On March 7, 2014, Judge Raymond Jackson of the U.S. District Court for the Eastern District of Virginia denied Dollar Tree’s motion for de-certification of a Fair Labor Standards Act (FLSA) class action case involving between 4,000 and 6,000 current and former employees. The lawsuit alleges that Dollar Tree required or permitted its hourly associates and assistant store managers to work “off the clock” and overtime without compensation. The suit covers employees in Dollar Tree stores located in 48 states and the District of Columbia. Dollar Tree’s headquarters is located in Norfolk, Virginia.
Part 1 of this post discussed a suit brought by Wings LLC to enforce a noncompete against two defector employees. The letter opinion said that the noncompete was unenforceable. In this post, I examine the role of noncompetition agreements and when other agreements may be better options in cases such as this one.
The Role of Noncompetes – Protecting the Investment
A closer look at this case also reveals a common misunderstanding about the purpose of noncompetes. Put simply, a noncompete is designed to protect a business from losing its investment. This can be seen most clearly in the context of a business sale. When one person buys a Pizza Hut franchise from its owner, the person also “purchases” the customer market that comes with it. If the former owner then opens a Little Caesar’s across the street, the purchaser’s investment is severely compromised in the form of lost customers and lost profits. A noncompete prohibiting the former owner from engaging in the same or similar business within the customer market for a sufficient period of time will help protect the purchaser from being undermined by immediate competition. And it prevents the seller from double-crossing the purchaser by profiting twice—once from the sale of the Pizza Hut and again from the profits made from Little Caesar’s.
On March 6, 2014, a Fairfax Circuit judge denied a preliminary injunction in a suit brought by Wings LLC to enforce a noncompete against two defector employees. In a letter opinion, Judge Bruce D. White said the noncompete was unenforceable because the geographical limits were overbroad. The ruling is not particularly unprecedented but offers another look into why noncompetes continue to get struck down and how to avoid it by examining the real business needs of an employer rather than imagined possibilities.
Founded in 1996 by John Kia, Wings LLC provides commercial and residential vinyl, fabric and leather repair services. Kia remains its sole owner. Technicians Jeffrey Manalansan and Cameron Fridey signed noncompetes when Kia hired them to work for Wings. The noncompete provided that the technicians could not, for 24 months after employment with Wings, directly solicit any customer that Wings serviced in the past 12 months prior to their departure. The noncompete also prohibited the technicians from accepting employment “in a position that is the same, or substantially the same” as their job with Wings with any business that had, within the past 12 months, provided “material, labor, or services” that competed with Wings. The restriction applied to “any U.S. state or foreign country in which the employer had conducted business during the 12 months prior to the employee’s departure.”
The U.S. Department of Labor (DOL) has once again delayed publication of its final rule on “persuader activities.” The DOL’s final rule was initially scheduled for publication in November 2013. As that date approached, the DOL rescheduled publication for March 2014. Having now hit that mark, the DOL once more has pushed off publication—this time without setting a future date. The new date is expected to be announced in the DOL’s Spring 2014 Regulatory Agenda.
In June 2011, the DOL published revisions to the persuader rule which broaden the scope of an employer’s reportable union-related activities by substantially limiting the application of the “advice” exemption in Section 203(c) of the Labor-Management Reporting and Disclosure Act (LMRDA).
On March 24, 2014, the final rule published by the U.S. Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP) requiring federal contractors and subcontractors to undertake affirmative action for individuals with disabilities will take effect.
The final rule makes changes to the regulations implementing Section 503 of the Rehabilitation Act of 1973, which prohibits federal contractors and subcontractors from discriminating in employment against individuals with disabilities (IWDs). It also requires these employers to take affirmative action to recruit, hire, promote, and retain these individuals. In addition, the final rule makes changes to the nondiscrimination provisions of the regulations to bring them into compliance with the ADA Amendments Act of 2008 (ADAAA).
As a business owner, it is inevitable that there will come a time when, for some reason or another, you will need to terminate an employee. In many circumstances an employer will use a severance agreement to obtain a release for any potential liability under which a severance amount will be paid. As with many employee-employer issues, there are certain potential pitfalls that surround severance agreements that an employer needs to take into consideration when offering severance.
Potential Pitfalls in Offering Severance Agreements
Put the Agreement in Writing: This first issue seems like an obvious requirement, but in the event an employer is offering severance payment it is the best business practice to put it in writing that contains a release for the employer. Unless agreed to otherwise, an employer is under no obligation to offer severance pay. In the event the employer wants to pay such amounts, it needs to get the agreement memorialized in writing.
In anticipation of a new year, the following is a brief overview of selected notable employment-related cases in Virginia from 2013. These cases involve non-competition agreements, discrimination claims and bankruptcy issues. Each case has components to keep in mind when dealing with employment matters in Virginia.
Demurrer Not Proper Challenge Non-Compete
Assurance Data, Inc. v. Malyevac, 286 Va. 137 (2013)
This appeal arises from a Fairfax Circuit Court case where the judge granted a demurrer to the employee on the issue of the enforceability of a non-compete in the employment contract. The Virginia Supreme Court reversed the judgment, finding that the purpose of a demurrer was to determine whether a cause of action states a claim upon which relief can be granted, not to decide the merits of the case (i.e. whether the non-complete was enforceable). The court emphasized that the enforceability of a non-compete must be decided on the merits of the case on a case-by-case basis. Thus, going forward, the proper method for challenging a non-compete is a plea in bar or summary judgment motion that would allow the court to “evaluate and decide the merits of a case.”
While employers strive to prevent workplace conflict, complaints about employee conduct may still arise. When the complaint involves discrimination or other unlawful conduct, it is important for the employer to thoroughly investigate the complaint and take appropriate action if the complaint is substantiated.
To manage these investigations, some employers rely on their in-house counsel. However, in-house counsel should not be the first line of defense when investigating an employee complaint, as counsel can become a trial witness and all documents not otherwise protected by attorney-client privilege are discoverable. This includes notes by counsel about discussions with employees during the investigation – notes most employers would rather keep to themselves.
Employers frequently use severance agreements when terminating an employee or when an employee resigns with the hopes of reducing potential liability. In our practice, we often advise employers to offer severance pay that is memorialized in an agreement containing a general release, covenant not to sue and often indicates that the employee is resigning. Since an employee has no legal entitlement to severance pay, the majority of the time, he or she accepts the offer and typically the employer does not hear anything else from the employee. However, this is not the case with all employees and it is imperative employers understand the benefits and downsides to severance agreements and how the EEOC and Virginia Unemployment Commission view these agreements.
In practice, severance agreements significantly reduce a company’s liability exposure by minimizing the risk of litigation and administrative proceedings. Offering pay that an employee is not already entitled to will often placate an otherwise disgruntled employee by providing additional financial assistance. Typically a severance agreement will offer severance pay, include a confidentiality and non-disparagement clause, a general release by the employee of all claims and often indicate that the employee is resigning from his or her employment.
In June 2013, the Fourth Circuit joined the United States Court of Appeals for the District of Columbia Circuit in vacating the National Labor Relations Board’s “notice posting rule” (the “rule”). The controversial rule would have impacted nearly six million employers, the majority of which are small businesses. The rule issued by the National Labor Relations Board (“NLRB”) declared that employers would be guilty of unfair labor practices if they failed to post at their office and on their websites a “Notification of Employee Rights under the National Labor Relations Act.” 76 Fed. Reg. 54,006 (Aug. 30, 2011). According to the NLRB website, the rule would have required most private sector employers to post the notice in a “conspicuous place” and publish a link to the notice on a website if other personnel notices are posted there.
What is the Notice Posting Rule?
The National Labor Relations Act (“NLRA”) oversees relations between private employers, labor unions and employees. The NLRB issued the rule on August 30, 2011 after a notice and comment period. The rule is comprised of 3 parts. Subpart A requires employers to post the notices. Subpart B makes the failure to post an unfair labor practice and enables the NLRB to toll the statute of limitations for any unfair labor practice claim made by an employee. Subpart C allows for the NLRB to consider a failure to post as evidence of unlawful motive that would weigh against it in any proceedings before the Board. 76 Fed. Reg. 54,006 (Aug. 30, 2011).