Paid Sick Leave is Coming to Chicago

E. Jason Tremblay

E. Jason Tremblay

On June 22, 2016, the Chicago City Council passed the Chicago Minimum Wage and Paid Sick Leave Ordinance (the Ordinance). Provided the Ordinance is signed into law by Mayor Rahm Emanuel (which is expected), the Ordinance will take effect on July 1, 2017. As discussed more fully below, the Ordinance will allow Chicago employees to accrue up to 40 hours of paid sick leave every 12 months.

Who is covered by the Ordinance?

Covered Employers

While there are some narrow exceptions (such as employees covered by a collective bargaining agreement), the Ordinance applies to virtually all Chicago employers, no matter their size. It applies to employers who have at least one (1) employee in Chicago and who either (A) maintain a business facility within the City, or (B) are subject to at least one of the City’s numerous licensing requirements. Put another way, a small employer who is not even physically located within Chicago may be covered by the Ordinance provided they have at least one employee working within the City.

Covered Employees

Covered employees include any full-time or part-time employee who works in Chicago at least two hours in any two-week period. To be covered, the employee must also work at least 80 hours for a covered employer in any 120-day period. Notably, time spent traveling in the City that is compensable, such as sales calls and making deliveries, counts towards the hours requirement.

How is paid sick leave earned and handled?

Commencing on July 1, 2017, covered employees will accrue one hour of paid sick leave for every 40 hours worked. Exempt employees are assumed to work 40 hours per week, unless their normal work week is less than 40 hours, in which case the accrual of paid sick leave will be based upon the number of hours the exempt employee regularly works in a work week.

Employers are allowed to limit the amount of paid sick leave an employee may accrue to 40 hours in a 12-month period, although employers are also allowed to offer more than 40 hours of sick leave too. At the end of the applicable 12-month accrual period, the employee is entitled to carry over one-half his or her unused accrued paid sick leave to the following 12-month period, up to a maximum of 20 hours. Moreover, if the employer is subject to the Federal Family and Medical Leave Act (FMLA), an employee may carry over up to an additional 40 hours of his or her accrued sick leave to the following 12-month period (in addition to the 20 hours) but the additional 40 hours must exclusively be used for FMLA-eligible purposes.

In lieu of allowing employees to accrue sick leave as they work (i.e., the accrual method), employers may also satisfy the Ordinance’s requirements by awarding the entire 40 hours of paid sick leave immediately upon the date of eligibility and, thereafter, at the beginning of each subsequent 12-month period. While this may be administratively easier for employers to implement, it “front loads” sick leave at the beginning of the 12-month period, and could provide more paid sick time than required if the employee leaves prior to the expiration of the 12-month period.

When can employees use sick leave?

While employees begin to accrue paid sick leave immediately upon the commencement of employment, the Ordinance does allow employers to prohibit employees from beginning to use such sick leave until 180 days after he or she commences employment. Employers also have the right to obligate employees to use sick time in increments of four hours or less per day.

The Ordinance entitles employees to use paid sick leave for the following reasons: (1) the employee, or the employee’s family member, is ill, injured, or is receiving medical care, treatment, diagnosis or preventative medical care; (2) the employee, or the employee’s family member, is the victim of domestic violence or a sex offense; or (3) a public official closes the employee’s place of business because of a public health emergency, or the employee needs to care for a child after a public official has closed the child’s school or place of care because of a public health emergency. The Ordinance broadly defines “family member” to include step- and foster relationships, legal guardians and domestic partnerships.

An employer cannot require an employee to find a replacement worker to cover the hours during which he or she is using paid sick leave. Such provisions, which tend to be prevalent, especially with smaller employers, are unenforceable under the Ordinance.

How do employees request sick leave?

There are also various leave request and certification aspects of the Ordinance. For example, when the employee’s need for paid sick leave is reasonably foreseeable, an employer may require the employee to provide up to seven (7) days advance notice of such paid sick leave. If the paid sick leave is not reasonably foreseeable, an employer may require the employee provide notice as soon as practicable. Not surprisingly, an employee is not required to provide prior paid sick leave notice if he or she cannot provide notice because he or she is unconscious or otherwise incapacitated.

An employer may also require a medical certification to justify the sick leave request, but only when the employee is absent for more than three (3) consecutive work days. Other notice and certification requirements apply in circumstances where the employee or the employee’s family member is the victim of domestic violence or a sex offense.

Do employers have to pay out unused, accrued paid sick leave upon termination?

Unless otherwise provided for in a collective bargaining agreement, unused, paid sick leave is not required to be paid out by the employer upon the termination or separation of employment.

What are the Ordinance’s notice requirements?

The Ordinance requires employers to post a written notice advising employees of the right to paid sick leave. As with all other labor law notices, the notice must be in a conspicuous place at each of the employer’s facilities or locations located in Chicago. Moreover, all covered employers must also provide employees with notice of their rights to paid sick leave under the Ordinance with their first paycheck. Such notice will be prepared in the near future by the Commissioner for Chicago’s Department of Business Affairs and Consumer Protection.

What remedies exist for employees under the Ordinance?

As with most employment-related statutes and ordinances, employers are prohibited from discriminating or retaliating against employees for exercising, or attempting in good faith to exercise, their rights protected under the Ordinance. An employer who violates the Ordinance, will be subject to a civil action by the affected employee. In such lawsuit, the employee will be entitled to recover damages equal to triple the full amount of unpaid sick leave lost or denied because of the employer’s violation, the interest on that amount, costs, and attorneys’ fees.

What should employers do to prepare?

This Ordinance is significant for all Chicago employers, small and large. While there is some time to prepare for the effective date of this Ordinance, Chicago employers should consider and implement some of the following actions:

  • Evaluate whether an existing paid time off (PTO) policy will satisfy the requirements of the Ordinance.
  • Determine whether to use an accrual or lump-sum method of providing paid sick leave.
  • Review and revise, if necessary, existing paid sick leave time and/or paid time off policies and procedures to meet the Ordinance’s requirements.
  • Audit time-keeping, payroll and benefit systems to insure proper tracking of paid sick leave usage, accrual, caps, and carry over limits.
  • Insure that the proper written notices will be provided, including the applicable poster at each worksite located within Chicago, as well as the separate employee notice provided to each employee in their first paycheck.

As always, should you have any questions, please contact E. Jason Tremblay at 312-876-6676 or your designated Arnstein & Lehr LLP attorney.

Defend Trade Secrets Act signed into law

Arnstein & Lehr Attorney Joseph Kuo

Joseph Kuo

On May 11, 2016, the Defend Trade Secrets Act (DTSA) of 2016 was signed into law. The DTSA was unanimously passed in the Senate and ratified in the House by a vote of 410-2. The DTSA became immediately effective for all trade secret misappropriations occurring after the date of enactment.

The DTSA is an addition to the Economic Espionage Act (18 U.S.C. §1831 et seq.), the 1996 federal criminal trade secrets statute. Prior to enactment of the DTSA, only the government could prosecute trade secret misappropriation at the federal level. Private civil actions, on the other hand, could only be brought in state court, likely under a version of the Uniform Trade Secrets Acts, which has been adopted by 48 states.

The DTSA now enables private parties to file civil actions for trade secret misappropriation in federal district court. In large part, the DTSA mirrors the Uniform Trade Secrets Act.

What is a Trade Secret?

A “trade secret” is defined in the Act as “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the another person who can obtain economic value from the disclosure or use of the information.”

In other words, there are two key components to whether something is a “trade secret”: (1) it is something that a company has taken steps to keep secret; and (2) the company derives value from the secret. Classic examples are the formulas for Coca-Cola and KFC Original Recipe.

What does the DTSA provide?

An owner of a trade secret that has been misappropriated may bring a civil action if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce. Therefore, in order to proceed under the DTSA, the trade secret must be “related to a product or service used in, or intended for use in, interstate or foreign commerce.” In some circumstances, it may be that the product or service does not meet this requirement, and can only be brought in state court.

There is also a statute of limitations of three years from the discovery of the misappropriation or from the time it should have been discovered by the exercise of reasonable diligence.

Important provisions of the DTSA:

Ex Parte Seizures:

  • An ex parte (without notice) civil seizure order may be sought in “extraordinary situations” with respect to “property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” Potential examples of such property may include computers, network hardware and digital storage media that were or could still be used by a defendant.
  • The requirements for an ex parte seizure order are similar to those for a temporary restraining order, i.e., such a seizure order may only be used where other equitable relief would be inadequate because it would be avoided or evaded by a defendant. A seizure order can only be issued upon proof of “immediate and irreparable injury” with equities balanced in favor of the plaintiff. The plaintiff must also establish a likelihood of success on the merits of the misappropriation claim.
  • To balance the potential harm to the defendant, the statute includes a number of procedural safeguards, including: (i) the seizure order must “provide for the narrowest seizure of property necessary” and must be executed by law enforcement officials (although technical experts may accompany); (ii) a bond sufficient to cover damages should the seizure turn out to be wrongful or excessive must be posted; (iii) the court must provide specific guidance to the officials executing the seizure that “clearly delineates” the scope of their authority and details how the seizure must be conducted; and (4) the hearing date related to any seizure must also take place within seven days.
  • If faced with an ex parte seizure order, the business team and/or technical personnel should consult counsel immediately and take great care not to interfere with the execution of a seizure order. Developing a procedure if faced with an ex parte seizure order when law enforcement officials are at the company is too late. One should proactively develop internal and external response plans for properly handling the receipt of a seizure order.

Injunctive Relief against a former employee:

  • An injunction may be granted to prevent any actual or threatened misappropriation. A concern with this is that it may be used by employers to prevent a departing employee from taking a job with a competitor.
  • Therefore, key limitations to the injunctive relief provision of the DTSA include that the injunction (1) cannot prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows; and (2) cannot otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.
  • It is not stated what the “applicable State law” is. For example, is it the law of the state in which the action is brought, or is it the law of the state where the former employee is going?
  • In any event, this is a departure from the Uniform Trade Secrets Act, which permitted injunctions against “threatened misappropriation” without the aforementioned restrictions, because some feared that the “inevitable disclosure doctrine,” which has been expressly rejected in some states, might be used by federal judges to block an employee from taking a new job.

Damages and Attorney’s Fees:

  • Damages for trade secret misappropriation are available in the form of actual losses to the plaintiff, and the value of any separate unjust enrichment on the part of a defendant. Alternatively, damages calculated based on a reasonable royalty for the unauthorized disclosure or use of the trade secret may be awarded.
  • Enhanced damages of up to two-times damages otherwise awarded may be available for willful and malicious trade secret misappropriation.
  • Legal fees may be awarded to a prevailing party, either plaintiff or defendant, where a claim for misappropriation is made in bad faith, a motion for injunctive relief is opposed in bad faith, or the trade secret was “willfully and maliciously misappropriated.”

Whistleblower Protection:

  • There is whistleblower immunity from divulging a trade secret when a person discloses a trade secret to any federal, state or local government official or agency, or to any attorney, solely for the purpose of reporting or investigating a suspected violation of law, or when the disclosure is part of litigation and is filed under seal.
  • There is also whistleblower immunity when someone files an action based on employer retaliation for reporting a suspected violation of law. In this case, one may also disclose the trade secret to that person’s attorney and use it in court provided such filings are made under seal.

Employer Requirements:

  • Companies should review and, if necessary, update their employment and confidentiality agreements and handbooks.
  • A company is only eligible to recover double damages and attorneys’ fees in trade secret litigation if it provides notice to an employee of the whistleblower and confidentiality provisions. The notice requirement may also be met by the employer providing the employee with a cross-reference to a policy document that sets forth the employer’s reporting policy for a suspected violation of law.
  • The term “employee” is defined broadly to include both traditional employees and independent contractors.
  • While the failure to include notice of whistleblower immunity bars the employer from seeking exemplary damages and legal fees in an action against an employee that was not given notice, the DTSA does not otherwise penalize the employer.
  • Since many companies use a variety of agreements to protect confidential information, including employment agreements, standalone confidentiality and inventions agreements, and separation agreements as well as handbooks and policy statements, an immediate review of these documents for compliance should be performed.

DOL Announces Final FLSA Overtime Regulations

E. Jason Tremblay

E. Jason Tremblay

On Wednesday, May 18, 2016, the U.S. Department of Labor’s (DOL) Wage and Hour Division released its final updated FLSA overtime regulations. While some of the changes were expected, there are a number of surprises.

First, the new salary threshold for exempt executive, administrative and professional employees will be $47,476.00 per year (or $913.00 per week). That is more than double the current $455.00 per week but less than the original proposal, which would have boosted the minimum annual salary threshold to over $50,000.00 per year.

Second, the salary basis test has also been amended to clarify that employers may use nondiscretionary bonuses and incentive payments (such as commissions) to satisfy up to 10% of the new salary threshold. This may allow certain employees who do not have an annual salary of at least $47,476.00 to still satisfy one of the overtime exemptions.

Third, in another deviation from the initially proposed regulations, the final regulations require an update of the salary threshold every three years, as opposed to every year, as originally proposed by the DOL.

Fourth, the final regulations also increase the “highly compensated employee” (HCE) exemption to an annual salary threshold of $134,004.00, an upward adjustment from what was anticipated to be an annual threshold of $122,148.00.

Finally, these new regulations will take effect on December 1, 2016, which will provide employers a longer period of time to comply with them, as prior indications were that the final regulations would take effect in July 2016.

In light of the foregoing, all employers must immediately analyze whether current “exempt” employees will satisfy the new FLSA regulations and, if not, develop FLSA-compliant pay plans for employees who have previously been treated as exempt but who will now not be exempt under the new overtime regulations.

Should you have any questions regarding the final FLSA regulations, or should you need assistance complying with the regulations, please do not hesitate to contact E. Jason Tremblay at 312-876-6676 or your designated Arnstein & Lehr LLP attorney.

Please click here for a print-friendly PDF of this post.

Chicago Human Rights Ordinance Amended to Include Military Status

E. Jason Tremblay

E. Jason Tremblay

Chicago has just amended its Human Rights Ordinance to address discrimination targeting current and former members of the military. Effective March 16, 2016, the City of Chicago will prohibit employment discrimination on the basis of military status. An applicant or employee will be able to claim military status protection if he or she is a veteran, on active duty or in the reserves of any branch of the armed forces. These protections are in addition to the existing protections for applicants and employees based on their military discharge status. While these changes will not obligate Chicago employers to give preferential treatment to members of the military, additional care should be taken with respect to any employment decisions made regarding members of the military. Finally, the amendments to the Ordinance do not provide any re-employment right obligations upon Chicago employers, but employers should still be cognizant of any federal and state laws which impose reemployment obligations upon Illinois employers.

If you have any questions regarding the amendments to the Chicago Human Rights Ordinance, please do not hesitate to contact E. Jason Tremblay at 312-876-6676 or your designated Arnstein & Lehr LLP attorney.

DOL Announces That the Exemption Regulations Will Be Published in July 2016

E. Jason Tremblay

E. Jason Tremblay

On February 17, 2016, Patricia Smith, U.S. Department of Labor solicitor, announced that the U.S. Department of Labor Final Rule regarding the Fair Labor Standards Act White Collar Exemption Regulations will be published sometime in July of this year. She added that such Regulations will take effect 60 days after their publication. Accordingly, we anticipate that such Regulations will be effective on employers no later than September 2016. As such, if not done so already, employers should accelerate their efforts to evaluate and confirm that they will be in compliance with the updated FLSA Regulations once they become final. For a summary of the updated Regulations, please click here to view my earlier blog posting.

If you need assistance preparing for the updated FLSA White Collar Exemption Regulations, please do not hesitate to contact E. Jason Tremblay at 312-876-6676 or your designated Arnstein & Lehr LLP attorney.

U.S. Department of Labor Weighs in on “Joint Employer” Standard

E. Jason Tremblay

E. Jason Tremblay

On January 20, 2016, the Wage and Hour Division of the U.S. Department of Labor (DOL) issued an Administrative Interpretation setting forth guidance for when businesses will be deemed “joint employers” under the Fair Labor Standards Act. A copy of DOL’s Administrative Interpretation No. 2016-1 (the “Interpretation”) is attached here for your reference.

The Interpretation makes abundantly clear to businesses that share employees or use contractors or temporary staffing agencies that they may be deemed “joint employers” and become legally responsible for any wage and hour violations committed by the other joint business. The Interpretation goes on to explain two types of joint employment scenarios – “horizontal” joint employment and “vertical” joint employment.

Horizontal Joint Employment

Horizontal joint employment, according to the DOL, refers to situations where two or more entities jointly use the same employees. This would occur, for example, if employees work for two or more businesses that have common ownership and joint control over the employees. The factors considered by the DOL as to whether two entities meet the horizontal joint employment test include, but are not limited to: (1) common owners or managers, (2) coordination of hours, scheduling and business operations, (3) shared control over hiring, firing and other personnel decisions, (4) joint supervision of employees, and (5) use of similar systems, such as the same payroll system. Therefore, by way of illustration, if an employee works 35 hours at restaurant A and 15 hours at restaurant B (and both restaurants are commonly owned), the employee can jointly sue both restaurant A and restaurant B for 10 hours of overtime in the event the employee is not properly paid overtime wages.

Vertical Joint Employment

Vertical joint employment exists when a worker has an employment relationship with one employer, such as a staffing agency or subcontractor, and the facts demonstrate that the worker is “economically dependent” by another, separate entity. An example cited by the DOL in the Interpretation of a vertical joint employment relationship involves a hotel that retains a staffing agency to provide daily custodial services, both of which are directing the staffing agency workers in some fashion. The facts considered by the DOL in evaluating whether entities meet the vertical joint employment test include, but are not limited to: (1) the degree of direction, control and supervision of the work performed, (2) the permanency and duration of the relationship, (3) the repetitive and rote nature of the work, (4) whether the service provided is an integral function, and (5) the location of where the work is performed.

The DOL is the latest of a number of federal agencies issuing guidance on the issue of joint employer liability. Just recently, in 2015, the National Labor Relations Board ruled in Browning-Ferris Industries, 2015 NLRB LEXIS 672 (2015) (click here for link to my prior blog post on this case) that, under the National Labor Relations Act, a company and its contractor can be deemed to be joint employers even when the company did not exercise direct control over its contractors. Similarly, the U.S. Occupational Health and Safety Administration has invoked joint employer arguments to assert safety violations against franchisors and their franchisees. Moreover, almost every day, more FLSA lawsuits are filed against purported joint employers – such as franchisors and franchisees – under joint employer theories seeking to impose liability for purported federal and state wage and hour violations.

While the DOL asserts that its Interpretation does not constitute a policy change, it is clear that the Interpretation, and the DOL’s view on the joint employer standard, will put many companies in the crosshairs of the DOL and at greater risk for minimum wage and overtime violations under the FLSA, especially those companies that rely on staffing firms and contractors.

For further information regarding the DOL Interpretation, or to evaluate whether or not your company may constitute a joint employer, please contact E. Jason Tremblay at 312-876-6676 or your designated Arnstein & Lehr LLP attorney.

NLRB’s New Joint Employment Standard

E. Jason Tremblay

Are You A Joint Employer?

Browning-Ferris Industries of California Case and Its Potential Impact

NLRB's New Joint Employment Standard

By now, most employers are aware of the recent and significant decision from the National Labor Relations Board in Browning-Ferris Industries of California, Inc., 2015 NLRB LEXIS 672 (2015)(“Browning-Ferris”). In that case, the NLRB expanded who qualifies as a “joint employer” and effectively called into question many existing business models and relationships. While currently limited to cases brought before the NLRB, time will tell whether this decision will be adopted by other jurisdictions and agencies throughout the country.

Traditionally, an entity was only determined to be a “joint employer” with another entity if it shared and exercised the right to control or determine essential conditions of employment of the employees of the other entity. By way of example, if one entity controlled or had a direct role in the hiring, firing, supervision or termination of employees of another entity, they would be deemed to be joint employers under common law. Put another way, the emphasis in determining joint employer status has traditionally been the exercise of direct, actual and substantial control over a separate entities’ employees.

Now, it is clear from the decision in Browning-Ferris that in ascertaining whether an entity possesses “sufficient control” over another company’s employees to qualify as a joint employer, the NLRB will not only look to whether an entity exercises control over the terms and conditions of employment, but also whether such control is indirect (e.g., through an intermediary) or whether it has reserved the authority to do so. In other words, a company that has either “indirect control” or the “unexercised potential to control” another entity’s employees will be deemed a joint employer.

The Browning-Ferris decision impacts just about every industry. It particularly impacts staffing agencies who temporarily lend employees to companies. The decision also significantly impacts the franchisor-franchisee business model where, under some franchise agreements and in order to ensure quality control of the franchise’s brand, the franchisor retains rights to control certain terms of employment of its franchisees. Already, cases have been filed against McDonald’s arguing that McDonald’s (as franchisor) is liable for the conduct of some of its franchisees. Similarly, contractors and subcontractors have to be aware of the Browning-Ferris decision as any unexercised right to control the other entities’ employees would very likely lead to the conclusion by the NLRB that both are joint employers.

Currently, the Browning-Ferris decision is limited to cases before the NLRB. However, employers should be aware that if courts and other federal and state agencies, including the U.S. Department of Labor, begin adopting the NLRB’s new joint employer standard, employers will inevitably face expanded coverage and increased liability. And, considering the fact that, just months ago, the DOL issued new administrative guidance confirming its position that “most workers are employees” for purposes of the Fair Labor Standards Act, it would not be surprising if the DOL adopted the NLRB joint employer test in the near future.

While it is undoubtedly too early to tell the long-term ramifications of the Browning-Ferris decision, a brief review of court cases citing the decision are very limited at this point. One case that did cite Browning-Ferris was Nardi v. ALG Worldwide Logistics and Transport Leasing Contract, Inc., 2015 U.S. Dist. LEXIS 123355, Case No. 13 C 8723, (N.D. Ill. Sept. 16, 2015). Nardi was a Title VII sex discrimination and retaliation case brought against a transportation company and its professional employment organization (PEO). While the PEO provided human resources services (such as payroll and benefits administration) to the transportation company, the PEO did not have any control over the day-to-day tasks and terms of employment of the employees of its client. Accordingly, citing Browning-Ferris and other prior joint employer decisions from the Seventh Circuit, the court granted summary judgment in favor of the defendants, finding that the PEO was not a joint employer with its client. This case should give employers some comfort that courts may not follow the NLRB’s lead in making joint employer determinations.

Though the true impact of Browning-Ferris may not be known for years, businesses, particularly those that have contractual rights to affect terms and conditions of another entities’ employees, should take heed of this case and work with legal counsel to assess the risks of being deemed a joint employer, as well as strategize on measures to mitigate those risks.

Should you have any questions regarding this article, or should you want to evaluate your company’s potential joint employer liability under the new and expanded NLRB definition, please contact E. Jason Tremblay at 312-876-6676 or your designated Arnstein & Lehr LLP attorney.

Restrictive Covenant Update

E. Jason TremblayE. Jason Tremblay

Restrictive Covenant Update: Don’t Forget to Establish Your Legitimate Business Interest!

Let’s consider the following scenario. Executive is hired by an employer and signs a standard restrictive covenant agreement. Executive is later terminated and, thereafter, immediately opens up a competing business, begins to solicit and hire her former co-workers and commences soliciting her former employer’s customers. Normally, you would think this would be a straightforward restrictive covenant case and that the departing executive would be enjoined from engaging in such conduct. However, the Seventh Circuit Court of Appeals in Instant Technology LLC v. DeFazio, Case Nos. 14-2132 and 14-2243 (7th Cir. July 1, 2015) felt otherwise, holding that, while the departing executive violated her restrictive covenant agreement, the covenants failed to protect any legitimate business interests of the employer. As discussed below, this recent case should serve as a stark warning to all Illinois employers to ensure they have evidence to support all the elements of a breach of restrictive covenant claim before filing suit against departed employees.

Instant Technology is a company engaged in the business of placing information technology professionals at companies in need of such workers. DeFazio, who executed a standard restrictive covenant agreement as a condition of her employment, served as a vice president of sales and operations for Instant Technology. After she was terminated, she opened a competing business, solicited away several of her former co-workers, began soliciting candidates with whom she had contact at Instant Technology and began competing with Instant Technology by attempting to place those candidates at clients with whom Instant Technology conducted business. Interestingly, DeFazio did not dispute, and in fact admitted, she had violated her restrictive covenant agreement. However, she denied that the restrictions were enforceable, as Instant Technology did not have a legitimate business interest in need of protection.

At trial, Instant Technology argued that it had three legitimate business interests sufficient to support the restrictions: confidential information, client relationships and workforce stability. However, the trial court disagreed (and the appellate court affirmed) that those were not legitimate interests as they applied to Instant Technology. First, the Court reiterated that there was no confidential information at issue, as DeFazio appeared to have obtained information about the candidates and customers from public sources. Second, the evidence at trial revealed that protecting client relationships was not valid because Instant Technology’s clients were not necessarily loyal to it. In fact, the evidence revealed that many clients who hired Instant Technology also hired between 5-10 other staffing agencies at the same time in order to secure candidates. In short, there were no exclusive or long-term arrangements between Instant Technology and its customers sufficient to establish legally protectable client relationships. Third, Instant Technology’s argument that it had a protectable interest in the stability of its workforce was likewise rejected, since the evidence at trial revealed that over 75% of Instant Technology’s employees had left or been terminated during the course of the litigation.

In sum, this case establishes that it is crucial for employers to fully evaluate and obtain evidence to support that a legitimate business interest exists before filing a lawsuit against a departing employee, even a former employee that is brazen enough to openly poach employees and solicit clients. Otherwise, as Instant Technology learned the hard way, prematurely filing a lawsuit without a protectable interest could prove to be unsuccessful, as well as very costly.

Should you have any questions regarding this case or its impact on your company, please do not hesitate to contact E. Jason Tremblay or your designated Arnstein & Lehr LLP attorney.

Many “Independent Contractors” May Now Be “Employees”

E. Jason Tremblay and Megan P. Toth

E. Jason TremblayArnstein & Lehr Attorney Megan Toth

Many “Independent Contractors” May Now Be “Employees” According to the Department of Labor

On July 15, 2015, the U.S. Department of Labor issued an Administrator’s Interpretation regarding the application of the Fair Labor Standards Act with respect to the increasing misclassification of workers as “independent contractors.” The DOL’s recent interpretation narrows the classification of independent contractors to very limited and specific situations and thus, more workers may now be deemed “employees” and qualify for overtime under the FLSA.

Under the DOL’s new interpretation, a worker’s classification no longer depends almost exclusively on the employer’s exertion of control over the worker, but rather, on whether the worker is “economically dependent” on the employer. Also known as the “economic realities” test, which is already used by most federal courts, the DOL’s new approach for determining whether a worker is an “employee” or “independent contractor,” requires examination of the following factors:

(1) The extent to which the work performed is an integral part of the employer’s business;

(2) The worker’s opportunity for profit or loss depending on his or her managerial skill;

(3) The extent of the relative investments of the employer and the worker;

(4) Whether the work performed requires special skills and initiative;

(5) The permanency of the relationship; and

(6) The degree of control exercised or retained by the employer.

In undertaking the foregoing analysis, the DOL notes, “each factor is examined and analyzed in relation to one another, and no single factor is determinative” and “the ‘control’ factor … should not be given undue weight.”

With the subjective nature of the “economic realities” test and the DOL’s explicitly stated opinion that “most workers are employees” under the FLSA, the DOL will most likely continue its aggressive examination of worker classification throughout the country. And, while this Administrator’s Interpretation is not binding and does not carry the force of law, courts throughout the country will most certainly give deference to the DOL’s Interpretation. Thus, employers who have independent contractors should re-evaluate such designations to ensure they correspond with the factors identified above. Additional, important takeaways from the DOL’s recent interpretation of “independent contractors” include:

  • Use independent contractors sparingly, as any such designation will be highly scrutinized by the DOL; 
  • Review the type and scope of the work needed by the worker, as any worker performing duties that are an integral component of the business will likely be deemed to be an employee;
  • Evaluate the investment the worker makes to do the work needed relative to the employer’s investment in the work. The more an employer invests in the tools and equipment for the worker (relative to what the worker invests) the more likely the worker is to be deemed an employee;
  • Be careful about the longevity of the relationship between the employer and the worker. The longer the relationship exist the more likely the worker will be considered an employee;
  • If regularly classifying workers as “independent contractors” is necessary, set up and maintain procedures and policies for determining how such classifications are made and keep records of all “independent contractor” designations and the facts considered in making the designation;
  • Workers who are classified as “independent contractors” should not have a company e-mail address, be given access to the company server, attend functions specifically for employees or have the functions, responsibilities or duties normally assigned to employees; and
  • Employers should continuously monitor existing independent contractors to ensure they have not acquired additional responsibilities or otherwise changed the type and scope of work that would convert them to “employee” status.

In the end, and in light of the DOL’s Administrator’s Interpretation, employers who engage independent contractors should evaluate whether the contractors are truly in business for themselves or whether they are economically dependent on the employer’s business. Given the DOL’s broad statement that “most workers are employees,” the reality is, going forward, most independent contractors will be considered employees for purposes of the FLSA, at least according to the DOL.

Should you have any questions regarding the DOL’s recent interpretation of the FLSA in regards to “independent contractor” classification or should you want assistance reviewing your current worker classifications in light of the new Interpretation, please contact Megan P. Toth, E. Jason Tremblay or your designated Arnstein & Lehr LLP attorney.

Fair Labor Standards Act Proposed Revisions Just Released

E. Jason TremblayE. Jason Tremblay

The U.S. Department of Labor just released its highly anticipated proposed revisions to the “white collar” exemptions to the Fair Labor Standards Act, which will significantly expand the number of workers who will be eligible for overtime pay. In fact, it is estimated that approximately 5 million additional workers in the United States, who are currently exempt under the FLSA, will now be entitled to overtime.

The primary change to the FLSA is the nearly doubling of the salary threshold for exempt employees from $455 per week to $921 per week. This means is that in order for an employee to be exempt from the overtime requirements of the FLSA, they must not only meet the necessary exempt duties test (which appear to have remain unchanged), but they must also be compensated at least $47,892 per year. The DOL added that the final regulations may actually increase the proposed salary threshold to $970 a week, or $50,440 a year.

Another update relates to “highly compensated” workers and, specifically, that in order to qualify as exempt under the FLSA “highly compensated” employee exemption, a full-time salaried worker must make at least $122,148 annually, as opposed to $100,000 annually.

Significantly, the DOL is also proposing to automatically update the salary levels for exempt employees on an annual basis in order to prevent these new salary level thresholds from becoming outdated. The DOL, however, is seeking comments on methods of increasing the salary threshold before implementing the final rules. These updated FLSA regulations are set to go through a comment period before becoming final, most likely in late 2015 or early 2016. Employers should therefore be preparing now for these updated regulations and promptly evaluate whether any existing exempt employees must now be reclassified as non-exempt and entitled to overtime.

If you need assistance in this regard, please do not hesitate to contact E. Jason Tremblay or your designated Arnstein & Lehr LLP attorney.