Zoom and the Inside Sales Exemption
The Coronavirus pandemic is forcing rapid change on the way we work and some of those changes might stick. Zoom meetings, for example, are replacing business trips while travel is restricted. But will the convenience and efficiency of online meetings reduce business travel once the restrictions are lifted? Why travel to see prospects when you can meet them online for a fraction of the cost? If this becomes a lasting change in business behavior, it could have serious legal implications for sales teams. The Distinction Between Inside and Outside Sales in California In California, there is an important legal difference between inside and outside salespeople. Inside salespeople have more rights than outside salespeople. Namely, inside salespeople are entitled to meal and rest breaks and, in some cases, overtime pay. Outside salespeople, on the other hand, are not entitled to breaks or overtime pay. Companies are required to properly classify salespeople so they know who is entitled to and breaks and overtime. Misclassification of salespeople can be costly because there are steep penalties for missing breaks and failing to pay overtime As sales teams reduce travel, they may need to be reclassified from outside sales to inside sales. This is because the classification system is based on travel frequency. The defining characteristic of an outside salesperson is travel. Those who spend more than 50% of their time traveling outside of the office are classified as outside sales. Those who don’t travel much and spend most of their time working from the office are inside sales. If salespeople conduct more business online and travel less, their classification can change from outside sales to inside. Contact Us Schedule your free consultation. Inside Salespeople are Always Entitled to Meal & Rest Breaks All inside salespeople are always entitled to meal and rest breaks. There are no exceptions. When rest breaks and meal periods are not provided as required, employees may recover penalty payments from employers of up to two hours of play per day for missed meal periods and rest breaks (one hour for each missed break). United Parcel Service, Inc. v. Superior Court of Los Angeles County, 192 Cal.App.4th 1043 (2011). Outside salespeople are not entitled to meal and rest breaks. Inside Salespeople and Overtime Pay Inside salespeople are also entitled to overtime pay. But the right to overtime pay is a moving target and difficult to track. As explained below, a salesperson’s right to overtime pay can vary each quarter and each pay period. Here is the rule: inside salespeople are entitled to overtime pay, unless more than half of their pay comes from commissions and their earnings exceed one and one-half times the minimum wage. Each part of this rule is discussed below. The 50% Commission Rule Applies Quarterly As explained above, a salesperson is entitled to overtime pay unless commissions make up 50% or more of their total compensation. This rule is not applied annually. Instead, it must be measured during the “representative period.” Since most sales organizations operate on a quarterly cycle, the period is typically a quarter. Therefore, a salesperson’s total compensation must be measured each quarter. If commissions make up less than half of their total compensation for the quarter, the salesperson is entitled to overtime pay. A salesperson’s right to overtime pay can vary quarter to quarter. During a good quarter with high commissions, a salesperson might not be entitled to overtime. But during a slower quarter, they might be entitled to overtime pay. The Minimum Wage Test Must be Calculated each Pay Period A salesperson must be paid overtime for each pay period that their total earnings do not exceed 1.5 times the minimum wage. This is true even if commissions account for more than 50% of their compensation. And, in California, commission payments cannot be carried over to other pay periods. Each pay period is analyzed separately and the right to overtime pay can vary each pay period. As a result, employers must essentially run the overtime exemption test anew for each pay period to determine whether or not a particular employee is overtime-eligible or -exempt, based on the earnings for that pay period. Employers must also maintain diligent, accurate timekeeping records for any insides sales employees for whom they wish to claim the California overtime exemption. Anytime requirements for the exemption are not met in a workweek, the employer must ensure the employee is paid appropriately for any overtime worked. Failure by employers to properly classify inside salespeople can also have other costly repercussions. For example, there are requirements for employers to pay all overtime due prior to an employee’s last day of employment. Failure to do so can result in “waiting time penalties” if the failure is willful. Employers must also itemize paystubs for non-exempt employees, showing the number of hours worked by the employee during the pay period. California Labor Code §226(a). If an employer has misclassified an inside salesperson as exempt when they shouldn’t have, they may also have failed to properly itemize the employee’s hours on their pay stub. Employees who have been misclassified by an employer may also recover attorney’s fees in many cases. The Impact of More Zoom Meetings and Less Travel As you can see, a company is required to treat inside salespeople much differently than outside salespeople. It’s very possible that thousands of outside salespeople are now actually inside salespeople. If they are conducting meetings online instead of traveling, they might be entitled to meal and rest breaks and overtime pay. But companies are just trying to survive the pandemic and possibly unaware that their sales teams now are entitled to breaks and overtime pay. A wave of Zoom misclassification lawsuits may be on the horizon.
Study Finds that Non-Compete Agreements are Bad for Employees and the Economy
A recent report released by the Economic Policy Institute (“EPI”) is arguing in favor of prohibiting noncompete agreements after concluding that the increasing use of noncompete agreements may be contributing to rising wage inequality, stagnant wages, and decreasing job mobility. Relying on data from a national survey of private-sector businesses, EPI found that almost half of responding establishments required at least some of their employees to sign noncompete agreements. Should noncompete agreements be prohibited? Do they stifle competition? EPI certainly makes a strong argument, showing just how dangerous noncompetes can be for workers and the entire American workforce. The Growing Use and Abuse of Non-Compete Agreements Noncompete agreements are commonly found in employment agreements or as free-standing agreements, prohibit an employee from working for a competing business or starting their own competing business within a prescribed timeframe and within a specified geographical area. While their use was formerly limited to executives and other highly paid employees, the use of noncompete agreements has spread into all industries and to all levels of employees, including minimum wage employees and those working entry-level jobs. As a result of employer overreach, some states have made significant efforts to eliminate or limit the enforceability of noncompete agreements. Labor Market Trends EPI began its report by highlighting two main trends in recent decades: (1) rising inequality and stagnant wages among all but highly paid employees; and (2) the decline in job mobility and other measures of labor market fluidity. While many factors influence these trends, evidence suggests that the increasing use of noncompete agreements may be part of the problem. In terms of wage growth, workers often change jobs for a pay increase; when noncompete agreements limit mobility and competition, wages remain unchanged. Since noncompetes prohibit a worker from starting their own business or taking another job, there is a decline in dynamism in the national labor market. In fact, EPI noted that enforceability of noncompetes reduces the formation of new firms by 12% and is associated with an 11% increase in the length of time a worker remains at their job. Indeed, noncompete agreements are inhibiting workers’ individual growth and impeding competition between organizations. Key Findings about Non-Compete Agreements The EPI study made several notable findings that supported its conclusion and argument for the prohibition of noncompete agreements. Almost half of businesses use noncompete agreements. Specifically, 49.4% of establishments reported that at least some of their employees were required to sign noncompetes; 31.8% of organizations indicated that all employees were required to enter into noncompetes (regardless of wages or duties). Based on the available data, EPI was able to estimate that 27.8% to 46.5% of private-sector workers are subject to noncompete agreements. Based on the assumption that there are 129.3 million people in the private-sector workforce, that means between 36 million and 60 million private-sector workers are subject to noncompetes. Mid-sized organizations are more likely to have all employees sign noncompete agreements. Establishments with 50 to 100 employees are less likely to use noncompete agreements than organizations with 100 or more employees. However, while larger organizations (1000 or more employees) are more likely to have legal counsel and sophisticated HR policies, mid-sized organizations (100–499 employees) are more likely to require all employees to sign noncompetes than both smaller and larger organizations. In the 12 largest states, 40% of establishments have at least some employees sign noncompete agreements. The EPI study reviewed the use of noncompete agreements in the 12 largest states (including California and New York) and found that 40% of organizations in these states use noncompete agreements with at least some of their employees. Shockingly, 45.1% of California establishments subject some of their employees to noncompete agreements even though noncompete agreements are unenforceable in that state. Why would California employers do this? They are relying on the fact that workers rarely challenge these agreements in court. The EPI study notes that employees’ fears of being sued and pressure from employers causes workers to stay in positions regardless of whether the noncompete agreement is enforceable. This lack of mobility leads to lower or stagnant wages, and it stifles creativity and the development of new companies, products, and ideas. Significant use of noncompete agreements in business services and wholesale trades. Seventy percent of business services and wholesale trade organizations use noncompete agreements. These agreements are used less in transportation, education, health services, and leisure and hospitality establishments. Noncompete agreements used more frequently at higher-wage workplaces. While noncompete agreements are used more with higher-wage workplaces than lower-wage workplaces, 29% of establishments where the average wage is less than $13.00 use noncompete agreements for all workers. Many opponents of noncompete agreements take issue with the use of noncompetes on lower wage earners arguing, in part, that organizations are not protecting legitimate business interests by limiting employment options for entry-level and lower-wage employees. Higher use of noncompete agreements with employees with higher education levels. Noncompete agreements are used more frequently with workers with higher education levels, especially in organizations where employees usually have a four-year college degree or higher. In addition, 45% of establishments where the typical education level is a college degree or higher used noncompete agreements for all employees. Lastly, in 27.1% of organizations where the typical employee has only a high school diploma, noncompetes are used for all workers. Employers requiring mandatory arbitration are more likely to use noncompete agreements. More than half (53.9%) of establishments have mandatory arbitration procedures. EPI concluded that employers using mandatory arbitration are more likely to use noncompete agreements. Advocating to Ban or Limit Non-Compete Agreements In 2019, the Workforce Mobility Act of 2019 [hyperlink to blog post on this Act] was introduced in the United States Senate, which would prohibit the use of noncompete agreements on a federal level; this bill is unlikely to pass. Regardless, many states have enacted their own legislation to address abuses of noncompete agreements, but this can be confusing and cumbersome for employers working in multiple states. In addition to legislation, the EPI suggested the Federal Trade Commission […]
Non-Solicitation Agreements: Announcing Your Change of Firms without Getting Sued
Recently, an Indiana federal district court tackled the issue of whether a former employee’s change in employment announcement to clients constitutes solicitation. In Edward D. Jones & Co., L.P. v. Kerr, No. 1:19-cv-03810-SEB-DML (S.D. Ind., Nov. 14, 2019), the court concluded the announcement was not a solicitation and, for those looking to enforce or defend against non-solicitation agreements, this decision provides helpful insight into behaviors that may cross the line from notification to solicitation. Background Mr. Kerr was a Financial Advisor for Edward Jones, serving as the sole advisor in the Westfield, Indiana branch for twenty years. At the outset of his employment, Kerr executed an employment agreement (“Agreement”) requiring, among other things, the return of account records and customer files upon termination or resignation, and a one-year prohibition on soliciting the employer’s clients. Kerr resigned his position during a meeting on August 1, 2019; however, the parties offer drastically different versions of how the resignation came about. Kerr claims that he printed confidential client reports in preparation for the meeting and destroyed them thereafter; Edward Jones contends Kerr printed the reports because he knew he would be terminated, and he used the reports to solicit clients. On August 2, 2019, Kerr began working at a different firm. Over the next few days, he contacted his former clients to announce his transition. Around that same time, Edward Jones also notified Kerr’s clients of the transition through letters and telephone calls. Edwards Jones filed suit to enforce the Agreement and requested a temporary restraining order; Kerr did not challenge the validity of the Agreement but argued that his actions were not “indirect solicitations.” The court limited its review to the alleged breach of the non-solicitation provision of the Agreement. Transition Announcement Does Not Constitute Indirect Solicitation Ultimately, the court denied Edwards Jones’ request for a TRO. Relying on the below case-specific facts and Kerr’s intent, the court concluded Kerr’s announcement was not a solicitation. Content of the notification. During the notifications, Kerr did not provide information about his new firm unless clients initiated the discussion or explicitly requested more information. In fact, some clients first learned of the transition from phone calls by Edward Jones’ employees, not Kerr. Origination of alleged solicited clients. Approximately 70 percent of clients that followed Kerr to his new firm had personal relationships with Kerr that predated his employment with Edward Jones. Employer’s protocol for new employees transitioning from other firms. Edward Jones’ protocol requires new employees to contact their former clients to inform them of their new affiliation and provide their new contact information. The court found this very persuasive and acknowledged such an announcement may be consistent with industry practices as evidenced by the employer’s policies. Extent of the former employee’s contacts with clients after the initial departure notification. Kerr made no contact with the former clients after the initial notification. The Kerr court notes that many courts reject the theory that an announcement like Kerr’s constitutes a solicitation, even when an employment agreement prohibits direct or indirect solicitation; however, transitioning employees should approach any client notifications with caution. Takeaways Financial advisors have a fiduciary duty to inform clients of a change in employment, but they must ensure that any notification does not cross the line into solicitation because non-solicitation provisions are enforceable. If you have questions regarding a non-compete or non-solicitation agreement, contact the Ottinger Firm for a free Review & Consultation. With offices in New York and California, our skilled employment attorneys will examine your agreement and meet with you to review and discuss your options. We have litigated non-compete and non-solicitation agreements in federal and state court and mediated, arbitrated and negotiated hundreds of disputes. Contact us today at (415) 325-2088 (San Francisco), (213) 377-5717 (Los Angeles), or (347) 305-5294 (New York).