Hiring: The Do's and Don'ts

On May 7th, Sherin and Lodgen and NEHRA presented the first seminar in our Best Employment Practice Series. View the presentation:

SJC Reminds Corporations to Put All Share Transfer Restrictions in Writing

Written by: Meyer H. Potashman

On March 27, the Massachusetts Supreme Judicial Court issued its latest decision involving the Demoulas supermarket family, a decision which may have significant impact upon closely-held Massachusetts corporations that want to limit transfers of their shares.

Demoulas Super Markets, Inc. (DSM) is a closely-held corporation owned largely by members of the Demoulas family.  The company is a Subchapter S corporation, which gives its shareholders favorable tax treatment.  The tax code requires, among other things, that for a corporation to maintain “S Corp” status, all of its shareholders must be individuals, and not corporations or other entities.  

As with many closely-held businesses, DSM’s Articles of Organization impose restrictions on transfers of shares.  The Articles provide that before any such transfer a shareholder must first notify the board of directors in writing, giving terms of a proposed sale, which is treated as an offer to the directors, who have thirty days to accept or reject the offer. The selling shareholder, however, need only offer to sell the shares to the company, and need not present specific third-party offers to the board.  If the board rejects the offer, the shareholders may attempt a private sale of the shares.  

In June, 2010, certain DSM shareholders decided to sell their shares, and presented an offer to the board.  After the board rejected the offer, the shareholders sought to sell their shares to a corporate buyer.  Because a sale to a corporation would cause DSM to lose its S Corp status, DSM sued to block the sale, arguing that the selling shareholders would breach their fiduciary duty to the company and the other shareholders by completing the sale.  

The SJC has long held that shareholders of closely-held Massachusetts corporations have a fiduciary duty of the “utmost good faith and loyalty” to each other.  In the Demoulas case, the court defined how this duty applies in cases where the shareholders have already agreed to share transfer restrictions, either in their Articles, bylaws or other contract.  The court’s decision acknowledged that the selling DSM shareholders had a fiduciary duty to the other shareholders, but found that the sellers fulfilled their obligations by complying with the restrictive provisions of the Articles: since the transfer restrictions are a contract among its shareholders, the shareholders only had to comply with the restrictive provisions in the Articles to satisfy their fiduciary duty.  The sellers’ duty to the other shareholders did not require them to preserve the company’s S Corp status if they were not contractually bound to do so.  The take-away is that if shareholders want to protect an interest, such as S Corp status, and have a contractual arrangement to protect this interest, it is critical that the entire agreement be put in writing, because courts will not look beyond the language of the agreement. 

In light of this decision, all closely-held Massachusetts corporations should thoroughly review their share transfer restrictions, whether in their Articles, bylaws or another agreement, to ensure that any necessary restrictions are clearly documented in writing. S Corporations may, for example, want to prohibit a transfer that would change the company’s tax status, unless approved by a majority of the remaining shareholders. They may also consider giving their boards the right to review, and potentially meet or beat, every offer received by a selling shareholder.  If a proposed offer would end the company’s S Corp status, the board would have additional incentive to put up the funds necessary to prevent the transaction from occurring.  

If you have any questions about reviewing your share transfer provisions, please contact a member of our Corporate Department.

Meyer Potashman is an associate in the firm's Corporate Department. Read his bio and connect with him on LinkedIn.

Five Questions Not to Ask a Job Applicant

From time to time even the most experienced HR professional needs a reminder of what not to say to a job candidate.  Below are five questions to avoid, whether asked directly or indirectly.

Employers may not ask an applicant for his or her age or date of birth, with the exception that an employer may ask if the applicant is under the age of 18. It also may be permissible to ask the applicant his or her age if required to comply with state or federal law, such as in situations where a public safety position has an age limit for employees, or where age is shown to be a bona fide occupational qualification. 

2. What is your maiden name? Do you have children? If so, how do you plan to take care of them while you’re at work?

This type of question is a red flag, as employers typically make such inquiries only to female applicants. Gender is a protected class, and any questions that pertain only to one sex are usually improper.  Employers also should be aware that any distinction they make between married and unmarried women that they do not make between married and unmarried men, or vice versa, may be discriminatory.

This question is inappropriate because the applicant’s response might reveal that the applicant has a disability. An exception exists when an applicant tests positive in a drug test designed to uncover the use of illegal drugs. In that case, the employer may ask about the use of medications to get an explanation (if any) for the positive result.

These types of questions are impermissible, as they tend to elicit information about an applicant’s national origin. Instead, employers should ask whether the applicant is legally authorized to work in the United States.  This question is an important one for employers who must comply with the relevant immigration laws related to employment; however, the relevant inquiry is whether the applicant has legal authorization to work in the United States, not whether he or she is a United States citizen.

Questions regarding where someone was born or the origin of his or her name may be innocuous from the employer’s perspective, but are problematic if they do not directly relate to the applicant’s ability to perform the job for which he or she is applying, or if they are likely to elicit the applicant’s national origin.

It is impermissible to ask an applicant about his or her religious beliefs, religious obligations, or religious practices.

The only time an employer may inquire into an applicant’s religious beliefs at the interview stage of hiring is when a religious organization is the prospective employer.  In that case, the religious organization employer may legally prefer members of the same religion in hiring employees.

Questions?

Contact Employment Group Co-Chairs Margaret H. Paget at mhpaget@sherin.com or C. Forbes Sargent at cfsargent@sherin.com.

Want to learn more? Register for our upcoming Employment Seminar May 7th: "Hiring: The Do's and Don'ts"

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The NLRB’s Recent Ruling Follows Earlier Headwinds Limiting Employers’ Ability to Curb Employee Discussion on Social Media

Written by: Sara Jane Shanahan

In a recent decision, Hispanics United of Buffalo, Inc. and Carlos Ortiz, 359 NLRB No. 37 (Dec. 14, 2012), the NLRB imposed limits on the ability of employers to reign in employee conversations held on social networking sites, such as on Facebook, even where an employer has a legitimate interest in enforcing policies aimed at preventing employee harassment. 

In Hispanics United, employee Lydia Cruz-Moore complained that five of her coworkers harassed and bullied her in a public conversation on Facebook. The Facebook post in question repeated an allegation made by Cruz-Moore that her fellow employees did sub-standard work, and it requested comments on the issue from others; the additional four employees responded to the post to refute Cruz-Moore’s allegations. Following Cruz-Moore’s complaint, the employer fired the five coworkers who participated in the conversation, citing its anti-harassment policy. The coworkers contested their terminations as a violation of the National Labor Relations Act (the “Act”).

Section 7 of the Act protects employees’ right to “engage in . . . concerted activities for the purpose of collective bargaining or other mutual aid or protection.”  It is an unfair labor practice to interfere with employees’ Section 7 rights.  In order to show such a violation, employees must prove that: (1) their activity was “concerted;” (2) the employer knew their activity was concerted; (3) the concerted activity was “protected” under the Act; and (4) the activity was the motivation for the terminations.  Here, the employer argued that the activity was not “concerted” or “protected.”  

The NLRB held in Hispanics United that “the activity engaged in by the five employees was concerted for the ‘purpose of mutual aid or protection.’”  Activity is concerted if it is “engaged in with or on the authority of other employees.”  Situations where employees seek to initiate group action fall within this definition.  The NLRB also held that explicit evidence of intent to act collectively is not required and that early conversations such as this are “indispensible initial steps on the way to group action.”  The NLRB found there was little dispute that the activity was protected.  It wrote, “the employees were directly responding to allegations they were providing substandard service to the [employer’s] clients.  Given the negative impact such criticisms could have on their employment, the five employees were clearly engaged in protected activity in mutual aid of each other’s defense to those criticisms.”

According to the NLRB’s decision, it was unreasonable to find these particular comments violated the employer’s anti-harassment policy because the employer’s determination was based solely on Cruz-Moore’s subjective claim that she felt offended.  A more objective test is required.  Further, the NLRB determined that even if the comments had been harassing, “legitimate managerial concerns to prevent harassment do not justify policies that discourage the free exercise of Section 7 rights.”

The Board did not address whether the public nature of the Facebook posts distinguished them from private conversations, as the employer had conceded in a hearing before an Administrative Law Judge that the Facebook posts should be analyzed in the same way as conversations around the water cooler or in the parking lot.  The Administrative Law Judge gave cursory treatment to the issue and found that protection under the NLRA was not forfeited due to the public nature of the comments.  On appeal, the NLRB held that because the employer argued that the comments never had protection, it did not need to consider whether the protected comments then lost protection as a result of their public nature.

In light of the guidance offered by the NLRB’s Acting General Counsel in the three social media-focused policy memoranda issued in 2011 and 2012 (Read the August 2011 memo, January 2012 memo, and May 2012 memo) and in light of the Board’s decision in Hispanics United, employers should review their code of conduct and social media policies to ensure compatibility with the Act, and exercise caution when disciplining employees for social media activity.  This is true even though the United States Court of Appeals for the District of Columbia’s January 25, 2013 decision in Noel Canning v. Nat’l Labor Relations Bd., called into question the legitimacy of all rulings by the NLRB since President Obama’s “recess appointments” in early 2012 to the NLRB.  In Noel Canning, the court held these appointments were unconstitutional.

Federal Jurisdiction Over Patent Malpractice Claims

Written by: Debra Squires-Lee

On January 16, 2013, the United States Supreme Court heard oral argument in Gunn v. Minton, a case in which the Court must determine whether and when federal courts have exclusive jurisdiction over legal malpractice claims involving patent issues.  In the ordinary course, legal malpractice claims, which arise out of allegations of negligence, are heard in state court, unless diversity jurisdiction applies.

The question of whether federal courts have exclusive jurisdiction, pursuant to section 28 U.S.C. § 1338(a), over legal malpractice claims arising out of patent prosecution or patent litigation was addressed in 2007.  In two unrelated cases, the Federal Circuit Court of Appeals held that the federal courts have exclusive subject matter jurisdiction over patent malpractice cases.  Those decisions heralded a sea change in jurisdiction over what everyone concedes is a state common law tort – legal malpractice. 

In March and April 2012, however, Federal Circuit Judge Kathleen M. O’Malley, in both dissenting and concurring opinions, called for her Court to reconsider its position.  Judge O’Malley concluded that her Court had misapplied Supreme Court precedent and failed to examine independently whether the precise “patent” issue in the malpractice cases was “substantial” in addition to being necessary.   According to Judge O’Malley, necessity and substantiality are two separate prongs of the four-part test used to determine federal court jurisdiction.   She wrote: “By finding that whenever a federal issue is a necessary element of a plaintiff’s state law claim, the federal issue automatically is a substantial one, our case law has collapsed the inquiry and discarded substantiality as a separate consideration.”

In Minton, a Texas state court patent malpractice case wound its way to the Texas Supreme Court.   The Texas Supreme Court relied on the 2007 Federal Circuit decisions and held that it lacked jurisdiction and, therefore, could not reach the merits of the legal malpractice claim.  Three judges dissented, arguing that the Federal Circuit “has not remained faithful to the Supreme Court’s federalism inquiry in the context of malpractice decisions arising from patent cases.”   Although the legal malpractice claim depended upon a determination of whether the experimental use exception was available as a defense in the underling patent infringement suit, because there was no dispute about the “validity, construction or effect” of the experimental use exception, the dissenting judges concluded the case on appeal did not involve a controversy about any federal issue.   They wrote: “[h]ere, the federal issue is not substantial for three reasons the Supreme Court has outlined: (1) the determination is one of fact – not law; (2) it will not result in precedent that controls numerous other cases; and (3) it involves federal common law, not a federal statute.”

The United States Supreme Court’s decision in Minton may have a broad impact, particularly where one study concludes that legal malpractice claims arising from alleged patent prosecution mistakes or patent litigation errors rose 30 percent from 2003 to 2007 and continue to rise.

You can read the transcript of the oral argument before the Supreme Court here.

Proceed Carefully When Hiring Non-Attorney Representatives

Written by: Margaret C. Kelty

In a recent decision, the Massachusetts Federal Court ordered the production of documents related to an audit report, including drafts of the report and emails concerning the audit, holding that they were not protected by the work product privilege or the attorney-client privilege, and even if there were an applicable privilege, it had been waived.  Specifically, the court found that the evidence before it did not support the plaintiff’s theory that the documents were “prepared for use in possible litigation,” a narrow standard that has been used by the First Circuit since 2009.  This decision should reinforce the need for potential litigants to proceed carefully when hiring non-attorney representatives to perform work that may later aid in litigation.  

In Columbia Data Products, Inc. v. Autonomy Corporation Ltd., et al., the plaintiff alleged that the defendant had, among other things, wrongfully copied and shipped the plaintiff’s software and failed to pay royalties for the use of the software pursuant to the terms of the parties’ License Agreement.  Following a dispute over royalty payments, the plaintiff retained litigation counsel for the potential action, and litigation counsel in turn retained an accounting firm.  The plaintiff informed the defendant that it was invoking its right to conduct an audit pursuant to the License Agreement, and the accounting firm conducted an initial audit, which included a review of the defendant’s records and interviews with the defendant’s employees.  Later, after litigation was underway, the plaintiff engaged the accounting firm to be an expert in the case.

During discovery, the plaintiff attempted to claim that the pre-litigation audit should be protected by the work product privilege.  The work product doctrine protects materials that are prepared by a party, its attorney or its representative in anticipation of litigation.  In United States v. Textron Inc. & Subsidiaries, the First Circuit adopted a narrow test for documents that serve both a business and a litigation purpose, determining that they must be prepared for use in possible litigation in order to be work product.  Under the “for use” test, a document must be created for the purpose of assisting in litigation; a document will not be privileged just because the subject matter of the document relates to issues that may one day be litigated. 

The Columbia court noted that the engagement letter between counsel and the accounting firm specifically stated that the accounting firm would not provide legal advice or provide opinions or assurances.  The accounting firm did not agree to update its report for use as an expert report until after litigation was well underway.  The court also found that the plaintiff represented to the defendant that the accounting firm was an independent auditor that was being retained pursuant to the License Agreement, and did not disclose that it had retained litigation counsel or that litigation counsel had engaged the accounting firm.  The court held that this evidence was inconsistent with any assertion that the audit report was prepared “for use in litigation” and ordered that the disputed documents be produced to the defendant.

As the Columbia case demonstrates, the First Circuit applies a narrow test for work product protection, and any analysis will be highly fact dependent.  Potential litigants should proceed with care whenever documents or analyses are prepared for a business purpose, but may also be relevant one day to anticipated litigation.      

Upcoming Bar Association Events: Justice and the Jury Trial

Sara Shanahan and Debra Squires-Lee are attending! Who else will we see there?

Employment Law in Massachusetts: What Out-of-Staters Need to Know

Written by: Margaret H. Paget

The technological advancements of recent years have led to increasingly flexible and far-flung employment arrangements that allow employees to live and work far from the employer’s principal places of business.  Massachusetts is known for having in place a multitude of laws governing the employment relationship. Employers unfamiliar with this landscape can easily find themselves making seemingly innocuous, but costly, mistakes when dealing with their Massachusetts employees.  We summarize here the most significant traps for the unwary employer:

• The Massachusetts Wage Act: Like many states, Massachusetts has enacted a statute requiring the regular payment of wages under what is commonly referred to as the “Wage Act.” Unlike many states, however, an employer may violate the law in wide-ranging circumstances, for example by withholding certain bonuses and commissions.  What you need to know:
  • Even if unintentional, failing to pay wages brings stiff penalties, including mandatory treble damages and payment of the employee’s attorney’s fees.
  • Certain agents and officers of a corporation are personally liable for violations of the Wage Act.
  • When terminating an employee, an employer must pay all unpaid wages earned to date, in addition to compensation for any accrued vacation (where the employer offers paid vacation time to employees).
• The Massachusetts Maternity Leave Act:  Employers with six or more employees must allow eight (8) weeks’ unpaid maternity leave to a mother upon the birth or adoption of a child.

• Sexual Orientation Discrimination: Unlike many states, an employer may not refuse to hire, or otherwise discriminate against an employee in the terms and conditions of employment based on the individual’s sexual orientation.

• Transgender Discrimination:  As of July 2012, an employer with six or more employees may not discriminate against employees or job applicants because of their gender identity.

• Sexual Harassment Policies: Massachusetts requires every employer with six or more employees to have in place a written policy governing sexual harassment and to distribute the policy annually to every employee. The MCAD now recommends that employers adopt written policies prohibiting harassment against members of any protected class (including, for example, harassment on the basis of race, religion, disability).

• Non-Competition Agreements: In recent years, Massachusetts courts have further limited the enforceability of non-competition and non-solicitation agreements in the employment context. Legislation is currently pending which, if enacted, would further limit an employer’s use of such agreements to restrict an employees after they depart.

• Criminal background checks: In 2010, the Massachusetts legislature reformed the laws governing criminal offender record information (“CORI”). What you need to know:

• The state now maintains a public database containing certain limited criminal record information about all individuals;  private employers may, in certain circumstances, seek access to more detailed criminal record information. 
• Most employers are prohibited from inquiring about an applicant’s criminal record on a written job application.
• Employers must obtain an individual’s written acknowledgement before seeking non-public CORI.
• An employer must provide an employee or applicant a copy of his/her CORI before questioning the applicant about it.
• Before making an adverse employment decision based on an individual’s CORI, an employer must provide: (i) the employee or applicant with a copy of the CORI , (ii) an opportunity to dispute its accuracy, and (iii) information on how to correct a CORI.
• There are a number of requirements that employers must follow in storing CORI records.

• Personnel Records: As in other states, Massachusetts requires certain employers to maintain personnel records for employees. Since August 2010, however, an employer is required to notify employees within 10 days after adding information to the employee’s personnel record that has been, or may be used to "negatively affect the employee's qualification for employment, promotion, transfer, additional compensation or the possibility that the employee will be subject to disciplinary action."

• Independent Contractors: The Massachusetts statute governing independent contractors makes it very difficult for employers to treat workers as independent contractors rather than employees. The Attorney General is charged with enforcing this law, although a violation can give rise to private claims by individuals (including, for example, wage and hour claims).

• Health Insurance:  Employers with 11 or more full-time employees must make fair and reasonable contributions to their employees’ health insurance premiums. This generally requires employers to pay at least 33% of health insurance premiums and to offer cafeteria plans for employees who wish to use pre-tax earnings to purchase health insurance.  And, of course, there are penalties for non-compliance.

Navigating the employment relationship in Massachusetts can be tricky. For those unfamiliar with this legal landscape, the better practice is to consult with counsel before acting.