NON-COMPETE AGREEMENTS UNDER ASSAULT

In my blog of May 26, 2016, I discussed a report released by the White House, highly critical of the non-compete agreements commonly used by American employers.  I noted at the time that the Administration could not take any direct action, because such agreements are governed under the individual laws of each state, and are not governed by federal law.  However, the report made it clear that the White House intended to:

[I]dentify key areas where implementation and enforcement of non-competes may present issues, examine promising practices in states, and identify the best approaches for policy reform”, suggesting plans to lobby state legislators and policymakers in the individual states.

It appears that the White House’s efforts already have borne fruit in the President’s home state of Illinois. Earlier this month, Illinois Governor Bruce Rauner signed into law the “Illinois Freedom to Work Act”, which will go into effect January 1, 2017.  The Act would prohibit employers from requiring employees to sign non-compete agreements if they make less than $13 per hour.  The new law is not supposed to have any effect on the enforceability of confidentiality agreements designed to protect trade secrets or other confidential business information.

The recent uproar over non-competes began over a sandwich, or more accurately, a sandwich maker.  Back in 2014, I reported how sandwich chain Jimmy John’s had attracted some unwelcome attention by requiring low-level employees to sign two-year non-compete agreements as a condition of employment.  After the story first broke nationally, Congressional Democrats sent a letter to the Federal Trade Commission (“FTC”)  and the U.S. Department of Labor (“DOL”), describing the restrictive covenants as “clearly anti-competitive and intimidating to workers.” The House Democrats asked for the FTC and the DOL to investigate the sandwich chain. 

Illinois Attorney General Lisa Madigan upped the ante, and on June 8, 2016, filed a lawsuit against Jimmy John’s, alleging the sandwich maker’s non-compete agreements were illegal under Illinois law “[b]y locking low-wage workers into their jobs and prohibiting them from seeking better paying jobs elsewhere, the companies have no reason to increase their wages or benefits.” Under Illinois law, non-compete agreements must be premised on a legitimate business interest and narrowly tailored in terms of time, activity and place. The State of New York was apparently about to take similar legal action, however, Jimmy John’s reached an agreement in June with New York Attorney General Attorney General Eric Schneiderman, in which the sandwich chain agreed to stop including sample non-compete agreements in hiring packets it sends to its franchisees. Jimmy John’s also agreed to inform its New York franchisees that the Attorney General has concluded the non-compete agreements are unlawful and should be voided.

It bears mention that in New York and Illinois, and most other states, non-compete agreements, in of themselves, are not illegal and are enforceable under the appropriate circumstances.  The real focus here, and the basis for the hostility from elected officials, is requiring low-level and low-paid employees to sign such agreements without a legitimate business purpose.  I anticipate more states will be taking legislative action similar to the new Illinois law.

While such restrictive employment covenants are generally not favored by the courts, they will be enforced if the terms of the agreement are reasonable under the particular circumstances.  Generally, there are three requirements: (1) the employer has a valid interest to protect; (2) the geographic restriction is not overly broad; and (3) a reasonable time limit is given.  The employer bears the burden of proving the reasonableness of the agreement.  The reason these types of agreements are construed very narrowly is that most courts recognize that an employer is not entitled to protection against ordinary competition from a departing employee.  Non-compete agreements can be valuable tools to protect an employer’s legitimate business interests, but generally, it is inadvisable to have low level employees sign such agreements, because they are typically not going to possess the confidential information that would warrant enforcement of the agreement. 

In most of the matters I’ve handled involving non-compete agreements, the employees in question were either highly trained individuals in technical or creative fields, with direct access to their employer’s trade secrets, or were high level sales people with similar access to confidential customer information.  I would be hard pressed to come up with a scenario where a fast food employer would legitimately need  to have a crew worker enter into a non-compete agreement, no matter how good the sandwich.

The lesson to be learned is that the use of these agreements should be confined to key employees whose knowledge of trade secrets and other confidential information could cause serious damage if they went to work for a competitor.  In light of the recently enacted federal Defend Trade Secrets Act ("DTSA") of 2016, businesses now have greater protection, but need to take affirmative steps as soon as possible to take advantage of all the provisions of the new law.  For more information on DTSA, see my recent article in the Mississippi Business Journal.



Message to Employers: “We’re from the Government . . . and we’re not here to help!”

Employers can expect some new challenges in responding to EEOC Charges and with eight months to go before a new administration, the White House has announced it is targeting the use of non-compete agreements, commonly used by many American employers to safeguard business interests and protect trade secrets and confidential information.  Employers also are facing a December 1, 2016 deadline to decide how to address the Department of Labor’s final Rule on the Fair Labor Standard Act’s “white collar exemption”, which has more than doubled the salary requirement employers must meet to claim the exemption from employee overtime.

EEOC Issues Standards for Employer Position Statements

The Equal Employment Opportunity Commission (“EEOC”) has issued first-time-ever national standards and procedures it expects employers to follow in responding to an employee EEOC Charge of Discrimination.  While some of the procedures are nothing new, and reflect long-standing practices, one aspect should cause employers and their legal counsel concern.

The new guidelines dictate that employers provide very detailed information and specific information, which is comparable to information a plaintiff’s attorney would typically request in litigation discovery.  In the new procedures, the EEOC explicitly states it  will provide a copy of the employer’s EEOC Response and any attached documents to the Charging employee at their request, and allow them to file a rebuttal statement, which will not be provided to the employer.  In essence, the EEOC will facilitate the employee’s pre-litigation discovery, but leave the employer in the dark.  This presents a quandary for employers.  Typically, you want to present your strongest arguments in your position statement.  However, knowing that particular information and legal theories presented to the EEOC will be seen by the employee and his or her attorney raises the issue of how much to include, knowing that litigation is likely to follow the filing of the Charge.  The EEOC procedures give no basis as to why the employer is not allowed access to the employee’s rebuttal statement.

The procedures also require that if any reference to trade secrets or confidential business or financial information is made in the employer’s position statement, copies of such documents must be provided as separate attachments.  The procedures note the “EEOC will review attachments designated as confidential and consider the justification provided, as the agency will not condone blanket or unsupported assertions of confidentiality.”  What this means is that the EEOC will decide whether it considers the documents confidential, and if it does not, such documents could be provided to the Charging employee and their attorney.  The procedures also provide a much stricter standard for granting employers extensions of time to submit their position statements.  The EEOC now requires that all position statements and documents be filed digitally via an EEOC Internet portal.

White House Targets Non-Compete Agreements

Earlier this month, the White House released a report highly critical of the use of non-compete agreements by American employers, and listed what it considered the seven (7) problem areas of non-compete agreements:  

1. Workers who are unlikely to possess trade secrets (i.e., low wage workers) who are nevertheless required to sign non-competes
2. Workers who are only asked to sign a non-compete after accepting a job offer (thereby reducing their bargaining power)
3. The lack of clarity to workers regarding the meaning and implications of the non-compete
4. Overly broad non-compete agreements
5. No consideration for non-compete beyond continued employment
6. Non-competes that prevent workers from finding new work - even when they were fired without cause
7. How non-competes restrict consumer choice

While such restrictive employment covenants are generally not favored by the courts, they will be enforced if the terms of the agreement are reasonable under the particular circumstances.  Generally, there are three requirements: (1) the employer has a valid interest to protect; (2) the geographic restriction is not overly broad; and (3) a reasonable time limit is given.  The employer bears the burden of proving the reasonableness of the agreement.  The reason these types of agreements are construed very narrowly is that most courts recognize that an employer is not entitled to protection against ordinary competition from a departing employee.  Non-compete agreements can be valuable tools to protect an employer’s legitimate business interests, but generally, it is inadvisable to have low level employees sign such agreements, because they are typically not going to possess the confidential information that would warrant enforcement of the agreement.

The White House cannot take any direct action, because such agreements are governed under the individual laws of each state, and are not governed by federal law.  The Report indicates that the Administration “will identify key areas where implementation and enforcement of non-competes may present issues, examine promising practices in states, and identify the best approaches for policy reform”, suggesting plans to lobby state legislators and policymakers in the individual states.

DOL Final Rule for FLSA White Collar Exemption

After significant delay, the U.S. Department of Labor (DOL”) announced its final rule updating the regulations applicable to white collar exemptions, which will go into effect December 1, 2016. The DOL estimates that, absent employer action, the change will entitle more than 4 million white collar workers currently classified as exempt to overtime eligibility.

The Fair Labor Standards Act (“FLSA”) generally requires that most employees be paid at least minimum wage for all hours worked and overtime pay for all hours worked over 40 hours in a workweek. However, employees employed as bona fide executive, administrative and (most) professional (“white collar”) employees are exempt from both minimum wage and overtime pay if they meet two key requirements: are paid more than a specified weekly salary on a fixed salary or “fee” basis and perform certain job duties. 

The most significant change in the final rules is that it more than doubles the required salary to $913 per week, or $47,476 annually.  The previous standard was $455 per week, or $23,660 annually. The new rule establishes a mechanism whereby the salary and compensation levels will be updated every three years, with the first update taking effect January 1, 2020.  Encompassed within the white collar exemptions are highly compensated employees who earn a higher total annual compensation level than the other categories of white collar employees and satisfy a minimal duties test. Currently, the minimum annual compensation threshold for highly compensated employees is $100,000. The final rule increases this threshold to $134,004.

In the U.S. Department of Labor Blog, the DOL has offered the following suggestions to employers on how to adapt to the upcoming new requirements:•Raise salary and keep the employee exempt from overtime: Employers may choose to raise the salaries of employees to at or above the salary level to maintain their exempt status, if those employees meet the duties test (that is, the duties are truly those of an executive, administrative or professional employee). This option works for employees who have salaries close to the new salary level and regularly work overtime.

• Raise salary and keep the employee exempt from overtime: Employers may choose to raise the salaries of employees to at or above the salary level to maintain their exempt status, if those employees meet the duties test (that is, the duties are truly those of an executive, administrative or professional employee). This option works for employees who have salaries close to the new salary level and regularly work overtime.
• Pay overtime in addition to the employee’s current salary when necessary: Employers also can continue to pay their newly overtime-eligible employees the same salary, and pay them overtime whenever they work more than 40 hours in a week. This approach works for employees who work 40 hours or fewer in a typical workweek, but have occasional spikes that require overtime for which employers can plan and budget the extra pay during those periods. 
• Evaluate and realign hours and staff workload: Employers can ensure that workload distribution, time and staffing levels are all managed appropriately for their white-collar workers who earn below the salary threshold. For example, employers may hire additional workers.

Despite the happy talk from the DOL, the business community is highly critical of the new final rule.  Lower-wage business and service industries call the move a business and career killer, with limited to no benefit to the employees it is supposed to help.  According to the National Retail Federation (“NRF”), instead of increasing salaries to raise workers above the overtime threshold, many businesses will simply reclassify professionals as hourly workers, removing their existing perks, flexibility, and benefits. Likewise, the NRF expects most businesses will pay the required overtime, but simply cut base pay to compensate for the cost.

In light of broad reach of the dramatically increased salary threshold, as well as the virtually automatic increase every three years, it is imperative that employers begin analyzing their salaried exempt workforce to prepare for compliance by December 1, 2016, if they have not done so already.