In a Tight Labor Market, a Reminder: Most No-Poaching Agreements are Illegal, Some Could Land You in Jail

In recent months, the U.S. unemployment rate has dropped to levels not seen since the late 1960s. This news—great for American workers—has left many employers scrambling to identify, hire, and retain qualified talent and to shore up efforts to assess and manage the business risks posed by an increasingly peripatetic workforce. As employers evaluate and implement tools to recruit workers (e.g., signing bonuses) and to protect business goodwill and competitive market position (e.g., confidentiality and non-compete agreements), a word of caution is in order: No-poaching agreements are, in most cases, illegal, and entering such agreements could lead to jail time.

What is a no-poaching agreement?

A no-poaching agreement is an agreement between employers to refrain from soliciting or hiring each other’s employees. It is distinct from a non-compete or non-solicit agreement between an employer and its employee because it is an agreement between competitors to limit competition; it is, as a result, a matter of antitrust law.

In late 2016, the Obama Department of Justice and Federal Trade Commission took aim at no-poaching agreements. In coauthored guidance, the agencies announced increased scrutiny of these agreements and warned that “[a]n individual likely is breaking the antitrust laws if he or she agrees with individual(s) at another company to refuse to solicit or hire that other company’s employees ….”

Here’s an illustration included in the guidance:

Question: I work as an HR professional in an industry where we spend a lot of money to recruit and train new employees. At a trade show, I mentioned how frustrated I get when a recent hire jumps ship to work at a competitor. A colleague at a competing firm suggested that we deal with this problem by agreeing not to recruit or hire each other’s employees. She mentioned that her company had entered into these kinds of agreements in the past, and they seemed to work. What should I do?

Answer: What the colleague is suggesting in a no-poaching agreement. That suggestion amounts to a solicitation to engage in serious criminal conduct. You should refuse her suggestion and consider contacting the Antitrust Division’s Citizen Complaint Center or the Federal Trade Commission’s Bureau of Competition to report the behavior of your colleague’s company. If you agree not to recruit or hire each other’s employees, you would likely be exposing yourself and your employer to substantial criminal and civil liability.

The guidance was issued in the wake of high-profile agency enforcement actions against eBay, Pixar, and Google involving those companies’ alleged agreements with competitors not to “cold call” each other’s employees about job opportunities. In a related case, Disney agreed to pay $100 million to settle claims alleging it maintained a “gentleman’s agreement” with competing animation studios under which the studios would not recruit or hire each other’s workers.

Recent agency statements make clear that no-poaching agreements remain an enforcement priority.

After President Trump was inaugurated in 2017, speculation swirled as to whether the new administration would dump Obama-era guidance on no-poaching pacts. But any doubt was laid to rest when a high-ranking member of the DOJ’s Antitrust Division gave remarks in late 2017 reminding outside employment counsel that their clients should be “on notice” that no-poaching agreements may lead to criminal prosecutions. More recently, this year, another top Antitrust Division official made more pointed threats of criminal sanctions, stating that employers failing to heed the DOJ and FTC warning about no-poaching agreements do so at their own peril and commenting that he had “been shocked about how many of these [agreements] there are, but they’re real.”

Are no-poaching agreements ever legal?

The 2016 DOJ and FTC guidance provides that “if the agreement is separate from or not reasonably necessary to a larger legitimate collaboration between the employers, the agreement is deemed illegal without any inquiry into its competitive effects.” Beyond this, the guidance contains no explanation of what a “larger legitimate collaboration” is or how to determine whether a no-poaching agreement is “reasonably necessary” to such collaboration. While there are court decisions fleshing out limited circumstances under which such agreements are legal (e.g., necessary as part of a merger or acquisition, necessary for the settlement of a legal dispute), employers should proceed with caution. It is fair to read the 2016 guidance as stating that DOJ will treat most no-poaching agreements as illegal, at least until proven otherwise.

The bottom line for employers

An agreement among competitors that limits competition for employees is subject to attack as per se illegal. And per se illegality comes with stiff penalties, including the possibility of criminal sanctions. As the 2016 guidance explains:

“The DOJ will criminally investigate allegations that employers have agreed among themselves on employee compensation or not to solicit or hire each other’s employees. And if that investigation uncovers a naked wage-fixing or no-poaching agreement, the DOJ may, in the exercise of prosecutorial discretion, bring criminal, felony charges against the culpable participants in the agreement, including both individuals and companies.”

Because the stakes are so high, employers must make certain that HR employees, as well as all others involved in recruiting and hiring, are trained to identify and avoid illegal no-poaching agreements. As the 2016 guidance explains, these agreements are not always apparent on their face: They may be informal or formal, written or unwritten, spoken or unspoken, and direct evidence of an agreement is not needed for a violation to be found—an agreement can be inferred from evidence of discussions and parallel behavior. As a result, prudent employers should consider extending or expanding antitrust training to HR personnel.

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Can Companies Require the Arbitration of Disputes Brought By a Vendor’s Workers?

Both before and after the U.S. Supreme Court’s important recent decision in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018) holding that class action waivers in arbitration agreements are not precluded by federal labor law, many employers have implemented arbitration agreements with their employees specifying that employment disputes with the company must be arbitrated on an individual basis only, and not as part of a class or collective action.  Our analysis of Epic Systems is available here.

But can companies require the arbitration of disputes brought by workers who, although they are paid by a third-party staffing agency or service provider, allege that they were employed by the company?  The reality is that despite companies’ efforts to disclaim employment relationships with vendors’ workers, these workers often allege otherwise through a variety of suits, including unpaid overtime, discrimination, retaliation, harassment, and personal injury lawsuits.

Recent cases have suggested at least two ways in which companies have successfully obligated vendors’ workers to arbitrate disputes.  First, some companies contract directly with the worker to require arbitration.  While that approach is relatively straightforward, some companies prefer to avoid direct contractual relationships with workers who are, after all, employed and paid by other entities.

A more common approach is for the company to be identified as a third-party beneficiary of an arbitration agreement between the worker and the employing entity.  Most courts, including courts applying Texas law, will enforce an arbitration agreement on behalf of a non-signatory to the agreement if the agreement clearly indicates the contracting parties’ intent to confer a direct benefit (in this case, the worker’s promise to arbitrate) on the third party.  See, e.g., In re NEXT Fin. Group, Inc., 271 S.W.3d 263 (Tex. 2008); In re Palm Harbor Homes, Inc., 195 S.W.3d 672 (Tex. 2006).  Careful drafting is required, however, because there is a presumption that parties contract only for themselves.  See City of Houston v. Williams, 353 S.W.3d 126 (Tex. 2011).

The Bottom Line for Employers

The courts have provided options for companies wishing to arbitrate disputes with vendors’ workers on an individual basis only.  The most common option is to assure that the company is a third-party beneficiary of an agreement to arbitrate between the worker and the employing entity.  Companies therefore should review the language of such arbitration agreements to assure that it encompasses claims against the company and clearly indicates the contracting parties’ intent to confer this benefit on the company.  As part of this review, companies should check the law of the jurisdiction that controls the agreement, as each state’s third-party beneficiary requirements differ slightly in formulation.  Retaining legal counsel to assist in these tasks is advisable.

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Jury in the Southern District of Texas Finds that Mud Engineers are Exempt from Overtime under the FLSA

On October 25, 2018, a jury in the Houston Division of the Southern District of Texas decided that drilling fluid specialists, also known as “mud engineers,” were exempt from the overtime provisions of the Fair Labor Standards Act (“FLSA”) under the white collar, administrative exemption.  This case is one of the very few FLSA cases actually tried to a jury in the Houston Division in recent years and one of the even fewer to address the applicability of the administrative exemption to this particular type of oilfield services worker.

Background

The case, Dewan v. M-I L.L.C., has an interesting procedural history.  In Dewan, the plaintiffs brought a putative class action in the United States District Court for the Southern District of Texas against their employer, M-I L.L.C. (“M-I”), an oilfield services company, alleging that M-I did not properly pay for overtime.  The plaintiffs were employed as drilling fluid specialists, more commonly known as “mud engineers,” and were tasked with managing drilling fluid systems at customer locations and ensuring that the drilling fluid was within specifications dictated by the project engineer’s mud plan.  Drilling fluid is tested by measuring the mud’s pH, rheology, weight and viscosity.  Mud engineers are allowed to give recommendations to customers based on the test results without needing permission from a supervisor.  At M-I, mud engineers are required to have high school diplomas and to complete an eight-week internal training program.

M-I moved for summary judgment in the district court arguing, among other things, that the plaintiffs were exempt under the administrative exemption of the FLSA.  To qualify for the administrative exemption, an employer must demonstrate that its employee: (1) is paid at least $455 per week on a salary basis; (2) primarily performs office or non-manual work directly related to management or general business operations of the employer or the employer’s clients or customers; and (3) exercises discretion and independent judgment with respect to matters of significance.  If an employer can establish that these factors are present, it does not have to provide overtime to the employee.  The district court granted M-I’s motion for summary judgment, ruling that the plaintiffs were exempt under the administrative exemption.

Appeal to the Fifth Circuit Court of Appeals

On appeal, the Fifth Circuit reversed the district court’s finding that mud engineers were exempt and sent the case back to the district court for further proceedings.  In particular, the Fifth Circuit found that the second and third prongs of the exemption (i.e., primary work and discretion/independent judgment) required a jury’s analysis rather than the lower court’s legal analysis.  The Fifth Circuit questioned whether a mud engineer’s primary duties were “directly related” to the management or general business operations because the duties seemed more closely related to the production of the commodity than to the administration of business affairs.  Further, the court found that the exemption requires applicable employees to make policy determinations rather than mere recommendations to customers.

In addition, the Fifth Circuit found that there were genuine issues of material fact regarding the mud engineers’ independent judgment and discretion and that a jury would have to weigh the issue.  Despite the ability to make recommendations without permission from a supervisor, the plaintiffs argued that their decisions were nothing more than recitations of well-established procedures.  Thus, the court held that the district court should not have granted M-I’s motion for summary judgment.

Jury Verdict

Upon remand, the case was tried to a jury.  Per the Jury Charge, the first prong of the administrative exemption was not at issue because the parties agreed that the plaintiffs were paid at least $455 per week on a salary basis.  Therefore, in determining whether the plaintiffs met the exemption, the jury was asked to decide by a preponderance of the evidence whether M-I met the 2nd and 3rd prongs of the exemption.  More specifically, the jury was to decide whether:

  • Plaintiffs’ primary duty was the performance of office or non-manual work directly and closely related to the management or general business operations of the Defendant or the Defendant’s customers or clients; and
  • Plaintiffs’ primary duty included the exercise of discretion and independent judgment with respect to matters of significance.

Ultimately, the jury answered these questions in the affirmative and found that the plaintiffs were exempt from the overtime requirements of the FLSA as administrative employees.

The Bottom Line for Employers

Although this is a win for the oil and gas industry, it is important to remember that FLSA exemptions are determined on a case-by-case basis, and that an employee’s specific job duties and salary must meet all of the requirements of the exemption.  In addition, this case is worth mention due to its unusual procedural background and the fact that it reached the jury-verdict stage, which is not typically the case in exemption cases involving the oilfield services industry.

 

 

 

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Department of Labor Clarifies the Compensability of Travel Time

Determining the circumstances in which “travel time” must be paid to non-exempt employees is often a vexing issue when employees work at customer locations rather than a fixed worksite.  A recent Department of Labor Wage and Hour Division opinion letter sheds light on some of the difficult questions that arise with respect to such employees.  See https://www.dol.gov/whd/opinion/FLSA/2018/2018_04_12_01_FLSA.pdf.

The opinion letter tackles the following specific issues:

What time is compensable when a non-exempt employee travels to or from company-mandated training, away from the employee’s home community?

  • The opinion letter confirms the general rule that travel time that cuts across the employee’s regular workday must be compensated, and travel time outside of the regular workday does not have to be compensated (unless work is done during the travel itself). But what happens when the employee does not work a set shift?  In that case, says the DOL, the employer has several options for determining the regular work schedule for purposes of travel time.  They include:
    • Review the employee’s time records for the most recent month of regular employment and see if there is a pattern that reveals regular work hours.
    • If no regular hours are revealed through the above method, choose the average start and end times for the workdays.
    • If the above option still does not reasonably identify regular work hours, the employer and employee may negotiate and ultimately agree to a reasonable amount of time or timeframe in which travel outside of the home community is compensable.
    • In addition to the above options, other “reasonable” methods for determining regular work hours are permissible.
  • What time counts if the employee forgoes the employer’s offer of plane travel and chooses to drive a car to the training instead?
    • In this situation, the employer may count as hours worked either the time spent driving or the time that would have counted as hours worked had the employee had taken the plane flight.
  • Does the employer have to pay for travel time between the training site and a hotel?
    • That time is considered ordinary home-to-work travel and is not compensable.

What is compensable when a non-exempt employee travels to a home office to get a job itinerary and then to the customer’s location?

  • The portion of the trip from home to the home office is not compensable unless work is performed while traveling. Per a previous opinion letter, a potential exception to this rule includes situations in which the commute time from home to a job site in the morning is “extraordinary” because it exceeds the normal commute.  The DOL has declined to define what constitutes an “extraordinary” commute, and the relevant FLSA regulations speak only to situations in which an employer makes a “special request” that an employee perform a “particular and unusual assignment” in another city.  29 C.F.R. § 785.37.
  • The portion of the trip from the home office to the customer location is compensable, as is travel between customer locations.
  • The answers to the above questions do not change simply because the travel occurs in a company-provided vehicle, as long as “the use of such vehicle for travel is within the normal commuting area for the employer’s business or establishment for the employer’s business or establishment and the use of the employer’s vehicle is subject to an agreement on the part of the employer and the employee or representative of such employee.” (citing 29 U.S.C. §254(a)).   The “normal commuting area” for the employer’s business has been interpreted by courts to mean the particular employee’s normal and reasonably expected commute.

The Bottom Line for Employers

Although DOL opinion letters are not binding on the courts, an employer’s reasonable reliance on them may be helpful in defending against an alleged violation or to demonstrate good faith.  Here, the DOL has provided clarification of the rules regarding several common forms of non-exempt employee travel, and employers would be well-served to familiarize themselves with these rules.  Employers should recognize that the opinion letter does not answer all related questions, such as what constitutes an “extraordinary” commute warranting payment for a portion of the commute time, and what is the “normal commuting area” with respect to employees who commute in company vehicles.  Employers should continue to monitor future opinion letters and court decisions for guidance in this area.

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OSHA Issues New Guidance on Workplace Safety Incentive Programs and Post-Incident Drug and Alcohol Testing Policies – And It’s Good News for Employers

Heads up if you administer a workplace safety incentive program or have a post-incident drug and alcohol testing policy – OSHA has just done an about face. Two-plus years ago on May 12, 2016, OSHA published a final rule that added a provision to 29 CFR §1904.35 prohibiting employers from retaliating against employees for reporting work-related injuries or illnesses. It sounded simple enough. The kicker, however, was in the preamble to the final rule and post-promulgation interpretive documents in which OSHA opined that certain broadly-applied, post-incident drug and alcohol testing policies and safety incentive programs could discourage employees from reporting work-related injuries and illnesses and could therefore be a violation of the amended regulation.

OSHA recently backed off its 2016 interpretation. On October 11, 2018, OSHA issued a memorandum to Regional Administrators clarifying the department’s position that §1904.35 does not prohibit workplace safety incentive programs or post-incident drug testing:

The Department believes that many employers who implement safety incentive programs and/or conduct post-incident drug testing do so to promote workplace safety and health. In addition, evidence that the employer consistently enforces legitimate work rules (whether or not an injury or illness is reported) would demonstrate that the employer is serious about creating a culture of safety, not just the appearance of reducing rates. Action taken under a safety incentive program or post-incident drug testing policy would only violate 29 C.F.R. §1904.35(b)(1)(iv) if the employer took the action to penalize an employee for reporting a work-related injury or illness rather than for the legitimate purpose of promoting workplace safety and health

Notably, the memorandum supersedes all previous interpretive guidance on the topic stating that “to the extent any other OSHA interpretive documents could be construed as inconsistent with the interpretive position articulated here, the memorandum supersedes them.” This includes previous memorandums to OSHA Regional Administrators and guidance on OSHA’s website.

Incentive Programs:

OSHA’s revised position on the legality of rate-based incentive programs is both practical and manageable. The memorandum begins by recognizing that many employers have incentive programs that are rate-based and reward employees with a prize or bonus at the end of an injury-free month or evaluates managers based on their work unit’s lack of injuries. It goes on to generally endorse these types of programs as an important tool to promote workplace safety and health and concludes with some practical guidance. The following is an excerpt:

Rate-based incentive programs are also permissible under §1904.35(b)(1)(iv) as long as they are not implemented in a manner that discourages reporting. Thus, if an employer takes a negative action against an employee under a rate-based incentive program, such as withholding a prize or bonus because of a reported injury, OSHA would not cite the employer under §1904.35(b)(1)(iv) as long as the employer has implemented adequate precautions to ensure that employees feel free to report an injury or illness.

A statement that employees are encouraged to report and will not face retaliation for reporting may not, by itself, be adequate to ensure that employees actually feel free to report, particularly when the consequence for reporting will be a lost opportunity to receive a substantial reward. An employer could avoid any inadvertent deterrent effects of a rate-based incentive program by taking positive steps to create a workplace culture that emphasizes safety, not just rates.

For example, the memorandum suggests that any inadvertent deterrent effect of a rate-based incentive program on employee reporting would likely be counterbalanced if the employer also incorporates elements such as::

  • an incentive program that rewards employees for identifying unsafe conditions in the workplace;
  • a training program for all employees to reinforce reporting rights and responsibilities and emphasizes the employer’s non-retaliation policy;
  • a mechanism for accurately evaluating employees’ willingness to report injuries and illnesses.

Post-Incident Drug and Alcohol Testing:

Equally helpful to employers, the memorandum also specifically addresses post-incident drug and alcohol testing policies and iterates that “most instances of workplace drug testing are permissible.” Examples of permissible drug testing set out in the memorandum include:

  • Random drug testing.
  • Drug testing unrelated to the reporting of a work-related injury or illness.
  • Drug testing under a state workers’ compensation law.
  • Drug testing under other federal law, such as a U.S. Department of Transportation rule.
  • Drug testing to evaluate the root cause of a workplace incident that harmed or could have harmed employees.  If the employer chooses to use drug testing to investigate the incident, the employer should test all employees whose conduct could have contributed to the incident, not just employees who reported injuries.

Practically speaking, what this means is that employers are no longer required to first determine if there is a “reasonable possibility” that drugs or alcohol were involved in a workplace incident as suggested when the final rule was enacted, but may proceed directly to post-incident drug and alcohol testing so long as all employees who could have contributed to the incident are tested.

The Bottom Line For Employers

The memorandum should be welcome news for employers and HSE managers. While OSHA continues to prohibit penalizing or retaliating against employees who report work-related injuries and illnesses, there is now substantially less ambiguity surrounding what constitutes retaliation and what does not in the context of workplace safety incentive programs and post-incident drug and alcohol testing policies.

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Fifth Circuit Upholds Right to Wear “Fight for $15” Buttons at Work

The National Labor Relations Act requires employers to allow all employees—including non-unionized ones—to express opinions on the terms and conditions of their employment. The National Labor Relations Board and the Fifth Circuit recently reaffirmed this idea in a case where the employer argued that the employees’ expression would hurt the employer’s business. The case is In-N-Out Burger v. NLRB, 894 F.3d 707 (5th Cir. 2018), and a petition for certiorari to the United States Supreme Court is pending as of October 24, 2018.

The dispute started at an In-N-Out Burger in Austin, Texas. Several employees began wearing buttons on their uniforms expressing support for the “Fight for $15” campaign, which seeks a national $15-an-hour minimum wage. In-N-Out had an employee handbook policy on employee uniforms at the time that required its employees to dress in a unique way: white pants, white shirt, white socks, black shoes, black belt, red apron, gold apron pin, company-issued name tag, and hat. The policy also prohibited wearing any pins or stickers.

In-N-Out managers required the employees wearing the Fight for $15 pins to remove them. The employees complied and filed an unfair labor practice charge. The Labor Board, and the Fifth Circuit, found that the employees had a right to wear the pins, despite In-N-Out’s two arguments:

First, In-N-Out argued that the pins clashed with a uniform that furthers In-N-Out’s unique public image of simplicity and cleanliness, and that adding buttons to the uniform hurt that image. The Board and court rejected the public-image argument, stating that the buttons had not been shown to disrupt the image sufficiently and in part because In-N-Out required employees to wear other buttons at Christmas and during an annual charity drive.

Second, In-N-Out argued that the pins created a food-safety danger, including because the Fight for $15 pins were smaller than the company-required Christmas and charity pins. The Labor Board and court rejected this argument because In-N-Out had not shown the danger sufficiently, the handbook prohibition on buttons was for all buttons (not just small ones that could fall into food unnoticed), and the company did not investigate the buttons for safety issues before requiring the employees to remove them.

The upshot is that the National Labor Relations Board—including under the new administration—and the Fifth Circuit continue to require employers to allow workers to express opinions on their working conditions. And those requirements exist whether or not the employees are unionized. There are certain exceptions that can apply, including special circumstances like safety and for patient-facing healthcare workers, but those exceptions must be followed precisely, and relying on them can be complicated. Employers should seek advice before drafting or enforcing policies that restrict employees from expression of opinions like this, even when those employees work in jobs where they interact with customers or patients.

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Do Employees Have to Return Severance Pay Before Filing Suit Under Title VII and the EPA?

Many employers have had employees sign separation agreements releasing all claims in exchange for severance pay.  But what happens when an employee signs a separation agreement and receives severance pay, but then changes her mind, alleging that she was pressured into signing the agreement and that the release is invalid, and decides to pursue her discrimination claims in court?  Must the employee give back the severance pay before filing suit?

In a matter of first impression, the U.S. Court of Appeals for the Sixth Circuit, in McClellan v. Midwest Machining, Inc., 900 F.3d 297 (6th Cir. 2018), held that the tender-back doctrine does not apply to claims brought under Title VII or the Equal Pay Act (EPA).  The Sixth Circuit, relying upon the United States Supreme Court’s similar decisions in Hogue v. Southern R.R. Co. and Oubre v. Entergy Operations, Inc., reversed the district court’s grant of summary judgment for the employer, finding that the plaintiff was not required to pay back consideration received as part of a severance agreement before bringing suit under Title VII or the EPA.

Background

After McClellan announced her pregnancy to her employer, Midwest Machining, she claimed that she was subjected to discriminatory behavior.  Specifically, McClellan alleged that her supervisor made negative comments about her and her pregnancy and was not happy she was attending pre-natal doctor’s appointments.  Shortly thereafter, her employment was terminated.  On the day she was fired, she was called into her supervisor’s office and was told that she needed to sign a severance agreement if she wanted to receive any severance pay.  The door to her supervisor’s office was closed and McClellan alleged that she did not feel free to leave.  Unclear about what claims she was waiving, and feeling pressured and bullied by her supervisor, McClellan claims she agreed to sign the severance agreement and received $4,000 in severance pay.

The Lawsuit

McClellan filed an EEOC charge claiming that Midwest Machining discriminated against her.  She received a right-to-sue letter and filed a lawsuit claiming pregnancy discrimination under Title VII, in addition to claims under the EPA and Michigan state law.  In response to the lawsuit, counsel for Midwest Machining informed McClellan’s lawyer of the severance agreement.  McClellan then sent a check for $4,000 (the severance amount) to Midwest Machining along with a letter stating that she was rescinding the severance agreement alleging the release was invalid, but Midwest Machining returned it, stating there was no legal basis for rescinding it.  Thereafter, Midwest Machining moved for summary judgment on the basis that McClellan did not “tender back” the $4,000 before she actually filed suit.  Although the district court concluded that there was a dispute over whether McClellan knowingly and voluntarily signed the severance agreement, the district court granted summary judgment based on the tender-back doctrine, which requires a plaintiff to pay back consideration received through a severance agreement before filing suit.

On appeal, the Sixth Circuit reversed the decision concluding (in agreement with the EEOC, which submitted a brief in support of McClellan’s position) that the tender-back doctrine does not apply to claims brought under Title VII and the EPA.   The Sixth Circuit relied on the Supreme Court’s reasoning in Oubre v. Entergy Operations, Inc., 522 U.S. 422 (1998) and Hogue v. Southern R.R. Co., 390 U.S. 516 (1968).  In Oubre, the Supreme Court held that employees need not tender back payments in the context of the Age Discrimination in Employment Act (ADEA).  Likewise, the Supreme Court in Hogue held that a plaintiff was not required to tender back payments received before bringing suit under the Federal Employers Liability Act (FELA).  Notably, other circuits, including the Fifth Circuit, have applied Oubre and Hogue to reject the use of the tender-back doctrine in suits brought under federal remedial statutes. See e.g., Botefur v. City of Eagle Point, 7 F.3d 152, 156 (9th Cir.1993) (recognizing that “the rule announced in Hogue, that tender back is not required for suit under the FELA, is generalizable to suits under other federal compensatory statutes” and finding no tender back requirement for § 1983 plaintiff); Smith v. Pinell, 597 F.2d 994, 996 (5th Cir.1979) (same for Jones Act plaintiff).

In reaching its holding, the court also recognized that employees who have lost their jobs would have spent their severance money already and would not have the ability to tender back the severance.  Thus, instead of being a bar to filing suit, the Sixth Circuit held that the amount of severance should be deducted from any future award to the plaintiff.

Bottom Line

In this case, the Sixth Circuit determined that, as with several other federal remedial statutes (discussed in Oubre and Hogue), that the tender-back doctrine does not apply to claims brought under Title VII and the EPA.  Although the Sixth Circuit did not consider the validity of the release and whether it was entered into voluntarily, which is something the parties would have to litigate in any case where a release bars the claims at issue, it makes it clear that a plaintiff does not have to return the severance payment to the employer before filing suit. Note that although this case is not binding on Texas courts because it is out of the Sixth Circuit (which has jurisdiction over federal appeals arising from Kentucky, Michigan, Ohio and Tennessee), a court in the Fifth Circuit may find this to be persuasive authority.

This case also serves as an important reminder that employers should be careful not to pressure separating employees into signing severance agreements.  An employer can minimize the chances that an employee will challenge a release by doing the opposite—i.e., providing the employee with an appropriate amount of time to review the agreement (which is required if the employee is over 40 and subject to the Older Workers’ Benefit Protection Act), making the release clear, avoiding actions that could be perceived as intimidating and/or bullying, and advising the employee that he or she should consult with an attorney before signing the agreement.

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Student Loans and 401(k)s: IRS Private Letter Ruling Opens the Door to a New Recruitment Strategy for Employers

Today I break from the newsletter’s traditional format of discussing an in-depth labor and employment legal issue to write on a topic of widespread application and an issue of personal interest to me – student loans, and a great new benefit employers may provide related to them courtesy of the Internal Revenue Service (“IRS”).

The IRS recently issued Private Letter Ruling (“PLR”) 201833012, available at https://www.irs.gov/pub/irs-wd/201833012.pdf, which has the potential to fundamentally alter employers’ retirement plans while offering an excellent marketing opportunity for employers to attract new talent fresh out of college. How does it do this? The short answer is by adding a new method for employers to contribute to employees’ 401(k) retirement accounts linked to employees’ student loan payments.

401(k) Plans Historically

Most people are familiar with a 401(k) plan, which the IRS defines as “a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts”—in other words, it allows an individual to place money in a tax-deferred savings or investment account for retirement purposes. These employer-sponsored plans are quite popular, with 79% of American workers working for an employer that sponsors a 401(k) retirement plan.

The Internal Revenue Code authorizes employers to contribute to an employee’s 401(k) account, and many do. This is done by matching an employee’s contributions on a dollar-for-dollar basis, up to a statutorily defined maximum. Employers often state this benefit as a percentage of salary, i.e., a typical plan might offer to match an employee’s 401(k) contributions up to 5% of his or her annual salary.

From the employee’s perspective, this is a great benefit as it is essentially additional income (albeit deferred). And from the employer’s perspective, this is a good way to attract and retain good employees.

The Student Loan Problem & PLR 201833012

In theory, all of the foregoing is great. But what if you are a recent college-graduate at your first job, faced with the responsibility of juggling living expenses, including making those first student loan payments? In that case, a 401(k) employer matching program may not be immediately valuable when retirement is far in the future and student loans need to be paid now. In other words, a new junior employee may not have enough income to make 401(k) contributions and therefore may miss out on his employer’s match.  A junior employee may not have enough income to make 401(k) contributions and therefore may miss out on his employer’s match.

This is a common problem. According to the Federal Reserve, Americans held a total of $1.489 trillion in outstanding student loans as of 2017. This equates to an average of $37,172 in student loans per college graduate, exceeding credit card and automobile loans balances for most people. Yet the average starting salary for a bachelor’s degree recipient is $50,219, meaning the average student loan balance accounts for 75% of a graduate’s starting annual salary. Despite the advent of income-based and other repayment plans available under certain loan programs, once living expenses are accounted for, new graduates often find student loans a significant ongoing expense-eliminating such luxuries as vacations, saving for a rainy day, and retirement planning. And aside from employer or government-sponsored public interest repayment programs in certain fields, employers by and large have not been involved with employees’ student loans.

PLR 201833012 is poised to change that. The taxpayer in that PLR requested and received permission from the IRS to amend its 401(k) plan to allow two options: first, the traditional employer match based on an employee’s own contribution; and second, a novel option that would base an employer’s match not on any employee contribution to the 401(k) plan, but rather on an employee’s payment of student loans. This means that under the plan as structured in the PLR, an employee would automatically receive employer 401(k) contributions of 5% of the pay period’s compensation in each pay period that the employee pays a student loan payment equal to or exceeding 2% of the compensation for that pay period–a student loan payment which the employee has to pay regardless.  Thus a recent graduate no longer needs to forego retirement saving in order to pay student loans and living expenses—he or she may even be able to go on a vacation every once in a while.

Granted, I’ve painted a caricature of a nearly destitute new employee, but the reality is, even for employees that have some years’ of experience, the ability to link retirement saving to student loans (that have to be paid anyways) offers employees flexibility that is unprecedented and certainly valuable, as employees can shift some of their funds to other endeavors and still build retirement wealth.

The Forefront of a New Opportunity

This potential new employee benefit offers employers an excellent marketing opportunity to attract and retain top new talent, while also helping their existing workforce. If a candidate has two equally lucrative opportunities straight out of college, but one employer would allow him or her to pay down student loans while also building retirement wealth while the other employer’s 401(k) follows the traditional plan format, all things considered the candidate is more likely to choose the former. What’s more, the plan amendment in the PLR was structured such that employees have the option of following the traditional plan matching format if that is preferable for their financial situation, providing even more value to employees. Further, this benefit would be tax-free to the employee, whereas a direct student loan repayment benefit from the employer most likely would be taxable income to the employee.

Given the novel nature of this PLR, now is a great time for employers to investigate if such a plan amendment is worthwhile to increase their marketability to younger talent. I suspect that this will become standard benefits practice in the coming years, so by acting quickly, employers can get ahead of the curve.

Of course, there are caveats. First, an IRS private letter ruling is only legally binding as to the entity that requested it, so other employers may not rely on PLR 201833012, although it does give a strong indication of IRS policy on the issue. Second, this article speaks in general terms—401(k) plan benefits are a nuanced area of law, so employers are advised to consult their benefits counsel to determine if such a plan amendment is feasible for their organization.

Nevertheless, I believe given the widespread proliferation of student loan debt, this potential benefit is worth exploring by employers as a marketing tool. Having endured the weight of student loans myself, I can say that I definitely would have viewed a 401(k) employer match tied to my student loan payment rather than to my own retirement plan contribution as a great benefit when I was first starting out. Your candidate pool may well feel the same.

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Five Tips for Better, Less Risky Terminations

Involuntary terminations can be tough to do well. Even when discharge is clearly warranted—such as in egregious for-cause situations—few managers are eager to sit down with an employee to deliver the bad news. And even fewer are interested in becoming expert in the art of letting someone go. But this doesn’t mean that termination discussions should be taken lightly. A well-executed termination may mean the difference between an amicable separation and a wrongful discharge claim.

Savvy employers know that employees who feel that they are treated fairly are significantly less likely to pursue wrongful discharge claims than are those who feel like they got a raw deal. Here are five recommendations for better terminations that reduce litigation risk:

  1. Do it in person.

    Occasionally, coordinating an in-person termination discussion is impossible, such as when the employee being terminated works in a remote location or refuses for some reason to cooperate with the employer’s request for a meeting. In all other situations, terminations should be handled in person. No, there’s no legal requirement for a face-to-face conference. And yes, an e-mail—or even worse, a text—might convey the message effectively. But the fact remains that employees, even bad ones, deserve to be treated with dignity and respect. Setting aside time to meet in person to discuss termination demonstrates that the employer understands that this is an important and serious matter. And unlike one-way termination notices (e.g., letters, e-mails, texts), a termination conference gives the employee being terminated the opportunity to ask questions and to be heard. This can soften the blow of otherwise unpleasant news and help focus the employee’s attention on the path forward.

  2. Have a plan, and stick to it.

    At first blush, executing a termination doesn’t seem like rocket science. But, in fact, there are dozens of small details that can be difficult to manage on the fly. When will the termination meeting happen? And where? Who will attend, and what, exactly, will each attendee say? The best termination discussions are carefully choreographed from start to finish. Before the termination meeting, it is wise to prepare a written plan that includes scripted talking points. This way, the terminating manager and HR representative will know how the meeting should run and what role each will play. And in the event of a post-termination dispute, the plan and script serve as evidence of what occurred during the meeting.

  3. Address the reason for termination head-on.

    It can be challenging to sit eye-to-eye with an employee while explaining to her that she is being terminated for cause. The natural reflex is to downplay the reason for the termination or to apologize that it is happening. But vague explanations like “We’re sorry to have to do this” or “It’s just not working out” don’t help anyone—they only muddy the waters with respect to the discharge. While in most states an employer is not obligated to tell an employee why she is being terminated, in the vast majority of circumstances, there is no reason to avoid doing so. Despite the at-will employment doctrine, most employees expect that they will not be fired without a good reason (and judges and juries tend to agree). An employer’s reluctance to identify and discuss the basis for termination can lead an employee to believe that other-than-legitimate factors may be at play with respect to the termination.

  4. Be humane.

    Remember that it’s difficult to lose a job—even when discharge is much deserved. A showing of compassion helps a termination meeting run smoothly and requires little extra effort on the employer’s part. For example, selecting a discreet and private location to advise an employee of her discharge may keep her from feeling like she was fired in front of her co-workers (such as in a glass conference room off of a busy hallway). Similarly, giving the employee being terminated some control, within reason, over the way she leaves the office can help ensure a dignified departure. Some employees prefer to slip out discreetly and have personal belongings shipped after the fact, others want to pack up and say a few goodbyes before going. Depending on the circumstances, both of these may be acceptable to the employer, and allowing the employee to choose may take some of the sting out of having been let go.

  5. Discuss the termination on a need-to-know basis.

    In most cases, there is little reason to rehash the details of a termination once it has been executed. But saying nothing further about it can backfire. Co-workers of the employee who was fired will notice her absence, and if the termination isn’t addressed at all, gossip will fill the void. Accordingly, it’s appropriate and often necessary to inform co-workers of a termination. Something simple and straightforward—such as “Danielle is no longer with the company; I can’t go into details because I want to ensure her privacy”—often quells the rumor mill. Focusing on the future is similarly effective. Co-workers will want to know what impact, if any, the termination may have on them. Will responsibilities be reallocated? Temporarily or permanently?

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San Antonio Joins Austin in Passing a Paid Sick Leave Law—But Will These Laws Survive, and What’s Next for Paid Sick Leave?

On August 16, 2018, San Antonio joined Austin to become the second major city in Texas to pass a paid sick leave ordinance.  The law allows workers to earn one hour of paid sick leave for every 30 hours worked in San Antonio, up to a maximum of 64 hours of paid leave each year for workers at companies with more than 15 employees.  Employees at companies with 15 employees or fewer are capped at 48 hours of paid sick leave per year.  Employees who are not working the requisite number of hours in San Antonio are not eligible.

The law is set to take effect on August 1, 2019 for companies with five or more employees, but that assumes it survives a near-certain court challenge, a potential state legislative override, or changes made by San Antonio itself.  Austin’s ordinance is currently the subject of a court challenge, and on August 17, a Texas court of appeals blocked implementation of the ordinance pending the resolution of an appeal to determine whether it is preempted by state law and thus invalid.

The Bottom Line for Employers

The Austin and San Antonio ordinances are part of a much bigger trend in which paid sick leave requirements have been implemented by dozens of localities, some states, and the federal government itself (with respect to federal contractors).  This has led to a patchwork of laws that are becoming increasingly difficult for employers to track and comply with.  Federal paid sick leave legislation that would override state and local laws has been proposed in Congress, but so far the proposed bills have gained little traction.

In the meantime, employers with operations in San Antonio, Austin, and other major metropolitan areas around the country would be wise to continue to monitor developments and to consider whether to implement different paid sick leave policies by jurisdiction, or a single policy that complies with the most stringent of the applicable laws—and hope that a more stringent applicable law is not passed somewhere else in the near future.  An employer’s decision should be influenced by factors such as its risk tolerance, ability to stay on top of developments, employee morale, and the degree to which it is able to administer different policies.

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