In its annual report to the South Carolina General Assembly dated October 1, 2012, the South Carolina Department of Employment and Workforce (DEW) reported that it expects to regain solvency in 2015. DEW became insolvent in 2008.
Between December of 2008 and the spring of 2011, DEW borrowed $782,187,983 from the federal government to pay unemployment benefits. According to a Business Week article dated August 17, 2012, the debt accumulated approximately $8,800 daily in interest. See www.businessweek.com/ap/2012-08-17/sc-unemployment-agency-paying-106m-toward-debt.
Escalating claims during the recession directly contributed to DEW’s insolvency. The South Carolina unemployment rate rose from 5.5% in January of 2008 to its zenith of 12% in December of 2009. The current South Carolina unemployment rate is 9.1%. An insured worker’s weekly benefit amount is fifty percent of his weekly average wage, with a threshold of at least $42.00 and maximum benefit of 66 2/3% of the statewide average weekly wage computed at the beginning of the benefit year. S.C. Code. Ann. § 41-35-40. The maximum compensation rate calculated on January 1, 2012 was $725.47.
The South Carolina General Assembly has modified unemployment qualifications and benefits to restructure the system and to eliminate the debt. First, changes have been made in the taxable wage base. In May of 2010, the taxable wage base increased from $7,000 to $10,000. In 2012, the taxable wage base increased to $12,000, and the taxable wage base will increase to $14,000 in 2014. In its October 1, 2012 report, DEW stated that the national average taxable wage base is “slightly over $15,000.”
Next, legislators reduced the applicable period for unemployment benefits. In 2011, the maximum number of weeks for unemployment benefits was curtailed from twenty- six weeks to twenty weeks.
On June 18, 2012, the South Carolina General Assembly passed Act 247, which tightened qualifications for unemployment benefits. South Carolina law has historically disqualified an unemployed claimant from receiving benefits if s/he:
S.C. Code Ann. § 45-35-120.
Act 247 broadened disqualification from benefits with respect to discharge “for cause.” Before Act 247’s passage, an employee was disqualified from receiving benefits if he “was discharged for cause connected with the employment.” S.C. Code Ann. § 45-35-120. Act 247 disqualifies an employee from receiving benefits if s/he was discharged for “misconduct connected with the employment.” 2012 S.C. Acts 247. Accordingly, if DEW determines that an employee has committed misconduct connected with his/her most recent work, the employee is completely disqualified from receiving unemployment benefits and is paid nothing.
Act 247 defines “misconduct connected with the employment” as:
2012 S.C. Acts 247. If DEW is unable to find that the employee was discharged for misconduct connected with the employment but determines that the employee was discharged for cause, DEW nonetheless “must find [the employee] partially ineligible” for five to nineteen weeks of unemployment benefits. Id. Accordingly, unemployment benefits for employees who are found to have been fired for cause are limited to no more than 15 weeks and in some instances only one week. Although Act 247 now totally disqualifies employees from receiving benefits based on misconduct, South Carolina law has long penalized applicants discharged for cause. See S.C. Code Ann. § 45-35-120(2)-(4).
In its October 1, 2012 report, DEW reports that it intends to aggressively combat fraud. The newly formed Integrity Department is designed to “prevent, detect, reduce and recover improper payments.” The Director of the Integrity Department will also lead DEW’s Integrity Taskforce, which DEW reports, “pushes an ambitious agenda to innovate and improve prevention and recover methods for benefit overpayments and tax debits through new staffing models and technology tools.”
Determining unemployment claims is inherently fact driven, and DEW appears committed to making an informed decision as a first line defense to combating fraud. Employers have ten days to respond to unemployment claims. According to its website, DEW has adopted an initiative in which it will contact by phone employers who fail to respond within the first seven days to request that the employer provide a response and grant a two-day extension to do so. DEW encourages employers to respond electronically through the SC Business One Stop or through the State Information Data Exchange System.
To further regain solvency, DEW itself will undergo substantial restructuring. In a press release dated October 15, 2012, DEW announced that its restructuring will result in layoffs of 136 employees.
In recent months, both the Fourth Circuit Court of Appeals, which has jurisdiction over federal cases in North and South Carolina, and the S.C. Supreme Court have addressed the issue of protecting trade secrets and confidential information.
The Fourth Circuit limited an employer’s ability to use the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. §1030, et seq., against a former employee who downloaded company trade secrets. The S.C. Supreme Court held that covenants not to disclose confidential information are not in restraint of trade and are not to be construed strictly in favor of the employee but analyzed under a more general reasonableness standard. Although the N.C. Supreme Court has not ruled recently on the issue, North Carolina affords similar protection for confidential information.
Fourth Circuit addresses application of CFAA to employees
Courts throughout the country disagree on whether an employee in this situation has “accessed a computer without authorization” or “exceed[ed] authorized access.” In WEC Carolina Energy Solutions, LLC v. Miller, 2012 WL 3039213 (4th Cir. 2012), the Fourth Circuit joined the Ninth Circuit in narrowly interpreting the application of the CFAA to an employee’s downloading of information from a company computer. However, five other circuits have interpreted the CFAA to apply to employees who violate company policies regarding the use of information stored on company computers. WEC Carolina has filed a petition for a writ of certiorari with the U.S. Supreme Court.
Mike Miller worked as project director for WEC, a company that provides specialized welding and related services to the power generation industry. WEC allowed Miller the use of a company laptop and provided him access to company trade secrets and confidential information. To protect such information, WEC maintained policies that prohibited an employee from using the information without authority or downloading it to a personal computer.
WEC alleged that prior to resigning from the company in April 2010, Miller e-mailed confidential documents to a personal e-mail address and, along with the help of his assistant, Emily Kelly, downloaded confidential documents to a personal computer. WEC also claimed that Miller, who went to work for a competitor, used these documents to make a presentation on behalf of the competitor to a WEC customer.
WEC sued Miller and Kelly, alleging that they violated the CFAA. WEC reasoned that under its policies, Miller and Kelly were not permitted to download confidential documents to a personal computer and that, in doing so, they violated their duty of loyalty to WEC, thereby either losing or exceeding their authority to access WEC’s computers.
The Fourth Circuit, however, disagreed, reasoning that the terms “without authorization” or “exceeds authorized access” do not apply where an employee has access to an employer’s data on a computer and then uses that information improperly. Although Miller and Kelly did not have authority to misappropriate trade secrets, they did have authority to access the information as employees of the company. Thus, their acts of downloading the confidential documents did not violate the CFAA. The Fourth Circuit noted:
Our conclusion here likely will disappoint employers hoping for a means to rein in rogue employees. But we are unwilling to contravene Congress’s intent by transforming a statute meant to target hackers into a vehicle for imputing liability to workers who access computers or information in bad faith, or who disregard a use policy.
WEC Carolina Energy Solution, LLC v. Miller, 2012 WL 3039213 at *13.
S.C. Supreme Court addresses scope of non-disclosure
In Milliken, the employer brought suit against a former employee, Brian Morin, for breach of a covenant not to disclose confidential information contained in his employment agreement after he resigned and started a new company. The covenant prevented Morin from using or disclosing confidential information for a period of three years after his resignation. It defined “confidential information” as “all competitively sensitive information of importance to and kept in confidence by Milliken, which becomes known to me through my employment with Milliken and which does not fall within the definition of Trade Secret” set forth in the agreement.
Morin argued that the non-disclosure covenant, like a non-compete, was a restraint of trade and should be strictly construed in favor of the employee. He reasoned that the covenant was not reasonable because it was so broad as to prevent him from using his own general skills and knowledge, as opposed to only restricting his use of confidential information.
The Court disagreed, finding that the covenant was not a restraint of trade. Nevertheless, it held that a non-disclosure covenant was still a restrictive covenant, and public policy demands that it be subject to judicial review for reasonableness. In this case, the covenant was reasonable because the definition of confidential information was limited, encompassing only important information not generally known to the public that became known to Morin during his employment. The Court held that Milliken had a legitimate business interest in protecting such information. The Court also noted that, although not necessarily required, the covenant was reasonably limited to only three years.
North Carolina law is consistent
What these cases mean for employers
Effective January 1, 2013, there was a new form that employers must provide prospective or current employees when conducting background checks subject to the Fair Credit Reporting Act (FCRA). The main change in the form directs employees to contact the Consumer Financial Protection Bureau (CFPB) or visit its website at www.consumerfinance.gov/learnmore for further information about their consumer protection rights, versus contacting the Federal Trade Commission (FTC), the agency that has traditionally had responsibility for interpreting the FCRA. The CFPB has not, at this time, imposed additional substantive requirements on employers.
The deadline resulted from the transfer of rulemaking authority from the FTC to the CFPB pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFPB will now have primary responsibility for interpreting the FCRA. The CFPB regulations require employers and consumer reporting agencies to modify one form, and consumer reporting agencies to modify two additional forms required by the FCRA; these modifications are addressed below. The new forms reflect the administrative transfer of authority, but do not impose substantive changes to the notification requirements on employers.
There is no per se penalty within the FCRA for failing to use the new form. However, employers that fail to comply with any of the Act’s requirements may be subject to penalties and fees, as well as lawsuits from applicants or employees.
When are employers subject to the FCRA?
Under the FCRA, an employer using a credit-reporting agency to gather a “consumer report” must notify the prospective employee, on a separate document, of its intent to do so, and obtain the applicant’s written consent before conducting the background check. As a general matter, criminal records, credit reports and driving records are all considered consumer reports. Therefore, such reports gathered from a credit-reporting agency trigger the notification requirements under the FCRA. Criminal records checks gathered directly from a law enforcement agency by an employer, not a third party, do not normally trigger the requirement.
Also covered under the FCRA are “investigative consumer reports” conducted by a third party. These include components of consumer reports, but may also include personal interviews with friends, neighbors or associates of the applicant. The notice and consent requirements under the FCRA are somewhat more elaborate for investigative consumer reports.
What forms have been modified?
Why conduct a background check?
Distance Learning Education Committee
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The deadline for filing the Supreme Court of South Carolina Commission on CLE & Specialization Application for Certification in Employment & Labor Law is May 31, 2013. For additional information and a copy of the application, please visit www.commcle.org/pdf/ellcert.pdf.
The following slate for the 2013-2014 Employment & Labor Law Section Council was approved at the section annual meeting on October 26.
Congratulations to Al Phinney and Kristen Baylis, who won complimentary registrations to the 2013 Bar Convention that was held January 24-27 at the Myrtle Beach Marriott Resort & Spa.
Section Midyear Seminar
The Employment & Labor Law Section will honor an individual nominated by his/her professional peers for meritorious service to employment and labor law practice in South Carolina. The 2013 recipient will be recognized at the Section midyear seminar. Click here for the nomination packet. Nominations must be submitted by March 8.
Articles are needed for future issues of the Employment & Labor Law Section newsletter. If you are interested in submitting an article, please forward your submission to Stephanie E. Lewis at firstname.lastname@example.org or call (864) 672-8048 for additional information.
This is a newsletter for the South Carolina Bar’s Employment and Labor Law Section. The South Carolina Bar and the Section council members reserve the right to refuse to publish any submission which is not consistent with their goals and standards. Articles that are published reflect only the opinions of their authors; they do not represent or reflect any positions held by the South Carolina Bar or the Section officers and council members. It is the policy of this newsletter that on all submissions of original articles, the authors assign their copyright in the work to the South Carolina Bar. Publisher may reprint, or authorize other entities to reprint, the material as deemed appropriate. The publisher has the right to authorize the reproduction, adaptation, public distribution and public display of the article as a contribution to this newsletter in electronic media, computerized retrieval systems and similar forms; such authorization includes use of the article anywhere in the world by means of public display, conversion to machine readable form and reproduction and distribution of copies. The South Carolina Bar is not required to secure the consent of the author before exercising the above named rights. In addition, the Bar has no duty or responsibility to negotiate, collect or distribute any royalties in connection therewith.