Yearly Archives

Construction Business in Trouble? Is Bankruptcy Right for You?

With the declining economy, bankruptcy filings are on the rise. The bankruptcy trend in the past few years has hit both residential and commercial developers, as well as general and subcontractors. This trend has impacted all facets of the construction industry—virtually all trades, vendors and suppliers. Frequently, businesses find themselves in trouble because their own clients fail to pay their bills timely or themselves filed bankruptcy. Cash flow is key in any business, but it is particularly important in construction businesses. Those in the construction industry faced with slow paying customers, receivables that become non-collectible, pressure from banks and reduced demand for their services, often find themselves considering bankruptcy.

You should be aware of the various options that businesses have in connection with bankruptcy. Generally, businesses can file for two types of bankruptcy protection: Chapter 7 and Chapter 11. When a business files bankruptcy, either Chapter 7 or Chapter 11, an automatic stay is created which prohibits creditors from pursing any actions against the business debtor to collect a debt or pursue a claim.

Chapter 7 Bankruptcy 
In a Chapter 7 bankruptcy, a trustee is appointed and typically immediately shuts the business down. Thereafter, the trustee may perform a liquidation of the business assets and pay creditors from the liquidation proceeds. Once the trustee has liquidated the business and paid creditors, the bankruptcy case is typically closed but the business debtor does not receive a discharge of its remaining debts. However, the business is usually dissolved following the liquidation as there is nothing left for the benefit of creditors. The length of a business Chapter 7 bankruptcy varies depending on the trustee’s analysis of the case, the time to sell assets and time to pay creditors, but could range from 6 months to a year.

Chapter 11 Bankruptcy
In a Chapter 11 bankruptcy, the business debtor can often stay in control and avoid the appointment of a trustee. The goal of a Chapter 11 bankruptcy is to get the court to approve a Plan of Reorganization that provides new terms upon which the business debtor will pay back its creditors, often at a fraction of the original amount. In the Plan, Chapter 11 debtors can extend matured loans; pay certain creditors less money than is owed; reject leases; and even possibly adjust interest rates on loans to the current market rate. Once the court approves the Plan, it rewrites the deal with the businesses’ creditors and the business emerges from the bankruptcy intact. Keep in mind that a Chapter 11 bankruptcy is a complicated, expensive and time consuming process. As a result, it is important to consult a bankruptcy professional and consider all of your options before filing a bankruptcy.

Wilke Fleury Represents Over 50 Homeowners in Construction Action

The Sacramento Business Journal recently reported Wilke Fleury’s representation of over 50 West Sacramento homeowners in a construction defect lawsuit against national builder Meritage Homes. The litigation, headed up by partner David A. Frenznick, seeks rescission of the sales contracts or money damages sufficient to make repairs.

“Our experts believe that all of the homes were built to the wrong wind exposure standards,” Frenznick said. “The homes are moving, which causes cracking, which then allows the entry of water into the homes."

Read more: 50 homeowners file suit against Meritage Homes

Wilke Fleury Files Suit For Fraud And Breach of Contract on Behalf of Falcon Technologies

As recently reported in the Sacramento Bee, the firm has filed suit on behalf of Falcon Technologies against Pro-Tech Industries. The suit alleges that Pro-Tech executives, once installed as Falcon officers, assumed control of Falcon and subsequently resigned before the merger was completed. The suit charges that Pro-Tech then instituted a "reverse merger," using former Falcon employees, contracts and equipment.

Read more: Falcon Technologies Sues Merger Target

Six Firm Lawyers Named “Super Lawyers”

Six of Wilke Fleury’s attorneys have recently been named either "Super Lawyers" or "Rising Stars" by the 2010 Northern California Super Lawyers Magazine. Phil Birney, Tom Redmon, Ron Lamb, and Dan Egan were named "Super Lawyers." It was Mr. Birney’s fifth year to receive this honor and Mr. Redmon’s fourth. Dan Baxter and Megan Lewis were named "Rising Stars" for the second year in a row. The list of honorees is compiled through a multiphase process of peer nominations and evaluations, as well as third party research. Just five percent of the lawyers in California are selected for the "Super Lawyers" designation, and no more than 2.5 percent are named "Rising Stars." Wilke Fleury congratulates these six outstanding lawyers on their achievement.

Mike Polis and Natalie Johnston Teach National Business Institute Seminar

Michael G. Polis and Natalie A. Johnston recently presented a day-long continuing legal education seminar for the National Business Institute entitled Accounting 101 for Attorneys. The seminar took place in Sacramento and was attended by a variety of private attorneys, in-house legal counsel, business managers, and controllers. Mr. Polis and Ms. Johnston lectured on a variety of topics, including basic accounting terms, how to read financial statements, understanding GAAP, interpreting the numbers, identifying fraud, using accounting and financial records as evidence, and complying with ethical standards. Mr. Polis has a wealth of experience in accounting, both in his previous career as a certified public accountant and in his current position as managing partner of Wilke Fleury. Mr. Polis also has extensive experience teaching. He has been an instructor for the California State University, Sacramento, University of California, Davis, and the University of Phoenix. Ms. Johnston obtained her accounting knowledge from the University of California, Davis, Graduate School of Management, where she received her Masters in Business Administration in 2008.

Samson Elsbernd appointed to CYLA

The California Board of Governors has appointed Wilke Fleury associate Samson R. Elsbernd to the State Bar’s California Young Lawyers Association (CYLA). CYLA advises the Board of the interests of California young lawyers, develops strategies for increasing young lawyer involvement and participation in the State Bar, and facilitates the development of programs and services that would assist young lawyers in their professional and leadership advancement and programs that benefit the public.

CYLA members serve as ambassadors of the State Bar to the young lawyer organizations within the state. A California young lawyer is defined as a member in good standing of the State Bar of California who is in his or her first five years of practice in place California or who is age 36 or under. Mr. Elsbernd’s appointment will begin at the close of the 2010 State Bar Annual Meeting on September 26, 2010.

Wilke Fleury obtains judgment in Bankruptcy Court Trial

Wilke Fleury obtains judgment in Bankruptcy Court trial. Megan Lewis and Jason Cinq-Mars recently obtained a $204,000 judgment following a trial in the Bankruptcy Court for the Eastern District of California.  Ms. Lewis and Mr. Cinq-Mars represented a client that had emerged from Chapter 11 bankruptcy proceedings and sued to recover monies the client had paid to purchase invalid medical claims. Ms. Lewis and Mr. Cinq-Mars regularly represent clients in all aspects of Chapter 7 and 11 bankruptcy proceedings.

Employers That Receive Federal Funding May Be Subject to Disability Discrimination Claims from Independent Contractors

California employers that receive federal funding may now be subject to disability discrimination claims from independent contractors under the Rehabilitation Act of 1973. In a surprising decision, the Ninth Circuit recently held that section 504 of the Rehabilitation Act should be broadly construed to protect all individuals denied participation from federally-funded programs, including independent contractors.

The Rehabilitation Act of 1973
The Rehabilitation Act was the first major federal statute designed to protect disabled individuals in this country. Section 504 of the Act creates a private right of action for individuals subjected to discrimination by any federally-funded program or activity. Specifically, the Act provides that an individual who is otherwise qualified cannot be excluded from participation in, denied the benefits of, or subjected to discrimination under any federally-funded program or activity solely because of his or her disability. A federally-funded program for purposes of the Act include businesses that receive any amount of federal funding. Further, section 504(d) provides that the standards used to determine a violation of the Act in an employment discrimination case are the same standards applied under Title I of the Americans with Disabilities Act (“ADA”).

Recently, various courts have been attempting to resolve the issue of whether section 504 covers only employees where the claim arises in the workplace or whether it also covers non-employees, such as independent contractors. In a recent Ninth Circuit case, Fleming v. Yuma Regional Medical Center, the court held that section 504 should be interpreted to cover independent contractors, which would allow them to bring discrimination claims under the Act.

Fleming v. Yuma Regional Medical Center
In Fleming v. Yuma Regional Medical Center, Dr. Lester Fleming applied for a position with the Yuma Regional Medical Center as an anesthesiologist. Upon learning that Dr. Fleming suffered from sickle cell anemia, Yuma informed him that it would not be able to accommodate his operating room and call schedules. Dr. Fleming declined to accept this condition, which effectively cancelled the contract. He then brought suit against Yuma for employment discrimination in violation of section 504 of the Act.

Yuma asked the Court to dismiss Dr. Fleming’s case, arguing that he was not an employee, but was instead an independent contractor who could not bring a claim a for discrimination under the Rehabilitation Act. The lower court agreed and granted Yuma’s motion, finding that Dr. Fleming was an independent contractor and that independent contractors are not protected by the Rehabilitation Act. Dr. Fleming appealed.

The Ninth Circuit agreed with Dr. Fleming, finding that the Rehabilitation Act (unlike the ADA) is not limited to employees but also applies to independent contractors and the entities that hire them. The Court reasoned that the Act covers any “otherwise qualified individual” denied participation in, benefits of, or subjected to discrimination from any program that receives federal funds. The Act defines “program or activity” broadly to include all operations of covered entities, not only those pertaining to employment. Based on the language of the Act, the Court concluded that it is broad enough to cover employees and independent contractors alike.

What this means for you:
It has long been understood that only employees may bring claims for disability discrimination. This case radically changes that notion. If you hire independent contractors and you receive any federal funding, you must now be aware of your obligation to reasonably accommodate a contractor who is disabled.

Notice Required — Your Duty as an Employer Under Executive Order 13496

Beginning on June 21, 2010, federal contractors and subcontractors that enter into new federal contracts, subcontracts or make modifications to existing contracts must post a notice informing employees of their rights under the National Labor Relations Act (“NLRA”). Executive Order 13496 applies to all federal government contracts and subcontracts for the purchase, sale, or use of personal property or non-personal services. The government contracts must exceed $100,000 and subcontracts must exceed $10,000. Contracts and subcontracts for work performed exclusively outside of the United States, as well contracts and subcontracts exempted by the Secretary of Labor, do not fall under the provisions of the Executive Order.

Contents of the Required Notice
The notice required by the Executive Order sets forth the employees’ rights under the NLRA to organize and bargain collectively with employers, and their right to engage in protected concerted activity. The notice also sets forth the types of employer and union actions the NLRA considers illegal, as well as the contact information for the National Labor Relations Board. The required notice may be obtained from or any field office of the DOL’s Office of Labor-Management Standards and must be in 11×17 size.

How to Comply:
You must display the required notice in conspicuous places in and about the plants and offices where it can be readily seen by employees engaged in activities related to the performance of the contract. The notice must be posted everywhere notices to employees about employment conditions are posted and not just where legal notices are placed.

If you customarily use electronic means to post notices, you must prominently post this notice on websites you customarily use. The electronic notice must include a link to the Department of Labor’s (“DOL”) website that contains the full text of the poster. The link must read, “Important Notice about Employee Rights to Organize and Bargain Collectively with Their Employers.” If electronic means are used, you must also physically post the notice in the workplace. The notice must be provided in the language spoken by a significant portion of your workforce.

Additionally, the Executive Order requires that federal contracts and subcontracts include certain prescribed language (the “employee notice clause”). The employee notice clause requires employers to comply with the notice requirement. The prescribed language does not need to be copied into a contract, but may instead be made a part of the contract by reference to 29 CFR Part 471, Appendix A to Subpart A.

Consequences for Non-Compliance:
The Office of Federal Contract Compliance Programs (“OFCCP”) is responsible for investigating employee and other complaints alleging non-compliance with the Executive Order. If you fail to comply with the Executive Order, your contract may be cancelled, terminated, or suspended. In addition, an order of debarment preventing you from entering into further government contracts may be issued.

Wilke Fleury Welcomes Diversity Fellow

Mariam Siddiqui has joined Wilke Fleury for the summer as a member of the Sacramento County Bar Association’s Diversity Fellowship program. Ms. Siddiqui received her bachelors degree from the University of California, Berkeley and recently completed her first year of law school at the University of Pacific, McGeorge School of Law. She is a Sacramento native and enjoys photography, traveling and spending time at the river.

Wilke Fleury Welcomes Bianca Watts

Wilke Fleury welcomes Bianca Watts to its Summer Associate Program. Ms. Watts recently completed her second year of law school at the University of the Pacific, McGeorge School of Law. She is a staff writer for the McGeorge Global Business and Development Journal and an executive board member of the Black Law Student’s Association. Last summer, Ms. Watts participated in the Sacramento County Bar Association Diversity Fellowship Program. Ms. Watts is an avid fan of the New Orleans Saints and the Sacramento Kings, and is currently studying karate.

Indemnity Provisions in Construction Contracts–Asset or Liability?

Construction contracts often contain indemnity provisions. Indemnity provisions generally allow one party to a contract who, if found liable in a lawsuit, may then seek reimbursement from the other contracting party. Indemnity provisions are commonplace in the construction industry, most significantly in contracts between general contractors and their subcontractors. When a developer or general contractor is sued by a commercial or residential property owner, they may seek indemnity, or reimbursement, from the subcontractors, who typically do most, if not all, of the actual work.

Indemnity Rights Can Be Assigned 
However, developers and general contractors are not always the only persons who can end up with indemnity rights. The law allows a person to assign their indemnity rights. While unusual, it is possible for a developer or general contractor to assign his or her indemnity rights to the plaintiff as part of the settlement of the lawsuit. Indemnity rights can be a valuable asset, but they can also be a liability.

Indemnity rights can become a valuable non-cash part of a settlement between a general contractor and a homeowner, for example. In a construction defect action, the homeowner may name the general contractor and certain subcontractors as defendants. The general may then, in turn, sue the subcontractors for indemnity, bringing them into the lawsuit as cross-defendants. If the homeowner settles with the general, he is relieved of liability, but the non-settling subcontractors are not. If, as part of the settlement, the general assigned his indemnity rights, the homeowner basically “steps into the shoes” of the general and may continue the lawsuit against the non-settling subcontractors for additional amounts and also based upon the indemnity rights in the contract between the general and the non-settling subcontracts.

For example, assume a homeowner sues a general contractor for negligence and breach of contract, and the subcontractor for negligence. The homeowner settles his lawsuit against the general contractor for $1.6 Million cash and an assignment of the indemnity rights in the contract. Further assume that the assignment has an estimated value of $200,000. The total settlement amount is thus $1.8 Million. The homeowner then continues the negligence lawsuit against the subcontractor and obtains a $3 Million judgment. At the same time, the homeowner also brings the general contractor’s indemnity action against the same subcontractor (based on the general contractor’s contract with the subcontractor) and the jury awards $1.5 Million. The homeowner’s $3 Million direct judgment against the subcontractor will be reduced by his earlier settlement amount, leaving the homeowner with $1.2 Million in his negligence action. The judgment based on the indemnity provision in the contract will not be reduced. The total judgment for the homeowner is $2.7 Million ($1.2 Million + $1.5 Million), which is less than the $3 Million in negligence damages the jury awarded him. Yet, when the homeowner adds the $2.7 Million judgment to the $1.6 Million cash from the settlement, the homeowner’s total recovery is $4.3 Million, or $1.3 Million more than the jury awarded him. Furthermore, if the assigned contract with the indemnity rights included an attorneys’ fees provision, the homeowner may also be entitled to attorneys’ fees.

Attorney Fees May Be Part Of The Claim
Consider however, that if the homeowner loses the lawsuit, the general contractor would not have been held liable for the work of the subcontractor. Therefore, the homeowner will not prevail on the assigned indemnity lawsuit making the indemnity provision worthless to the homeowner.

Although worthless to the homeowner, the indemnity rights may be quite valuable to the prevailing subcontractor since many contracts contain attorneys’ fees provisions that are also assigned with the contract. Attorneys’ fees provisions give the prevailing party, whichever party that is, the right to reimbursement for reasonable attorneys’ fees. When the lawsuit is based on a contract that contains an attorneys’ fees provision and other non-contract causes of action, the attorney fees can generally only be recovered for the contract cause of action. However, a court may grant attorney fees for the entire lawsuit, not just the contract cause of action, when the legal issues were common to the contract and non-contract causes of action.

Losing Party May Be Forced To Pay Attorney Fees Twice

Consequently, the losing homeowner may be liable for attorneys’ fees both in his negligence action and in the indemnity action against the subcontractor based upon the indemnity provision in the assigned contract. The indemnity provision required the general contractor to be found liable for negligence so that the general contractor could indemnify the subcontractor for the subcontractors’ defective work. In other words, the subcontractor was not liable unless the general contractor was liable. Therefore, when the homeowner brought his negligence and indemnity causes of action, both causes of action were intertwined and the court had discretion to award attorneys’ fees to the subcontractor in defending itself against both the negligence and indemnity claims. This result occurs even though the homeowner was not a party to the original contract.

In conclusion, contractual indemnity provisions can provide protection to developers and general contractors who are later sued for defective work. In the event of a lawsuit, the indemnity rights may be assigned and become part of a negotiated settlement. When accepting indemnity rights, the risks and benefits associated with any attorneys’ fees provision must be considered.

Know How to File and Enforce Your Mechanic’s Lien

A mechanic’s lien is a remedial mechanism by which a contractor or subcontractor on a private work project can guarantee payment for services and work provided. The reasoning behind this is that since the contractor or subcontractor provided services which increased the value of the private property, they should have an enforcement tool toward guaranteeing payment for those improvements. Take, for example, a not-uncommon scenario in today’s economy: a general contractor contracts with a roofer but fails to pay and files bankruptcy. A valid mechanic’s lien held by the roofer will likely require the homeowner to pay the roofer for his or her services even though the homeowner may have paid the general contractor in full.

The law provides this remedy to a very broad spectrum of claimants, essentially any person or business entity who at the request of a private owner, or his agent, has furnished labor, material, leased equipment or furnished any special skills and/or services to a project for improving real property may be entitled to record a lien against that property. (See Civil Code §3110.)

Step 1: Preserve Your Right To A Mechanic’s Lien By Recording And Serving A Preliminary Notice
Pursuant to Civil Code section 3114, before you can enforce a mechanic’s lien a preliminary twenty (20) day notice must be served. The notice must be in writing and must contain at least the following information:

(1) A general description of the labor, service, equipment, or materials furnished, or to be furnished, and an estimate of the total price thereof.

(2) The name and address of the person furnishing that labor, service, equipment, or materials.

(3) The name of the person who contracted for purchase of that labor, service, equipment, or materials.

(4) A description of the jobsite sufficient for identification.

(5) A heading, set forth in boldface type, stating “Notice to Property Owner,” and the subsequent statements as spelled out in Civil Code section 3097(c)(5).

Any tradesperson that provides services to a general contractor who in turn is providing services to a private landowner must serve a preliminary notice within twenty (20) days of the time services are first provided on the project. A general contractor and/or a subcontractor with a direct contractural relationship with the owner is not required to provide preliminary notice. Additionally, this preliminary notice must be served upon the owner or reputed owner, the original contractor, or reputed contractor, and to the construction lender within the twenty (20) day time period. A preliminary notice must be served either personally, by registered or certified mail.

Step 2: Record And Serve The Lien
If you are not timely paid during the course of the project or at the end of the job, the recordation of a mechanic’s lien is a powerful remedy. Often, payment follows shortly thereafter. It is important to understand, however, that the lien must recorded within ninety (90) days after the completion or cessation of the work on the project. However, if the owner of the property records either a notice of completion or a notice of cessation, the contractor has only thirty (30) days from the time the notice is recorded to record his mechanic’s lien. The lien should be recorded in the County in which the real property is situated. Pursuant to Civil Code section 3084, the mechanic’s lien must include the following:

(1) A statement of the amount owed, after deducting all just credits and offsets.

(2) The name of the owner or reputed owner, if known.

(3) A general statement of the kind of labor, services, equipment, or materials furnished by the claimant.

(4) The name of the person by whom the claimant was employed or to whom the claimant furnished the labor, services, equipment, or materials.

(5) The location or a description of the site sufficient for identification.

(6) The claimant’s signature and verification that the claims made in the mechanic’s lien are true and accurate.

Frequently, the mere recordation of a mechanic’s lien will motivate payment of any outstanding balance. If not, then the lien must be perfected by filing a lawsuit in the Superior Court.

Step 3: Perfect the Mechanic’s Lien
If the contractor remains unpaid after the recordation of the mechanic’s lien, the claimant must file a lawsuit to foreclose the lien within ninety (90) days from the date the lien was recorded. A lawsuit is commenced by the filing of a complaint in the Superior Court. Failure to meet the filing deadline will result in the loss of your ability to enforce the lien.

While a contractor always retains the ability to proceed with a breach of contract action against the person or entity that actually hired you, (the homeowner or general contractor in most cases) the loss of lien rights through failure to file the preliminary notice or to perfect the lien may mean that you won’t get paid if the primarily responsible party has filed for bankruptcy protection or is otherwise judgment-proof. That is why it is always a good idea to have an attorney draft the paperwork and ensure that the filing deadlines are met. However, to save money, some contractors fill out the forms themselves and simply have the attorney review them before mailing or filing.

Recent Developments In Construction Law

Construction law is constantly changing. A savvy contractor keeps abreast of those changes and adapts his business methods to conform to new requirements. Here are some recent legislative updates and court decisions that may affect your business.

Notice of Mechanic’s Liens Now Required 
As of January 1, Civil Code section 3084 now requires that lien claimants provide written notice to the property owner that the lien is recorded. The new law contains specific language and font size requirements. Most importantly, failure to provide the notice as required renders the lien unenforceable.

Notice of Pendency of Action to Become Mandatory
As of January 1, 2011, Civil Code section 3146 will mandate that a Notice of Pendency of Action (Lis pendens) be recorded within 20 days of the filing an action to foreclose a mechanic’s lien. Current law does not require the recordation of a Lis pendens. It is unclear if a failure to timely record the notice will affect the validity of the lien.

Unlicensed Contractors Ordered to Disgorge 
In White v. Cridlebaugh (2009) 178 Cal. App. 4th 506, the court of appeal recently held that an unlicensed contractor was required to reimburse an owner more than $80,000 for construction work performed while unlicensed. The appellate court found that Business & Professions Code section 7031(b) was designed to treat consumers consistently, regardless of whether or not they already paid the contractor for unlicensed work. Section 7031(b) protects an owner from suit for payment by an unlicensed contractor. This case now makes clear that unlicensed contractors cannot avoid the effect of the statutes by collecting prepayment before undertaking work or by retaining progress payments for completed phases of work.

Social Networking In The Workplace – TMI

Like it or not, if you have employees with access to the internet, they are likely using online social networking websites such as Facebook, Twitter, MySpace and LinkedIn. The explosion in the popularity and use of such sites creates a whole new (cyber)world of concern for employers trying to regulate and monitor the online activities of their employees. The ease with which users can now post information on the internet leads to the possibility that employees may damage their company’s reputation, reveal confidential information, or expose employers to claims of defamation or harassment. To deal with such risks, employers must consider creating a comprehensive set of policies to regulate and monitor the online activities of employees in the workplace, while at the same time remaining cognizant of privacy concerns and other limits on managing online activity and communications.

Liability for Harrassment
As most informed employers already know, federal and California anti-discrimination laws require that employers act to prevent or eliminate harassment in the workplace. With the advent of the online world, employers must now be aware of online activity such as posting unwelcome messages or statements which can form the basis of a hostile work environment claim. An employer may be held liable for such activity if the conduct has a sufficient nexus to the workplace and the employer has actual or constructive knowledge of the unwelcome conduct but takes no steps to stop it.

The risk of liability from employee conduct was illustrated in Blakey v. Continental Airlines, Inc., where the New Jersey Supreme Court found that an employer could be held liable for a hostile work environment claim arising out of derogatory statements posted on an Internet bulletin board designed for continental employees. While the bulletin board was provided by an outside vendor and not Continental itself, the board was available to all pilots and crew members. Continental argued that because the harassment did not occur at a workplace under its direct control, it should not be liable. The Court disagreed, finding that although the electronic board may not be located at a physical site, it may have been so closely related to the workplace and beneficial to the employer that harassment in the forum could be regarded as a part of the workplace. The Court recognized that privacy concerns were implicated by its ruling and emphasized that employers are not required to monitor all private communications of their employees, but that employers still have a duty to stop co-worker harassment in settings related to the workplace if they know or have reason to know that harassment is taking place. This case demonstrates that employers can no longer turn a blind eye to harassment in the virtual world.

Liability for Monitoring
Given the myriad risks associated with employee online activity, employers clearly have an interest in monitoring social networking activities that relate to an employee’s work. While it’s true that employers cannot turn a blind eye to the virtual world, they must cautiously approach any type of online monitoring they undertake. Of primary concern is the employee’s right to privacy. In California, the courts balance the employee’s reasonable expectation of privacy against the employer’s business justification for the monitoring to determine whether an employee’s privacy has been violated. While it used to be well-settled that an employer in the private sector could monitor email and internet activity on equipment provided by the employer (so long as there was an explicit policy which called for such monitoring), the law is becoming increasingly unclear, particularly where an employee has restricted access to his or her online social network.

The Stored Communications Act (“SCA”) is a federal statute that prohibits third parties (i.e. employers) from accessing electronically stored communications – for example, email or Facebook entries – without proper authorization. While the SCA creates an exception where the conduct is “authorized”, most courts have construed that exception narrowly. Two recent cases are illustrative.

In Pietrylo v. Hillstone Restaurant Group, two employees were fired after posting derogatory comments about their employer on a MySpace user group that the employees had created to complain about their jobs. The user group was by invitation only and required a password to view, but the employees’ supervisor requested and received the password from another employee and viewed the postings. The employee who provided the password later testified that she feared her refusal to give the password to her supervisor would have affected her job negatively. The jury found that the employee was coerced into providing the login information and returned a verdict against the employer for violating the SCA. Similarly, in Konop v. Hawaiian Airlines, Inc., a pilot created and maintained a website wherein he posted entries critical of his employer. Access to the site was restricted by the pilot and he only allowed access to “authorized users.” Two of the users provided their login information to a Hawaiian official, who then accessed the site. The creator of the site sued Hawaiian under the SCA and the court held that Hawaiian was liable because there was no evidence that either of the authorized users who provided the login information had ever accessed the site themselves; and therefore, they were not “users” who could authorize the Hawaiian official’s access. These cases illustrate the confusing and unsettled waters employers must navigate when monitoring online activity.

Steps to Take
A final consideration for employers is what they may do once monitoring has uncovered unsavory information. California law prohibits employers from discriminating against employees for lawful conduct that occurs away from the workplace during non-work hours. There is also concern that certain employee online activity may be protected by the National Labor Relations Act. Further, even if an employer were to determine that it could (and should) take action, such action should be taken consistently so as to avoid claims that the employer has discriminated against a protected group by not imposing the same disciplinary action on other similarly situated employees.

So what is an employer to do?
Start by developing a comprehensive set of policies to regulate and monitor employee online behavior in the work context. An employer must consider the goals of these policies, which should include protection of the company’s reputation, confidential information, trade secrets, and the privacy of its employees. Such policies will be most effective if they (1) urge employees to go to human resources before venting online, (2) establish a disciplinary framework for misuse of social networking sites related to employment, (3) establish a reporting system for suspected violations of the policy and, (4) reiterate that the company may monitor email and internet use on company equipment. Above all, the policies must be enforced uniformly.

Wishing the internet away or eliminating its use by employees is, respectively, impossible and increasingly infeasible. Gaining control of the issue proactively through education and a well written policy allows employers to harness the good that can come from the internet while minimizing the bad.