More News on the Noncompete Front: Employers Should Still Expect Strict Scrutiny of Their Restrictive Covenant Agreements

In earlier posts, I reported on the passage of the new Massachusetts Noncompetition Agreement Act, which took effect on October 1, 2018. That Act significantly changed the law in this area, narrowing the permissible protections and imposing several new requirements on an employer who wants its employees to sign noncompetition agreements. 

While the Act did not ban noncompetition agreements altogether as certain constituencies had advocated, many commentators, including me, felt that the Act sent a dual message to employers. The first message was “you can still use noncompetition agreements if you must, but it isn’t going to be easy and they won’t be as useful as you would like.” The second implicit message was “you are better off using less restrictive agreements such as nonsolicitation agreements and nondisclosure agreements.” 

As evidence of the implicit message, the legislation provided a definition of noncompetition agreements covered by the Act as well as express exclusions: 

“Noncompetition agreement”, an agreement between an employer and an employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended. Noncompetition agreements … do not include: (ii) covenants not to solicit or transact business with customers, clients or vendors of the employer 

Accordingly, many employers have embraced the dual messages and abandoned the use of noncompetition agreements, but continued to have employees sign nonsolicitation agreements. 

A recent decision by a judge in the Business Litigation Session of the Superior Court in Bruett v. Walsh reminds us not to misperceive this encouragement as meaning the more limited restrictions will always be enforced. While nonsolicitation agreements were placed outside the scope of the Act, they will still be subjected to the same strict scrutiny by the courts that existed prior to the Act’s passage. Consequently, enforcement will not be a sure thing. 

David Bruett was an insurance agent who had started in the insurance business with John J. Walsh Insurance Agency. Prior to beginning that employment, he had signed an agreement whereby he agreed that he would not: 

solicit, attempt to obtain, accept, write, service or transact insurance business of any nature for any customer or account on the books of the Agency. 

Fourteen years later, Bruett left to start his own agency. Bruett scrupulously did not solicit his former customers nor did he even notify them of his new agency. Several of the customers, however, found out where he had gone and contacted him. In violation of the express language of his agreement, Bruett transacted insurance business and wrote polices for those former Walsh customers. 

Judge Mitchell Kaplan was called upon to determine whether a preliminary injunction should issue restraining Bruett from doing business with the former Walsh customers for the remaining term of the agreement. The Court noted the express language prohibiting the acceptance or transaction of business. The inquiry did not stop there, however, and the Court carefully reviewed the underlying facts and circumstances. Ultimately, the Court refused to impose that restraint, enjoining Bruett only from solicitation, something he was not doing anyway. 

Central to the Court’s reasoning was the requirement that to obtain enforcement an employer must be attempting to protect a legitimate business interest, typically trade secrets, confidential information or good will. The judge found that there were no trade secrets and only limited confidential information at issue. 

Turning to the question of good will, the Court noted that good will “is the prior history of reliability, integrity, knowledgeability, insurance experience, and prompt service that would cause present insurance clients to renew their existing insurance policies …, procure new policies … and to refer their friends and colleagues ….” The Walsh Agency had argued that this good will was its good will because it had invested the time, effort and expense to support Bruett’s development of the relationships with the customers. It was therefore entitled to protect it by the restraint requested. 

The Court did recognize that good will is typically the result of the combined efforts of the agent, as the public face of the Walsh Agency to the customers, and the management team, clerical and technical staff, who the customer may never see nor speak with. Despite noting that the company’s good will and the employee’s good will with those customers were “inevitably intertwined,” the Court drilled down to determine where the good will line should be drawn and whether Bruett should be restrained. 

In that regard, the Court’s inquiry was industry specific. It distinguished the insurance business from the business of a financial investment advisor that provides “handcrafted products.” In contrast, the Court found that the “products” of an insurance agency are not created by the agency, but rather the Agency steers the customer to the lowest price policies, provides assistance with claims and makes sure the policies don’t lapse. The Court then concluded that, by the nature of the insurance business, “most, although not all, of the good will belongs to the agent himself.” Granting the requested injunction, the Court said, would unfairly take away the good will that belongs to Bruett. The Court also noted that such restraint would impose a significant burden on the agent’s former customers who have come to trust him, not the agency, to handle their insurance needs.

As a result, the Court came down on the side of Bruett, leaving him free to do business with his former customers provided those customers had made, or in the future make, the first contact. 

Bruett does not pave new ground. It should, however, serve as a reminder to employers and their counsel that efforts at enforcing any type of restrictive covenant will occasion the same strict scrutiny that existed prior to the passage of the Noncompetition Agreements Act.   

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MA Paid Family and Medical Leave Act

On June 14th, we reported that Massachusetts delayed the implementation of the payroll tax under the Family and Medical Leave law by three months (i.e., until October 1, 2019). At the time, the government informed the public that the contribution rate would be increased from 0.63% to 0.75% of wages when withholding of contribution amounts begins on October 1st, but we were not informed about how the 0.75% contribution amount would be allocated between family leave and medical leave contributions. Last week, the Massachusetts Department of Family and Medical Leave answered that question and published two updated rate sheets and employer notices – one for employers with 25 or more covered individuals and the other for employers with fewer than 25 covered individuals.

Employers who completed the notification process prior to the June 14th extension will need to issue an amendment to the form and distribute it to all employees with the modified contribution rate. However, the amendment does not need to be signed by employees and can be sent electronically. The Department of Family and Medical Leave noted that this process will need to be completed each time that the rate changes. The revised notice forms, as well as the amendments, can be found here.

We will continue to monitor all developments regarding the Paid Family and Medical Leave law. Please contact any member of the Labor, Employment and Employee Benefits group if you have any questions.
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Massachusetts Delays Family and Medical Leave Act Payroll Contribution Three Months

Late Tuesday evening, news broke from Beacon Hill that the payroll tax funding the Paid Family and Medical Leave Act – scheduled to take effect on July 1st – is being delayed three months to October 1, 2019.  According to a joint statement issued by Governor Baker, House Speaker DeLeo, and Senate President Spilka, the delay is intended “[t]o ensure businesses have adequate time to implement the state’s Paid Family and Medical Leave program….”  It is expected that the legislature will pass, and the Governor will sign, an emergency bill over the next few days to officially delay the implementation of the payroll tax.

The joint statement also foreshadowed the legislature’s intent to “adopt technical changes to clarify program design.”  At this time, it is not clear what “technical changes” the legislature is considering.  It appears, however, that to maintain the amount of pre-funding and not reduce total contributions paid to the new family and medical leave trust fund, the contribution rate will be increased from .63 percent to .75 percent of wages when withholding of contribution amounts begin on October 1, 2019.

We will continue to monitor all developments regarding the Paid Family and Medical Leave Act.  Please contact any member of the Labor, Employment and Employee Benefits Group if you have any questions.

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Department of Family and Medical Leave Announces Extension of Time to Provide Notice to Employees

On May 1st, the Commonwealth’s Department of Family and Medical Leave announced that the deadline for the employer notice to employees has been extended from May 31, 2019 to June 30, 2019.  The notice, which may be provided electronically, must include the opportunity for an employee or self-employed individual (which would include independent contractors) to acknowledge receipt or decline to acknowledge receipt of the information.

It is anticipated that the Department will be publishing further updates as the final regulations deadline of July 1, 2019 approaches.  We will continue to provide updates as appropriate. 

If you have any questions on the above requirements or concerning the Commonwealth’s Paid Family and Medical Leave Law, please contact any member of Mirick O’Connell’s Labor, Employment and Employee Benefits Group.    

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A Rebalancing for Wage Act Claims and Class Actions?

Citing three Wage Act cases in 2018, I raised the question in this space whether the Massachusetts Supreme Judicial Court was now taking a more pro-employer view. With appointees of Governor Baker now holding a majority of the Court, did those three decisions in which the Court adopted a narrow interpretation of the Massachusetts Wage Act, G.L. c. 149, §148, mean that the interests of employers might be in the ascendancy? A fourth Wage Act decision decided in April 2019, however, suggests that those questions were premature.
In Gammella v. P.F. Chang’s China Bistro, Inc., the Court took up the appeal of a plaintiff-employee whose attempts to assert a class action based upon wage violations had been thrown out at the trial court level. The case involved alleged “reporting pay” violations by the defendant-employer. Specifically, “reporting pay” is required when an employee who appears for work is sent home early. When sent home early, the employee must be paid for at least minimum wage for three hours.
Mr. Gammella’s individual “reporting pay” claim was small – $453. He therefore sought class certification which would enable him to assert “reporting pay” claims on behalf of hundreds of employees of the defendant-employer who in the aggregate had been sent home early 7,000 times over a four year period. If proven, the class claims would dwarf the individual claims of Mr. Gammella.
A Superior Court judge denied class certification. He found that the plaintiff had failed to show that a sufficient number of those 7,000 instances were entitled to “reporting pay” due to violations by the employer to satisfy the class action numerosity requirement. In that regard, the lower court had held that the plaintiff’s showing had failed to establish which employees had been sent home for reasons that would trigger “reporting pay” and which had left early for reasons for which no such payment was required (for example, the employee had asked to leave early). Because of that uncertainty, the plaintiff’s proof failed and class certification was denied.
After successfully defeating the class certification attempt, the defendant-employer had then employed a tactic to prevent the plaintiff from appealing that denial. In that regard, it tendered a certified check for all of the payments that the plaintiff claimed were due. Following the plaintiff’s rejection of that check, the defendant argued that his claim should be dismissed. Adding insult to the injury of the denial of class certification, a different Superior Court judge agreed and found that the plaintiff’s rejection of that offer rendered his individual case moot. The case was then dismissed in its entirety.
On appeal, the Supreme Judicial Court sided with the employee, vacating the dismissal and denial of class certification. The Court then remanded the case for a further consideration of whether the class should be certified.
In reaching that conclusion, the Court looked askance at the employer’s obstruction of the plaintiff-employee’s efforts to develop the facts that might have permitted him to meet the class requirements. Specifically, the employer had provided records showing employees who had been sent home early, but its records did not show why. The employer also refused to provide employee names effectively handcuffing the plaintiff’s ability to show that the reasons were illegitimate and should have triggered the payment requirement. The uncertainty created by the defendant’s strategic “information monopoly,” the Court held, should not be held against the plaintiff-employee, but rather against the employer. Giving the benefit of the doubt to the employee, the Court held that it was “reasonable to infer that the number of plaintiffs would satisfy the numerosity requirement.”
The Court also rejected the employer’s argument that the plaintiff-employee’s refusal to accept its “make whole” offer should render his individual claim moot. Recognizing that such a finding would have the effect of terminating the entire litigation and avoiding the possibility of an appeal of the class certification denial, the Court overturned the lower court’s mootness ruling and dismissal. In doing so, the Court avoided giving the defendant the practical power to make the denial of class certification questions unreviewable through this type of clever buy-out strategy. The net effect was that the Court revived the plaintiff-employee’s individual claim and permitted him a chance to relitigate the class question aided by the Court’s strong language tilting in favor of certification.
In light of this recent opinion, it is apparent that the potential “lean” of the Baker Court perceived by this author [See “WARN Act Violations ≠ Wage Act Violations,” January 3, 2019; “Violation of Sick Time Payout Policy Not a Wage Act Violation,” January 31, 2018; “A Bridge Too Far – Individual Liability for Wage Act Violations,” January 3, 2018] was more imagination than reality. Or is it perhaps a situation where the employer’s aggressive tactics in this one case precipitated the need by the Court to level the playing field?
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Decision in Spaulding v. Town of Natick School Committee is a Message to All School Committees

A Superior Court Judge recently issued a decision holding that portions of the Natick School Committee’s Public Participation at School Committee Meetings Policy (the “Policy”) are unconstitutional. The relevant provisions, which are common in similar school committee policies across the Commonwealth, prohibited “improper conduct and remarks” and “defamatory remarks.” Although the Policy allowed “objective criticisms of the school operations and programs,” it provided that the School Committee would not hear “personal complaints of school personnel nor against any member of the school community.”

The Judge, applying well-established First Amendment principles, determined that the public comment portion of a school committee’s meeting creates a “designated public forum,” meaning that the government body can only restrict statements based on their content when necessary to effectuate a compelling state interest. The School Committee argued that it had such “compelling interests” in trying to protect student and staff privacy, promoting a learning environment that fosters success, maintaining a positive workplace, prohibiting bullying and conducting its business in an orderly and efficient manner.

The Judge acknowledged and agreed with the School Committee’s interests and then analyzed those interests in light of the School Committee’s statutory authority to hire and fire the superintendent of schools, review and approve budgets, and establish educational goals and policies for the District. In light of the School Committee’s legal authority, the Judge distinguished between complaints about school operations and programs, which are within the School Committee’s jurisdiction, and personal complaints about staff (excluding the Superintendent) and students, which are not. Thus, the Judge concluded the provision of the Policy prohibiting complaints was lawful, except to the extent it prohibited complaints against individuals under the jurisdiction of the School Committee, i.e., the Superintendent of Schools. The Judge also held that the limitation in the Policy to “objective” criticisms was unconstitutional.

With respect to the prohibition on “defamatory” remarks, the Judge held that the Policy could only lawfully be applied to comments that have been found by a court to be defamatory. Other critical comments, however, may not be prohibited simply because they show an individual or the school district in a negative light. The Judge also held that the prohibition of “improper” and “abusive” remarks was not narrowly tailored to meet the School Committee’s compelling interest in conducting orderly meetings as the First Amendment only allowed for the prohibition of so-called “fighting words” or threats.

Although Spaulding v. Natick School Committee is only a Superior Court decision and, therefore, not binding on school committees state-wide, the decision appears well-reasoned and supported by other precedent-setting decisions. As such, we recommend that all school committees review their current public comment policies. For school committee policies based upon the MASC’s model policies, the relevant policy is BEDH. School committees would be wise to clarify their policies to provide that public comment will only be permitted with regard to matters under the school committee’s jurisdiction. In addition, any references, typically in paragraph 4, to “improper” and “abusive” comments should either be stricken or defined as prohibiting only vulgarities, threats or remarks likely to provoke a violent reaction. References to “defamatory” comments should either be deleted or limited to the unlikely comment related to a matter in which a court has already adjudicated a comment as defamatory. References, typically in paragraph 6, to “objective” criticisms should be deleted.

 The Judge’s full decision, including a description of the specific facts involved, can be found here

 Please contact any member of our Public Education Group if you have any questions or if you need assistance updating your policies regarding public participation at school committee meetings.

 

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Department of Labor Releases Proposed Rule to Increase Minimum Salary Threshold for Overtime Exemption

On March 7, 2019, the Department of Labor released a long-awaited proposal to increase the minimum salary requirement for exempt employees from $23,660 to $35,308.  The DOL’s proposed rule comes nearly two months after it sent the rule to the Federal Office of Management and Budget for review – a story we previously reported about here.  

Assuming the proposed rule is adopted, to be exempt from overtime, an employee would need to be compensated on a salary basis at a rate of not less than $679 per week and perform the job duties required by the applicable “white-collar” exemption – namely, the executive, administrative, professional, outside sales, or computer professional exemption.   According to commentators, the increase in the minimum salary threshold would make 1.1 million additional workers eligible for overtime.

The proposed rule also contemplates a process to update the minimum salary threshold every four years.  The DOL has specifically requested input from the public on how this process should function.   

The proposed regulations will be formally published in the Federal Register next week.  After their publication, members of the public (e.g. employers, unions, business groups, workers’ rights groups, etc.) will have 60 days to comment on the proposed regulations.  Following the notice and comment period, the DOL may decide to amend its proposal based on the feedback it receives.  Alternatively, the DOL could keep its proposed rule intact.  

Readers will recall that in 2016, twenty-one states, the U.S. Chamber of Commerce, and several business groups filed a lawsuit to enjoin the Obama Administration from raising the minimum salary from $455 per week to $913 per week.  Many commentators believe this time around will be no different and readily expect both business and workers’ rights groups to mount legal challenges.

We will keep you updated on this developing story.   

March 7, 2019, the Department of Labor released a long-awaited proposal to increase the minimum salary requirement for exempt employees from $23,660 to $35,308.  The DOL’s proposed rule comes nearly two months after it sent the rule to the Federal Office of Management and Budget for review – a story we previously reported about here.  

Assuming the proposed rule is adopted, to be exempt from overtime, an employee would need to be compensated on a salary basis at a rate of not less than $679 per week and perform the job duties required by the applicable “white-collar” exemption – namely, the executive, administrative, professional, outside sales, or computer professional exemption.   According to commentators, the increase in the minimum salary threshold would make 1.1 million additional workers eligible for overtime.

The proposed rule also contemplates a process to update the minimum salary threshold every four years.  The DOL has specifically requested input from the public on how this process should function.   

The proposed regulations will be formally published in the Federal Register next week.  After their publication, members of the public (e.g. employers, unions, business groups, workers’ rights groups, etc.) will have 60 days to comment on the proposed regulations.  Following the notice and comment period, the DOL may decide to amend its proposal based on the feedback it receives.  Alternatively, the DOL could keep its proposed rule intact.  

Readers will recall that in 2016, twenty-one states, the U.S. Chamber of Commerce, and several business groups filed a lawsuit to enjoin the Obama Administration from raising the minimum salary from $455 per week to $913 per week.  Many commentators believe this time around will be no different and readily expect both business and workers’ rights groups to mount legal challenges.

We will keep you updated on this developing story.   

 

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