Five Hot Topics in 2014 Employment Law

Issue: June 2014 by John W. Francisco, Esq., Edmunds & Williams

Legal Employment law is a volatile area because political and economic tensions seem to most quickly influence employment-related regulatory activities at federal and state levels. As we approach the halfway point of 2014, there are five noteworthy topics/trends in employment law that you should be aware of in order to proactively address potential high risk areas for your business and stay compliant with the law.

1. Misclassification of Employees as Independent Contractors

There is a growing trend of audits by regulatory agencies (and the IRS) of employers’ classification of workers as “independent contractors.” All employers must remember that the legal test utilized by most federal and state regulatory agencies to search out and identify worker misclassifications is usually more stringent than both the IRS’ and common law tests.

Most employment agencies presume as a default that every worker is an employee, and the burden always remains on the employer to prove otherwise. Whether a particular worker may be free from “direction and control” is just one factor to consider. To survive scrutiny, an employer also must establish that (1) the services the worker performs are either outside the employer’s usual course of business or outside the employer’s place of business, and (2) that the worker is engaged in an independently established trade, occupation, profession or business. In addition, the US Department of Labor (USDOL) and the IRS have now made worker misclassification an area of priority of investigation and control.
For example, on November 12, 2013, a bill was introduced in the U.S. Senate entitled the “Payroll Fraud Prevention Act of 2013.” If passed, it will amend the federal Fair Labor Standards Act (FLSA) and impose significant penalties on employers who intentionally misclassify workers as independent contractors. Even if not ultimately passed, it evidences a priority on the federal level. In light of this trend of increased scrutiny and the potential risk of significant penalties, if your company has recently made a “close call” in classifying workers as independent contractors, it would be wise to consult with an attorney to confirm the decision is proper.

2. Misclassification of Non-Exempt Employees as Exempt

It appears that many employers continue to assume (incorrectly) that all of their “salaried employees” are not entitled to overtime pay. In fact, paying an employee a salary does not necessarily mean the employee is exempt from the minimum wage and overtime requirements of the FLSA and similar state laws. In addition to determining merely whether the employee is “salaried” and stopping there, employers also must consider the duties the employee performs and whether those duties qualify the employee for an exemption.
Because misclassification can result in liability for two years of back pay (three years for willful violations), as well as double damages and attorneys’ fees, this issue has become an easy target like low hanging fruit for the USDOL and, more importantly, to plaintiffs’ attorneys (who see a ripe source of damage with which to justify generating large fees). To assess whether an employee is properly classified as exempt, there is a lot of information online to provide an initial guide. But, we also strongly recommend that your company consult with an attorney before making a final determination on classifications (especially in the case of any reclassification process).

3. Criminal Background Check Practices as a Basis for Scrutiny

If you haven’t already done so, it would be prudent to review and possibly update your criminal background check procedure in your Employee Manuals. Although the Equal Employment Opportunity Commission (EEOC) has been under attack in recent months on this issue, the agency continues to aggressively pursue compliance with its updated Enforcement Guidance on the Consideration of Arrest and Conviction Records in Employment Decisions Under Title VII of the Civil Rights Act of 1964. Therefore, you must be very cautious now in asking job applicants to answer generic questions about their criminal convictions on employment applications, as the new trend is for state and local jurisdictions to deem such inquiries to be illegal.

4. IRS’ Tipping Rule for Employers in the Hospitality Industry

Effective January 1, 2014, gratuities automatically added to customers’ bills by employers in the hospitality industry (for example, an automatic 18 percent gratuity on parties of six or more) will not be considered “tips,” but rather “service charge wages.” This will impact not only employer recordkeeping and reporting obligations, but also compliance with overtime rules under the FLSA, as such mandatory tips need to be included as part of an employee’s regular rate of pay in order to properly calculate the overtime rate. Failure to comply with the rule may subject hospitality employers to increased scrutiny by the IRS, the USDOL and plaintiffs’ attorneys. Accordingly, employers in the hospitality industry should review their recordkeeping and reporting practices and wage calculations regarding these mandatory gratuities.

5. Geographic Limitations in Restrictive Covenants

A recent case from a Circuit Court in Fairfax, Virginia, is instructive on how courts are continuing to struggle with balancing the protection of employers in making resource investments to train employees versus allowing such employees to go out and earn a fair living once separated from the company. (See, Wings, LLC v. Capitol Leather, Fairfax County Circuit Court, March 2014).
In the case, the employer sued two ex-employees who went to work for a competing residential vinyl, fabric and leather repair business. The vast majority of the plaintiff-employer’s customers were automobile dealerships and collision repair centers that hired the employer to furnish interior features in vehicles. The employer had spent significant time and resources providing extensive technical training and marketing and business development methods to the ex-employees as technicians and then assigned them to territories in which to regularly contact customers.

When the two employees quit and went to work for a competitor, the employer filed the lawsuit and attempted to enforce restrictive covenants which sought to prohibit the ex-employees from working “in a position that was the same or substantially the same” as their jobs with the employer, with any business that had within the past 12 months competed with the employer, and it sought to apply the prohibition to any U.S. state or foreign country in which the employer had conducted business within the last 12 months.

Evidence demonstrated that, during the previous 12 months, the employer had conducted business in Virginia, Maryland and West Virginia. The court, however, refused to grant a preliminary injunction enforcing the agreement because the geographic restriction was overly broad and not narrowly drawn to protect the employer’s legitimate business interests. As drawn, the agreement would prevent the former employees from working, for example, in Abingdon, Virginia, more than 300 miles away from Fairfax and an area in which the employer did no business and had no legitimate interest in protecting from competition. According to the court, requiring these two residents of Northern Virginia to attempt to locate work outside Virginia, Maryland or West Virginia simply put too much of a burden on them in their efforts to earn a living.

As you can see, the trend continues to be for courts to strike down non-competes in Virginia, and it is increasingly difficult to attempt to draft a non-compete agreement carefully enough so as to not appear to be over-reaching. Again, we suggest that you retain a lawyer to assist you in carefully crafting these restrictive covenants as narrowly as possible so that they have a chance to be enforced under Virginia law.

The preceding is for general informational purposes only and not intended to constitute specific legal advice or form an attorney/client relationship. Please seek the services of a licensed attorney for specific legal advice.

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