Wages & Hours

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.

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Employment Law Blog

Pregnancy Discrimination at Work: A New Epidemic

My name is Robert Ottinger and I’m an employment lawyer. For 20 years I’ve been helping employees and we have offices in New York and California. Trying to work while pregnant or as a new mother has never been harder. There’s a misconception in America that a woman can’t be both a good mother and an effective worker at the same time.  A recent New York Times article said it well, pregnancy discrimination is rampant in America’s largest companies. Pregnant woman today get sidelined and worse, when they complain about it, they often get fired. For example, Otisha Woolbright, she was featured in that article and she asked her boss at Walmart if she could stop lifting heavy objects due to her pregnancy. Her boss though said no, “lift or leave”, and she knew though if she left, it’d be really hard to find a job while she’s pregnant. So she just kept on lifting. But after she had her second near miscarriage, she asked for maternity leave and Walmart fired her three days later. Rachel Mountis, another example, she was also in that article. She had a similar experience in her job at Merck, the big pharmaceutical company. She was rising up the ranks, getting promoted, winning awards all before she got pregnant and hat changed when she asked for maternity leave and she was fired just a few weeks before her due date. There’s a strong network of federal and state laws that protect women from pregnancy discrimination. It is 100% illegal to fire a woman because she’s pregnant. Now if this has happened to you, you are legally protected, but you need to take action against the company. Pregnancy-related firings normally happen in other one of four circumstances: (1) after the company first learns about the pregnancy or (2) after the pregnant employee asks for time off or for an accommodation for her pregnancy, (3) while on maternity leave or (4) within the first year after returning from leave. If you suspect that you were fired because of your pregnancy, fill out the pregnancy discrimination form on our website. This form is on our website or you can also click the card above the video.  If you fill out this form, it will help us determine if we can help you.   All the information on the form is confidential and it won’t be shared with anyone. Thanks for watching this video and remember, if your rights are violated at work, call The Ottinger Firm.

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Non Compete Agreements

New York Non-Compete Core Concepts: The Reed, Roberts Decision

Decided almost a half century ago, Reed, Roberts Assoc. v Strauman, 40 N.Y.2d 303 (N.Y. 1976), remains a pillar of New York case law when determining if a non-compete is enforceable. With this decision, New York State’s highest court established a framework for determining whether a non-compete (or any other restrictive covenant) is “reasonable” and, therefore, enforceable. Background In this case, the employer, Reed, Roberts Associates, Inc. (“Reed Roberts” and, sometimes, “the company”), provided advice and guidance to employers with respect to their obligations under New York State unemployment laws. The company’s expertise also extended to advising their clients in the areas of worker’s compensation, disability benefits, and pension plans. By 1976, Reed Roberts boasted over 6,000 customers, 21 offices nationwide, and gross sales of almost $4 million. In 1962, Reed Roberts hired John Strauman. As part of his employment contract, Mr. Strauman agreed to two restrictive covenants: a non-solicitation covenant and a non-compete covenant. The non-solicitation covenant provided that Mr. Strauman would never solicit any of Reed Roberts’ clients. The non-compete provided that Mr. Strauman would not, for a period of three years from the date of his termination of employment, engage in or have an interest in any business of the same type as Reed Roberts, provided such business was located within the City of New York or the counties of Nassau, Suffolk and Westchester. During his 11-year tenure with Reed Roberts, Mr. Strauman became a valuable employee and received three promotions, eventually rising to the position of senior vice-president in charge of operations. A key employee, Mr. Strauman was both responsible for formulating company policy and instrumental in devising most of the forms utilized by the company in rendering its services and in setting up its computer system. “Importantly, however, he was not responsible for sales or obtaining new customers.” Reed, Roberts Assoc. v Strauman, 40 N.Y.2d 303 (N.Y. 1976) p. 306. In 1973, Mr. Strauman left Reed Roberts and started his own company, Curator Associates, in direct competition with his former employer. Curator Associates was located in the same municipality as Reed Roberts, a geographical area specifically covered by the non-compete covenant that Mr. Strauman had signed in 1962. Reed Roberts brought a lawsuit against John Strauman and Curator Associates alleging that Strauman had been soliciting their customers and requesting that the court enforce the non-compete and non-solicitation covenants. Specifically, Reed Roberts requested relief via a court-issued injunction prohibiting Mr. Strauman and Curator Associates from (a) engaging in the business of unemployment tax control within the New York City metropolitan area for a period of three years, and (b) soliciting any of Reed Roberts’ customers permanently. Rules for Evaluating Restrictive Covenants Under New York State law, generally, restrictive covenants such as non-compete and non-solicitation provisions are enforceable only to the extent that they are reasonable. Whether or not a provision is determined to be “reasonable” differs based on context. In Reed, Roberts Assoc. v Strauman, the New York Court of Appeals outlined a framework for determining whether a restrictive covenant is “reasonable” (and therefore enforceable) under New York law. Reasonableness Framework for Restrictive Covenants In the employment context, restrictive covenants (such as non-competes) will only be considered reasonable and therefore enforceable to the extent that such provisions are: reasonable in time and geographic area; necessary to protect the employer’s legitimate interests; not harmful to the general public; and not unreasonably burdensome to the employee. In addition to considering the above framework for determining reasonableness, New York courts are more inclined to find that a restrictive covenant is reasonable if the facts show that there has been a conspiracy or breach of trust by the employee that results in commercial piracy. When is a Non-Compete Necessary to Protect an Employer’s “Legitimate Interests”? Focusing on the second prong of the reasonableness framework described above, the New York Court of Appeals set forth the following two-part test for determining whether a restrictive covenant (such as a non-compete) is necessary to protect an employer’s legitimate interest. A restrictive covenant is necessary to protect an employer’s legitimate interests and enforceable on such grounds only: to the extent necessary to prevent the disclosure or use of an employer’s trade secrets or confidential customer information; or where an employee’s services are unique or extraordinary. When is a Non-Compete Not “Unreasonably Burdensome” to the Employee? Focusing on the fourth prong of the reasonableness framework, the New York Court of Appeals shed some light on when a non-compete might be considered unreasonably burdensome to the employee. According to the court, a restrictive covenant is unreasonably burdensome to an employee when it restrains the employee’s right to apply, to their best advantage, the skills and knowledge (including those techniques which are skillful variations of general processes known to the particular trade) acquired by the overall experience of any previous employment.Id.at p. 307. The Reed court also noted an exception for members of “the learned professions.”  The Court explained that a restrictive covenant  might not be unreasonably burdensome to such an employee, provided that the restrictive covenant is reasonable and such employee’s services are unique or extraordinary. Procedural History On the first issue, the trial court ruled against Reed Roberts, refusing to grant an injunction that would enforce the non-compete and prohibit Mr. Strauman and Curator Associates from engaging in its business. The trial court explained that an injunction was not appropriate because (a) there were no trade secrets involved and (b) Mr. Strauman’s services were not so unique or extraordinary (even though he was considered a “key employee”), and therefore the non-compete agreement was not reasonable and was therefore not enforceable. On the second issue, the trial court ruled in favor of Reed Roberts, granting an injunction to permanently prohibit Mr. Strauman and Curator Associates from soliciting Reed Roberts’ clients. The trial court reasoned that it would be unjust and unfair for Mr. Strauman to utilize his knowledge of Reed Roberts’ internal operations to solicit its clients. Upon appeal, the New York State Appellate Division affirmed the trial court’s decision on both issues. The decision was […]

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Employment Law Blog

FMLA Firings: Getting Fired for Taking Family Leave

My name is Robert Ottinger and I’m an employment lawyer. My law firm, The Ottinger Firm has been helping employees for over 20 years and we have offices in New York and California. Have you ever had to take time off of work to care for or a sick parent or a child or even yourself if you’re sick? Well, you’re not alone because you know that happens to pretty much everybody at some point.   Take Kirsten, for example, she had to take time off to care for her mother. Kirsten was a fifth grade teacher at the time at the St James School in Torrance, California.  After her first year of teaching, Kirsten got a great review from the school’s principal, sister Mary Margaret. The evaluation said that Christian was really good at creating a safe and caring environment for her children. Well, sadly, six months later, Kirsten got some really bad news about her mom who was diagnosed with breast cancer. Kirsten told the school she needed to take some time off to care for her mom during the surgery and chemotherapy and the law that she had to use to have the right to take this time off is called the family medical leave act. It’s also called the FMLA. This law gives every one of us, if you qualify, the right to take 12 weeks of unpaid leave to care for a sick family member. Since Kirsten worked for a Catholic school, we would expect it mighty do the right thing for Kirsten at this time, like give her all the time off she needed and throw the full support of the church and the community be behind her. Is that what sister Mary Margaret did though? Sadly, it’s not.   Sister Mary Margaret fired Kirsten right after she asked for the time off. So what do you think Kirsten did well? She used that law I just mentioned ,the family medical leave act and she sued the school for firing her. Now under this law, the FMLA, it does give you the legal right to take time off to care for a sick parent, your kids, your spouse, and even you. It also says though, that it’s highly illegal to fire somebody who asked to use the FMLA.   Firing someone for trying to use the FMLA is called FMLA retaliation. This is a really strong law. It’s a federal law and it provides for mandatory doubling of damages.  If you have been fired over the family medical leave act, you might have a really strong case. If that’s you, please fill out this form on our website. It’s a very detailed form we designed it just for FMLA cases and I guarantee you the information you provide is confidential. We won’t share it with anyone. Thank you for watching and remember, if your rights are violated at work, call The Ottinger Firm.

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Employment Law Blog

Federal Ban on Non-compete Agreements—Is It Possible?

Non-compete agreements have the attention of congress.  A bipartisan effort to regulate non-compete agreements on a federal level was introduced in the U.S. Senate in October 2019 by Senators Chris Murphy (D-Conn.) and Todd Young (R-Ind.). Senate Bill 2614, the Workforce Mobility Act of 2019, proposes a near federal ban of all employee non-compete agreements, with limited exceptions for certain business transactions. The bill would have sweeping implications, but does it have any chance of becoming law?   Workforce Mobility Act Would Limit Noncompete Agreements  The Workforce Mobility Act (WMA) defines a “non-compete” agreement as any agreement between “a person and an individual performing work for the person” that restricts the individual, after the termination of the working relationship, from doing the following:  Working for another person for a period of time.  Working in a specified geographic area.  Working for another person similar to the individual’s work for the company.  The WMA generally prohibits the use of non-compete agreements, except in limited instances. The bill permits noncompete agreements in connection with the sale of a business, as part of the dissolution of a partnership (or buyout of a person’s partnership interest), or as part of a severance agreement with senior executives as part of the sale of a business (but the agreement is limited to 12 months and the employee must receive 12 months’ severance pay).   The WMA does not expressly prohibit non-solicitation agreements or non-disclosure agreements. Still, the definition of a “noncompete agreement” leaves open the possibility that these agreements may also be restricted. The bill does not prohibit agreements that prevent employees from sharing trade secrets.   The Federal Trade Commission and the Department of Labor would be responsible for enforcing the WMA. The bill does allow workers to file suits for violations of the WMA.   How the WMA Impacts Employees  Non-compete agreements limit employee mobility, stifle wage growth and innovation, and prevent true competition. An estimated 40 percent of American workers have been subject to a non-compete agreement at some point in their careers. Given the growing use of these agreements in today’s workforce, even with employees in low-paying jobs, the harm imposed on the economy and workers has not gone unnoticed.   A prohibition on non-compete agreements would force companies to find a new way to protect their company’s legitimate interests without impeding a person’s ability to change jobs and earn higher wages. Passage of the WMA would also provide a uniform standard, which would ease the current discrepancies between states.  Does the Workforce Mobility Act Have a Chance?   The WMA is not the first attempt by legislators to regulate the use of non-compete agreements. Similar federal efforts failed in 2018 and January 2019, and many states have proposed or enacted legislation to limit the use of non–compete agreements.   While the WMA received praise from many, its future seems uncertain, and some critics argue that safeguards against employer abuse of non-compete agreements already exist in the court system and that the bill goes too far. A hearing was held in November 2019, but there has been no movement since that time. While passage of the bill may be unlikely, it has again brought the issue of abuse of non-competes to the forefront and may be a good step towards negotiating a compromise bill.  The Ottinger Employment Attorneys have drafted, reviewed, and negotiated non-compete agreements for over 20 years. Non-compete agreements can ruin your future career prospects, so it is critical that you carefully review and consider the long-term implications of these agreements. If you are contemplating entering into a non-compete agreement or fighting enforcement of an agreement, contact us today.  Click here for more about non-compete agreements in New York. 

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Employment Law Blog

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). 

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Employment Law Blog

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 […]

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Non Compete Agreements

The “Choice of Law” in Non-Compete Disputes

The “choice of law” in a non-compete dispute can impact the outcome of the case.  New York, Massachusetts, and California, for example, have highly developed laws that favor employee mobility.  Other states might be more inclined to enforce a non-compete agreement according to its terms.  Therefore the question of which law applies can be determinative.  Employers often try to avoid the employee friend laws of states like California by inserting a “choice of law” provision in the agreement.  This happened to Patrick Miles who served as Vice Chairman of the Board of NuVasive, Inc., a medical device company based in San Diego and incorporated in Delaware.  Even though NuVasive was based in California, Mr. Miles’s non-compete agreement provided that Delaware law would apply.  Mr. Miles left NuVasive in October 2017 and joined a competitor. NuVasive sued Mr. Miles in Delaware and the question in the case, as eventually posed by the court, was whether the choice of law provision was included for the purpose of “importing [Delaware’s] well-developed body of commercial law” into the agreement or “as an attempt to contract around a fundamental public policy” of California against restraints on trade in the form of non-compete and non-solicitation clauses in the employment contract.  NuVasive, Inc. v. Miles (Del. Ch. Ct. August 26, 2019).  The court noted that Delaware generally respects parties’ choice of law provisions in contracts disputes.  However, because Delaware follows the Restatement (Second) of Conflicts of Law, the existence of a Delaware choice of law clause does not portend the end of the story.  Rather, Delaware will adopt and apply another jurisdiction’s law when the following test is satisfied:  The other jurisdiction’s law would apply absent the contractual choice of Delaware law,   Failure to apply the other jurisdiction’s law would frustrate a fundamental policy of the other jurisdiction, and   The other jurisdiction’s interest materially outweighs Delaware’s interest in the matter.  The court concluded that California law would apply since it was the state with the “strongest contacts to the contract.”    The court further found, consistent with its prior decision in Ascension Insurance Holdings, LLC v. Underwood (Del. Ch. Jan. 28, 2015) and citing California Business and Professions Code section 16600, that non-compete provisions are fundamentally against California policy.  The only exception – for a non-compete covenant in connection with the sale of a business – that California makes to its section 16600 prohibition against contracts in restraint of trade is also set forth in the statute.      The court noted that since its Ascension decision, California had added, in 2016, a new section to its labor code that only served to strengthen its already strong statement of public policy against non-competes.  This law provided that:  An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following: (1) Require the employee to adjudicate outside of California a claim arising in California. (2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.  Under this section of the California Labor Code, any provision of a contract that violates the above provision is voidable by the employee unless the employee has legal representation during negotiation of the forum or choice of law clause.  In Ascension, the Delaware court had held that “California’s specific interest [in its public policy against restraints of trade] is materially greater than Delaware’s general interest in the sanctity of a contract that has no relationship” to Delaware.   Similarly, the NuVasive court held in favor of Miles, concluding, for the non-solicitation clauses as well as the non-compete covenants, that California’s public policy was “sufficiently strong that it must not be ‘diluted by judicial fiat,’” and, therefore, substantially outweighed Delaware’s general interest in freedom of contract.    The lesson here is that the choice of law provision in a non-compete agreement should be ignored in these situations.   The law of the state with the greater interest typically should apply and that is the state where the executive works.  If the executive works in New York, for example, then New York law should apply.

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Employment Law Blog

Trade Secrets: What Companies Must do to Protect them

A trade secret is, essentially, information of commercial value that is kept secret by those who have an interest in protecting and benefitting from its value. The attribute of secrecy is fundamental to whether certain information qualifies as a trade secret.  Unless the entity possessing the information makes a reasonable effort to maintain the secrecy of the information, the information will not be deemed a trade secret and will not receive legal protection as such. The decision in the case of Abrasic 90 illustrates just how vital protecting secrecy is.  Abrasic 90 v. Weldcote Metals, No. 18-C-5376 (N.D.Ill. Mar. 4, 2019).  In that case, the court held that plaintiff Abrasic 90 could not show an adequate likelihood of success on the merits of its claims to warrant enjoining defendants, including plaintiff’s former CEO and his subsequent employer, Weldcote Metals, from operating in the abrasives industry and using Abrasic 90’s purported trade secrets to do so. Central to the court’s holding was its finding that, although some of the information taken by the defendants was of such a nature that its compilation might be protectable as a trade secret, Abrasic 90 “did virtually nothing to protect that information to preserve its status as a trade secret.”  The company’s “data security was so lacking” the court had difficulty identifying “the most significant shortcoming.” The court nevertheless lists those shortcomings, which included: Failure to enter into any nondisclosure or confidentiality agreements with employees, distributors, or suppliers. The nonexistence of any policy around the confidentiality of its business information. Failure to train employees or otherwise instruct them regarding their obligations to keep certain categories of information confidential. Allowing the defendant CEO’s employment agreement, with its nondisclosure and noncompete provisions, to expire five years prior to his departure. Failure to ensure any confidential information was returned when employment relationships ended. Failure to ask former employees to delete secret business information from personal devices. Use of a shared network drive, accessible via a shared password, with no encryption and no restrictions on anyone’s ability to access, save, copy, print or email anything kept on the shared drive. Rejection by the company of its IT manager’s recommendation that the company segregate certain documents, allow access only on a need-to-know basis and adopt an “Acceptable Device Use Policy.” Generally, doing nothing to protect trade secrets that was, in any way, different than steps taken to protect information that was “indisputably not a trade secret.” The lessons are clear for any entity that wants to claim trade secret status for certain information.  Steps to protect such information must include: Identification, labeling, and segregation of the secret information. When secret business information is unidentified and freely intermingled with non-confidential information, it undermines any otherwise reasonable measures to protect that information. Physically and electronically securing the information. Physical security means that hard copies of secret business information is kept in locked file cabinets, rooms or other areas of restricted access.  Access to and use of electronic information must also be controlled.  The information must not be made freely available on shared drives.  Rather, access must be restricted to those who have a “need-to-know” the information.  This may be done through encryption, access permissions systems, password protection, etc. Having clear data security policies to describe what is a trade secret, who is authorized to access, use, copy or disclose such information, and what employees must generally do to protect secret business information. Training employees on these matters. Adequate use of nondisclosure and confidentiality agreements with anyone to whom trade secret information is disclosed – especially employees. This includes keeping all such agreements current. Monitoring and enforcement of data security policies and nondisclosure and confidentiality agreements. Procedures to ensure the return or destruction of trade secret information in possession of others when relationships with employees, suppliers, distributors, and customers reach their end. Designating information as a trade secret can have important implications for executives embroiled in non-compete disputes.   This is becasue New York courts generally will not enforce a non-compete agreement unless necessary to protect a companies trade secrets.   If a company does not take steps to protect its trade secrets then the information will be not be deemed a trade secret.   This will likely prove fatal to the companies attempt to enforce its non-compete agreement.

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Non Compete Agreements

Why Not Blue Pencil?

“Blue penciling” refers to the convention whereby a court may exercise its discretion to modify parts of a contract that violate public policy, and which are, therefore, void.  In the employment context, the questions whether, when and how much blue-penciling is warranted come up most frequently when courts are asked to enforce restrictive covenants such as non-compete and nonsolicitation agreements.    A decision last year in the Colorado Court of Appeals, 23 LTD v. Herman, illuminates why some courts have retreated from “blue penciling.”  2019 Colo. App. 113, No. 18CA0950.    Ms. Herman Solicits a Customer In the Colorado case, the company, 23 LTD, doing business as Bradsby Group, sued a former employee, Tracy Herman, for breach of non-compete and nonsolicitation sections of her employment agreement.    Herman had been hired by Bradsby as a legal recruiter.  She had signed an employment agreement stating that she would not become for “twelve (12) months from the date of termination of employment … an owner, partner, investor, or shareholder in any entity that competes with Bradsby” within a restricted area.  The restricted area was defined as any place within thirty miles of Bradsby’s principal place of business, which was located in downtown Denver.  The agreement also included a nonsolicitation provision restricting Herman from contacting any person or entity who had had any contact with Bradsby during Herman’s last twelve months of employment with them.  At the conclusion of her employment with Bradsby, Herman formed her own company, obtaining and designating a mailing address for it at a location outside the restricted area.  She later reached out to a former job applicant from her time at Bradsby to inquire whether anyone in the contact’s network might be interested in a position she was recruiting to fill.  The contact had been previously offered a position with a law firm client of Bradsby’s but had turned it down.  When Herman contacted him later, he asked whether that law firm job might still be open.  Herman then communicated with the law firm. The contact was eventually hired by the law firm, and Herman collected a fee from the hiring firm. A One Dollar Verdict At trial, a jury decided that Herman had not violated the non-compete provisions of the agreement but that she had violated the nonsolicitation provision.  The jury awarded damages to Bradsby of one dollar.  However, the district court set aside that verdict because it found the nonsolicitation provision of the contract to be so broad as to be void and in violation of Colorado law.  The district court also declined to “blue pencil” the nonsolicitation provision to make it enforceable.    Upon appeal, Bradsby argued that the district court erred and/or abused its discretion in declining to blue-pencil the nonsolicitation provision.  Bradsby argued that the severability clause in its agreement obligated the district court to blue-pencil the agreement to conform to Colorado law.  Stating that “Colorado law provides little guidance as to when, and to what extent, trial courts may blue pencil unreasonable non-compete provisions,” the court of appeals considered case law from other jurisdictions.   In discussing its reasoning, the court of appeals pointed out that even though a contract may grant a court the authority to modify an overly broad non-compete agreement, doing so would essentially require the court to rewrite an unlawful contract.  No Blue Penciling The court noted that other states’ courts had rejected the proposition that parties to a contract may delegate the responsibility to the court to draft language for them.  “We are firmly convinced that parties are not entitled to make an agreement, as these litigants have tried to do, that they will be bound by whatever contract the courts may make for them at some time in the future.”  Quoting Rector-Phillips-Morse, Inc. v. Vroman, 489 S.W.2d 1, 4 (Ark. 1973).  The court further explained that it is not itself a party to the contract.  The parties “have no power or authority to enlist the court as their agent.”  Thus, parties to a contract cannot “contractually obligate a court to blue pencil non-compete provisions that it determines to be unreasonable.”    “Fundamentally, it is the obligation of a party who has and wishes to protect, trade secrets to crafting contractual provisions that do so without violating the important public policies of [the] state.  That responsibility does not fall on the shoulders of judges.” Citing Rector-Phillips-Morse, Inc. v. Vroman, 489 S.W.2d at 4; Bayly, Martin & Fay, Inc. v. Pickard, 780 P.2d 1168, 1175 (Okla. 1989).   Accordingly, the court of appeals held that “it is not the function of a court to write or rewrite contracts for parties to enable enforcement of a contract that, as written, violates the public policy of the state.”  While a court may elect to blue pencil “an otherwise offensive restrictive covenant,” the trial court “has broad discretion whether and when to exercise that authority.”

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