May 15, 2018

IRS Is Sending ACA Penalty Notices to Employers

Bret Busacker

If you believe your company was subject to the Affordable Care Act (ACA) coverage requirements in 2015 (generally, all employers with 50 full-time or full-time equivalent employees), please take note that the Internal Revenue Service (IRS) is beginning to send out notices of ACA penalties due from employers who failed to satisfy ACA health coverage requirements. Specifically, the IRS is mailing Employer Shared Responsibility Payment (ESRP) notices to employers that it believes failed to comply with the ACA coverage requirements in 2015. Some employers receiving these notices may have actually complied with the ACA requirements in 2015, but the IRS received inaccurate or incomplete information and consequently has incorrectly identified the employer as failing to satisfy the ACA coverage requirements.

Limited Time To Respond To IRS Notice

If an employer receives an ESRP notice, it must dispute the IRS penalty within 30 days of the date of the notice. We have seen employers receiving very large fines for periods in which the employer actually complied with the ACA coverage requirements.

Employers who were subject to the ACA coverage requirements in 2015 should review their 2015 ACA filings (on Form 1094-C) to: (1) determine who at the company will receive the ESRP notice from the IRS, if one should arrive; and (2) make sure the contact address is correct (See Part 1; Lines 1 thru 8 of Form 1094-C). If any of the contact information on the Form 1094-C is inaccurate or if the contact person is no longer employed by the company, the employer should consider updating its contact information with the IRS. Employers with questions about responding to an ESRP notice should contact their legal counsel promptly.

May 14, 2018

DOL Launches “PAID” Program To Resolve Wage Violations

Brad Cave

By Brad Cave

Workers want to get paid, and the U.S. Department of Labor (DOL) is offering a new way to help make sure they do. The DOL’s Wage and Hour Division (WHD) recently launched the Payroll Audit Independent Determination (PAID) program to help resolve potential minimum wage and overtime disputes without litigation. With a healthy bit of skepticism, employers and their counsel may want to explore this new avenue to resolve inadvertent wage violations.

Wage and hour claims are difficult to resolve because the Fair Labor Standards Act (FLSA) states that an employee cannot waive or release his FLSA rights to minimum wages or overtime through an agreement with the employer, unless it is part of a court-approved or DOL-supervised settlement. Most employers are understandably reluctant to involve the DOL in resolving wage and hour errors because the agency may decide to take other enforcement actions, and nobody wants to be sued for trying to informally resolve the problem directly with your employees, only to have them reject your offer and hire a lawyer. The PAID program may give employers a viable third option for getting into compliance and resolving any outstanding liability to employees.

Here’s a look at the pilot program and its potential benefits and pitfalls.

FLSA-Covered Employers May Participate

The PAID program is open to all employers covered by the FLSA that want to attempt to resolve wage issues quickly and without having to defend claims in court. To participate, an employer must review WHD’s compliance materials (available on its website) and conduct a self-audit of its compensation practices. If the employer discovers any issues, it must specify the potential violations to WHD, identify affected employees and the time periods involved, and calculate the amount of back wages it would owe each employee.

The WHD will evaluate the information provided, contact the employer to seek any additional information needed, and confirm any back wages that are due. The agency then will issue a summary of unpaid wages. It also will provide forms describing settlement terms for each affected employee.

The settlement forms will include a release of claims, limited to the potential violations for which the employer will pay back wages. Each employee must sign a settlement form in order to receive any back pay owed. The employer then will pay the back wages directly to each employee no later than the end of the next full pay period after it receives the summary of unpaid wages. The employer must send proof of payment to the WHD.

Wage Violations Covered By PAID Program

The WHD intends that the PAID program will be used to resolve potential FLSA violations related to overtime and minimum wages. For example, the agency suggests that failure to pay overtime at one-and-one-half times the regular rate of pay, “off-the-clock” work, and misclassification of exempt employees may be appropriate topics for resolution through the program.

Importantly, the PAID program cannot be used if an employer is already facing a WHD investigation for payroll practices, the employer has already been sued, or an attorney or union acting on behalf of employees has threatened a lawsuit or demanded a settlement.

Potential Benefits and Pitfalls of Program

The PAID program will require employers with identified wage violations to pay all back wages due, but the WHD will not assess liquidated damages or civil monetary penalties. As a result, the process can help employers avoid costly litigation. The lack of penalties and litigation fees can be a substantial incentive to take advantage of the pilot program.

On the other hand, settlements with employees who are owed back wages will be limited to the wage issues resolved through the PAID program. That suggests that employees are free to assert additional FLSA violations not addressed through the program as well as state-level wage and hour issues at a later date or in a different forum.

In addition, the program requires participating employers to agree to correct their problematic pay practices at issue going forward. That leaves the door open to potential follow-up by the WHD down the road. Moreover, there do not appear to be any assurances that the WHD will not investigate wider payroll issues at participating companies once it has been alerted to potential self-identified noncompliance. That means the wage violations resolved through the PAID program may be used against an employer should any future FLSA violations be discovered or litigated, resulting in potential willful violations.

Approach Program With Caution

The pilot program will be implemented for approximately six months. The WHD then will evaluate the program and consider future options. For most employers, conducting a self-audit of payroll practices can be worthwhile and may help eliminate potential liability for violations going forward. However, because troublesome details of the program remain unknown, employers should use caution when deciding to utilize this WHD-facilitated resolution process.

April 12, 2018

Salary History Cannot Justify Unequal Pay Between Men and Women, According to Ninth Circuit

Dora Lane

by Dora Lane

The Ninth Circuit Court of Appeals ruled this week that an employer cannot justify a pay difference between male and female employees performing equal work based on prior salary. Rizo v. Yovino. This is a significant decision that could increase potential liability for Equal Pay Act (EPA) claims for employers with workers in states covered by the Ninth Circuit, namely California, Nevada, Idaho, Montana, Arizona, Oregon, Washington, Alaska, and Hawaii.

Equal Pay Act Requirements

The EPA was enacted in 1963, amending the Fair Labor Standards Act, to prohibit wage disparities based on sex. In short, it requires that men and women be paid equal pay for equal work regardless of sex. Specifically, the law provides that no employer shall discriminate on the basis of sex in paying wages for equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions. Exceptions are permitted when wages are made pursuant to a seniority system, a merit system, a system measuring earnings by quantity or quality of production, or a differential based on any other factor other than sex.

Employer’s Pay Policy Added Five Percent to New Hires’ Prior Salary

In the case before the court, Aileen Rizo was hired as a math consultant by the Fresno County Office of Education. Her salary was set according to the County’s Standard Operating Procedure under which a new hire would be paid five percent over his or her prior salary, and placed on a corresponding step of the County’s ten-step salary schedule. Based on Rizo’s prior salary in Arizona, she was placed at step 1 of level 1 on the County’s hiring schedule.

A few years into her employment, Rizo was having lunch with her colleagues and learned that her male counterparts had been subsequently hired as math consultants at higher salary steps. Rizo filed a pay disparity complaint with the County which replied that her pay was set in accordance with its Standard Operating Procedure. Rizo filed a federal lawsuit alleging a violation of the EPA, sex discrimination under Title VII, and related state law claims.

Prior Pay Not A “Factor Other Than Sex”

The County did not dispute that it paid Rizo less than comparable male employees for the same work. Instead, it argued that considering each employee’s prior salary to set wages was a permissible “factor other than sex,” so any resulting wage differential was not in violation of the EPA.

The Ninth Circuit ruled that an employer was not permitted to consider an employee’s prior salary, either by itself or in combination with other factors, when establishing the employee’s wages. The Court specifically stated that “prior salary alone or in combination with other factors cannot justify a wage differential” because prior salary history does not constitute a “factor other than sex” under the EPA’s statutory “catchall” exception. The Court wrote that prior salary is not a legitimate measure of work experience, ability, performance, or any other job-related quality, and that employers must look directly to those underlying factors rather than prior salary when justifying a wage differential between male and female employees doing equal work. Writing for the majority, Judge Reinhardt stated, “To hold otherwise – to allow employers to capitalize on the persistence of the wage gap and perpetuate that gap ad infinitum – would be contrary to the text and history of the Equal Pay Act, and would vitiate the very purpose for which the Act stands.” Read more >>

April 10, 2018

Colorado Non-compete Law for Physicians Amended To Allow Continuing Treatment For Rare Disorders

Mark Wiletsky

by Mark Wiletsky

The Colorado legislature recently added a paragraph to the state statute that governs non-compete agreements to permit physicians to continue to treat patients with rare disorders without liability. Signed into law by Governor Hickenlooper on April 2, 2018, Senate Bill 18-082 allows physicians to disclose their continuing practice and new professional contact information to any patient with a rare disorder to whom the physician was providing consultation or treatment before termination of their relationship with the organization.

Physician Non-competes Only Allow Damages

Under Colorado Revised Statute 8-2-113, non-compete provisions in an employment, partnership, or corporate agreement with a physician that restrict the physician’s right to practice medicine when the agreement terminates is void and unenforceable. However, the law does permit such an agreement to require the physician to pay damages in an amount that is reasonably related to the injury suffered because of competition. In other words, if a physician in Colorado leaves a group practice or other employer, he or she may practice anywhere but may be compelled to pay damages if he or she practices within an area that is directly competitive with his or her former employer.

New Provision Creates Exception to Damages Remedy

Under the newly passed amendment, physicians and their new employers are shielded from damages for providing information and care to patients with a rare disorder, as defined in accordance with the criteria developed by the National Organization For Rare Disorders, Inc., or any successor organization. Specifically, a non-compete agreement cannot prohibit physicians from disclosing their continuing practice of medicine and new professional contact information to any patient with a rare disorder. Similarly, physicians may continue to provide care to such patients.

Next Steps for Healthcare Employers

Hospitals, physician groups, and other healthcare employers should consider the extent to which this new exception to non-compete damages will apply to the doctors in their group. It is possible that very prominent, renown physicians who may cause the hospital or group to suffer the most in monetary damages when they leave the group will be the same physicians who treat multiple patients for rare disorders. But because the new exception applies only to those patients with rare disorders, the physician may still be held liable for damages for continuing treatment of patients without rare disorders. If in doubt about how to structure and enforce these types of non-compete agreements with physicians, please consult with experienced counsel.

April 9, 2018

Idaho Legislature Repeals 2016 Changes to Non-Compete Law

Nicole Snyder

by Nicole Snyder and A. Dean Bennett

When a new business comes to town, when an existing business seeks to expand, or when a startup is making its way off the ground, it may want (or need) to recruit key employees from existing companies. That can be especially true in the technology field where experienced developers, analysts, and executives are hard to come by.

In 2016, the Idaho legislature made it more difficult for key employees and independent contractors across all industries to change jobs when they were covered by a post-employment non-compete agreement. Recently, the Idaho legislature repealed that 2016 provision in a move seen as correcting an imbalance in the playing field between employers and their key employees when it comes to non-compete restrictions.

A. Dean Bennett

2016 Non-Compete Presumption Burdened Key Employees

When enacted in 2016, the recently repealed non-compete law was touted as business-friendly, as it strengthened an employer’s ability to enforce a non-compete agreement with its key employees. The 2016 law provided that if a court found a key employee or key independent contractor breached a non-compete agreement, the employee or independent contractor then had the burden of overcoming a presumption that their breach of the non-compete caused irreparable harm to the employer. Essentially, the employee was forced to prove a negative, namely that he or she could not adversely affect the employer’s legitimate business interests.

However, the perceived effect of the 2016 non-compete law was that it made it tougher for key employees and independent contractors to change jobs, seek more responsibility or pay at another company, or even start up their own business. Idaho’s non-compete laws have received national attention at the same time Idaho is recognized as the fastest growing state with the fastest growing pay rate.

Repeal Restores Pre-2016 Standard of Proof For Non-Competes

Senate Bill 1287 strikes the language added in 2016 that shifted the burden to key employees and independent contractors to prove that they have no ability to adversely affect the employer’s legitimate business interests as a result of their competitive employment. Consequently, when a breach of a non-compete is litigated in court, the burden will be back on the employer to prove its former employee’s competitive actions harmed the employer’s legitimate business interests.

Governor Otter allowed this repeal bill to become law without his signature. He wrote, “There is no consensus within the business community, or even within the community of technology-driven businesses, for this second change within two years to Idaho Code regarding non-compete agreements between employers and key employees or key independent contractors.” The governor further wrote that the issue can vary depending on the nature of each company’s business plan and whether management considers a “dynamic” workforce, with regular turnover, a positive or detrimental aspect of their business. The governor suggested that he saw little risk in removing the 2016 language as it had not yet been tested in Idaho courts. He also urged the Idaho legislature to take up the issue again in 2019, suggesting that perhaps the creation of a different less onerous standard on employees may be a good middle ground.

Effect on Idaho Employers

Whether you think this repeal is a good or bad development may rest largely on whether you seek to retain your key employees and contractors by limiting their mobility through non-compete agreements, or whether you need to expand and recruit talent within your industry without your recruits being subject to post-employment restrictions. Regardless of what side of that debate you are on, the repeal of the 2016 rebuttable presumption means that Idaho employers seeking to enforce a non-compete in court will need to show that the employee or contractor harmed its legitimate business interests when leaving to work for a competitor in violation of a restrictive covenant. Consequently, this is a good time to revisit your non-compete agreements, giving thought to what business assets and interests you are seeking to protect. In addition, be sure to review the geographic, time, and scope limitations of your non-compete restrictions as only reasonable provisions will be enforceable. As always, check with your attorney to resolve any questions.

April 2, 2018

Service Advisors Exempt From Overtime, Says Supreme Court

Brian Mumaugh

by Brian Mumaugh

In a 5-to-4 decision, the Supreme Court ruled that service advisors at car dealerships are exempt from overtime pay under the Fair Labor Standards Act (FLSA). In an opinion written by Justice Thomas, and joined by Justices Roberts, Kennedy, Alito and Gorsuch, the Court determined that service advisors are salesmen who are primarily engaged in servicing automobiles, putting them within the FLSA exemption language. Encino Motorcars, LLC v. Navarro.

Service Advisors Challenged Exempt Status

In 1961, Congress amended the FLSA to exempt all employees at car dealerships from overtime pay. A few years later in 1966, however, Congress narrowed the car dealership exemption so that it no longer exempted all dealership employees but instead applies only to “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, truck, or farm implements, if he is employed by a nonmanufacturing establishment primarily engaged in the business of selling such vehicles or implements to ultimate purchasers” (as currently written). Until 2011, federal courts and the Department of Labor (DOL) interpreted that exemption to apply to service advisors.

In 2011, however, the DOL issued a new rule stating that a service advisor was not a “salesman” under the FLSA exemption. This new interpretation ran contrary to 50-years of precedent and threw auto dealerships a curve ball. In 2012, service advisors at a Mercedes-Benz dealership in Los Angeles sued their employer, alleging that their regular work hours were 7 a.m. to 6 p.m. resulting in a minimum of 55 hours per week for which they were owed overtime pay for all hours over 40 in a work week.

The Mercedes-Benz dealership moved to dismiss the complaint, arguing that service advisors were exempt under the FLSA language, despite the new DOL interpretation. The district court agreed and dismissed the lawsuit. The service advisors appealed and the Ninth Circuit Court of Appeals reversed, relying on the DOL’s 2011 rule. The dealership appealed to the Supreme Court who decided that the DOL’s rule could not be given deference as it was procedurally defective. On remand, the Ninth Circuit again ruled in favor of the service advisors, determining that Congress did not intend to exempt service advisors from overtime, in part because FLSA exemptions should be narrowly construed and the legislative history did not specifically mention service advisors. The case went up to the Supreme Court a second time.

Service Advisors Are Salesmen Engaged in Servicing Automobiles

The Supreme Court looked to the plain meaning of “salesman” as someone who sells goods and services. Because service advisors sell customers services for their vehicles, the Court stated that a service advisor “is obviously a ‘salesman.’”

The Court also decided that service advisors are primarily engaged in servicing automobiles because they are “integral to the servicing process.” The Court acknowledged that service advisors do not physically repair cars, but the justices decided that the phrase “primarily engaged in servicing automobiles” necessarily included individuals who do not physically repair automobiles, including service advisors.

In an interesting passage of the opinion, the Court rejected the Ninth Circuit’s statement that FLSA exemptions should be narrowly construed. Justice Thomas quoted his friend and former colleague, deceased Justice Antonin Scalia, “Because the FLSA gives no ‘textual indication’ that its exemptions should be construed narrowly, ‘there is no reason to give [them] anything other than a fair (rather than a ‘narrow’) interpretation.’” A fair reading of the FLSA, the majority concluded, focuses not only on the overall objective of the law but also on the stated exemptions. And the Court concluded that a fair reading of the automobile salesmen, partsmen, and servicemen exemption is that it covers service advisors.

Dissent Says Overtime Required, Unless Commission Exemption Applies

Justice Ginsburg wrote a dissent with which Justices Breyer, Sotomayor, and Kagan joined, stating that because service advisors neither sell nor repair automobiles, they should not be covered by the auto dealership salesman, partsman, and serviceman exemption. The dissent notes that many positions at dealerships are not covered by the exemption, including painters, upholsterers, bookkeepers, cashiers, purchasing agents, janitors, and shipping and receiving clerks. Consequently, the dissent stated that there are no grounds to add service advisors as a fourth category of dealership workers that are exempt, adding to the three positions explicitly enumerated in the FLSA exemption.

The dissent notes that many dealerships, including the Mercedes-Benz dealership in this case, compensate their service advisors on a primarily sales commission basis. According to the dissent, such commission-based positions could fall within the FLSA overtime exemption that applies to retail and service establishments where employees who receive more than half of their pay through commission are exempt from overtime pay, so long as each employee’s regular rate of pay is more than one-and-one-half times the minimum wage. The dissent concludes that even without the auto salesman, partsman, serviceman exemption at issue, many service advisors compensated on a commission basis would remain ineligible for overtime premium pay under the commission exemption.

Dealerships May Treat Service Advisors As Exempt

As a result of the Court’s ruling, car dealerships may continue to treat their service advisors as exempt from overtime under the FLSA. Dealerships should still review applicable state laws to ensure that the exemption applies under state wage law. It is also a good time to review written job descriptions to include service advisor duties that support their exempt status under this decision.

March 29, 2018

Five Tips For Handling Tricky Religious Accommodations

Steven T. Collis

by Steven T. Collis

When an employee’s religious beliefs conflict with a workplace policy, you need to consider whether a reasonable accommodation can be made, without creating an undue hardship. Many times, these religious accommodations present challenging issues for supervisors and HR professionals, but these five tips can help ease the struggle.

Tip #1: Consider each request individually

When an applicant or employee first tells you that her religious beliefs won’t allow her to comply with one of your policies, don’t assume that an accommodation will be difficult or expensive. Many times, you may be able to offer an accommodation that is easy and inexpensive and that works for all involved.

For example, if your grooming policy requires male employees to wear short and neatly trimmed hair styles and a new male employee informs you that he must keep his hair long based on his religious beliefs, you could simply allow him to tie his hair in a ponytail or to put it up under a company-approved hat.

Or, if you require all employees to have a clean-shaven face as part of maintaining a sterile work environment, an employee who may not cut or trim his beard because of his religion may be able to wear a face mask or hair net over his beard as an accommodation.

Different religions may have varying restrictions or observances, so always work with the individual employee to see what accommodations are appropriate for him.

Additionally, employers often fear that if they make an exception to their policies as a religious accommodation for one employee, it will open the floodgates to many more accommodation requests by other employees. Because individual religious practices can vary–even among members of the same religion– you shouldn’t deny an accommodation based only on speculation that others will ask for it, too.

If you are able to accommodate one, two, or 10 employees without undue hardship, you should make those accommodations, realizing that at some point, it may become an undue hardship to offer it to any additional employees. As long as you engage in an interactive dialog with each individual employee who requests an accommodation, and you offer accommodations that don’t create an undue hardship, you will be meeting your legal obligations.

Tip #2: Anything more than nominal is undue hardship

An undue hardship under Title VII of the Civil Rights Act of 1964 is easier to establish than under the Americans with Disabilities Act (ADA). Where the ADA defines an undue hardship as a significant burden or expense, an undue hardship under Title VII, is a cost or burden on the organization that is more than de minimis or nominal.

Generally, administrative costs involved in switching an employee’s schedule or infrequent overtime pay will be seen as de minimis and, therefore, not an undue burden. But anything more than ordinary administrative costs, such as hiring additional workers, paying for frequent overtime work, or violating a collective bargaining agreement, will be more than de minimis and an undue burden.

Despite this lower threshold, be careful about rejecting all religious accommodations on undue hardship grounds. Analyze each request for a potential undue hardship. And because business conditions and policies change, you shouldn’t assume that because an undue hardship prevented a religious accommodation in the past, it will continue to do so.

If you ultimately decide not to accommodate a religious belief, be certain to document your analysis, including all accommodations considered and the costs and operational burdens associated with each one. Otherwise, you could leave yourself vulnerable to a discrimination charge.

Tip #3: Be flexible on scheduling

One of the trickiest accommodation issues arises when an employee (or group of employees) can’t work certain days or hours because of religious beliefs. For example, Seventh Day Adventists who honor the Sabbath may need to refrain from working every Saturday (from sundown on Friday until sundown on Saturday). Or perhaps a Jewish employee asks for multiple days off to observe the High Holidays.

Do you need to schedule around these restrictions? Can you require the employee to swap with another employee or use vacation time to get the time off? What if she has exhausted all of her time off?

First, remember that an employee isn’t entitled to demand a particular accommodation. You don’t have to honor her preferred accommodation as long as you offer another reasonable accommodation that will allow her to observe her religious obligations.

Generally, this means that you may require an employee to use vacation or other paid time off as an accommodation to avoid a scheduling conflict with a religious obligation. Or you may allow her to trade shifts with other employees or work additional shifts on a different day to make up for time missed. Remember, however, that if an agreed schedule change results in a non-exempt employee working more than 40 hours in a work week, you are still obligated to pay overtime. The cost of any related overtime may be taken into consideration when conducting an undue hardship analysis.

Keep in mind that what is a reasonable accommodation for one employee may not be reasonable for another because of differences in job duties, departments, shifts, and other factors. If you’re able to remain flexible when work schedules conflict with religious observances, you may often be able to offer a reasonable accommodation that doesn’t unduly burden your operation.

Tip #4: Don’t segregate workers who need religious accommodations

Perhaps you agree to let a female Muslim employee wear a headscarf at work–despite your policy against employees wearing any hats or other headgear– as a reasonable religious accommodation. But then you relegate her to a back office and tell her that she isn’t to have any in-person contact with your customers. Your decision to segregate this employee or treat her differently because she wears a headscarf for religious reasons could be deemed religious discrimination.

Generally, customer and co-worker preferences that are based on a religious bias don’t justify failing to reasonably accommodate a worker’s religious beliefs. In rare cases, conflicts between an employer’s public image and accommodating religious dress or grooming beliefs can result in an undue hardship, but it typically is only in very limited situations where the employer can show the need for uniformity of appearance. Again, each situation must be addressed on a case-by-case basis, so don’t make any blanket policies that rule out religious accommodations in all cases.

Tip #5: Avoid retaliation

If an employee has requested a religious accommodation, be careful about any subsequent discipline or termination decisions. In many cases, employers handle the accommodation request properly, but then a supervisor harasses, demotes, fails to give a pay raise, or finds fault with the employee for no legitimate business reason.

Title VII prohibits retaliation based on an employee engaging in protected activity, and the Equal Employment Opportunity Commission (EEOC) takes the position that requesting a religious accommodation is protected activity. Consequently, remind supervisors and managers not to retaliate against an employee who has requested a religious accommodation.

However, avoiding retaliation doesn’t mean that you may not hold your employees to the same performance standards and work rules. If an employee has violated your employment policies or isn’t performing up to par, follow your normal procedures for imposing discipline. Be sure to document every step so that if an allegation of retaliation arises, you have sufficient written support for your employment decisions.

Conclusion

As with many tricky workplace issues, religious accommodations require an open dialog with the requesting employee and a case-by-case analysis regarding what will work for your operation. If the request will result in more than a de minimis burden or cost on your organization, you may be able to deny providing it, but be sure to consider the wide range of possible accommodations before relying on an undue hardship defense.

Research has shown that employers that are willing to provide religious accommodations benefit tremendously and can actually improve their bottom lines. If in doubt, it’s always a good idea to consult with experienced employment counsel.

March 20, 2018

Settlements Reached in Joint-Employer Case That Could Have Affected Franchisors Nationwide

Steven Gutierrez

By Steve Gutierrez

Franchisor McDonald’s USA LLC has agreed to settle the high-profile labor disputes over whether it is a joint employer with its franchisees. Although the settlement still needs to be approved by the administrative law judge overseeing the litigation, McDonald’s and its franchisees negotiated settlement agreements with the National Labor Relations Board (NLRB) to settle allegations of unfair labor practice charges without admitting liability or wrongdoing. In doing so, McDonald’s avoids prolonged litigation and a potentially adverse decision that would have had sweeping ramifications for franchisors and their franchisees nationwide.

Protracted Litigation Over Joint-Employer Status

In 2012, multiple McDonald’s employees filed unfair labor practice charges against their employer, seeking to improve their working conditions. In 2014, former NLRB General Counsel, Richard Griffin, approved filing dozens of unfair labor practice complaints against the larger franchisor, McDonald’s USA, under a theory that McDonald’s USA is a joint employer of the employees of McDonald’s franchises. By pursing the franchisor, the 2014 NLRB signaled that it was attempting to hold the larger, nationwide entity responsible for treatment of its franchisees’ employees.

McDonald’s USA, along with many restaurant, industry, and employer groups, vigorously objected, arguing that a franchisor is not a joint employer with its franchisees and therefore, cannot be held liable for any labor law violations made by a franchisee. The joint-employer test at the time was based on whether the putative employer exercises direct control over the employees and McDonald’s USA argued that it did not exercise such control over its franchisees’ employees.

In 2015, the NLRB issued its controversial decision in Browning-Ferris Industries that significantly broadened the joint-employer test so that an entity could be deemed a joint employer if it reserved contractual authority over some essential terms and conditions of employment, allowing it to have indirect control over the employees. (See our post here.) Under that expanded test, McDonald’s USA faced higher scrutiny from the NLRB as to whether it was a joint employer and whether it retained some indirect control over the employees of its franchisees.

Due to changes in the makeup of the NLRB under the Trump Administration, as well as a new NLRB General Counsel, the NLRB has sought to reverse Browning-Ferris Industries and return to the former joint-employer test that required direct and immediate control. In December 2017, the NLRB overturned Browning-Ferris in its Hy-Brand decision, only to have to vacate Hy-Brand in February 2018 because new Board member William Emanuel should not have participated in that decision. As a result, the 2015 Browning-Ferris joint-employer test is still the standard used to determine joint-employer status under the National Labor Relations Act.

Leaving The Status Quo on Joint-Employer Status – For Now

By settling these cases, both McDonald’s USA and the current NLRB avoid having to litigate and have a judge rule on whether franchisors like McDonald’s can be deemed a joint employer under the current Browning-Ferris test. Although the Board (and Congress) continue to seek to overturn Browning-Ferris, the McDonald’s settlement will push the issue down the road to another day.

According to the NLRB’s March 20, 2018 announcement, the settlement will provide a full remedy for the employees who filed charges against McDonald’s, including 100% of backpay for the alleged discriminatees. The settlement also will avoid years of potential additional litigation.

Take Aways

Franchisors, staffing companies, and other entities who have some contractual authority or obligations related to employees of a second entity need to use caution to ensure that the second entity complies with all applicable labor laws. With the broad Browning-Ferris test in place, entities with reserved contractual control or indirect control of another entity’s employees may be found to be a joint employer under the NLRA. This could open the door to liability for labor law violations as well as union organization and collective bargaining obligations related to joint employees. If in doubt about your exposure, consult with an experienced labor attorney.

Photo credit: AP2013/Jon Elswick

March 13, 2018

Physician’s Noncompete Unenforceable After He Dissents To Merger

By Mark Wiletsky

Are physician noncompete agreements enforceable? They can be, depending on the circumstances, though there are few reported decisions in Colorado analyzing such agreements. In one recent case, the Colorado Court of Appeals concluded that, following a merger, the surviving physicians entity could not enforce a noncompete provision against a dissenting shareholder-physician. The Court also concluded that an amount of damages calculated under a liquidated damages clause in the agreement must be reasonably related to an actual injury suffered by the entity as a result of the physician’s departure and competition, not simply a prospective injury estimated at the time the contract was created. Crocker v. Greater Colorado Anesthesia, P.C., 2018 COA 33.

Noncompete and Liquidated Damages Provision

Anesthesiologist Michael Crocker was a shareholder in, and employee of, Greater Colorado Anesthesia, P.C. (Old GCA). In April 2013, Dr. Crocker signed a shareholder employment agreement with Old GCA that contained a noncompete provision. In relevant part, the noncompete stated that if Dr. Crocker competed with Old GCA by participating in the practice of anesthesia within fifteen miles of a hospital serviced by Old GCA in the two years following termination of the agreement, he would be liable for liquidated damages as calculated by a stated formula. The restricted geographic area included nearly all of the Denver metro area, from Broomfield on the north to Castle Rock on the south. The agreement further stated that the liquidated damages provision would survive termination of the agreement for a period of two years, or until all amounts due by the employee to the company were paid in full.

Physician Objects To Merger

In January 2015, the shareholder-physicians of Old GCA faced a vote on whether to approve a merger that would result in a 90-doctor corporation. In exchange for accepting a 21.3% reduction in pay and making a five-year employment commitment, the shareholder-physicians would receive a substantial lump sum of cash plus stock. Dr. Crocker voted against the merger and provided notice under Colorado law that he would demand payment for his share of Old GCA in exercise of his dissenter’s rights. The other shareholder-physicians approved the merger resulting in a new corporation (New GCA).

Dr. Crocker never worked at New GCA. In March 2015, he signed an employment agreement with a different anesthesia group that included providing services at Parker Adventist Hospital, which was within GCA’s noncompete restricted area. Old GCA sent him $100 for his share in the group, which he refused. New GCA sought to enforce Dr. Crocker’s noncompete provision, seeking liquidated damages under the stated formula, while Dr. Crocker sought a higher valuation of his share in Old GCA.

Physician’s Shareholder Rights Were Intertwined With Employee Rights

The Colorado Court of Appeals noted that generally, a noncompete provision will survive a merger, allowing the surviving entity to enforce the noncompete restrictions. But it drew a line in Dr. Crocker’s scenario, finding that his shareholder rights were wed to his rights as an employee. He could not be an employee without being a shareholder, and he could not be a shareholder without being an employee. Consequently, when he exercised his dissenter’s rights in opposing the merger and sought payment for his share in Old GCA, Dr. Crocker was forced to quit his employment with GCA. Therefore, the Court stated that it could not construe the enforceability of the noncompete provision without consideration of Dr. Crocker’s rights as a dissenter. Finding no prior authority evaluating a noncompete under such circumstances, the Court decided that it could only enforce the noncompete if it is reasonable, and to be reasonable, it must not impose hardship on the employee.

Noncompete Unreasonable Due to Hardship on Employee

Because an anesthesiologist must live within approximately 30 minutes of where he or she works, enforcement of the Old GCA noncompete provision against Dr. Crocker would require that he either move outside of the restricted geographic area or pay liquidated damages to GCA. The Court stated that enforcement in that circumstance would “further penalize [Dr.] Crocker’s exercise of his right to dissent, rather than protect him from the conduct of the majority.” The Court ruled that the noncompete provision imposed a hardship on Dr. Crocker and therefore was unreasonable. Read more >>

March 7, 2018

Federal Appeals Court Rules Sexual Orientation Discrimination Violates Title VII

By Cecilia Romero

Overturning prior precedent, the full panel of the Second Circuit Court of Appeals recently ruled that sexual orientation discrimination is a form of sex discrimination that violates Title VII. Zarda v. Altitude Express, Inc.. With this landmark ruling, the Second Circuit joins the Seventh Circuit in extending Title VII sex discrimination protection to employment discrimination based on sexual orientation. However, this opinion further highlights a split in circuits over this issue—the Eleventh Circuit which holds the opposite. The EEOC has taken the position consistent with the Second Circuit.

Facts of Case

Donald Zarda, who worked for Altitude Express as a skydiving instructor in New York, was gay. To preempt any discomfort his female students might feel being strapped to an unfamiliar man, Zarda often disclosed he was gay. Before one particular tandem jump with a female student, Zarda told her that he was gay and had an ex-husband to prove it. After the successful skydive, the student told her boyfriend that Zarda had inappropriately touched her and disclosed his sexual orientation to excuse his behavior. The woman’s boyfriend told Zarda’s boss, who fired Zarda shortly thereafter. Zarda denied touching the student inappropriately and believed that he was fired solely because of his reference to his sexual orientation.

After filing with the EEOC, Zarda filed a lawsuit against his former employer in federal court asserting, among other claims, that his firing violated Title VII under a sex stereotyping theory as well as violating New York law (which prohibits sexual orientation discrimination). In March 2014, the district court granted summary judgment to Altitude Express on his Title VII claim, stating that he failed to establish a prima facie case of gender stereotyping discrimination.

Zarda appealed, pointing to a 2015 EEOC decision that held that allegations of sexual orientation discrimination state a claim of discrimination on the basis of sex and therefore, violate Title VII. In April 2017, a three-judge panel of the Second Circuit refused to reverse the lower court’s ruling on Zarda’s Title VII claim because it was bound by the Circuit’s prior precedent in which the court had ruled that discrimination based on “sex” did not encompass discrimination based on sexual orientation. The three-judge panel noted, however, that the full court sitting en banc could overturn its earlier precedent and subsequently ordered a rehearing so that the full court could determine whether to sexual orientation was prohibited under Title VII.

Sexual Orientation Discrimination Recognized as Sex Discrimination Claim

In deciding whether Title VII prohibits sexual orientation discrimination, the full Second Circuit Court of Appeals examined the phrase “because of . . . sex” as used in Title VII. The Court stated that Congress had intended to make sex irrelevant to employment decisions, leading the U.S. Supreme Court subsequently to prohibit discrimination based not only on sex itself, but also on traits that are a function of sex, such as non-conformity with gender norms. The Second Circuit concluded that sexual orientation is a function of sex, because one cannot fully define a person’s sexual orientation without identifying his or her sex. The Court wrote, “Logically, because sexual orientation is a function of sex and sex is a protected characteristic under Title VII, it follows that sexual orientation is also protected.”

The Court also concluded that sexual orientation discrimination is a subset of sex discrimination by considering associational discrimination. Pointing to decisions where courts have held that an employer may violate Title VII if it takes action against an employee because of the employee’s association with a person of another race, the Court extended that prohibition to address when an adverse action is taken against an employee because his or her romantic association with a person of the same sex.

Some judges on the Second Circuit dissented, writing that the drafters of Title VII included “sex” in the civil rights law in order to “secure the rights of women to equal protection in employment” with no intention of prohibiting discrimination on the basis of sexual orientation. The majority of the judges respectfully disagreed.

What Employers Need to Know

Because the Eleventh Circuit (which includes Florida, Georgia, and Alabama) refused to recognize a Title VII claim for sexual orientation discrimination in 2017, the split in the circuit courts make this issue ripe for consideration by the U.S. Supreme Court. However, until the Supreme Court is presented with, and agrees to hear, a case raising this issue, we are left with varying protections in different jurisdictions.

Employers with operations located in the Second and Seventh Circuits, which have recognized sexual orientation discrimination as prohibited by Title VII, should update their policies and practices to reflect that protected category. That means, employees located in New York, Vermont, Connecticut, Illinois, Wisconsin, and Indiana are protected against harassment, discrimination, and retaliation on the basis of sexual orientation under federal law.

Employers also need to comply with state and local laws that may prohibit employment discrimination on the basis of sexual orientation. At present, approximately 20 states plus the District of Columbia have laws banning private employers from engaging in sexual orientation discrimination. Additional states ban such discrimination by government employers. And more and more cities and counties are enacting ordinances to prohibit sexual orientation discrimination. To ensure compliance, employers may wish to implement policies prohibiting such discrimination regardless of jurisdiction. Otherwise, employers are forced to examine the laws applicable to each of their locations and alter their policies accordingly.