is through word of mouth and your workforce consists entirely of white men, the word-of-mouth recruitment can be illegal discrimination; it’s likely that few people other than white men will hear about the job openings. The effect of the procedures is what counts.

• advertise job openings in diverse places so they come to the attention of diverse people

• determine the skills, education and other attributes that are truly necessary to perform the job so that you don’t impose job requirements that unnecessarily exclude capable applicants, and

• avoid application forms and screening techniques that have an unfair impact on any group of applicants.

Running afoul of anti-discrimination laws can be both time-consuming and costly.An unhappy employee or applicant may sue your business.Federal and state agencies also may take legal action against it.And publicity about a violation of anti-discrimination laws can adversely affect your business reputation, driving down revenues.If word gets out that a company has discriminated against women employees, for example, women customers may avoid dealing with the company for years—even long after the discriminatory practices have been dropped.

2. Respecting Applicants’ Privacy Rights

As an employer, you likely believe that the more information you have about job applicants, the better your hiring decisions will be.But there’s a potential problem in mounting intensive background checks.Your attempt to assess an applicant by gathering information about the past can conflict with his or her right to privacy—and sometimes violate federal and state laws.To avoid claims that you’ve invaded an applicant’s privacy, obtain the applicant’s written consent before you send for high school or college transcripts and credit reports and before you contact a former employer.

It’s often a waste of time and effort to acquire and review transcripts and credit reports—although occasionally they’re useful.If you’re hiring a bookkeeper, for example, experience garnered on the job is much more important than the grades the applicant received in a community college bookkeeping program 10 years ago.But if the applicant is fresh out of school and has never held a bookkeeping job, then a transcript may yield some insights.Similarly, if you’re hiring a switchboard operator, information on a credit report would be irrelevant.But if you’re filling a job for a bar manager who will be handling large cash receipts, you might want to see a credit report to learn if the applicant is in financial trouble.

In addition, laws and court rulings restrict your right to screen applicants through aptitude tests and drug tests.

Another privacy concern, for which legal guidelines are less clear, is your ability to control what workers do outside of the workplace. Some states have granted a measure of legal protection for an employee’s off-the-job conduct. Colorado, for example, has a statute prohibiting discharge based on lawful activity off the employer’s premises.

But in other states, employers are free to reject a job applicant or fire an employee whose lifestyle or conduct away from work they find distasteful. Even in such states, however, caution is in order; to be on relatively safe legal ground, it’s best to avoid rejecting or firing a worker for off-duty conduct or lifestyle unless you can tie the actions to actual or highly likely business losses. In Baltimore, for example, it was OK for a bus company to fire a driver who was publicly identified as the Grand Dragon of the Ku Klux Klan. The court considering the case found that there was a real danger of physical danger and a possibility of a boycott if the driver were retained.

Some employers want to limit their employees to people who don’t smoke, drink alcohol or use drugs—even off the job—to hold down healthcare costs or to keep a harmonious workforce.The emerging law is that you can’t dictate such off-the-job behavior.

3. Avoiding False Job Security Promises

Traditionally, employees have had no job security.Employment has been an at-will relationship.If there’s no contract for a fixed term of employment, the employee works at the will of the employer and employee; the employer can fire the employee at any time for any reason—or for no reason at all.And the employee is free to quit at any time.That’s still the basic law, although you can’t fire someone for an illegal reason—because of the color of the employee’s skin, for example, or because you prefer to put a younger person in the job.

The at-will relationship gives you maximum freedom to fire employees, but preserving your legal right to fire at will can be tricky.Courts in many states have held that if employers are not careful about what they tell the employee, what they write in employee handbooks, and what they say in documents and letters, they may lose that right.

• A law firm hired Joan as a receptionist and fired her eight months later.Joan sued the law firm.She claimed that when she was hired, she was assured that she would remain employed as long as she did a good job.The court held that such assurance was sufficient to create a contract that Joan would be fired only for just cause. (Hetes v. Schefman & Miller Law Office, 393 N.W.2d 577 (1986).)

• A bingo hall hired Scott as a general manager and gave him an employee handbook.Later, Scott was fired without warning or suspension.He sued, claiming that the handbook stated that the employer could fire an employee only after warnings were given and disciplinary procedures were followed.The court ruled that the employer was required to follow the procedures set out in its own employee handbook and couldn’t fire Scott at will. (Lukoski v. Sandia Indian Management Co., 748 P.2d 507 (1988).)

During the hiring process, don’t give assurances that you may not be able to honor and that may give an applicant a false sense of security.This restraint can be difficult when you’re trying hard to entice an attractive candidate to join your workforce.You’ll have a natural tendency to say positive things about your business, the candidate and the future relationship.But those upbeat statements can be turned against you if the employee is later fired.

Your best protection is to make sure your application forms, employee handbooks and offers of employment state that the job is at will—and to have the applicant acknowledge this in writing. Then you’ll have an excellent chance of terminating the employment on your own terms and without legal repercussions. Be aware, however, that some judges approach the whole idea of at-will employment with a measure of hostility or skepticism. These judges may disregard even the most carefully worded at-will language if it seems to be contradicted by other oral or written statements you’ve made to the applicant or new employee.

Here’s an example of language you may wish to include in your job application form:

Another way to protect yourself is to be sure that you have a good reason for firing the person. That way the firing will be lawful, even if the employee was not an at-will employee after all.

Statements you make during interviews and when making job offers may later be treated as binding contracts.

In a leading case, a New York law firm recruited a lawyer who was beginning to make a name for herself in environmental law.The carrot that was dangled in front of her was that she’d head an environmental law department that the firm was starting. She bit—but wound up being assigned to general litigation work instead.

Later, when she was fired as part of a cutback, she sued the firm, claiming she’d been damaged because the firm had thwarted her career objective of continuing to specialize in environmental law.The court of appeals held that she had a valid legal theory. (Stewart v. Jackson & Nash, 976 F.2d 86 (2d Cir. 1992).)

The lesson of this and similar cases is that the type of work an employee does can be important.Employees often leave one employer to join another—or turn down opportunities—because a particular job seems to offer a greater chance for career advancement.To avoid claims that you misled an applicant about the nature of the work, stick to what you know the work will consist of rather than what you think the applicant may want to hear.

Similarly, if your company is considering staff reductions in the near future—because, for example, a major account is about to move out of the state—disclose this to applicants. Otherwise, you may find yourself on the defensive end of a lawsuit, especially if the employee left a secure job elsewhere to come work for you.

Consider, for example, the case of Andrew, who held a good job in New York City—a job that paid $120,000 a year. According to Andrew, executives of a Los Angeles company strongly urged him to take a job with them that they said would be secure and would involve significant pay increases. The executives portrayed the company as financially strong, with a profitable future. Brushing aside Andrew’s request for a written employment contract, they told him, “Our word is our bond.”

That was good enough for Andrew. He quit his New York job, bought a home in California, moved there with his wife and two children, and began working for the L.A. company. Two years later, the company fired Andrew as part of a management reorganization. He sued, claiming that the company fraudulently induced him to give up his old job and move to California. He said that when the company executives induced him to change jobs, they falsely represented the company’s financial condition—concealing the fact that the company’s financial outlook was bleak and that the company was already planning to eliminate the job for which it was hiring him. The California Supreme Court held that Andrew could sue for both fraud and breach of contract. (Lazar v. Superior Court (Rykoff-Sexton Inc.), 49 Cal. Rptr. 2d 377 (1996).)

4. Preventing Negligent Hiring Claims

The main reason to investigate an applicant’s background is to make sure the person will do a good job for you and fit in with other employees on the staff.But sometimes there’s an additional, equally powerful reason to make a thorough investigation.When you hire someone for a position that may expose customers or others to danger, you must use special care in checking references and making other background checks.

Legally, you have a duty to protect your customers, clients, visitors and members of the general public from injury caused by employees you know or should know pose a risk of harm to others. In some states, you may also have a duty to protect other employees from an employee whom you know—or should know— is dangerous. If someone gets hurt or has property stolen or damaged by an employee whose background you didn’t check carefully, you can be sued for negligent hiring.

Be especially vigilant when hiring maintenance workers and delivery drivers, whose jobs would give them easy access to homes and apartments.

Example: The Village Green, a 200-unit apartment complex, hires Elton as a maintenance worker and gives him a master key. Elton enters an apartment and sexually molests a four-year-old girl while the child’s parents are running an errand. Had the company checked before hiring Elton, it would have discovered that Elton had just completed a prison term for a sexual offense. The child’s parents sue The Village Green for negligent hiring.

Doing a background check can be a delicate matter, since laws also require you to respect the applicant’s privacy.If you hire people for sensitive jobs, you must investigate their backgrounds as thoroughly as possible without stepping over the line and violating their privacy rights.You can be faulted for not looking into an applicant’s criminal convictions—but not for failing to learn about prior arrests that didn’t result in convictions, since such arrest records are generally protected by privacy laws.

In doing background checks on applicants for sensitive jobs, check for felony convictions and also be diligent in contacting all previous employers.Keep a written record of your investigation efforts.Insist that the applicant explain any gaps in employment history.Consider turning over the pre-hire investigation to professionals who do this for a living.If you choose to follow this route—and can afford it—it can go a long way toward refuting later claims that you failed to use reasonable efforts to learn about the employee’s history.

To learn more about negligent hiring cases, see Employer’s Guide to Workplace Torts, by Ronald M. Green and Richard J. Reibstein (Bureau of National Affairs). It costs $45 and can be ordered by calling 800-372-1033.

5. Protecting Against Unfair Competition

One risk you run in hiring people is that they’ll later start a competing business or go to work for a competitor.If so, they may use information they gained at your workplace or contacts they made there to draw away business that otherwise would be yours.

Obviously, you need not be too concerned about the employee you hire to flip hamburgers or the clerk you hire to handle drycleaning orders.But employees who have access to inside information about product pricing or business expansion plans, for example, may pose competitive risks.The same goes for employees who serve valuable and hard-won customers—a salesperson, perhaps, who handles a $200,000 account.

You can help protect your business from unfair competition by asking new hires to sign agreements not to take or disclose trade secrets and other confidential information.You can also ask selected employees to sign covenants not to compete with your business—although such covenants must be carefully written so that a former employee has a reasonable chance to earn a living.

For a guide on creating non-disclosure agreements for your workers to sign, see Nondisclosure Agreements: Protect Your Great Ideas When You Share Them With Others, by Stephen Fishman (Nolo). You can obtain this guide from Nolo’s website at http://www.nolo.com or by calling Nolo directly at 800-992-6656.

a. Trade secrets

In hiring and working with employees, some business owners need to protect their unique assets from misuse.Some possibly protectible business assets may include, for example:

• a restaurant’s recipes for a special salad dressing and muffin that draw people from miles around

• a heating and cooling company’s list of 500 customers for whom it regularly provides maintenance, or

• a computer company’s unique process for speedily assembling computer boards.

If they are treated as such, the recipes, the customer list and the assembly process are all trade secrets.Other examples are an unpatented invention, engineering techniques, cost data, a formula or a machine.To qualify for trade secret protection, your business information must meet two requirements.

First, you must show that you’ve taken steps to keep the information secret—for example, by:

• having employees acknowledge in writing that the information is a trade secret.

Example:Sue works at Speedy Copy Shop.She has daily access to the list of larger accounts that are regularly billed more than $2,000 per month.Sue quits to open her own competing shop.Before she does, she copies the list of major accounts.One of her first steps in getting her new business going is to try to get their business away from her former employer.Speedy sues Sue for infringing on its trade secret.At trial, Speedy shows that it keeps the list in a secure place, permits access only to selected employees who need the information and has all employees sign nondisclosure agreements.In light of these precautions, the judge orders Sue not to contact the customers on the list and requires her to compensate Speedy for any profits she has already earned on those accounts.

Second, the information must not be freely available from other sources.If the recipe for a restaurant’s award-winning custard tart can be found in a standard American cookbook or recreated by a competent chef, it simply isn’t a trade secret.On the other hand, if the restaurant’s chef found the recipe in a medieval French cookbook in a provincial museum, translated it and figured out how to adapt it to currently available ingredients, it probably would be considered obscure enough to receive trade secret protection.That’s because the recipe isn’t readily available to other American restaurants.

In addition to the requirements that a trade secret must be guarded information that is somewhat obscure, judges sometimes look at how valuable the information is to you and your competitors and how much money and effort you spent in developing the trade secret.

b. Covenants not to compete

To prevent an employee from competing with you after leaving your workplace, consider having him or her sign a covenant not to compete.In a typical covenant, the employee agrees not to become an owner or employee of a business that competes with yours for a specific time and in a specific location.

The best time to secure a covenant not to compete is when you hire an employee.An employee who is already on the payroll may be more reluctant to sign anything—and you’ll have less leverage to negotiate the agreement.

Battles over the legality of these agreements must usually be resolved in court.Judges are reluctant to deprive people of their rights to earn a living, so the key to a legally enforceable covenant not to compete is to make its terms reasonable.In evaluating whether a covenant not to compete is reasonable, focus on three questions—each of which relates to the specific job and the specific employee.

• Is there a legitimate business reason for restricting the future activities of the particular employee? There probably is if you expect to spend significant time and money in training a high-level employee and plan to entrust him or her with sensitive contacts on lucrative accounts.Such an employee could easily—and unfairly—hurt your business by competing with you.This would motivate a judge to find that you have a legitimate business reason for the covenant.On the other hand, if you require a new receptionist or typist to sign a similar covenant, a judge would probably find that you have no valid business purpose for restricting the employee’s ability to work elsewhere.

• Is the covenant reasonably limited in time?A one-year limitation may be reasonable for a particular employee. A three-year limit might not be.

• Is the covenant reasonably limited as to geographical scope?A 50-mile limit may be reasonable for a particular employee.A limit spanning several states might not be deemed reasonable.

Example: When Mary hires Sid to be the office manager for her profitable travel agency, she realizes that Sid will have access to major corporate accounts and daily contact with the corporate managers who make travel arrangements. Mary also knows that she’ll spend considerable time in training Sid and invest more than $4,000 in specialized seminars that she will require Sid to attend. She has Sid sign a covenant not to compete in which Sid promises that while working for Mary and for two years afterwards, he won’t work for or own a travel agency within 50 miles of Mary’s agency. After six months, Sid quits and starts a competing agency one mile from Mary’s. The judge enforces the covenant not to compete by issuing an injunction forbidding Sid from operating his new business and by awarding damages to Mary as well.

6. Hiring Young Workers

There are federal and state laws that restrict your right to hire workers who are under 18 years old.These laws limit the type of work for which young people may be hired and the hours they may work.

7. Hiring Immigrants

Federal law prohibits hiring undocumented aliens.You and each new employee are required to complete INS Form I-9, Employment Eligibility Verification.

The IRS believes that many small businesses are labeling some workers as independent contractors instead of employees to avoid withholding payroll taxes—and that the agency is collecting less money than it’s entitled to.Acting on this belief, the IRS is vigorously investigating and challenging how businesses classify workers.

Excerpted from the “The Employer’s Legal Handbook”, by Fred S. Steingold