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Jason Rosenthal

Managing the Employment Relationship

Four steps CPA firms can take to prevent lawsuits.

April 16, 2009
by Jason Rosenthal, Esq.

This article was originally published in the AICPA CPA Insider™.

Terminating an employee is rarely a desired result. But what can be even more undesirable are the potential pitfalls that can arise from a termination. Fortunately, there are several steps CPA firms can take to help prevent lawsuits by former employees, prevent former employees from working for competitors and prevent the theft of trade secrets.

Layoffs are an unfortunate result of the current economic crisis. CPA firms need to take heed to make sure they in turn are not the casualties of improper employment practices and to protect their business. The termination process does not start at the end of the employment relationship. Prudent employers who conduct themselves properly from the outset of the relationship will be far better positioned to make difficult employment decisions and to avoid any fallout from those decisions.

Start at the Beginning

Adequate preparation begins at the hiring process. The employment relationship should usually be “memorialized” in writing. Particularly if the employee’s relationship is “at-will,” meaning the employee can be terminated at any time, this should be clearly communicated. Probationary periods are also useful to make sure the employee is a good fit before he or she becomes a permanent employee. For that reason, many employers also enact grace periods before employees can contribute to a 401(k) plan or receive other benefits.

Similarly, any restrictive covenants should be set forth in writing. These may include the following:

  • Non-compete clauses, which restrict former employees from working for competitors;
  • Non-solicitation clauses, which prevent former employees from soliciting clients of the firm; and
  • Non-disclosure agreements, which prevent former employees from disclosing trade secrets and other confidential information.

These provisions must be drafted with state law requirements in mind. For example, non-compete clauses must be reasonable in scope, as courts do not like to inhibit individuals from earning a living. Other laws may limit the enforceability of a non-compete clause when the employee is terminated without cause. Similarly, not all information that the company deems confidential may actually qualify as a protectable trade secret.

During the Relationship

In addition to documenting the terms of the employment relationship, employers should also document performance, including any improper conduct, along the way. When a discrimination or related claim is filed and attorneys become involved, the first request is often for the employee’s personnel file. It is important that the reason for termination (or any other adverse employment action) is properly documented. Supervisors and managers will sometimes not want to give an employee (particularly one of their own) a negative review. But if former employees suing for unlawful discrimination are told that they were really fired based on poor performance, red flags may fly if the personnel file does not reflect that poor performance. Also keep in mind that state and local laws may provide broader protection from discrimination than do federal laws. For example, local ordinances might protect employees from discrimination based on sexual orientation or marital status.

Internal complaint procedures (e.g., for reporting improper conduct) should also be clearly set forth in writing, preferably in an employee handbook or a written equal opportunity policy statement.

If employees are given access to confidential information, make sure this is also documented and that employees are instructed properly to protect the information. This should include steps as to how the information should be protected. For example, electronic information may be password-protected, while hard-copy documents might be kept in a locked file.

Handling the Actual Termination

Terminated employees should be given a straightforward explanation why they were terminated. If it is based on poor performance, it usually benefits no one in the long run to tell the employee otherwise. And CPA firms rarely benefit from providing laid-off employees false hope that they may return one day if that is unlikely to occur.

When employees are terminated, have more than one person present. The second person may be an important witness as to what the employee was told if litigation ever occurs. Also consider asking the individual to voluntarily resign, which may be in the interest of both the firm and the individual. If severance is provided, consider obtaining a release of all employment-related and other claims in exchange. Also consider whether additional provisions are appropriate in a written severance agreement, such as a non-disparagement clause or a covenant not to reapply for employment with the firm.

It is good practice to obtain any confidential or critical information from employees before they are terminated (lest they be permitted to take such information with them). When employees who were given access to confidential information leave, consider checking whether they e-mailed such information to themselves or others or otherwise downloaded or took the information. And if terminated employees subsequently violate a restrictive covenant, it is important to maintain a practice of enforcing the contract. A consistent record of enforcement will help establish the importance of the protected information and may deter others from violating their contracts.

Finally, upon termination, provide the employee with a final paycheck. Many states have laws requiring final payment (including vacation pay) within a specific timeframe.

Know the Law

Human resources personnel are not the only ones who need to be aware of discrimination and other employment laws. Oftentimes a company’s liability will depend in part on whether managers took appropriate action to stop improper conduct and whether the company conducted a proper investigation. Educating your workforce of their rights, including what they can or cannot do, benefits everyone. Consider having human resources or outside consultants meet with your employees — particularly supervisors or managers — to educate them on relevant employment laws.

Many of these same principles will apply to decisions to forego hiring an employee, promoting one employee rather than another and other types of employment decisions. Taking appropriate steps throughout the entire employment process will help CPA firms better manage their workforce and avoid additional unpleasantness that often comes with layoffs or terminations.

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Jason M. Rosenthal is a partner with Schopf & Weiss LLP, a national business litigation firm based in Chicago. For more information, contact Rosenthal at 312-701-9300 or visit sw.com.