Quirky Questions

Real Life Employment Law

Court Halts DOL Rule Set To Extend Overtime To Millions on December 1

In an unexpected decision, on Tuesday, November 22nd, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction against implementation of the Department of Labor’s (“DOL’s”) controversial final Rule expanding overtime eligibility for millions of workers, which was set to take effect on December 1st.

The DOL’s new Rule, issued on May 18, 2016, nearly doubled the salary threshold for the so-called “white collar exemptions” from the Fair Labor Standards Act’s (“FLSA’s”) minimum wage and overtime requirements. Under the old Rule, employers satisfied the minimum salary threshold if they paid exempt employees a salary of $23,660 annually (or $455/week). The new Rule increased this requirement to $47,476 annually (or $913/week). According to the DOL, this new threshold was set based on the salary level at the 40th percentile of earnings for full-time workers in the lowest-wage Census Region (which currently is the South). See DOL Factsheet, Final Rule to Update the Regulations Defining and Delimiting the Exemption for Executive, Administrative, and Professional Employees, available at https://www.dol.gov/whd/overtime/final2016/overtime-factsheet.htm.

Since the 1940s, the DOL’s regulations have required employers to satisfy both a “salary” and a “duties” test in order to classify employees as exempt executive, administrative, or professional employees. The DOL last updated the minimum salary requirement in 2004. When it issued the new minimum salary requirement in May 2016, the DOL stated that in focusing on the salary component in its new Rule, its intent was to “simplify the identification of overtime-protected employees, thus making the [executive / administrative / professional] exemption easier for employers and workers to understand and apply.” See DOL Factsheet, supra. The DOL observed that—absent an upward salary adjustment by their employers—the new Rule would expand the right to receive overtime pay to approximately 4.2 million workers currently classified as exempt. See id.

Despite this lengthy regulatory history, in deciding to issue a nationwide preliminary injunction, U.S. District Judge Amos Mazzant held that while Congress delegated significant authority to the DOL to define exempt duties, it did not authorize the DOL to limit application of the white collar exemptions based on salary level. The District Court noted: “While [Congress’s] explicit delegation would give the [DOL] significant leeway to establish the types of duties that might qualify an employee for the exemption, nothing in the [executive / administrative / professional] exemption indicates that Congress intended the [DOL] to define and delimit with respect to a minimum salary level.” As such, in promulgating the May 2016 final Rule, “the [DOL] exceed[ed] its delegated authority and ignore[d] Congress’s intent by raising the minimum salary level such that it supplants the duties test.”

Although the District Court stated that its decision applies only to the DOL’s May 2016 final Rule – and expressly disclaimed an intent to make a “general statement on the lawfulness of the salary-level test for the [executive / administrative / professional] exemption” – proponents of the DOL’s final Rule likely will continue to argue that the District Court’s decision runs counter to an established understanding of the state of the law and considerable judicial precedent across the country enforcing the DOL’s minimum salary requirement for decades. Indeed, despite the District Court’s attempt to limit its holding, the court’s rationale would appear to have considerably broader implications than an injunction only against the new minimum salary requirement.

Yesterday’s preliminary injunction is a welcome development for employers concerned about the DOL’s abrupt and significant increase in the minimum salary requirement for the white-collar exemptions. It is clear that the new minimum salary requirement will not go into effect for U.S. employers on December 1, 2016, as anticipated. However, employers should not assume that the DOL’s final Rule is dead. The District Court’s order only imposes a preliminary injunction, which the District Court could lift itself after further litigation, although that outcome seems relatively unlikely at present. The DOL also could appeal any final injunction to the United States Court of Appeals for the Fifth Circuit, a possibility that also is uncertain given the imminent change in presidential administrations. Further, future litigation will determine whether the Eastern District of Texas’s rationale could be adopted more broadly to have a more sweeping effect on the longstanding salary basis test.

While the future of the DOL’s new minimum salary requirement is now uncertain, employers should remember that the duties requirements for the FLSA’s white collar exemptions remain intact. Employers should remain diligent in ensuring that only those employees whose primary duties satisfy one or more of the applicable exempt duties tests are treated as exempt from overtime requirements.

Employers also should remain aware of exemption requirements under applicable state law, which are unaffected by developments at the federal level. For example, employers must remember that during the period the injunction is in effect, they still must comply with varying state-level minimum salary requirements that are higher than the existing federal minimum. For example, California requires that white-collar exempt employees be paid a monthly minimum salary of at least twice the state’s minimum wage. California’s minimum wage will increase starting January 1, 2017, with annual increases thereafter. As of January 1, 2017, the California salary minimum will be $43,680, lower than the $47,476 proposed requirement at issue but far above the current federal salary requirement.

A Matter of Protocol — Rules for Departing Brokers Trying to Solicit Former Clients

Question:  We operate a financial services firm that employs account executives who execute investment trades on behalf of clients.  One of our brokers recently resigned to move to a competitor firm.  With his resignation letter, he included a list of clients he plans to solicit at his new firm.  This list includes clients with whom the broker may have had some association, but it’s not clear he ever executed commission-generating trades for them.  The broker signed a non-solicitation agreement with us when he started.  Can we stop him from soliciting these clients at the new firm?

Answer:

By Joel O’Malley and JoLynn Markison

Enforcement of restrictive covenants like non-compete, non-solicit, and non-disclosure agreements is highly dependent upon the industry in which the covenant is sought to be enforced. Nowhere is that more true than in the financial services industry.  As a result of an agreement initially signed a dozen years ago by a handful of the largest financial firms and now having over 1,000 firm signatories, there exists an established methodology for a financial advisor or broker to depart a firm which, if followed, protects the broker and the new firm from litigation over the departure while protecting client privacy. The methodology is found in the Protocol for Broker Recruiting, which applies only to broker moves between Protocol signatories. (The Protocol applies to “registered representatives” – we’ll use the shorthand “broker” here.)  Frequently, however, brokers and firms either mistakenly or deliberately disregard the Protocol, so financial firms must remain vigilant in protecting their valuable confidential information, client relationships, and goodwill.  Thus, the first necessary piece of information to answer your question is whether you and the competitor are Protocol signatories.

The Protocol itself is rather simple. A broker transitioning between signatory firms may take only the following information:  “client name, address, phone number, email address, and account title of the clients that they serviced while at the firm.”  The broker is prohibited from taking any other information or documents.  To gain protection under the Protocol, the broker must resign in writing, deliver the resignation to local branch management, and include with the resignation letter a copy of the client information that will be taken, including account numbers.  The broker’s compliance with the Protocol need not be perfect – s/he need only exercise “good faith” and “substantially comply” with the requirements.

The Protocol also places obligations upon the broker after leaving the prior firm, and upon the new firm. The information taken by the broker may be used only for solicitation of the former clients by the broker, and only after the broker has actually joined the firm.  In other words, the broker may not start soliciting clients to move to the new firm while the broker is still engaged with the old firm (but planning to move), nor may client information be shared at the new firm for solicitation by other brokers.  The Protocol also contains requirements regarding the movement of broker teams or partnerships and governing trailing commissions.

Many brokers have executed agreements with firms containing terms prohibiting solicitation of customers or retention of customer lists. So long as the old and new firms are signatories to the Protocol and the broker substantially complies in good faith with its terms, the Protocol protects the broker from liability to the old firm for retaining the information identified in the Protocol or soliciting clients on behalf of the new firm.  But if a broker or new firm violates the Protocol, the former firm may be in a good position to file suit and seek immediate injunctive relief barring the broker and the new firm from irreparably damaging the former firm’s business.

There are several points to consider when analyzing potential legal action when the Protocol is at play.

First, not all firms are Protocol members. Over 1,000 firms have joined the pact, including almost all of the major financial services companies, but many smaller brokerages are not. And those smaller brokerages frequently seek to poach successful brokers from more established signatory firms.  If the new firm is not a Protocol signatory, then a broker taking client information, even under the Protocol’s methodology, could violate the broker’s non-compete or non-solicitation obligations and subject the broker and the new firm to liability.  Firms should beware of the situation of a broker claiming she acted in “good faith” because she thought the new firm was a Protocol signatory.  If the new firm misled the broker into that mistaken belief, liability may lie against the new firm for claims like tortious interference with contract or misappropriation of trade secrets.

Second, only “good faith” compliance with the Protocol provides protection. There continue to be examples when brokers purport to comply while secretly violating the Protocol, often by stealing confidential client or firm information beyond the information disclosed with the broker’s resignation letter (e.g., detailed client account history).  This theft can occur in any number of ways – emailing a personal email account, copying information to thumb drives, or simply walking out the door with confidential hard copy documents.  Firms should establish best practices for when brokers depart, including review of the broker’s email activity in the months preceding the resignation.  If the firm suspects wrongdoing, further investigation may be warranted, such as forensically examining the broker’s computer for electronic evidence of wrongdoing, reviewing office copy machine electronic records, or even watching building surveillance tapes.

Third, and more specifically to your question, client information that permissibly may be taken covers only clients that were actually serviced by the broker at the former firm. This issue recently was litigated before a Connecticut federal court in Westport Resources Management v. DeLaura (June 23, 2016), with the broker arguing that client “service” included any efforts the firm made on behalf of the clients. In that case, the broker was employed by two related entities, and when he resigned both to move to a new firm, he included with his resignation letter clients of one entity even though the services he provided were through the other entity.  The former entity sued under the broker’s non-solicit agreement.  The court held that “services” under the Protocol meant “what clients pay registered representatives to do on their behalf” – in other words, something for which the broker normally would receive a commission.  The court held that because the broker had not received any commissions from the entity with which the clients were associated, they were not clients that the broker serviced at that entity.  Applied to your question, you may have a claim against your former broker since it sounds like he never performed work for certain clients he included with his resignation letter.

Fourth, solicitation of former clients is permissible only after the broker has joined the new firm. Brokers are often tempted to start priming the pump before they depart, either secretly or overtly (and increasingly through social media) telling clients of their plans to move firms and inviting the clients to follow.  This sort of pre-move solicitation is explicitly prohibited under the Protocol, is typically forbidden under non-solicitation agreements, and should be investigated by firms in the same manner described above.

Fifth, the Protocol does not immunize corporate raiding, i.e., one firm targeting another firm to steal a group of employees. Raiding claims can be challenging to prove, and often rely on some evidence that the new firm used the former firm’s confidential information or trade secrets to aid in its improper recruitment, or that the new firm has undertaken a deliberate pattern of soliciting a competitor’s key employees with the purpose of damaging the competitor’s ability to compete.  Firms may therefore have reason to be concerned when several brokers move to another firm, even when the competitor is a Protocol signatory.

Finally, whether the Protocol is implicated or not, firms must be mindful that legal claims will be governed by applicable state or federal laws. States take a variety of approaches to enforcement of non-compete, non-solicit, and non-disclosure agreements, and both state and federal law may apply to a trade secret misappropriation claim.  In addition, agreements frequently contain clauses dictating where litigation may occur and what law applies.  These issues should be fully investigated before a firm decides whether to bring suit against a former broker or competitor firm.

Quirky Question #288: Zika in the Workplace?

Question: We have been flooded with coverage of Zika, from the Rio Olympics to the recent travel restrictions in Miami As an employer, I want to be prepared and proactive to protect my employees, but I am also concerned about overreacting. I understand there are many reported cases of Zika, but only six cases where the individual actually became infected with the virus by a mosquito bite in the United States. I want my company to take prudent measures, but also not to panic and cause my employees to unnecessarily fear for their wellbeing. What can (and should) I do to protect my employees? Also, are there any state or federal employment law obligations implicated by a potential Zika outbreak that I should be aware of? Answer→

Quirky Question #287: “Cat’s Paw” Claims – How could an employer violate antidiscrimination laws, even though the decision-making manager has no discriminatory bias at all?

Question: We just went through a five-person layoff, and one of the individuals laid off (an African American) has hired a lawyer and is threatening to sue for racial discrimination. I have enormous confidence in the fairness of the individual manager making the layoff selections, and those selections were based on years of performance ratings.  However, the lawyer hired by our ex-employee says that doesn’t matter, because the ex-employee’s direct supervisor was racially biased.  He says that the bias of the direct supervisor taints the entire process and that the manager was merely a “cat’s paw.”  Let’s assume for a moment that the direct supervisor is a little rough around the edges.  Do we have a problem here, even though the manager is fair and unbiased?  And what the heck is a “cat’s paw” anyway? Answer→

Quirky Question #286: Best Practices on Restroom Access and Terminology for Transgender Employees

Question: There has been a lot of news coverage lately on restroom policies related to transgender employees.  Can you provide some guidance on how to structure our restroom-use policies to be both lawful and respectful of all employees?  More generally, can you help me understand the appropriate, respectful terminology in this area?  I certainly don’t want to offend anyone on purpose, and I also don’t want to do so by mistake. Answer→

Quirky Question #285: Potholes on the Ethical “High Road”

Question:  We learned that some of our employees may have been engaging in unethical, and perhaps even illegal, behavior.  We don’t tolerate this, so we hired a law firm to conduct an investigation, and based on the results of that investigation, we terminated the employees.  The terminated employees were high-profile employees, and we told some people why they were fired.  Also, when we fired the employees, we briefly referenced the investigation, but didn’t provide them with any substantive information about it.  Do you see any problems with that?

Answer→

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Nearly every day, executives and managers, and the in-house counsel and Human Resources professionals who work with them, are confronted with unanticipated questions regarding the workforce. Just when they think they have "seen it all," along comes a new and often stranger scenario involving an odd twist to an area they thought they fully understood. These individuals often find themselves back at square one when trying to construct an appropriate response and devise a creative solution to the problem presented. Sometimes these "Quirky Questions" can be resolved easily; other times, they implicate practical and legal issues that are not immediately apparent. This Quirky Questions blog addresses these unanticipated employment questions.

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