Employers can become more of a partner in their employees’ health and wellness by adding to their intranets links to a number of federal Web sites that offer information. For instance, there’s the National Institutes of Health, part of the U.S. Department of Health & Human Services. The NIH site offers information on such topics as Health and Wellness, Conditions/Diseases, Healthy Lifestyles and Research. The site also contains quick links to areas including Men’s Health, Women’s Health, and Child & Teen Health; NIH toll-free information lines and toll-free numbers to health organizations around the country.
Incentive Plan Design Begins With Good Questions
Incentives continue to surge in popularity as a management tool. A recent WorldatWork survey found that 81 percent of U.S. organizations (up from 68 percent just six years ago) are using variable pay—or incentives—for employees outside the sales force. So popular, in fact, is this particular pay-for-performance approach that leaders are increasingly calling for it as a solution to all manner of performance issues. This puts us as human resources professionals on the spot to deliver on the demand. I would urge caution, though, before leaping at that urgent request for an incentive plan. Take a deep breath and take some time to fully understand the nature and context of the performance issue at hand. If there’s one thing I’ve learned in many years of designing, implementing, reviewing and—yes—fixing incentive plans, it’s this: Incentives can be a powerful force for the positive, but they also have the potential to be ineffective and even damaging when carelessly thrown at ill-defined problems.
The temptation to do just that, however, is strong. I recall a conversation with the CEO of a manufacturer who felt his company urgently needed an incentive plan so that employees would “perform better.” “Do they have pretty clear information on performance expectations?” I asked. “Are they getting good feedback on how they were doing?” Negative. The CEO informed me that they didn’t do performance management, didn’t even have job descriptions in place. These things, he told me, were simply not their “style.”
Further conversations with other members of company leadership revealed that many people, including those in management roles, had no clear idea on what was expected of them. The CEO was holding out hope that an incentive plan would provide a shortcut of sorts, allowing the company to detour around all those messy and time-consuming management and communication tasks, and get right to the place where employees performed exactly as desired. Unfortunately, as most of us know, that isn’t how people management works. And dropping an incentive plan into this situation, holding out a reward for better performance without having a foundation of performance measurement or even basic information on job accountabilities in place, would have been a waste of time and money, at best.
Then there was the health care center whose board asked for incentives in order to push patient-care providers to be more productive. It didn’t take a lot of investigation for me to learn that 90 percent of the productivity of the providers was out of their hands, and in the hands of the scheduling department, which had a long history of thwarting all provider efforts to more fully utilize their available time. The first priority of the scheduling department, you see, was to ensure that all patients were given their top-choice time slot, not to ensure that provider schedules were full.
In this scenario, it would have done no good and would have created a great deal of frustration to dangle incentives in front of the providers without first addressing the larger system in which they had to function—particularly the obstacles created by the scheduling department.
In another instance, a retail company executive wanted to use incentives to drive significant changes in the way the company’s sales staff served customers. When asked to detail the most common characteristics of sales employees, she described them as people who “love the product and are totally unmotivated by money.” So we were going to ask them to drastically change the way they dealt with the products they loved and, in return, offer them something they didn’t highly value? Not a recipe for success.
You get the picture. What to do? My recommendation is this: When management comes pounding on your door asking for an incentive plan, begin by asking questions—lots of questions. Here a few of my favorites to get you started.
What, specifically, do you want to achieve by putting an incentive plan in for these employees?
What specific improvements—behaviors and outcomes— would the incentive plan be designed to drive?
Why aren’t these improvements happening now? What’s preventing them from taking place?
What kinds of difficulties or obstacles might employees face in trying to make these improvements happen? What might thwart their efforts to succeed?
If there is an incentive, how will employees respond to these difficulties and obstacles? How will they try to overcome them? What will they most likely do? Is this what you want?
Do employees have what they need—the skills, experience, systems and support—to overcome these difficulties and obstacles? If not, what is lacking?
Probe hard, push back and don’t quit until you get the answers. Only then will you know whether and how you should design and implement the incentive plan being requested. If my experience is any indicator, you will discover that there are some basic organizational, management and communication issues at the center of the performance problem. Much as our management “customers” might like to believe the contrary, incentives are not a sound substitute for an effective organizational structure, good management practices or clear and regular communication.
Incentives, at their very best, are all about focus. Well-designed and well-implemented plans can focus employees on the few key things where you need them to really move the bar. That’s their unique strength, among all other rewards. When organizations try to use incentives to do their general management and communication tasks for them, they end up building in too much discretion, too much complexity or just too many measures. With this, we bleed the incentives of their particular power and advantage, and they become just another way to distribute pay.
Better to use your investigative skills to discover and define the exact nature of the performance challenges. Then you are in a position to cull out the broader management, organizational and communication issues which must be addressed with foundational-level improvements, and pinpoint those areas where incentives can have a positive impact.
Performance, as W. Edwards Deming told us, is a systems thing. It is complex and multifaceted. Incentive plans, or any other reward vehicles, cannot drive the performance-improvement bus alone. Unless you identify and remove the barriers to performance, and create the setting in which performance improvement is possible and even likely, throwing incentive money at the problem will likely have little positive impact and could produce some very real negative consequences.
The Art of the Subject Line
Hit “send” these days and you never quite know where your e-mail will be read.
Your recipient could be sitting behind a desk, but he’s just as likely to be sunbathing on a Mexican beach or weaving through a downtown traffic snarl. Perhaps more important, the reader could be scanning that game-changing e-mail a few lines of type at a time on a personal digital assistant.
As if business writing wasn’t challenging enough, the proliferation of PDAs has added a new layer of writing complexity for readers and writers, says Kiko Korn, a Los Angeles-based writing coach who works primarily with attorneys. It’s still a business communication, she warns her students, regardless of where that message is composed. “If you’re e-mailing your client from a BlackBerry while driving, you still have to make sure your e-mail is appropriate.”
One good first step for PDA writing: Pay attention to subject lines. If space is at a premium, a subject line can get a message noticed and deliver crucial information. When introducing a new subject, take an extra moment to start a new subject heading rather than piggybacking on a previous e-mail thread.
In the e-mail itself, explain concisely why you’re getting in touch and what action you need, Korn says. Given the small screens, there’s no luxury of an introductory paragraph, she says. “I would say those first three sentences are the key.”
What if you’re uncertain how an e-mail will be picked up? When a lengthy document is involved, J.D. Schramm advises his MBA students to attach rather than paste it within an e-mail. That way the sender can properly format the memo or report with the appropriate bullets and various headings without worrying that all of those presentation details will be lost on a tiny PDA screen, says Schramm, director of the CAT (Critical Analytical Thinking) Writing Program at Stanford’s Graduate School of Business. Along with the attachment, you can send a brief e-mail warning the recipient that the document might require some time to peruse, he says.
For some verbose writers, PDA communication may promote writing discipline, Korn says. By learning to synthesize complexities into just a few sentences, an attorney may develop similar skills for more lengthy documents, such as 10-page briefs, she says.
When in doubt, though, listen to your instincts, Korn says. Sometimes nothing beats a quick phone call to a colleague or a client. “Anything you write down never goes away,” she says. “You can’t undo the tone—you can’t undo that misstep.
Fewer Americans Get Health Coverage Through Employers, Report Says
Three million fewer Americans younger than 65 received health insurance through employers in 2007 compared with 2000, according to a report from the Economic Policy Institute in Washington.
The number of individuals receiving employer-sponsored health insurance from their own or a family member’s employer has declined for seven consecutive years, to 62.9 percent of the under-65 population in 2007 from 68.3 percent in 2000, according to the report.
The report, “The Erosion of Employer-Sponsored Health Insurance,” attributed the growing uninsured population across the country to declines in employer-sponsored health insurance. Despite a slight gain in the number of U.S. individuals younger than 65 with health insurance in general from 2006 to 2007, the overall uninsured population has expanded by 4 million individuals since 2000.
Public health insurance, as opposed to private, nongroup coverage, is the predominant alternative to employer-provided coverage that has been cut, especially for children. Employer-sponsored health insurance for children through their employed parents dropped 6.4 percent from 2000 to 2007, affecting 3.4 million kids. However, coverage for children through Medicaid and the State Children’s Health Insurance Program increased by about 7 percent.
According to the report, no category of worker has escaped losses in employer-sponsored health insurance since 2000, with every race, education level and work status experiencing declines. Hispanic workers experienced a 3.4 percent decline in employer coverage, compared to a 2.7 percent drop for black workers and a 3.2 percent decrease for white employees.
College-educated workers experienced a 2.6 percent drop in coverage from 2000 to 2007; high school-educated workers, a 6.3 percent drop. Full-time employees saw a 3.3 percent drop in coverage, and part-time employees saw a 5.9 percent drop in coverage.
Filed by Kristin Gunderson Hunt of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.Workforce Management’s online news feed is now available via Twitter.
Market Mess Exposes Gaps in 401(k) Savers’ Knowledge
Heading into work September 15, Linda Garcia knew she was in for a long day.
That morning, amid a financial market meltdown, Bank of America announced it was acquiring Merrill Lynch. Garcia, vice president of HR at Seffner, Florida-based Rooms To Go, knew employees would have questions regarding the deal’s effect on their 401(k) plans.
What Garcia didn’t expect was the kinds of questions she received from employees. While she knew there would be specific concerns with Merrill Lynch as the record keeper for the furniture company’s 401(k) plan, she didn’t realize how little employees understood about what that meant.
“We were getting questions about how the decline in Merrill’s stock price was affecting their 401(k)s,” she said. “People didn’t understand what the role of a record keeper was or how it all worked.”
Garcia is one of a number of HR managers who have realized in recent weeks that despite all the financial education they offer, many employees still don’t understand the fundamentals of 401(k) plans.
George Lane, a principal at Mercer in Washington, said the crisis has revealed deep misconceptions among workers about how 401(k) plans work. Last month, as Wall Street imploded, Lane traveled to an employer to facilitate a town hall-like discussion for employees on retirement benefits. One employee mistakenly believed that her 401(k) was protected by the Federal Deposit Insurance Corp.
“She said, ‘We don’t have to worry about our 401(k)s because they’re insured up to a hundred thousand dollars,’ ” Lane said. “I just shook my head.”
Such questions always come up in times of crisis, said Don Stone, a Chicago-based 401(k) consultant.
“It illustrates that people aren’t educated about investing and not reading the materials that are made available to them,” he said.
The good news is that as a result, many investors are stuck in a state of inertia in times of market volatility, which is, usually, what they should do so they can be fully invested when the markets recover, Stone said.
And that’s why many companies have decided in the past few weeks to hold off on sending communications to employees about the market crisis, he said.
“By sending out communications, they may be raising people’s temperature instead of lowering it,” Stone said.
Novi, Michigan-based Trinity Health Services delayed sending communications during the height of the crisis about the importance of investors staying the course, said Silvia Frank, manager of defined-contribution plans.
“We pulled back on that because the message wasn’t different from the guidance we have been giving,” Frank said. “We want to be careful with what we communicate given the magnitude of what’s happening.”
Rooms To Go has taken a different approach. In fact, the week of September 15, Garcia sent an e-mail explaining what the Bank of America acquisition meant, which was followed by an e-mail from Merrill Lynch.
Later that week, Garcia sent another e-mail to the company’s plan participants about money market funds. “We are just trying to keep putting e-mails out on different topics to make sure people don’t panic and do something foolish with their investments,” she said.
Ultimately, employers need to come to terms with the reality that there will always be employees who don’t pay attention to their investments, Stone said.
“That’s why a lot of people are pushing for auto-everything on 401(k) plans,” he said. “The reality is, most people are not investment gurus and we aren’t going to get them there.”
—Jessica Marquez and Jeremy Smerd
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Chrysler Chief Warns of Industry Collapse
Bob Nardelli, just 14 months into his tenure as CEO of Chrysler, now fears the collapse of an “extremely fragile” auto industry amid the credit crisis and Wall Street meltdown.
Nardelli said federal officials, preoccupied with trying to unfreeze credit, don’t appreciate the importance of the auto industry.
“You start to see the global collapse of the auto industry where strong, dominant international players are really feeling it in their home market,” he told Automotive News last week. “We thought the $4-a-gallon gas was going to be our biggest challenge, but that’s been minimized by the credit market.”
Nardelli’s comments came as shares of Detroit Three rivals General Motors and Ford Motor Co. cratered. GM closed at $4.89 on Friday, October 10, down from a 52-week high of $43.20. Ford ended at $1.99, off from a 52-week high of $3.34. On Friday, GM issued a statement saying it was not preparing to seek bankruptcy protection.
Nardelli said the auto industry faces unique federal regulatory burdens, such as increased fuel economy requirements.
“I’m not sure it’s registered at the highest levels the impact of losing the auto industry,” he said. “When I say the entire industry, it’s not only the OEMs; it’s the Tier 1, Tier 2, Tier 3” suppliers.
Nardelli said cash is “the No. 1 metric for the auto industry.” In Chrysler’s case, he said, “We’re concerned about it. We’re monitoring it, but we’re not on the edge.”
Filed by Bradford Wernle of Automotive News
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A Writing Test Run
Initially, Kush Wadhwa simply requested a writing sample when hiring contractors and employees for Global Security Intelligence, the security technologies consulting firm that he founded.
But the writing samples he received didn’t necessarily fit with the type of work the applicants would be performing. So Wadhwa provided a topic. Then he realized that some applicants devoted an inordinate amount of time to completing the two-page assignment.
These days Wadhwa selects the topic, sending it at a predetermined time. Applicants are given two hours to research and write an analysis, frequently on a subject outside their expertise. “This is about assimilating the information quickly and presenting it in a cohesive, coherent, compelling and concise fashion,” says Wadhwa, the firm’s founder and managing director.
It’s a screening step that relatively few companies take, according to a 2006 survey conducted by the Conference Board and several other groups. Just one in four companies reported that they assessed an applicant’s writing skills before extending a job offer.
Developing and grading a writing test may appear daunting and labor intensive, but it can still be far more cost-effective than placing a writing-challenged employee on the payroll, says David Arnold, general counsel at Wonderlic Inc., a Libertyville, Illinois-based educational testing and consulting firm. “When it comes to training, it takes a significant amount of time and effort to get someone improved in terms of writing skills,” he says.
As a general rule, Arnold says, it’s legally defensible to pre-screen applicants as long as the employer can demonstrate that writing constitutes an intrinsic part of the job description. For that reason, Arnold suggests that employers request a writing sample that fits with the applicant’s prospective job. A customer service manager, for example, might be asked to respond in writing to a customer complaint letter.
Equally important is consistent evaluation of that writing sample, given the various interpretations and subtleties involved with writing, Arnold says. He recommends that corporate leaders establish a standardized grading system ahead of time. Then they should monitor its usage to verify that certain applicants aren’t adversely affected based on race or gender, he says.
Moretrench American, a New Jersey-based construction company, already has writing workshops in place, but the firm’s organizational development coordinator, Jack Paluszek, plans to recommend that applicants write their own job description, once they clear several stages of the interview process. The benefits could be twofold, determining if applicants understand their proposed role and gauging whether they possess the writing acumen to pull it off, says Paluszek. “That’s something that I’m going to push for,” he says.
Wadhwa, meanwhile, estimates that he turns down five applicants for every hire he makes, because their writing can’t withstand the screening scrutiny. These applicants already boast a top-level résumé and technical background, he says. “But we are now convinced that we will not sacrifice this, even for a fantastic candidate, if they cannot write.”
Dear Workforce How Much Bonus Detail Should We Routinely Share With Employees
Even before their first day on the job, employees want to know: “What’s in it for me?” They are numbers-savvy and knowledge-thirsty. So you should strive to be candid and transparent, and consider showing employees as much as possible to ensure they appreciate the full value of your bonus program.
Regardless of the type of bonus program you have, it’s important for employees to understand:
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The goals for your organization and whether those goals are set on an individual, group, business-unit or companywide basis (or a combination).
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How bonus funding is established and aligned with meeting business goals.
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The full range of pay potential and how their contributions affect their personal earnings potential.
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In other words, for your company to maximize its investment in the program, employees must know what is expected of them, how they can achieve it and what their reward is.
Communication can provide the critical link to company performance. Some best practices based on our experience include:
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Cascade timely, consistent messages. Communicate company financials against targets throughout the year while employees can still positively affect the numbers.
- Arm your champions. Make sure HR recruiters, managers and leaders at every level are prepared to explain and answer questions about your bonus program.
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Keep it clear. Avoid jargon, use conversational language, and provide examples to illustrate complex concepts.
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Show them their money. Some leading companies offer employees personalized communications about how their bonus is calculated (with detail on how the program is structured) and online tools that allow them to model “what if” scenarios based on individual and company performance.
SOURCE: Suzanne Johnson and Linda Ulrich, Buck Consultants, Secaucus, New Jersey, July 2, 2008
LEARN MORE: Cash bonuses remain popular tools for rewarding employee performance.
The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.
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Bailout Comp Restrictions May Curtail Rewards for Risk
Restrictions on executive compensation contained in the massive financial markets rescue package reflect congressional—and constituent—anger about exorbitant payouts to Wall Street executives who were at the controls when their firms sank.
Congress was right on the money when it reined in C-suite pay for firms participating in the $700 billion federal bailout, according to Nell Minow, editor of the Corporate Library, a governance think tank in Maine. President Bush signed the bailout plan into law October 3.
Financial firms collapsed under the weight of complex mortgage-based assets whose value is plummeting as the housing market deteriorates. Executives were inspired to concoct the opaque mortgage derivatives, or at least foster their creation, because of enormous financial incentives to take big gambles, Minow said.
“The pay plans poured gasoline on the fire and were a direct contributor to the demise of these financial institutions,” she said.
The degree to which executive compensation is limited for firms selling toxic assets to the government depends on whether the Treasury Department buys them directly or at an auction.
In general, the rules curb golden parachutes; enable companies to recover bonuses paid for inaccurate performance achievements; and “exclude incentives for executive officers … to take unnecessary and excessive risks.”
Although these reforms apply to relatively few companies, Democratic congressional leaders want to address executive pay next year.
“There now exists a template that Congress could follow if it wanted to extend prohibitions on compensation to the rest of corporate America,” said Steven Seelig, executive compensation counsel at Watson Wyatt Worldwide in Arlington, Virginia.
With CEO pay skyrocketing while income for average workers stagnates, the issue has become volatile.
“Incentives are the life blood of any economy, and they are at risk in this backlash,” said Leslie Stretch, CEO of Callidus Software, a San Jose, California, maker of pay management programs.
The desire to start curbing compensation at the top of the corporate ladder is misguided, Stretch said. With 30 million to 40 million workers receiving variable pay, companies should take a harder look at the returns they’re receiving on rewards for the rank and file.
Stretch suggests requiring a line on financial disclosure forms that outlines incentives that are awarded across the company.
“The world at large has not addressed this problem in a structured way,” Stretch said.
Other experts don’t predict fundamental changes in pay systems.
“I don’t see the desire to reduce the rewarding for risk,” said John Mancuso, managing director of executive compensation and benefits at the Bostonian Group, a Boston consulting firm. “I see a more well-rounded package on the executive benefits side versus pure equity.”
Mancuso predicts greater use of restricted stock and more emphasis on performance rather than length of tenure when vesting bonuses.
Taking prudent risks that result in accomplishing business goals—like developing innovative products—should continue to be rewarded, said Charles Tharp, executive vice president for policy at the Center on Executive Compensation, a Washington organization sponsored by the HR Policy Association.
“Most companies tend to have a greater [emphasis] on long-term incentives, not annual bonuses, which tend not to encourage significant annual risk taking,” Tharp said.
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The Death of the Noncompete
The California Supreme Court recently affirmed that noncompete agreements are unenforceable against departing employees. The court expressly rejected decisions by the federal 9th Circuit Court of Appeals that allowed enforcement of noncompete agreements if they were narrowly drafted.
Because so many national and international employers do business in California and because California is often on the leading edge of legal and technological development, non-California businesses should take note of the decision.
First, some background: Noncompete agreements, or more commonly, noncompete provisions in broader employment agreements, are used by employers to prevent their employees from competing with them after termination. Employers invest substantial time and money training and developing their employees and are loath to see those employees quit and join a competitor or set up a competing business across the street. In turn, employees reject being tied to a single employer or situation, instead seeking to maximize their abilities and income by looking for better employment in the same industry.
Noncompete agreements can be broadly written (“employee shall never perform similar type of work within the state”) or they can be narrow (“employee shall not solicit or contact employer clients for six months following termination of employment”).
Historically, most states were initially hostile to noncompete agreements and other restraints of trade, either applying a reasonableness test that greatly favored the employee or enacting laws prohibiting contracts restraining trade. However, as time passed, many states adopted a more balanced approach, and courts, when faced with onerous noncompete agreements, would often redraft the terms to make them reasonable, rather than voiding the agreements altogether.
The pendulum appears to be swinging the other way, and courts are increasingly weighing noncompete agreements with emphasis on the employee’s rights over the employer’s rights.
Today, most states enforce noncompetes if they are reasonably drafted to balance the rights of the employer and employee. But since 1872, California has rejected such agreements. California Business and Professions Code Section 16600 provides that, with exceptions unrelated to the normal employer/employee relationship, “every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.”
In the recent case, Edwards v. Arthur Andersen, the California Supreme Court examined an employment agreement between Arthur Andersen, formerly one of the five largest public accounting firms, and one of its former tax-manager employees, Raymond Edwards. Edwards’ employment agreement included a typical noncompetition clause, prohibiting Edwards from working for or soliciting Arthur Andersen clients for limited periods after his employment ended.
When Edwards was terminated without severance benefits, he sued Arthur Andersen, alleging that the noncompete agreement violated Section 16600. The trial court ruled in favor of Arthur Andersen, finding that the noncompete agreement was narrowly drafted and therefore enforceable. The court of appeal reversed the trial court, finding for Edwards, and the Supreme Court decided to review the case, apparently to stamp out any confusion that noncompete agreements can be enforced if they are narrowly drafted.
The Supreme Court largely affirmed the court of appeal’s ruling, holding that the Edwards/Arthur Andersen noncompete agreement was void. The court emphasized California’s strong public policy favoring open competition and employee mobility, and determined that noncompetition agreements are permissible only if they fit within one of the statutory exceptions of Section 16600, relating to the sale or dissolution of corporations, partnerships and limited liability companies. None of those exceptions were present in the Edwards case.
The Supreme Court noted that the trial court had erred by relying on the “narrow restraint” exception to Section 16600, which is not part of Section 16600 but had evolved from several cases from the federal 9th Circuit Court of Appeals. Under the “narrow restraint” exception, some federal courts have enforced noncompete agreements if the restriction on the employee “is limited and leaves a substantial portion of the market available to the employee.” The California Supreme Court found that Section 16600 does not include any “narrow restraint” exception and that this exception cannot be implied. The court recognized that allowing a “narrow restraint” exception would give employers “an incentive to draft noncompetition agreements that push the envelope of the ‘narrowness’ requirement” and the exception would “burden a terminated employee with the task of guessing, at his or her peril, whether a court might find particular restrictions sufficiently narrow or overly broad.”
Federal courts are often required to apply state law in situations involving diversity jurisdiction, in which one of the parties to a lawsuit does not reside in the state where the dispute occurred. But the federal courts must apply that law based on that state’s interpretation of its own law. Here, the 9th Circuit had misinterpreted California’s rule against noncompete agreements, and the California Supreme Court expressly rejected the 9th Circuit’s interpretation, finding that “the ‘narrow restraint’ doctrine is a misapplication of California law. Noncompetition agreements are invalid under Section 16600 even if narrowly drawn, unless they fall with the statutory or trade secrets exceptions.”
The court was referring to two statutory exceptions in Section 16600 to the general rule that noncompete agreements are unenforceable in California, and they both relate to the good will of an existing company. First, if a company owner sells his business and the company’s good will is part of the sale, the seller can be bound by a noncompete agreement. Second, when partnership is dissolved, one partner can agree not to compete with the other partner who intends to carry on the business, and that noncompete agreement can be enforced.
The court also referred to a trade-secrets exception to California’s rule against noncompete agreements. California has adopted the Uniform Trade Secrets Act, and the court noted that under California law, an employer can prevent its former employees from taking and using the employer’s trade secrets after his or her termination.
In the Edwards case, Arthur Andersen relied entirely on the noncompete agreement language and did not allege that Edwards had misappropriated its trade secrets. The Edwards decision merely emphasizes that trade secrets will continue to grow as the key battleground between employers and employees. While an employer cannot bind an employee with a noncompete agreement, it can require the employee to acknowledge that he or she will be obtaining trade-secret information that shall not be used for any purpose that does not further the employer’s interests.
Many employers try to throw the trade-secret blanket over everything they share with their employees, but under California law, information only qualifies as a trade secret if it: (1) has economic value from not being generally known, and (2) has been subject to reasonable efforts, under the circumstances, to maintain its secrecy. Thus, an employer seeking to prevent a former employee from contacting its clients would need to show that the list of clients would be difficult to create and that the employer actually made reasonable efforts to keep the list confidential. “Reasonable” is in the eye of the beholder, but obviously, the courts are more likely to protect highly valuable and deeply protected trade secrets like computer chip design or the recipe to Coca-Cola than they are to protect the names of potential real estate investors.
Under California law, even non-California employers cannot enforce noncompete agreements against their California employees. Moreover, out-of-state employers cannot avoid the rule merely by including language in the employment contract that the law of another state applies. California courts have jealously protected California employees by striking down such “choice of law” provisions. While a non-California employer can sue in its home state to enforce a noncompete agreement against the former employee, California courts are reticent to enforce such judgments in California, viewing it as inimical to public policy. Some employers have successfully enforced noncompete agreements by avoiding the judicial system completely through the use of a binding-arbitration provision in the employment agreement. In such situations, the arbitrators may apply the reasonableness standard in determining the validity of the noncompete agreement.
Since noncompete agreements are unenforceable in California, an employer seeking to prevent former employees from using its legitimate trade secrets will need to be proactive and establish the trade-secret status of the information before the employee leaves. Thinking creatively, non-California employers can draft employment agreements that will increase, if not guarantee, the chances that the noncompete agreements will remain enforceable when it comes to their California employees.