Ruling Provides Guidance on Restrictive Covenants

Contributed by Suzanne Newcomb, October 16, 2019

man is signing non compete agreement

Long used to prevent former employees from gaining an unfair competitive advantage, covenants not to compete are increasingly under attack. California, North Dakota and Oklahoma essentially ban employee non-competes and recent legislation in Illinois, Maine, Maryland, Massachusetts, New Hampshire, Oregon, and Washington prevents their use with lower wage employees (the definition of which varies by state). Some laws go further, in Massachusetts, for example, a non-compete cannot be enforced against an employee terminated without cause and, in many cases, the employer must pay 50% of the former employee’s salary for the duration of the covenant.

In September, a federal court in Indiana struck down a non-compete as overly broad, but in an interesting twist, ordered the employee to cease work for a competitor because of his breach of the parties’ confidentiality agreement. Like the majority of states, Indiana “disfavors” employee non-competes and will enforce them only when they are supported by adequate consideration and the restrictions imposed are “reasonable” in scope, time and geographic reach and are no greater than is necessary to protect the employer’s legitimate interests.

The covenant in the Indiana case was deemed prohibitively broad in scope because it prevented the employee from working for a competitor “in any manner.” The decision cautions employers to limit non-compete restrictions to competitive positions analogous to the work the employee actually performs. However, because the employee downloaded thousands of documents immediately before departing and shared at least some confidential information with his new employer, the court issued a preliminary injunction prohibiting the employee from continuing in his new role. His “pre-departure harvesting” of his former employer’s confidential information warranted the injunction, the court concluded, because it created an “ongoing threat of potential or actual misappropriation” of his former employer’s confidential information or trade secrets.

Restrictive covenants are tricky and one size does not fit all. So what steps can organizations take to protect themselves from unfair competition in today’s highly competitive environment?

1. Location matters. Restrictive covenants are a matter of state law. Each agreement must meet the specific requirements of the jurisdiction where that employee’s employment relationship is based. Include choice of law and forum selection clauses to streamline disputes.

2. Don’t over reach. Some positions warrant a true non-compete and for others an agreement not to solicit customers will suffice. Patent and copyright assignments are critical for some segments of the workforce but for many, the only real concern is ensuring a departing employee does not make use of confidential information or steal trade secrets. Focus on what you need to protect and tailor the agreement to meet those needs.

3. Safeguard confidential information. A company’s failure to adequately protect confidential information in its day to day operations can undercut the best confidentiality agreement.

4. Be upfront about restrictive covenants. Waiting until after an employee accepts a position undercuts the consideration component and, in some jurisdictions, can invalidate an otherwise enforceable agreement. Ask prospective employees about ongoing contractual obligations before hiring them. Remind departing employees of ongoing contractual obligations.

5. Stay current. Review your forms periodically. The law is constantly evolving in this area.

A Wild Time On Campus: Higher Ed Whipsawed By September’s Employment Law Developments

Contributed by Michael J. Faley, October 11, 2019

Colleges and universities have witnessed major developments in September with student teaching and research assistants at private schools losing the right to unionize but student-athletes in California gaining the right to be paid. U.S. higher education will see significant changes as a result. 

In Major Reversal, U.S. Labor Board’s New Proposed Rule Would Deny Students at Private Schools the Right Unionize 

26487627 – group of happy graduates throwing graduation hats in the air celebrating

In 2016, the National Labor Relations Board (NRLB) gave teaching and research assistants at private colleges and universities the right to unionize. Viewed as a major win for organized labor, student teaching and research assistants have conducted 15 union elections at private schools over the last three years with 12 of them deciding to unionize. State law separately governs the eligibility of employees at public schools to unionize where it is much more common. 

However, the political leaning of the NRLB has tilted over the last couple of years. On September 23, 2019, the NRLB reversed course and proposed a new rule to exclude undergraduate and graduate students under Section 2 (3) of the National Labor Relations Act. The proposed rule will exempt from the NRLB’s jurisdiction any undergraduate and graduate students who are paid to perform services in connection with their studies. The new rule effectively strips unionization rights from teaching and research assistants at private schools. At the moment, the NRLB has released the proposed rule for a 60-day period of public comment and will most likely implement the rule soon thereafter.

New California Law Allows Student-Athletes to Receive Endorsement Deals; Illinois and Other States Are Likely to Follow 

While federal law has once more reset the dynamic between administrators, teachers and research assistants at private schools, several states now see themselves as championing the cause of unpaid student-athletes. College athletics has been the subject of a long-running debate over whether student-athletes, who help schools raise huge sums of money, should be treated simply as students or more like paid employees. A new California law seeks to upend the applecart in favor of paying college athletes.

On September 30, 2019, California Gov. Gavin Newsom signed a new law permitting student-athletes at California colleges and universities to be paid for the use of their name, image and likeness. Starting in 2023, student-athletes in California will be able to hire sports agents and pursue individual endorsement deals. It is a big change and strikes at the heart of the NCAA’s broad amateurism rules. The NCAA has threatened to sue California and penalize California schools.

Unfortunately for the NCAA, California may just be the start. Legislators in Illinois, New York, South Carolina and Florida have all announced efforts to pursue similar bills. In Illinois, for example, soon after Gov. Newsom signed the California measure into law, Illinois State Rep. Emanuel “Chris” Welch introduced a similar bill. Illinois HB3904, known as the Student Athlete Endorsement Act, would prohibit schools or athletic conferences from interfering with the right of student-athletes to earn money from their name, image or likeness. Student-athletes could hire sports agents to help them obtain endorsement deals. In the wake of the California law, the Illinois bill appears very likely to move forward.           

Some U.S. congressmen have also publicly declared their intent to take up the issue on the national level. U.S. Rep. Anthony Gonzalez from Ohio and U.S. Rep. Mark Walker from North Carolina both support enacting federal legislation to give college athletes the right to profit from endorsement deals. Rep. Gonzalez recently stated that he will give a group formed by the NCAA to study the issue some time to report their findings and recommendations to the NCAA before introducing federal legislation. Given that the California law only takes effect in 2023, the NCAA will have an opportunity to change its rules nationwide. However, it remains to be seen whether the NCAA’s vehement opposition to paid student-athletes will give way in the face of the changing legal landscape that it must soon navigate.           

Uncertain Times Ahead

These recent changes in the law are likely to cause a fair level of uncertainty among many higher education administrators and spur a lot of litigation. During such times, it is always advisable to consult with attorneys well experienced in employment and higher education legal practice to help guide the best path forward for the college or university.    

NLRB Makes ‘Unilateral’ Less of a Dirty Word

Contributed by Beverly Alfon, October 8, 2019

union workers

The National Labor Relations Act (NLRA) requires employers with a unionized workforce to bargain in good faith with the union over mandatory subjects of bargaining (e.g., wages, hours, and other terms and conditions of employment). The duty to bargain continues during the term of a collective bargaining agreement (CBA) with respect to mandatory subjects of bargaining that are not covered by the agreement.  An employer who makes unilateral changes to these terms without satisfying its bargaining obligations violates the Act, unless it can establish a valid defense.  Until now, the only available defense that was available to an employer who made such unilateral change was a union’s “clear and unmistakable” waiver of the right to bargain over the precise matter at issue – a standard which the D.C. Circuit has characterized as an “impossible to meet” burden for an employer.  

Overturning 37 years of precedent, however, the NLRB, in a recent 3-1 decision, changed the standard that the Board applies to determine whether a CBA grants the employer the right to take unilateral actions without violating the Act. In M.V. Transportation, Inc. (28-CA-173726; 368 NLRB No. 66), a local of the Amalgamated Transit Union (ATU) alleged that the employer, MV Transportation Inc., violated the Act by unilaterally adopting several policies, including ones related to safety and attendance, without bargaining with the union. The Board accepted the employer’s argument that the CBA contained language, including a broad management rights clause referring to adoption and enforcement of work rules, that allowed it to unilaterally adopt the policies. 

Under this new “contract coverage” standard, the Board will examine the plain language of the parties’ collective-bargaining agreement to determine whether or not the change made by the employer was within the scope of CBA language granting the employer discretion to act unilaterally. For example, if the CBA gives the employer the ability to implement and revise work rules, then it may now lawfully implement new safety rules or revise an existing attendance policy, without further bargaining. 

Key Takeaways:  Although this new standard relaxes an employer’s burden in defending against charges of a failure to bargain, it does not give an employer full license to take such unilateral actions.  The extent to which an employer can take unilateral action will depend on the scope and clarity of the language of the CBA.  If there is no CBA language that grants the employer the right to take unilateral action, the Board will consider whether or not the union “clearly and unmistakably” waived its right to bargain over the change.  Also, keep in mind that unions will still have the option of filing a grievance and proceed to arbitration on the matter. 

Now more than ever, given the Board’s approach in these matters to honor the parties’ agreement, CBA language must be carefully crafted.  Employers should review their rights in current CBAs and seek to strengthen rights in negotiations for the next contract.  At negotiations, employers should expect much scrutiny and pushback on management rights clauses and other CBA language that can be interpreted as granting the employer any level of discretion.  

Separate Franchise or Joint Employer? – The Ninth Circuit rules in favor of McDonald’s NOT being a Joint Employer of its Franchisee’s Employees

Contributed by Mike Wong, October 3, 2019

gavel on white background

The Ninth Circuit U.S. Court of Appeals ruled in a California lawsuit that one of the most recognized franchises, McDonald’s, does not exert sufficient direction or control over its franchisees’ employees to be considered a joint employer under California statutory or common law and therefore is not liable for how the franchisee treats its employees.

In doing so, the Ninth Circuit affirmed the District Court’s ruling that McDonald’s was not an employer under California’s Labor Code definition under the “control” definition, the “suffer or permit” definition or under California common law. The court also rejected the Plaintiffs’ claims that McDonald’s could be held liable under an ostensible-agency theory or that McDonald’s owed the employees a duty of care.

In this case, Plaintiffs argued that McDonald’s requirements of the franchisee made it a joint employer. Specifically, Plaintiffs argued that McDonald’s exerted control through the franchise agreement that required the franchisee to use its point of sale (POS) system and in-store process (ISP) computer systems every day to open and close each location, managers received training at McDonald’s Hamburger University and then trained employees on meal and rest break policies, required franchisee employees to wear uniforms, and the franchisee voluntarily used McDonald’s computer system for scheduling, timekeeping and determining overtime pay.

The court followed the California Supreme Court’s rational in Martinez v. Combs 231 P.3d 259 (Cal. 2010) and held that a franchisor “becomes potentially liable for actions of the franchisee’s employees, only if it has retained or assumed a general right of control over factors such as hiring, direction, supervision, discipline, discharge and relevant day-to-day aspects of the workplace behavior of franchisee’s employees.” Patterson v. Domino’s Pizza, LLC, 333 P.3d 723, 725 (Cal. 2014). It further held that McDonald’s is not an employer under the “control” definition, as it did not have “control over the wages, hours or working conditions.” Martinez, 231 P.3d at 277. Much like in Martinez, the court found that directing control over workers geared towards quality control, does not rise to the level of controlling the day-to-day work at the franchise. Id. In essence, branding does not represent control over wages, hours or working conditions.

The court also held that McDonald’s was not an employer under the “suffer or permit” definition because it did not have any power to prevent the employees from working by hiring or firing them, directing them where to work, or setting their wages and hours.

The court further found that although there was evidence suggesting that McDonald’s was aware that the franchisee was violating California’s wage and hour laws, there was no evidence that McDonald’s had the requisite level of control over the employees’ employment to render it a joint employer. 

This is a major win for franchisors and employers, considering the influx of cases alleging franchisors are “joint employers” of their franchisees’ employees. It should be noted that this win may be short lived as the U.S. Department of Labor is working to modify or update its definition of when a franchisor is considered a joint or partial employer of its franchisee’s employees.

Additionally, this case must be viewed in context of the U.S. District Court of New Jersey’s recent decision in Michalak v. ServPro Industries, Inc., where the court held that the Plaintiff’s allegations that ServPro “issued manuals, training materials and other writings” specifying policies and procedures for hiring, training, disciplining and firing employees were sufficient to establish an agency relationship and avoid dismissal at the motion to dismiss stage. The court further held that the Plaintiff’s allegations that she informed ServPro and that ServPro tipped off the franchisee and buried the complaint, was sufficient to support a claim that ServPro had aided and abetted discriminatory conduct in violation of New Jersey law. 

When making the leap to becoming a franchisor or selling franchisees it is important to understand how much direction or control is too much and what actions or requirements could open you up to liability for the actions of your franchisee. As such, it is vitally important that franchisors team with knowledgeable labor and employment counsel that can keep them up to date on the evolving risk of being a joint employer or having an agency relationship with their franchisees.

Has Your Wellness Program Had a Check-Up Lately?

Contributed by Suzannah Wilson Overholt, October 1, 2019

EMPOLOYEE WELLNESS Businessman drawing Landing Page on blurred abstract background

Wellness programs are a popular employee benefit. Whether an employer already has a program in place or is considering implementing one, it should be mindful of the requirements of federal law.

The Health Insurance Portability and Accountability Act (HIPAA) divides workplace wellness programs into two categories: participatory and health-contingent.  The latter are subject to specific nondiscrimination standards while the former are not.

Participatory programs give an employee a reward for engaging in a specific act.  These include gym membership reimbursement; diagnostic testing with rewards not based on outcomes; reimbursement for the cost of smoking cessation programs (regardless of whether the employee quits); and rewards for attending free health education seminars. As long as participation is available to all individuals, the program complies with HIPAA’s nondiscrimination requirements.  There is no limit on financial incentives for these programs. 

By contrast, health-contingent programs require individuals to meet certain health-related standards to qualify for rewards. There are two categories of health-contingent programs: activity based and outcome based. These programs must follow certain nondiscrimination standards. 

Activity based programs require performance or completion of an activity related to a specific health factor to obtain a reward but not a specific health outcome. Examples include walking, diet, and exercise programs.

Outcome based programs require that a particular health outcome or reasonable alternative be reached or maintained. These programs generally have a measurement, test, or screening as part of an initial standard and a larger program targeting individuals who do not meet the initial standard. Examples of such standards include quitting smoking, lowering cholesterol, or meeting certain exercise goals.

Five non-discrimination standards apply to all health-contingent programs:

  1. Participants must be allowed to qualify at least once a year;
  2. The incentive/penalty must be limited to 30% of the cost of the premium for the plan (50% for programs related to reducing tobacco use);
  3. The program must be reasonably designed to promote health or prevent disease;
  4. The full reward must be available to all similarly situated individuals, and the program must provide a reasonable alternative standard to achieve the reward; and
  5. Notice must be provided of other means of qualifying for the reward.

Regardless of the type of program, privacy rules apply if the program conducts health risk assessments (HRAs) or monitors employee health.  HIPAA prohibits employers from using protected health information for employment-related reasons.

The Americans with Disabilities Act (ADA) requires that wellness programs be voluntary.  The rewards associated with a wellness program cannot be so significant that an employee feels coerced to participate.

The Genetic Information Non-Discrimination Act (GINA) is an issue if the program collects genetic information. Any HRA conducted prior to, or in connection with, benefit enrollment may not collect genetic information, including family medical history. Such information may only be requested after enrollment. No reward may be tied to providing genetic information. HRAs that do not request such information can be tied to a reward. 

Employers should consult their program designers to ensure their wellness programs comply with these regulations.

US DOL Issues Final Rule on Salary Threshold for Exempt Status

Contributed by Sara Zorich, September 24, 2019

In a follow up to our recent post, the US Department of Labor (DOL) has now issued its final rule regarding the salary thresholds for exempt status. The final rule will go into effect on January 1, 2020 and establishes the following rules:

  1. Salary exempt employees must earn at least $684/week (equivalent to $35,568 per year for a full-year worker) (which is slightly more than was proposed in March 2019 due to inflation/updated data but less than was proposed during the Obama Era);
  2. Employers can use non-discretionary bonuses and incentive payments that are paid at least annually to satisfy up to 10% of the salary basis for the white collar exemptions (if this is utilized the minimum salary paid can be no less than $615.60/week) (however, it should be noted that (1) if the employee does not earn the bonus the employer will need to pay the amount anyway no later than one week from the end of the 52 week period or the salary basis will not be met and (2) if the employee leaves employment before the bonus is paid/earned the employer will have to pay the pro-rata share of the bonus at termination to ensure the minimum salary threshold was met);
  3. In order to qualify for the “highly compensated exemption” employees must earn at least $107,432/year (formerly $100,000/year) and must be paid at least $684/week (however, Illinois employers should note this is not applicable in Illinois because Illinois did not adopt the highly compensated exemption); and
  4. Revises the special salary level for the motion picture industry and US territories.

We anticipate the new rule will receive legal challenge. However, litigation is unpredictable, so employers should begin preparing now to ensure they are ready for January 1, 2020.

EEOC Says It Will Not Renew Pay Data Collection after September Submissions

Contributed by Allison P. Sues, September 19, 2019

Flat 3d isometric business analytics, finance analysis, sales statistics, monetary concept infographic vector. Collage icons: chart graphs, tablet, coins, credit card, dollar banknote, currency signs.

As employers scramble to meet the September 30, 2019 deadline to submit pay data for years 2017 and 2018, they can find some relief in knowing that the EEOC recently stated that it does not intend to collect pay data for 2019 or after at this time. According to the EEOC’s Notice of Information Collection, the EEOC will only request approval from the Office of Management  and Budget (OMB) to renew its collection of Component 1 data (demographic data), but will not seek approval to continue collection of Component 2 data (pay data and hours worked data). 

Since previously requesting approval from the OMB to collect pay data for 2017 and 2018, the EEOC has created the Office of Enterprise Data and Analytics, which developed a more accurate way to calculate the burden on employers when it comes to complying with EEO-1 filing requirements. The EEOC then concluded that it had previously underestimated the burden on employers in submitting pay data and hours worked data. Without knowing the true utility of the pay data collection, the EEOC has opined that the collection’s effectiveness in fighting pay discrimination is “far outweighed” by the burden that the collection imposes on employers.

This announcement does not affect the deadline to submit 2017 and 2018 pay data by September 30. It also does not affect employers’ continuing obligation to submit Component 1 demographic information, as the EEOC has made clear it intends to request approval to continue collecting this subset of data collection. The future of EEOC’s pay data collection is uncertain. For now, we know that the EEOC is not currently seeking to continue pay data collection. But, the agency did mention that if it ever decided to pursue data collection in the future, it would do so using the notice and comment rulemaking and public hearing process pursuant to Title VII. We will keep you posted