Labor and Employment Law Weekly Update

24 May 2010 Publication

Legal News: Employment Law Update

Federal Court Upholds Georgia Non-Compete Agreement

In H&R Block Eastern Enterprises, Inc., v. Morris, 09-11184 (11th Cir. 2010), a Circuit Court of Appeals determined that a non-compete agreement that national tax preparation company H&R Block used for its Georgia employees was enforceable. Here, former employee Vicki Morris worked as a seasonal tax preparer for the 2000 – 2005 tax seasons. Each year, Ms. Morris signed an employment agreement that contained a non-compete and non-solicitation clause. The employment agreement prohibited Ms. Morris from providing tax-related services to any H&R Block client that she had serviced within her work district or a 25-mile radius of her work office for a period of two years following her termination of employment.

After H&R Block terminated her employment in December 2005, Ms. Morris opened her own company and prepared tax returns for 87 former H&R Block clients, 47 of whom she had personally serviced. H&R Block filed the instant lawsuit against Ms. Morris. Under Georgia law, courts consider several factors to determine if a non-compete agreement is reasonable: the duration of the restriction, the geographic scope, and the type of activity prohibited. Applying these factors to the H&R Block non-compete clause, the court found the duration (two years), geographic scope (work district or 25-mile radius), and type of activity prohibited (H&R Block clients she had serviced) to be reasonable. In particular, the court found that the prohibited activity was reasonable because it only prevented Ms. Morris from providing tax preparation services to the clients that she had previously serviced at H&R Block, and did not prohibit her from servicing other H&R Block clients or the general public. The court found that the non-compete agreement appropriately balanced Ms. Morris’s right to earn a living with H&R Block’s right to protect its client relationships.

While many states employ the same test as Georgia, they may have widely varying outcomes. For example, allowable non-compete durations may range from a maximum of six months to several years. Other states such as California generally prohibit non-compete agreements. Because the enforceability of non-compete agreements is state-specific, employers need to make sure the agreements are well drafted for each particular jurisdiction.

Using Credit Reports in Employment Decisions

While no federal laws directly prohibit employers from conducting credit checks on applicants, certain laws can come into play in such situations. For example, Title VII prohibits an employment practice that disproportionately screens out racial minorities, women, or another protected group unless the practice is job-related and consistent with business necessity. Accordingly, if an employer’s use of credit information disproportionately excludes candidates of a particular race or other protected group, the practice would be unlawful unless the employer could establish that the practice is needed for it to operate safely or efficiently.

Certain critics have argued that credit checks have not been shown to be a valid measure of job performance. However, some courts have determined that credit checks are appropriate for certain positions such as when an employee handles large amounts of cash. Thus, for the employer that determines that the risk of liability for hiring unfit employees outweighs the risk of a discrimination claim, consumer credit reports may be used to evaluate employees for employment as long as the employer complies with the Fair Credit Reporting Act (FCRA).

The first key requirement of the FCRA is written notice and authorization. Before you can get a consumer report for employment purposes, you must notify the individual in a separate writing that a report may be used. The employer also must obtain the person's written authorization before requesting the report from a credit reporting agency (CRA). (Note: special writing and notification procedures apply to the trucking industry.)

Second, if a credit report is relied upon in denying a job application or other adverse action such as job reassignment, termination of employment, or denying a promotion, the employer must: (1) before taking the adverse action — give the individual a pre-adverse action disclosure that includes a copy of the individual's consumer report and a copy of "A Summary of Your Rights Under the Fair Credit Reporting Act," as prescribed by the Federal Trade Commission (the CRA furnishing the individual's report will provide the summary of consumer rights), and (2) after taking the adverse action — give the individual notice that the action has been taken in an adverse action notice, including the following:

  • The name, address, and phone number of the CRA supplying the report
  • A statement that the CRA supplying the report did not make the decision to take the adverse action and cannot give specific reasons for it
  • A notice of the individual's right to dispute the accuracy or completeness of any information the agency furnished, and his or her right to an additional free consumer report from the agency upon request within 60 days

An employer who fails to comply with the above requirements of the FCRA can be sued for damages, including court costs and attorneys’ fees. 


Legal News is part of our ongoing commitment to providing legal insight to our clients and colleagues. If you have any questions about or would like to discuss these topics further, please contact your Foley attorney or any of the following individuals:

Authors

Lynn Goodfellow
San Diego, California
619.685.6430
lgoodfellow@foley.com

Samantha Powers
Orlando, Florida
407.244.3224
spowers@foley.com

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