New Congress and Legislature, New Proposed Employment Laws

It’s still early, but members of Congress and the Texas legislature have proposed a few laws that have a better chance of passing than others. Here I discuss four proposed laws, one federal and three from Texas. They have gotten attention, and have a reasonable chance of being passed, because the federal one was introduced by a Republican Senator in the Republican-controlled Senate, and the three Texas ones were introduced by Republicans, who control both Texas houses.  The proposed federal law suggests a trend toward greater scrutiny of noncompete agreements at the federal level.  The state laws reflect a trend at the state level of requiring increased compliance from employers with employment eligibility verification laws, while limiting the ability of cities to regulate employers within their borders.

Federal law

Freedom to Compete Act. Senate Bill 124, sponsored by Senator Marco Rubio, would amend the Fair Labor Standards Act to void any non-compete agreements (including retroactively) other than for employees who fall into the FLSA’s white-collar exemptions (which exempt executive, administrative, learned professional, creative professional, outside sales, and computer employees from the statute’s overtime pay requirements).

The proposed law’s goal is to prevent non-compete agreements from preventing lower-level workers from changing jobs. This law passing would have serious consequences for employers. As many employers have experienced first-hand, non-compete lawsuits often begin with temporary restraining orders and preliminary injunctions, which—combined with the time restrictions in non-compete agreements—lead to expedited consideration. This law would inject FLSA exemption decisions into these fast-tracked cases, with decisions on this complicated area of federal law being made by state courts less familiar with FLSA principles and precedent.

This could lead state courts to decide whether positions are FLSA-exempt or not, outside the context of a squarely presented FLSA exemption dispute, and with serious consequences for pay practices and future FLSA lawsuits against the employer.

Texas laws

Requiring Texas state contractors to use E-Verify. Senate Bill 197 would require employers to use E-Verify to compete for Texas state agency contracts. Employers would have to certify that they participate in E-Verify, and if that certification is inaccurate, then the employer could be barred from state contracts. Even more concerning, if the certification that the employer uses E-Verify becomes inaccurate, the employer could be barred. This raises the danger of an employer who attempts but fails to comply with E-Verify being barred based on their certification being “inaccurate.” E-Verify is notoriously difficult to comply with, and expanding its use without addressing these difficulties could create significant burdens for covered employers.

Prohibiting Cities from Requiring that Employers Provide Paid Sick Leave. House Bill 222 would forbid any municipality’s governing body from requiring an employer to provide paid sick leave to an employee. This would eliminate the paid sick leave ordinances in Austin and San Antonio (with the Austin one already being challenged in court).

Prohibiting Cities from Requiring that Employers Provide Other Benefits. Senate Bill 762 would not only prohibit cities from requiring paid sick leave—it would also prohibit cities from requiring employers to provide paid holiday, vacation, or personal leave. And it would go even further, prohibiting cities from requiring employers to provide health, disability, retirement, profit-sharing, death, or group accidental death and dismemberment benefits.

 

Bottom Line for Employers: Several already-proposed laws could significantly impact employers when it comes to overtime exemptions, noncompete agreements, immigration compliance, and city-specific regulations on wages and benefits. Whether all of these proposed laws pass or not, they are a good reminder for employers to seek out legal advice and to review and update their policies to reduce risk and ensure compliance with the law.

 

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The Return of Entrepreneurial Opportunity as a Hallmark of Independent Contractors

Recently the National Labor Relations Board (“NLRB”) reversed a 2014 NLRB decision that has major implications for distinguishing between independent contractors and employees for National Labor Relations Act purposes.  This question impacts whether particular workers are entitled to the protections of the Act, such as the right to unionize and to engage in other types of concerted activity regarding the workplace and conditions of employment.

For more than 40 years, the NLRB distinguished between employees and independent contractors using a common law agency test comprised of ten factors. See NLRB v. United Ins. Co. of Am., 390 U.S. 254, 256 (1968).  These factors include, for example, the required skill for the work, who supplies the tools, the method payment, and the intent of the parties. Bound up in the relevant factors are the countervailing principles of employer control and the worker’s entrepreneurial opportunity for gain or loss.

The focus of the test largely shifted in the NLRB’s FedEx Home Delivery, 361 NLRB 610 (2014) decision. In FedEx, the NLRB stated that “entrepreneurial opportunity represents one aspect of a relevant factor that asks whether the evidence tends to show that the putative contractor is, in fact, rendering services as part of an independent business.” Id. at 620. Thus entrepreneurial opportunity was quickly relegated from an overarching principle to but one aspect of one factor out of ten. Further complicating matters, the D.C. Circuit, which has jurisdiction over all NLRB appeals, rejected the NLRB’s new standard in the FedEx appeal, yet the NLRB continued to use the FedEx standard. See, e.g., Minnesota Timberwolves Basketball, LP, 365 NLRB No. 124, slip op. at 1 (Aug. 18, 2017) (utilizing NLRB’s FedEx standard).

This confusion was addressed when the NLRB reversed course in the recent case of SuperShuttle DFW, Inc., No. 16-RC-010963 (Jan. 25, 2019), restoring entrepreneurial opportunity as the principle that lies on the other end of the spectrum from an employer’s control of the work. Now the factors relevant to distinguishing employees from independent contractors under the National Labor Relations Act once again include: 1) the employer’s extent of control over the work; 2) the distinctness of the worker’s occupation or business; 3) whether the work is typically done at the employer’s direction or without supervision; 4) the requisite skill necessary to perform the work; 5) whether the worker or employer supplies the tools; 6) the length of time the worker is engaged; 7) whether the pay is per job or per time period; 8) whether the work is part of the employer’s regular business; 9) the parties belief regarding their status as master and servant; and 10) whether the employer is in business. See Restatement (Second) of Agency § 220 (1958).

Although the crux of the decision turned on the SuperShuttle drivers’ ability to set their own schedules (thus demonstrating entrepreneurial opportunity), the impact of the SuperShuttle decision reaches far beyond ride-sharing services. This decision restores the prominence of entrepreneurial opportunity to the equation, meaning factors such as a worker providing his or her own tools, or performing a distinct service, are more likely to result in a finding that the worker is an independent contractor under the NLRA. Employers may also refer again to pre-2014 precedent to understand how the NLRB is likely to decide as to any given fact pattern, as well as D.C. Circuit law which now accords with the NLRB approach.

The Bottom Line for Employers

The SuperShuttle decision promotes uniformity in the application of the test for determining which workers are independent contractors under the NLRA.  It also makes it easier for employers to show that a particular worker is an independent contractor, and thus not entitled to the protections of the statute.

Note, though, that while SuperShuttle offers helpful guidance with respect to classifying workers as independent contractors for NLRA purposes, it does not affect workers’ classifications under the FLSA or other labor laws, and employers should consult counsel to determine the applicable test for non-NLRA contexts.

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Five Tips for More Effective Offer Letters

Most seasoned HR professionals and employment lawyers give little thought to offer letters. This isn’t because they’re not important; it’s because the organizations with which we work have developed forms designed to standardize the recruitment process and to minimize the administrative burden associated with onboarding a new hire. While these are worthy objectives, it’s key to keep in mind that even an employer’s most basic form employment documents, like offer letters, may give rise to trouble when they are not reviewed and refreshed on a periodic basis.

Here are five advanced-level tips for employment-law professionals seeking to ensure that offers letters are as effective as they can be:

  1. Include an at-will employment disclaimer, and avoid other promises that may be construed as creating a contract. All of us know that we should state directly in our offer letters that employment is at-will and may be terminated by either the employer or the employee at any time, for any reason, with or without notice. Even so, I still encounter in my practice a surprising number of offer letters that omit this disclaimer, or that otherwise describe the concept of at-will employment in muddy, confusing terms. More nuanced, though, is the fact that an at-will employment disclaimer, even an indisputably clear one, does not foreclose other language in an offer letter from being construed as a contract. I often spot this issue when reviewing bonus-related language in offer letters. Employers should be aware that what seems like efficient shorthand—e.g., “Employee will be eligible for an annual bonus with a target of 15% of base salary”—typically is not adequately descriptive to convey important terms and conditions. Does being “eligible” for a bonus mean that it’s non-discretionary? And is a bonus “target” a guaranteed amount, or are there criteria that are used to determine whether the full “target” amount will be paid?
  2. Describe compensation terms carefully, and with wage-and-hour compliance in mind. An effective offer letter states clearly the manner in which an employee will be paid (e.g., hourly, salary) and whether the employee is entitled to overtime pay. I sometimes encounter letters that state that an employee will be classified as “non-exempt” or “exempt” without further description. There’s nothing legally wrong with this approach, but since much of an offer letter’s value is derived from the fact that it clearly explains to a candidate the key terms and conditions of employment, it makes sense for an employer to explain in its letters more about what “non-exempt” or “exempt” status means (e.g., “You will be entitled to overtime pay of 1.5 times your regular rate for all hours that you work in excess of 40 in a workweek.”). For exempt employees, the best practice is to express salary consistent with the Fair Labor Standards Act—on a weekly basis (e.g., “Employee’s base salary shall be $2,500 per week, which is $130,000 on an annualized basis.”), eliminating the possibility of an employee’s asserting that salary expressed only as an annual sum implies a contract for one year of employment. Wage-and-hour savvy employers also state in offer letters for exempt employees that base salary is intended to compensate the employee for all hours worked, limiting such employees’ ability to later assert in connection with a wage-and-hour claim that salary was intended to cover only a set number of hours (e.g., 40 per week).
  3. Require the employee to acknowledge that she does not have any contractual obligations to any prior employer. Numerous recent surveys of employers demonstrate that the use of non-compete agreements (including agreements that contain post-employment non-disclosure and non-solicitation covenants) is on the rise. These agreements are now being used in industries in which they were previously unheard of, and employers generally are rolling such agreements out more expansively, including to non-executive and non-managerial employees. I have written before about the virtues of investigating, before an employee is hired, whether the employee is party to a non-compete agreement—most significantly, avoiding the surprise and disruption that comes from being notified of the existence of such agreement by phone call on a Friday afternoon when the former employer’s lawyer is waiting at the courthouse to have her application for temporary restraining order heard. To this end, an offer letter is a perfect place to have a candidate to confirm in writing, before employment has commenced, that she is not party to any agreement with a former employer that purports to impose post-employment obligations. The letter should state that, if such agreement exists and has not previously been disclosed, the offer is contingent on the employer’s review and consideration of the agreement in issue. It also is prudent to memorialize in an offer letter instructions about the candidate’s use of other employers’ confidential information during employment—i.e., “Employee is not permitted to bring any former employer’s confidential information (including electronically stored information) onto Company premises or to transfer such information onto any Company computer or information system. Employee is not permitted to use or disclose any former employer’s confidential information in connection with Employee’s employment with the Company.”
  4. Remember that less is often more when describing employment policies and benefits. There is danger in treating an offer letter as a compressed digest of all applicable employment policies and benefits. The trouble with this approach is that it creates the opportunity for ambiguity, especially when the way policies and benefits are described in an offer letter appear to conflict with employee handbooks and benefit plans. This ambiguity can give rise to legal trouble: Which document controls—the offer letter or the formal policy or plan? Some of this trouble can be controlled by stating clearly in an offer letter that, in the event of any conflict between the letter and a policy or plan, the policy or plan will control. But a more effective way to eliminate ambiguity is to avoid creating it in the first place. In most cases, it is adequate to state in an offer letter that an employee’s employment will be subject to all company policies and procedures. This puts the employee on notice that she will be required to comply with such policies and procedures without the necessity of having to summarize the policies and procedures in the offer letter. The same goes for benefits—it is often adequate to state in an offer letter that an employee will be eligible to participate, subject to plan eligibility requirements, in all employee benefit programs offered by the company without having to summarize such programs and, in some cases, without having to detail premiums or how premiums will be split between the employee and the employer.
  5. Clearly identify any contingencies on which the offer is based. Every offer of employment issued in the United States is, as required by law, contingent on the employee’s providing proof of her authorization to work in the United States. Many offers are made subject to other contingencies: satisfactory clearance of a background check, satisfactory completion of a pre-employment drug and alcohol screen, and, in some cases, completion of a pre-employment medical examination. An effective offer letter identifies these and any other applicable contingencies directly. And though they may not qualify as contingencies in the strict legal sense, it is most effective to identify in an offer letter any agreements that a newly hired employee must sign as a condition of continued employment. If, for example, your organization will not allow continued employment of any employee who refuses to enter an agreement to resolve all employment-related dispute through binding arbitration, it is wise to state this condition of employment in the organization’s offer letter. The same logic applies to standard confidentiality and non-compete agreements. And in most cases, the best practice is to provide such agreements to a candidate to review and consider at the time the offer letter is issued. An added benefit to this approach is that it helps to curtail sometimes troublesome hiccups in the hiring process (e.g., on her first day of employment a new hire asserts that she will not sign a standard non-compete agreement and that she was never told during recruitment that she would be required to sign one), and it limits fairness-based arguments that former employees sometimes try to advance to challenge the validity of such agreements (e.g., arbitration agreement is an unenforceable contract of adhesion that was sprung on the employee after employment commenced, and only after her negotiating leverage had evaporated).
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The Use of Third-Party Background Checks – New Forms And Old Traps

The use of third-party background check companies to conduct background checks as part of the hiring process continues to be popular with many private employers. The procurement and use of background checks, however, is fraught with new changes and old traps for the unwary. Below are five things every employer who uses third party background check companies should consider in keeping their background check processes legal and compliant:

  1. Keep Your Forms Up To Date: Beginning September 21, 2018, employers are required to use a revised version of the “Summary of Your Rights Under the Fair Credit Reporting Act” form as part of the pre-adverse action notification process. The revised form incorporates new language informing consumers of their rights to a security freeze. The failure to use the revised form is precisely the type of unintentional conduct that has generated numerous lawsuits under the Fair Credit Reporting Act (“FCRA”) in the past. A link to the new form is here.
  2. Don’t Forget About Pre-Adverse Action Notices: The law still requires notice (actually two notices) to applicants and employees before taking an adverse job action if the results of the third-party background check (including a criminal conviction check or a motor vehicle report) are used, in whole or in part, to make the adverse decision. Employers should have standard adverse action notice letters as part of their compliance tools.
  3. Scrutinize Your FCRA Disclosure Form: The disclosure required by the FCRA before obtaining consent to procure a background check report from a third-party must be in a separate document that includes nothing except the disclosure itself. This means the disclosure should not be part of an employment application or other hiring document. There have been a number of lawsuits filed over the failure to satisfy this requirement, including a large class action against Wal-Mart that was certified in January 2019 over this very issue.
  4. Consider How Background Checks Will be Used: Employers do themselves a great service if they consider in advance how the results of a background check will be used and what policies and procedures should be put in place to ensure that they are used in a lawful manner. For example, the EEOC recently reached a conciliation agreement with a nationwide retailer to resolve claims of race discrimination brought by an African-American applicant who had an offer of employment rescinded because of a background check. As part of that agreement, the employer agreed to change its policies: (1) to remove any blanket exclusion for criminal convictions, (2) provide an individualized assessment for all applicants, and (3) postpone questions about criminal convictions until later in the hiring process. The EEOC also required the employer’s human resources and other staff to participate in mandatory implicit bias training. A copy of the press release announcing the conciliation agreement is here.
  5. Be Aware of State Laws: State laws may impose different and stricter requirements on the procurement and use of background checks, and criminal background checks in particular. For example, several Texas cities have passed ban the box laws. In Oklahoma, employees must be given written notice before obtaining a background report and the notice itself must contain a box that the employee may check to receive a copy of the report. The latter is not required by the FCRA unless an adverse action is taken on the basis of the report. And in New Mexico, convictions can appear on a background report only if they occurred during the last seven (7) years. There is no comparable limit for convictions under the FCRA.

The Bottom Line For Employers

Background checks continue to generate both confusion and litigation. Employers using third party companies to conduct background checks should continue to be vigilant about non-compliance and stay informed on new forms and new state laws. We also encourage employers to give advance consideration to how the results of a background check will be used and to be mindful of both the procedures to be followed and the legal risks to be considered if an adverse action is taken in whole or in part on the results of a background check.

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Can the FLSA’s White-Collar Exemptions Apply to Employees Paid on a Daily, Hourly, or Shift Basis?

To qualify for the “white collar” exemptions under the FLSA, an employee must be paid on a “salary basis” and meet a job duties test.  To meet the salary basis test, the majority of exempt employees are paid a guaranteed weekly salary that does not vary depending on the number of hours they work.  However, employees paid on a daily, shift, or even hourly basis can also meet the salary basis test if they are guaranteed at least $455 per week in pay and the amount they actually earn bears a “reasonable relationship” to the guaranteed amount.  A “reasonable relationship” exists when the guarantee is “roughly equivalent to the employee’s usual earnings . . . for the employee’s normal scheduled workweek.”  29 C.F.R. § 541.604(b).

The consequence of failing the salary basis test as to employees who the employer thought were exempt can be severe, as it can result in up to three years of unpaid overtime, liquidated damages, and attorneys’ fees.  Much litigation has occurred over the years regarding what constitutes a “reasonable relationship” between usual earnings and a guarantee, not only as to the ratio between actual pay and the guarantee, but also as to the proper time period for measuring the employee’s “usual earnings.”

The Department of Labor has resumed its practice of issuing opinion letters, and a recent letter explains the DOL’s position on what constitutes a “reasonable relationship.”  According to the letter, a “reasonable relationship” between actual earnings and a guarantee is a ratio of 1.5-1 or less.  By contrast, according to the DOL, a ratio of 1.8-1 “materially” exceeds a 1.5-1 ratio and thus is not reasonable.  The DOL does not specify what, if any, factual circumstances could exist that would permit a ratio between 1.5-1 and 1.8-1.

In terms of an appropriate time period for measuring “usual” weekly earnings in a “normal scheduled workweek,” the opinion letter endorses averaging weekly earnings over a calendar year.  According to the DOL, such an approach “should ordinarily provide ample representations in variations in an employee’s earnings and hours.”  The letter leaves open the question of what other time periods might suffice, and further notes that the usual-earnings inquiry is employee-specific and so calculating an entire group of employees’ average earnings may not reflect accurate earnings for a particular employee within the group.

The letter is here:  https://www.dol.gov/whd/opinion/FLSA/2018/2018_11_08_25_FLSA.pdf

The Bottom Line for Employers

Employers desiring to classify employees paid on a daily, shift, or hourly basis as exempt should keep the following in mind:

  • The employee must be guaranteed at least $455 per week.
  • The DOL’s position is that the employee’s usual weekly earnings should ordinarily not exceed a ratio of 1.5-1 as compared to the guarantee. The employer should carefully consider how it measures the usual weekly earnings.  If it chooses a period other than the calendar year in which to average the employee’s earnings, it should be able to articulate why the chosen time period is likely to generate a more appropriate average than earnings over a calendar year.
  • The employee must still meet one or more of the white-collar exemptions’ job-duties tests.
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When the Government Shuts Down, So Does E-Verify

Government shutdowns seem to be occurring all too frequently.  Although President Trump recently signed a bill to end the most recent government shutdown on January 25, 2019, it is only a short-term bill, which means another shutdown could be looming in the coming weeks.

Government shutdowns cause numerous issues, but one that employers should be aware of is that shutdowns prevent access to E-Verify.  E-Verify, which is overseen by the Department of Homeland Security (DHS), is a web-based system that allows enrolled employers to confirm the eligibility of their employees to work in the United States.  E-Verify helps employers by verifying the identity and employment eligibility of newly hired employees by electronically matching information provided by employees on the Form I-9 against records available to the Social Security Administration (SSA) and DHS.

During the most recent shutdown, some employers were surprised to find the following notice posted on the E-Verify website: “NOTICE: Due to the lapse in federal funding, this website will not be actively managed … E-Verify and E-Verify services are unavailable.”

So how should employers who use E-Verify proceed when there is a government shutdown?

Because E-Verify and its services are unavailable, employers should understand that they will not be able to access their E-Verify accounts to enroll in the program; create a case; view or take action on any case; add, delete or edit accounts; reset passwords; edit company information; terminate accounts; or run reports.  Also, employees will be unable to resolve E-Verify Tentative Nonconfirmations (TNCs).

During the most recent shutdown, DHS issued the following guidance for employers given that E-Verify’s unavailability would have a significant impact on employer operations:

  • The “three-day rule” for creating E-Verify cases is suspended for cases affected by the unavailability of E-Verify.
  • The time period during which employees may resolve TNCs will be extended. The number of days E-Verify is not available will not count toward the days the employee has to begin the process of resolving their TNCs.
  • DHS will provide additional guidance regarding the “three-day rule” and time period to resolve TNCs deadlines once operations resume.
  • Employers may not take adverse action against an employee because the E-Verify case is in an interim case status, including while the employee’s case is in an extended interim case status due to the unavailability of E-Verify.
  • Federal contractors with the Federal Acquisition Regulation (FAR) E-Verify clause should contact their contracting officer to inquire about extending federal contractor deadlines.

Importantly, even though E-Verify is not available during shutdowns, Form I-9 requirements remain unchanged.  In its guidance, DHS advised that the lapse in government appropriations did not affect Form I-9 employment eligibility verification requirements. Even during a shutdown, employers must complete the Form I-9 no later than the third business day after an employee starts work for pay, and comply with all other Form I-9 requirements.

Now that the federal government has reopened, the E-Verify website has a new notice regarding the recent shutdown: “E-Verify has resumed operations. Given that E-Verify was unavailable for over a month, we ask for your patience as we reinstate the service.”  Employers should keep in mind, however, that the bill reopening the government is only a temporary funding measure.  If another shutdown occurs in the next few weeks, employers can expect E-Verify to shut down again, too.

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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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