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The Bloomberg Editorial Board recently published an article entitled “Too Many Workers Are Trapped By Non-Competes” arguing that the practice of requiring relatively low-wage and/or unskilled workers to sign non-compete agreements is a drag on the economy and is contributing to wage stagnation. The article contends that restricting unspecialized workers’ ability to freely change jobs hinders competition in the marketplace and decreases worker bargaining power.
An economist could best say whether the article’s assessment of the effects of non-compete agreements on low-wage workers and the U.S. economy more generally is accurate. But as a lawyer who frequently deals with non-compete agreements it is easy to highlight some risks for companies who use non-compete agreements with unspecialized workers en masse.
The first problem is that some state attorneys general have recently come after employers using this practice. Take for example a nation-wide sandwich chain that required its hourly employees to sign an agreement which prohibited workers during their employment and for two years after from working at any other business that sold “submarine, hero-type, deli-style, pita, and/or wrapped or rolled sandwiches” within two miles of any the chains locations in the United States. The New York Attorney General opened an investigation into the company and the Illinois Attorney General filed a lawsuit against it alleging violations of state law. The company settled both matters by, among other things, agreeing to stop requiring workers to sign such agreements (at least in those two states).
Another example of reportedly ubiquitous use of similar agreements attracting litigation is popular west-coast fast-food chain which was sued for allegedly requiring many of its workers to sign agreements containing strict anti-poaching provisions. They were effectively prevented from going to work at other fast-food restaurants – which is normally quite common for this group of employees. These kinds of requirements on lower-level workers has attracted very public enforcement actions, and likely will continue to do so.
Another problem is that some states now (and more may soon) have legislation prohibiting the use of non-compete agreements for low-wage and/or relatively unskilled workers. For example, the Illinois Freedom to Work Act prohibits applying “covenants not to compete” agreements on anyone earning less than the greater of: (1) the hourly rate equal to the minimum wage required by the applicable federal, state, or local minimum wage law, or (2) $13.00 per hour. Other states, such as California, Oklahoma, and North Dakota, generally prohibit nearly all non-compete agreements no matter the employee’s position or pay rate. Several other jurisdictions have also recently considered legislation that would restrict the use of non-compete agreements, including states like Pennsylvania, New Hampshire, Vermont, Washington, and cities like New York.
An additional issue with using non-competes with low-skill or low-wage workers is that they may not be enforceable as written or may cost more to enforce than they are worth. These agreements can be tricky to write correctly from state to state, and the costs associated with enforcing a non-compete agreement will most likely be in the tens of thousands of dollars in even the best-case scenario – and often even greater. The filings and hearings required take a considerable amount of time to complete even for lawyers experienced in handling these types of cases, not to mention the distraction to company officials required to prove the claim.
This leads some companies to think, “Well, I can just have the employees sign a non-compete agreement and let the mere looming threat of the company possibly enforcing the agreement discourage them from violating it.” But issues with that approach are obvious, including that once the word gets out, the threat disappears. Plus, sometimes an employee will sue the company to invalidate the agreement. The company must then spend money defending a lawsuit, possibly against an employee that it never even intended to enforce the agreement against, or else the whole thing collapses like a house of cards.
Overall, whether a company should use non-compete agreements with particular employees or various levels of its organization is a business decision that needs to take several factors into consideration. But a one-size-fits-all approach is rarely going to be the best strategy.
The National Labor Relations Board is signaling yet another change to the joint employer test in its recent issuance of a new proposed rule. The Board has waffled back and forth on this important issue recently, creating a lot of uncertainty for employers. Here’s an explanation of what has been going on and what is likely to come.
Remind Me: What’s Been Going On?
Many of you will remember the Board’s 2015 decision in Browning-Ferris Industries. That decision rocked the labor world because it held that two or more companies are joint employers of the same employees if they “share or co-determine those matters governing the essential terms and conditions of employment.” Our earlier coverage of that decision is here.
That new standard was a significant departure from the Board’s earlier, well-established precedent which held that a company must exert direct and immediate control over hiring, firing, discipline, supervision, and direction to be a joint employer. Under Browning-Ferris, indirect control or a reserved—even if unexercised—right to control was sufficient. The Board also expanded the “essential terms” to include scheduling, seniority, overtime, assigning work, and determining the manner and method of work performance.
Employers and management-side labor lawyers were obviously not happy with the Browning-Ferris decision, while employee and union-side folks were pleased. Luckily, however, the decision had a relatively short (initial) lifespan.
The Board overturned Browning-Ferris in December 2017 in its Hy-Brand Contractors Ltd. decision. That case adopted a test more closely resembling the pre-Browning-Ferris joint employer test, requiring proof that: (1) a putative joint employer actually exercised control rather than merely had a (an unexercised) right to do so; (2) the control is direct and immediate (as opposed to indirect); and (3) the joint employer will not result from “limited and routine” control.
It looked like we’d gone back to the old standard and would have some stability on this issue. But then some drama emerged at the Board.
Just a couple of months after the Hy-brand opinion’s publication, the Board’s Inspector General reported that new Board member William Emanuel should not have participated in the Hy-Brand decision because his former law firm represented one of the two alleged joint employers in the Browning-Ferris case. Based on the report, the other four members of the Board then unanimously vacated Hy-Brand, effectively reinstating the Browning-Ferris standard.
And now there’s a new development.
What’s Happening Now?
On September 13, 2018, the Board released a draft rule to re-define the joint employer test. Under the proposed rule, a company would only be considered a joint employer if it: “possesses and exercises substantial, direct and immediate control over the essential terms and conditions of employment and has done so in a manner that is not limited and routine.” Further, “[i]ndirect influence and contractual reservations of authority” will not establish a joint employer relationship under the proposed new rule.
The proposed new rule requires a 60-day public comment period. The Board will then consider the public comments prior to publishing a final version of the rule, which we probably won’t see until early- to mid-2019.
So, to recap (and to make sure we’re all on the same page): Browning-Ferris’s broad test is still in place for joint employer liability under current Board law. It will remain that way – until it is either reversed (again) by another decision or a final rule is published by the Board setting a new standard. Employers, therefore, need to continue to use caution when evaluating the extent to which their contractual relationships or actions might be interpreted as giving them indirect control over another company’s employees. And, of course, keep paying attention here for the latest updates!
Since the federal government vowed to take strong measures against employers and unauthorized foreign workers under the “Buy American Hire American” (BAHA) Executive Order, we have seen an increase in the number of worksite enforcement visits and arrests. U.S. Immigration and Customs Enforcement (ICE) has increased its workforce by four to five times, and as a result, there has been a dramatic increase in the number of worksite enforcement visits. A review of this increase has also made it more difficult to predict which employer(s) might be targeted.
Here are some of the key worksite visits by ICE from the first nine months of 2018:
Last month ICE arrested 364 individuals during 30-days of enforcement visits in the midwestern states of Illinois (134), Indiana (52), Kansas (43), Kentucky (60), Missouri (42), and Wisconsin (33).
Also, last month ICE conducted a worksite visit at a family-owned business in Texas with 500+ employees and arrested ~160 foreign nationals. In 2014, the employer had paid a $445,000 fine for hiring individuals without proper work authorization. (This likely put the employer on ICE’s continued radar.) Remember that if a business has previously been audited by the government and fined, repeat violations can result in higher monetary fines and more serious charges. So, it is in the business’s interest to implement measures to avoid committing the same types of violations in the future.
ICE served search warrants at various businesses in Nebraska and Minnesota resulting in the apprehension of 133 foreign nationals this summer. The businesses included a grocery store, restaurants, a private ranch, and a grain company. According to ICE, these enforcement actions were part of a 15-month on-going investigation based on evidence that these employers were knowingly employing unauthorized workers.
In June 2018, 200 federal officers raided an Ohio gardening and landscaping company, arresting 114 foreign nationals suspected of being in the U.S. without lawful status. ICE also obtained volumes of business records to investigate and determine whether to file charges against the business. It has been reported that the Department of Homeland Security had been receiving tips about the employer’s unlawful business practices for years, and it began investigating the employer after arresting a woman suspected of operating a document mill.
In April 2018, 97 foreign nationals working at a meat processing plant in Tennessee were arrested on federal and state charges. This was a joint operation between the Homeland Security Investigations arm, the Internal Revenue Service, and the Tennessee Highway Patrol. According to the IRS, the business is under criminal investigation for evading taxes, filing false tax returns, and hiring immigrants without work authorization. The government opened a case to investigate the business after the employer’s bank noticed large sums of money being withdrawn every week, supposedly to pay the unauthorized workers in cash. The IRS alleges that the business failed to report $8.4 million in wages and failed to pay at least $2.5 million in payroll taxes.
In January 2018, ICE raided nearly one hundred 7-Eleven stores in 17 states and D.C. to issue Notices of Inspection and interview employees. The investigation led to 21 arrests. ICE stated that this should be a clear message to employers who hire foreign nationals without proper work authorization. ICE stated this raid was a follow-up enforcement operation on a 2013 raid where nine 7-Eleven owners and managers were charged with various crimes, including conspiring to commit wire fraud, stealing identities, and concealing and harboring undocumented individuals employed at their stores.
As these incidents make clear, employers need to take action now to review and assess their company’s hiring practices and get everything in order. Even if your company does not routinely hire foreign nationals, you are still subject to immigration laws, most notably the ones relating to keeping proper Form I-9s and using E-Verify (where applicable). Fixing a problem now, especially with help from immigration counsel, is much smarter – and less expensive – than fixing a problem after an ICE raid or other government enforcement action.
Refusing to serve a patron is a hot topic right now, and it is not something any employer should take lightly. When recently asked about this issue by Thomson Reuters, partner Seth Ford and staff attorney Matt Anderson outlined the do’s and don’ts for a refusal of service policy. The main point is that employees themselves should have very little leeway to make such decisions on their own or based on their own opinions, save for extenuating circumstances.
These quotes can be found in Thomson Reuters‘ Employment Alert dated August 6, 2018 in an article titled, “Stop Trouble Before It Starts With A Refusal Of Service Policy” by Maureen Minehan, found here(used with permission).
A recent ruling by the California Supreme Court could have lasting consequences for timekeeping practices and the payment of wages for hourly employees. In the case of Troester v. Starbucks Corp., the court ruled on July 26, 2018 that Starbucks had to pay the plaintiff for time spent on regular, off-the-clock tasks. The court found that, at least in this particular case, plaintiff’s claims for unpaid wages were not exempt from payment under the FLSA de minimis rule and declined to apply the longstanding federal rule to California wage claims of the type raised by plaintiff. The court, however, did not entirely eliminate the possibility of the de minimis rule applying to state wage claims.
In Troester, the plaintiff routinely had to perform tasks related to closing the store after he had clocked out. These tasks included things like shutting down the computer system and locking the doors. Under the FLSA de minimis rule, infrequent and insignificant periods of work that occur outside work hours and cannot be precisely recorded need not be counted as work time. The court found that the routine, regular nature of the tasks performed by plaintiff was the crux of the issue: because employees are regularly doing these tasks, employees should be compensated for them and Starbucks’ argument that the time was de minimis was not accepted. Indeed, the court said: “The relevant statutes and wage order do not allow employers to require employees to routinely work for minutes off-the-clock without compensation.” (emphasis added).
Because this ruling applies to all hourly workers in California, the implications could be quite broad. Retailers will have to ensure that employees who open and/or close a shop have a consistent way to capture time spent doing the required tasks if those functions would normally not be recorded as hours worked. Employers will then need to go further and evaluate what sort of tasks are regularly expected from their hourly workers when they are off the clock, whether it’s opening/closing activities, bank deliveries, or other functions that may take place outside of work. Employers will need to determine whether these tasks are routine enough to devise a system to capture the time. For example, if an employer expects an hourly employee to routinely respond to emails or texts during off hours, there will need to be a way to capture this time and policies and procedures should be put in place to ensure that happens.
Currently, this ruling is limited to California, whose wage and hour laws do not make mention of a de minimis exception. However, this issue could potentially spread to other states with similarly drafted statutes regarding hours of work. Given the ubiquity of technology, and the increased pressure to stay connected to work via smartphones, VPNs, etc., it would be no surprise to see more and more plaintiffs attempt to use this ruling to work to capture what may have previously been considered de minimis time. Employers should be looking carefully at their policies and procedures for timekeeping and to help protect from any potential legal issues.