We’ve got some situations brewing concerning moonlighting. We have a few employees who are working during their off hours for a company that competes with us indirectly, and we have a few others who we believe are missing work due to jobs elsewhere. We also have a few who are obviously pretty tired—again, we think because they are working nights somewhere else. Can we investigate what these employees are doing? Can we just prohibit employees from taking other work? In general, what can we set as a policy on moonlighting? — Robert R., HR Director in Vallejo
400+ pages of state-specific, easy-read reference materials at your fingertips—fully updated! Check out the Guide to Employment Law for California Employers and get up to speed on everything you need to know.
Employers who wish to prohibit moonlighting, beware: Trying to control your employees’ lawful off-duty conduct in California can generate legal risks.
Labor Code Section 96(k), enacted in 1999, creates pitfalls for those who seek to regulate their employees’ off-duty activities such as moonlighting. The code allows the labor commissioner to make claims on behalf of employees for wage losses resulting from demotion, suspension, or discharge “for lawful conduct occurring during nonworking hours away from the employer’s premises.” In 2001, Labor Code Section 98.6 extended similar protections to applicants, specifying that an employer shall not “discharge” an employee, or “discriminate against” an applicant or employee, for engaging in such lawful, off-duty conduct. These provisions initially raised significant concerns for employers because their wording seemed to broadly invalidate any employer restrictions on moonlighting.
Since then, two decisions from California’s Fourth District Court of Appeal have limited the reach of these provisions, collectively holding that they do not set forth an independent public policy, but merely establish a procedure by which the labor commissioner may assert “recognized constitutional rights.” While this was welcome news for employers, it remains unclear whether other courts and the labor commissioner will follow suit. These decisions also leave open an argument that a right to pursue outside employment through moonlighting inheres in the right to possess and protect property contained in the California Constitution.
Indeed, based on informal discussions with the labor commissioner’s office, this is exactly the position it is considering adopting. That position is that individuals may have a right, rooted in Business & Professions Code Section 16600 (barring restraints on trade) and the California Constitution, to work a second job; that Labor Code sections 96k and 98.6 protect that right; and that, while this right must be balanced against the employee’s duty of loyalty to the employer, an employee breaches no duty merely by working for another company. Rather, the determining factor is whether the employment at the second job poses a real conflict to legitimate business interests or disrupts the company’s operations. Further, restrictions on corporate officers, high-level managers, or other high-level employees possessing trade secrets are more likely to be upheld than those imposed on lower-paid employees, many of whom may need to moonlight to make ends meet.
On one end of the spectrum, then, an employer that adopts a blanket no-moonlighting policy risks violating the law. On the other end of the spectrum, an employer that restricts outside employment only as necessary to protect its trade secrets is likely within its rights. Between these two extremes, unfortunately, it is unclear precisely what types of restrictions will be deemed permissible. In general, however, the touchstone will be whether the employer can articulate a sufficiently substantial business-related reason for restricting outside work.
Working with the Competition
With these principles in mind, let’s address the particular questions posed. First, the HR director notes that some of his company’s employees are “working off-hours for a company that competes with us indirectly.” Not enough information is provided to assess whether the employer could investigate or lawfully restrict this activity, but from the description given, the employer should probably tread very carefully here.
I would want to know the following:
What is the nature of both companies’ businesses, and how much do they compete with one another?
What level are the moonlighting employees, and what is the nature of their work for both companies? Are they corporate officers, possessing fiduciary duties, or lower-level employees performing more clerical work?
Does the dual employment pose an actual or potential conflict of interest or some other significant risk to the employer’s legitimate interests?
Do the employees possess trade secrets, or have they solicited employees or customers?
Is there some reason to believe the employees have breached confidentiality, usurped corporate opportunities, or otherwise engaged in self-dealing?
Missing Work and Fatigue on the Job
As for the employees who are missing work and those who seem exhausted on the job, the prudent approach is simply to address the underlying performance problems. Any disciplinary action taken would then be based not on the employees’ lawful off-duty conduct (which could land you in legal hot water) but rather on the negative impact of that conduct on their work performance.
Moonlighting Policies
Finally, the questioner asks what kind of moonlighting policies an employer can establish. Rather than adopt a moonlighting policy per se, an employer would be wise to address the problems raised by moonlighting in other ways, for example:
- Employers might adopt a properly drafted conflict of interest policy, which defines and prohibits conflicts of interest and provides well-grounded examples applicable to the employer’s business or industry. The policy might also instruct employees to consult management if they are unsure about whether particular conduct creates a conflict of interest.
- Likewise, employers might adopt a carefully drafted policy that defines trade secrets and other confidential and proprietary information and prohibits their disclosure or misuse.
- Finally, employers might adopt policies governing rules of conduct and discipline. Such policies typically include the grounds on which employees may be disciplined for poor job performance or misconduct.
Ultimately, it currently remains unclear precisely what California employers legally can do to control their employees’ outside activities. Thus, employers are advised to act cautiously in this area, to articulate a substantial business interest for any restrictions they wish to impose, and to consult legal counsel before taking disciplinary action for, or otherwise restricting, employees’ lawful, off-duty conduct.
Lindsay Harris is senior counsel at Speer Associates/ Workplace Counsel, an employment law and employee relations consulting firm in San Francisco.