Part III of “The Restricting Covenant” Series: Recipes and Restaurants

By Lawrence J. Del Rossi

This is the third article in a continuing series, “The Restricting Covenant.” In restrictive covenant cases, a company’s trade secrets are sometimes referred to as its “secret sauce” or “secret recipe.”  The “secret formula” of Coca-Cola soda is an analogy used to help explain the uniqueness of a company’s protectable interest and the need to prevent unauthorized disclosure, misappropriation or unlawful competition.  This talk about secret sauces and recipes not only made me hungry, but it also relates to the subject of this article – restrictive covenants, trade secrets and the food and restaurant industry.

What’s in Your Secret Sauce?

Food recipes can constitute trade secrets.  In Tavern Restaurant v. Brandow, for example, the Supreme Court of Iowa held that a restaurant had successfully demonstrated at trial that its former manager and his new employer (a competing restaurant) had misappropriated “secret recipes” for pizza sauce, pizza crust and grinder sandwiches.  To win at trial, the plaintiff had to show that its recipes derived independent economic value and that it took reasonable steps to maintain their secrecy.

As to the independent economic value requirement, the plaintiff’s owner testified that he had purchased the restaurant (including its recipes) for almost half a million dollars, and that his restaurant had won several “highly-prized local food awards.”  In addition, the plaintiff presented an expert from the Culinary Institute of America, who concluded that he could not determine the exact amount of specific ingredients found in the recipes “without access to prohibitively expensive chemical analysis machinery.”  Even the defendants’ expert conceded that he could not determine the underlying process by which the pizza and grinders were assembled.  The court explained that, “[w]hile the core ingredients were determinable with the resort to a rare and expensive machine, the exact assembly and baking processes used could not be determined.”

With respect to secrecy requirement, the plaintiff-restaurant presented evidence that its recipes were not generally known or ascertainable in the public domain.  The owner told its employees that the recipes were confidential.  All recipes, including the crust recipe, were locked in a safe deposit box.  Even though the kitchen employees who prepared the dough knew the crust recipe, the court found that the restaurant’s secrecy procedures were “reasonable under the circumstances.”

Based on this evidence, the Iowa Supreme Court upheld the jury’s award of money damages, as well as the restaurant’s request for a permanent injunction that prevented the defendants from “using, divulging, and communicating to anyone else any of the trade secrets or confidential information which includes all or any part of the plaintiff’s recipes for pizza sauce, pizza dough or grinders or any substantially similar recipes thereto.”

That’s the Way the Cookie Crumbles?

Courts will enjoin a competitor from using a food recipe if it is a trade secret and the holder of the secret has taken steps to protect it from the public.  The opening two sentences of the Massachusetts appeal court’s opinion in Peggy Lawton Kitchens, Inc. v. Hogan is priceless.  The court begins:  “Nothing is sacred.  We have before us a case of theft of a recipe for baking chocolate chip cookies.”

The owner of Peggy Lawton Kitchens (“Kitchens”) had mixed the chaff from walnuts, which he called “chaff, nut meal, nut dust, and nut crunch” in his chocolate chip cookie batter.  This produced “a unique and distinctive flavor.”  The appeals court found that while the basic ingredients of flour, sugar, shortening, chocolate chips, eggs, and salt, would be common in any chocolate chip cookie, and therefore not a trade secret, “the insertion of the nut dust served to add that modicum of originality which separates a process from the every day and so characterizes a trade secret.”  This cookie recipe led to immediate commercial success for Kitchens, and according to its creator, “did to the cookies what butter does to popcorn or salt to a pretzel.  It really made the flavor sing.”

The owner had carefully guarded the cookie recipe by locking the only copies in an office safe and in his desk drawer.  The baking process for the cookies was divided into three separate components and was written on three separate cards.  Access to the cards was limited to long-time trusted employees, including the defendant, Terence Hogan.  The appeals court found that Kitchens had taken “reasonable steps to maintain its mystery and to narrow the circle of those privy to its essentials.”  The court also concluded that the “absence of admonitions about secrecy or the failure to emphasize secrecy in employment contracts (if there were any in this relatively small business)” was not fatal to the plaintiff.

The defendant Hogan, who had no prior experience in volume baking before working at Kitchens, left Kitchens and established a competing bakery business under the trade name “Hogie Bear.”  Hogie Bear’s first product was chocolate chip cookies, which included the “miraculous nut dust” and looked “similar in appearance, color, cell construction, texture, flavor and taste.”  At that time, about 40 brands of chocolate chip cookies were sold in New England.  Except those made by Kitchens and Hogie Bear, no two of them were alike.  The record established that Hogan had “employed a ruse to examine the ingredients cards and may have helped himself to a look at the formula tucked away in Kitchens’ safe or [its owner’s] desk.”  The trial court did not award Kitchens damages because the evidence was “too vague and speculative.”  However, Hogan was enjoined permanently from “making, baking, and selling chocolate chip cookies which use the plaintiff’s formula.”

Inevitable Disclosure of the Secret Formula?

The Third Circuit’s decision in Bimbo Bakeries USA, Inc. v. Botticella is another interesting case discussing the intersection between food recipes, trade secrets, restrictive covenants, and injunctive relief.

Bimbo Bakeries is one of the largest baking companies in the United States, producing and distributing baked goods under popular brand names including Thomas’ and Entenmann’s.  The defendant, Chris Botticella, was responsible for five of Bimbo’s production facilities and oversaw a variety of areas including product quality and cost, labor issues, and new product development.  As one of Bimbo’s senior executives, Botticella had access to and acquired a broad range of confidential information about Bimbo, its products, and its business strategy.  For example, he was one of only seven people who possessed all of the knowledge necessary to replicate independently Bimbo’s popular line of Thomas’ English Muffins, including the secret behind the muffins’ unique “nooks and crannies” texture.  He signed a “Confidentiality, Non-Solicitation and Inventions Assignment Agreement,” in which he agreed not to compete directly with Bimbo during his employment, not to use or disclose any of Bimbo’s confidential or proprietary information during or after his employment, and to return every document he received from Bimbo after his employment.  The agreement, however, did not include a covenant restricting where Botticella could work after he left Bimbo.

Botticella accepted a job at one of Bimbo’s primary competitors in the baking industry – Hostess Brands, Inc.  However, he did not disclose his plans to work for Hostess for several months, continued to engage fully in his work at Bimbo, and had access to Bimbo’s confidential, proprietary and trade secret information after he accepted the job with Hostess.  After Botticella’s departure, a computer forensics expert concluded that the person logging in as Botticella had accessed confidential documents during the final weeks and days of his employment at Bimbo, including 12 documents in 13 seconds on his last day within just minutes after Botticella had disclosed to Bimbo his plans to work for Hostess.

Bimbo brought a lawsuit in Pennsylvania federal court against Botticella seeking to protect its trade secrets and to enjoin him from working for Hostess.  Even though Botticella did not have a post-employment non-compete in his employment agreement with Bimbo, the District Court granted Bimbo’s motion and preliminarily enjoined Botticella from working with Hostess and from divulging to Hostess any confidential or proprietary information belonging to Bimbo.  The court found there was “substantial likelihood, if not an inevitability, that [Botticella] will disclose or use Bimbo’s trade secrets in the course of his employment with Hostess.”

On appeal, the Court of Appeals for the Third Circuit affirmed the District Court’s rulings.  After discussing the contours of the “inevitable disclosure” doctrine under Pennsylvania law, the court concluded that “(1) a determination of whether to grant injunctive relief in a trade secrets case and, if so, the proper scope of the relief, depends on a highly fact-specific inquiry into the situation in the case the court is considering[,] and (2) a court conducting this inquiry has discretion to enjoin a defendant from beginning new employment if the facts of the case demonstrate a substantial threat of trade secret misappropriation.”  Proof of actual misappropriation was not required.  Note that many states do not recognize or have rejected the inevitable disclosure doctrine.

The Third Circuit found that the trial court had not abused its discretion in concluding, at the preliminary stage of the case, that Bimbo would suffer irreparable harm absent injunctive relief because the disclosure of its trade secrets to Hostess would put Bimbo at a competitive disadvantage that a legal remedy could not redress.  Additionally, the private and public interests in preventing the misappropriation of Bimbo’s trade secrets outweighed the temporary restrictions on Botticella’s choice of employment with Hostess.

Caught with Your Hand in the Cookie Jar?

Although trade secret and non-compete laws are state-by-state specific, there are some common ingredients that are baked into most state laws.  The three cases discussed above highlight some recurring themes and common ingredients found in food recipe restrictive covenant cases (and many non-foody non-compete cases).  First, unique and distinctive recipes that derive independent value can constitute trade secrets and are protectable secrets from unauthorized use and disclosure.  Second, the holder of the recipe is expected to take reasonable steps to keep it secret and out of the public domain.  And third, bad actors get punished when their hand is caught in the preverbal cookie jar (sorry, that one was too easy).

No One Size Fits All

Finally, on a somewhat foody-related/restrictive covenant note, there has been a recent uptick in enforcement efforts by certain states related to non-competes, particularly for low-wage workers in the fast food industry.  The trend is based on the ability of non-executive and non-supervisory employees’ ability to earn a living as long as they do not steal and use trade secrets.  For example, in June 2016, the Illinois Attorney General’s Office filed a lawsuit against Jimmy John’s franchises “for imposing highly restrictive non-compete agreements on its employees, including low-wage sandwich shop employees and delivery drivers whose primary job tasks are to take food orders and make and deliver sandwiches.”  The agreements barred departing employees from taking jobs with competitors for two years and from working within two miles of a Jimmy John’s store.  In December 2016, Jimmy John’s reached a settlement, agreeing to pay $100,000 and to remove non-compete clauses from its new-hire agreements.  This deal was reached after Jimmy John’s had settled with the New York Attorney General’s Office and agreed not to use non-compete agreements for most of its workers in New York.

The goal of this Series is to provide a brief overview and some interesting insights and practical pointers when dealing with unique issues that might arise in the context of restrictive covenants and a particular occupation or industry.  It is not intended to provide and should not be construed as providing legal advice.  Each situation is different, and if legal advice is needed, you should seek the services of a qualified attorney who is knowledgeable and experienced in this area of the law to address your specific issues or needs.  Stay tuned for future articles in this Series, which will discuss the restrictive covenant landscape for other occupations and industries, including computer engineers, carpenters, car salespersons, and more.

Click here to view all posts in “The Restricting Covenant” series.

Part II of “The Restricting Covenant” Series: Barbers and Beauty Shops

By Lawrence J. Del Rossi

This is the second article in a continuing series, “The Restricting Covenant.” In this article, I discuss a topic that is near and dear to me – my hair and my long-time relationship with my barber.  I have used the same barber to cut my hair since high school, even after moving many miles away.  I sit in his chair, he cuts my hair with expert precision, and I am a satisfied customer.  This got me to think about one of the most basic reasons why employers want to impose non-compete and non-solicitation obligations on their employees – the value and strength of a long-term customer relationship.  Courts have long recognized that protecting customer relationships is a legitimate protectable business interest that can support the enforcement of a restrictive covenant if it satisfies standards of “reasonableness.”  So if my barber was to leave his current location, could his employer enforce a post-employment covenant that would prohibit him from cutting my hair?  Yikes!

The Art of Barbering

The barber’s trade has a long history, dating back to Ancient Egypt.  Many states require a barber to have a license in order to practice barbering professionally.  There are quite a few cases throughout the country that discuss the enforceability of restrictive covenants in the context of barbers, barbershops, hair stylists, hair, nail and beauty salons, and beauty shops.  Many of these decisions involve the sale of an entire business, not just the transition of one employee to a competitor.  Courts generally tend to be more willing to enforce broader restrictions in the sale of a business context.

One interesting case in my home state of New Jersey that involves barbers and non-competes is Dellacorte v. Gentile, 98 N.J. Eq. 194 (1925). The plaintiff-barber Victor Dellacorte obtained a preliminary injunction to stop the defendant-barber Jean Gentile from directly competing against him in Summit, New Jersey.

In 1922, Gentile sold his barbershop, including “fixtures and goodwill,” to Paula Tally for $2,500.  The bill of sale had the following non-compete:

The party . . . agrees that he will not, directly or indirectly, either as employer or employee, engage in any branch of the barber business within a radius of one mile from No. 13 Maple Street, Summit, New Jersey, for a period of five years from the date hereof.

As discussed below, the key phrase was “any branch of the barber business.” Thereafter, Tally sold the business, including the non-compete, to Dellacorte.

A few years later (during the restricted period), Gentile opened a “beauty parlor” about 250 feet (in the restricted territory) from Dellacorte’s (formerly Gentile’s) barbershop.  Gentile argued that his new shop did not compete with Dellacorte because it “cut and bobbed ladies and children’s hair,” and was “in no sense a branch of the barber business.”  To bolster this argument, Gentile’s attorney cited the Latin root of the word “barber” (“barba,” meaning “beard”), and provided the court with “opinions of the courts in some of the Western states, to the effect that a beauty shop is not a barbershop, and that hair bobbing is not barbering.”  The court was not persuaded.

Barber’s Hair Bobbing Activities Cut it Too Close to His Competitor

After examining several different authorities, including the Standard Dictionary’s definition of “barber,” the judge found that “the bobbing of ladies’ hair is a distinct and important part of the business of a modern barber shop, as much as, or more than, was cupping a branch of that business in ancient times.”  The judge observed that it was “not uncommon today to see members of the female sex occupying chairs in barber shops having their hair bobbed in an effort to keep pace with the ever-changing styles.”  The judge then discussed “Samson and Delilah” and the “Holy Writ,” but I will leave those portions of the court’s opinion for you to read yourself.

The court focused on Gentile’s activities before he sold his business.  Gentile’s barbershop had engaged in the bobbing of women’s hair for several years before he sold his business.  Accordingly, this line of work “must have been in the minds of the parties when the covenant was entered into.”  The court also looked at Gentile’s conduct leading up to the opening of his new competing shop.  Gentile had tried unsuccessfully to purchase a release from the covenant, and therefore it was “quite apparent to [the judge] that this defendant went into the new business with his eyes open, and has no right to now complain if the successor of his vendee insists upon compliance with the covenant solemnly entered into.”  Based on these facts, the court enjoined Gentile from engaging in any branch of the barber business within the restricted territory pending a final hearing.

Courts Will Look Beyond Labels and Examine Actual Job Functions

Fortunately, for me (and my hair), my barber owns his own barbershop and does not have to worry about non-competes.  However, if he were to hire an apprentice, or merge with another barbershop, he would need to consider the pros and cons of having them sign a non-compete or some other form of restrictive covenant.  Not only is the Dellacorte decision an interesting case about the history of barbers and barbering, it highlights the searching view that some courts will undertake to determine whether someone should be enjoined from working based on a non-compete agreement.  Courts will look behind the “labels” and examine the person’s actual job functions to determine whether a business is truly engaged in unlawful competition.  The judge in Dellacorte, for example, did not take Gentile’s representation at face value that “bobbing ladies’ and children’s hair” was not “a branch of the barber business.”  Instead, he reviewed extraneous sources regarding the meaning of “barbers.”  He also relied on his own experience and observations at barbershops.  He looked at the parties’ conduct before and after the sale of the barbershop.  Did Dellacorte get the benefit of the bargain on the non-compete?  The judge did not think so.  Could Gentile earn a living in his trade outside of the restricted territory?  The judge thought he could.  The balancing of the equities, which is an unpredictable and nebulous concept of “fairness,” favored Dellacorte.

The Dellacorte decision also highlights the critical importance of focusing on the language used in the non-compete itself to determine its scope.  For example, if Gentile’s covenant had contained only the words “barber business,” as opposed to “any branch of the barber business,” would the court have stopped him from operating a “beauty parlor”?  Would it have been more helpful if Gentile had defined “the barber business” in the bill of sale?  While the duration of the restriction and the geographic scope are usually straightforward, the description of the prohibited activity can generate much dispute and litigation.  When drafting non-compete agreements, give careful attention to the description of the activity-based restrictions.

The goal of this Series is to provide a brief overview and some interesting insights and practical pointers when dealing with unique issues that might arise in the context of restrictive covenants and a particular occupation or industry.  It is not intended to provide and should not be construed as providing legal advice.  Each situation is different, and if legal advice is needed, you should seek the services of a qualified attorney who is knowledgeable and experienced in this area of the law to address your specific issues or needs.  Stay tuned for future articles in this Series, which will discuss the restrictive covenant landscape for other occupations and industries, including brokers, bankers, broadcasters, and more.

Click here to view all of the posts in “The Restricting Covenant” series.

Part I of “The Restricting Covenant” Series: Psychologists and Psychiatrists

By Lawrence J. Del Rossi

Restrictive covenants are private agreements that restrict an individual’s business activities within a specific geographic area for a period of time, in return for wages, access to information, or some other type of tangible benefit. Like the spots of a leopard, they come in all shapes and sizes.  Their enforceability varies from state to state, from occupation to occupation, and from industry to industry.  Many states have quirky or arcane rules or regulations tailored to specific occupations.  Some industries have specific rules and practices that dictate the parties’ course of dealing and determine the “reasonableness” of the restrictions.  Some employers prefer non-competes, while others prefer non-solicitations or non-disclosures, or some combination of each.  In any event, before agreeing to be restricted, or before asking someone to be restricted, this legal landscape should be explored and understood because litigation in this area of the law can be financially and emotionally draining.  This article discusses restrictive covenants and psychologists and psychiatrists.[1]

An Offer You Can’t Refuse  

As anyone who has watched the HBO series The Sopranos observed, Dr. Jennifer Melfi, a psychiatrist, occupied a unique position of trust and confidence with her patient, Tony Soprano.  Dr. Melfi was a sole practitioner with no other partners, so she probably did not have to worry about non-competes.  But what if she had just graduated from medical school, found a dream job with a well-established psychiatry practice in her home state of New Jersey, and was asked to sign an employment agreement that contained “non-compete” and “non-solicitation” provisions that restricted her from engaging in psychiatry, or from having any contact with patients, within twenty miles of her office, for two years after she left that practice?  What are Dr. Melfi’s options?  Should she accept, reject or negotiate a new deal?  What would be the financial and ethical impact to her and the patients?

New Jersey Regulations Prohibit Non-Competes for Licensed Psychologists

There is good news for Dr. Melfi, at least if she decides to stay in New Jersey.  She does not have to walk away from the deal.  Her post-employment restrictions most likely would not be enforceable because of New Jersey Administrative Code Section 13:42–10.16, a provision of the rules adopted by the State Board of Psychological Examiners, which reads:  “A licensee shall not enter into any business agreement that interferes with or restricts the ability of a client to see or continue to see his or her therapist of choice.”

In 2005, a New Jersey Appellate Court, in Comprehensive Psychology System, P.C. v. Prince, held that the State Board of Psychological Examiners adopted a regulation that restricted licensed psychologists from entering into non-competes.  In addition to this regulation, the court found that “the nature of the practice of psychology” and “the uniquely personal patient-psychologist relationship forbid any restrictions which might interfere with an ongoing course of treatment.”  The court did not elaborate on the particulars of this “unique personal relationship”, or compare or contrast it to a patient’s relationship with other types of doctors, social workers or therapists.  And interestingly, if the State Board of Psychological Examiners had not adopted this specific regulation, New Jersey courts, following the Supreme Court’s decisions in Community Hosp. Grp., Inc. v. Moore (2005), and Pierson v. Medical Health Ctrs., PA (2005), might have enforced some or all (New Jersey is a “blue-pencil” state) of Dr. Prince’s restrictions if they were otherwise found reasonable to protect a legitimate business interest of her employer (e.g., training, customer relationships, confidential information), not injurious to the public, and did not impose an undue hardship on her.  Future articles in this Series will address restrictive covenants and health care providers in other fields of medicine.

One issue that frequently arises when doctors leave a practice is whether they can contact patients to notify them of their departure and new whereabouts. Often times, the employment agreement will not address this issue directly.  The court in Comprehensive Psychology System, P.C. explained that, “a psychologist who changes his office location, voluntarily or involuntarily, has a duty to inform patients of the change and the new location and phone number.”  Otherwise, in the court’s view, the psychologist would “abandon” his obligations to the patient.  The plaintiff argued that it could have informed “its” patients of Dr. Prince’s departure, and the geographic restrictions were reasonable because Dr. Prince could have treated his patients outside of the restricted area.  However, the court was not persuaded by these arguments and leaned heavily on the “critical patient-psychologist and . . . the right of the patient to continued treatment from that psychologist.”

Other Jurisdictions Might or Might Not Enforce Non-Competes for Psychologists or Psychiatrists  

Dr. Melfi would likely fare the same if her job offer were from a practice in California, Colorado, Delaware, Massachusetts or Tennessee, where either the state legislatures or the courts in those states have prohibited, or significantly curtailed, restrictive covenants in physician employment contracts.  These states find persuasive the American Medical Association Council on Ethical and Judicial Affairs, Op. E-9.02 (1998), which provides: “Covenants-not-to-compete restrict competition, disrupt continuity of care, and potentially deprive the public of medical services.  The Council of Ethical and Judicial Affairs discourages any agreement which restricts the right of a physician to practice medicine for a specified period of time or in a specified area upon termination of an employment, partnership, or corporate agreement.  Restrictive covenants are unethical if they are excessive in geographic scope or duration in the circumstances presented, or if they fail to make reasonable accommodation of patients’ choice of physician.”

However, if Dr. Melfi’s job offer was from a psychiatry practice located just across the Hudson River in “Johnny Sack” territory, her restrictions might be enforced completely or in part.  For example, in Metropolitan Medical Group, P.C. v. Eaton (1989), a corporation that provided medical, psychiatric and psychological treatment for private patients sued Dr. Eaton, a licensed psychologist, for violating a one-year non-compete that prohibited her from rendering clinical or psychological services within 20 miles of Regent Hospital in New York County.  Although the employer did not successfully obtain a preliminary injunction (because it failed to show irreparable harm), the court nevertheless allowed the employer to proceed with the case against Dr. Eaton for monetary damages.  The court appeared to strike a balance between a patient’s right to choose his or her own psychologist and an employer’s right to protect and recoup its legitimate business interests in training Dr. Eaton and providing him with access to patients.

The difference in approach to restrictive covenants between New Jersey and New York highlights that there is no “one size fits all” rule.  Each state’s laws, rules, regulations, and judicial decisions must be consulted to determine applicability and enforceability.

This is the first article in a continuing series entitled, “The Restricting Covenant.”  The goal of this Series is to provide a brief overview and some interesting insights and practical pointers when dealing with unique issues or special circumstances that might arise in the context of restrictive covenants and a particular occupation or industry.  It is not intended to provide and should not be construed as providing legal advice.  Each situation is different and if legal advice is needed, you should seek the services of a qualified attorney who is knowledgeable and experienced in this area of the law to address your specific issues or needs.  Stay tuned for future articles in this Series, which will discuss the restrictive covenant landscape for other occupations and industries, including accountants, actors, agents, attorneys, and more.  And that’s just the “A’s.”

Click here to view all posts in “The Restricting Covenant” series.


[1] Future articles in this Series will discuss how similar restrictions might or might not apply to other mental health professionals such as social workers and therapists.

Third Circuit Makes it Easier to Prove ADEA Disparate Impact Claims By Use of Subgroups of Older Workers

By Lawrence J. Del Rossi 

The Third Circuit Court of Appeals recently issued a precedential decision, Karlo, et al. v. Pittsburgh Glass Works, LLC, that likely will make it easier for subgroups of older workers to bring lawsuits under the Age Discrimination in Employment Act (“ADEA”), on a “disparate impact” theory of liability.  It also creates a split with the Second, Sixth and Eighth circuits, paving the way for greater uncertainty for national employers.

The Karlo Decision – Comparison of Subgroups Permitted For Disparate Impact Analysis  

The defendant Pittsburgh Glass Works, LLC instituted reductions in force that resulted in the termination of approximately 100 employees.  The plaintiffs, a group of workers all over the age of 50, brought a putative ADEA collective action, asserting, among other things, disparate impact claims.  To establish a prima facie case for disparate impact under the ADEA, a plaintiff must (1) identify a specific, facially neutral policy, and (2) proffer statistical evidence that the policy caused a significant age-based disparity. The plaintiffs alleged that they had identified a policy that disproportionately impacted a subgroup of employees older than 50.  However, because the policy favored younger members of the protected class (i.e., employees older than 40 but younger than 50), adding them into the comparison group did not show any statistical evidence of disparity.  The district court initially certified a collective action, but subsequently granted a motion to decertify and then granted summary judgment to the employer.

On appeal, the Court characterized the central question as, “whether so-called ‘subgroup’ disparate-impact claims are cognizable under the ADEA.”  It answered in the affirmative and vacated the district court’s dismissal orders.  The Court concluded that ADEA disparate-impact claims are not limited to forty-and-older comparisons.  A comparison of “subgroups” of older workers within a particular age band (e.g., over 50) is permissible to show a specific, facially neutral employment practice caused a significantly disproportionate adverse impact based on age.  Relying on the “plain text” of the ADEA as interpreted by the Supreme Court and the ADEA’s “remedial purpose,” the Third Circuit explained that various forms of evidence can establish disparate impact based on age, including “forty-and-older comparisons, subgroup comparisons, or more sophisticated statistical modeling, so long as that evidence meets the usual standards for admissibility.”  It rejected the notion that the risk of “gerrymandered evidence is so great that it can override” the ADEA’s statutory language prohibiting discrimination based on age.

Circuit Split

The Court in Karlo expressly acknowledged that its decision is “at odds” with rulings from other circuits, including the Second Circuit, Lowe v. Commack Union Free School District (1989), the Sixth Circuit, Smith v. Tenn. Valley Authority (1991), and the Eighth Circuit, EEOC v. McConnell Douglas Corporation (1999).  While it was reluctant to create a circuit split, the Court cited three “compelling” grounds on which to diverge: (1) those decisions pre-date and contradict Supreme Court precedent, (2) they confuse “evidentiary concerns with statutory interpretation,” and (3) they “incorrectly assume that recognizing subgroups will proliferate liability for reasonable employment practices.”

Takeaways

The Karlo decision hits upon a number of complex issues when dealing with reductions in force, particularly the use and analysis of statistical evidence to establish disparate impact claims.  The decision could have a significant impact on any employer that has a facially neutral policy that in practice favors workers over the age of 40, but disfavors one or more “subgroups” of those workers, e.g., workers over the age of 50 or 60, etc.  It is unclear from Karlo, for example, to what extent a court would limit the age parameters of the subgroups or the number of subgroups in the comparison set.  Employers in the Third Circuit that are planning to conduct reductions in force must consider carefully the statistical impact to different age “subgroups” within the larger group of forty-and-older workers.  As Karlo highlights, “[m]ore exacting analysis may be needed in certain cases, and subgroups may answer that need.”

In addition, one unique challenge that national employers could now encounter is a reduction in force that impacts workers across state lines with conflicting statistical analysis and evidentiary rules, e.g., New York in the Second Circuit versus New Jersey in the Third Circuit.

Finally, it is noteworthy that at the beginning of its opinion, the Karlo court commented that the employer had not trained its decision makers on how to implement the RIF, did not have any written guidelines or policies related to the RIF, did not conduct any disparate-impact analysis, did not review prospective RIF terminees with counsel, and did not document why any particular employee was selected for inclusion in the RIF.  Employers should document the decision-making process, conduct a disparate-impact analysis, and consult with counsel regarding the scope and impact of the RIF on prospective terminees.

Laboring Under New Laws

By Mark E. Terman

*Originally published by CalCPA in the January/February 2017 issue of California CPA — the original article can be found here.

Few things in this world can be certain, except that the California Legislature will expand regulation of employers each year and the sun will come up tomorrow. In an apparent pendulum swing, 569 bills introduced in 2016 mention “employer,” compared to 224 in 2015 and 574 in 2014. Most of those bills did not pass, and of the ones that did, most were not signed into law by Gov. Brown. Essential elements of selected bills that became law affecting private employers, effective Jan. 1, 2017, unless otherwise mentioned and organized by Senate and Assembly bill number, follow.

California Minimum Wage Ascending to $15
SB 3 sets a state minimum wage for non-exempt employees that will escalate annually over the next several years. As of Jan. 1, the state minimum wage at employers with 26 or more employees increases to $10.50 per hour, and then increases 50 cents per hour on Jan. 1 of each following year until and including 2022, when the rate will reach $15 per hour. For employers of 25 or fewer employees, state minimum wage will remain $10 per hour until Jan. 1, 2018, when it will increase to $10.50, and then escalate 50 cents per hour each year until and including 2023 when the rate will arrive at $15 per hour.

Beginning July 1, the state director of finance is to determine each year whether economic conditions can support the next scheduled increase. If conditions cannot support an increase, the governor can—no more than twice—temporarily postpone the increase schedule for a year. After the final scheduled escalation year, the state minimum wage can remain the same or increase based on any increase in consumer inflation as determined by the director.

Changes in state, but not local, minimum wage also impact classification of most exempt workers. In addition to strict“duties tests” for administrative, executive and professional wage and hour exemptions, a salary of at least twice the state minimum wage must be paid to meet the “salary basis test.” As of Jan. 1, the annualized salary rate that employers with 26 or more employees must pay to meet the exempt salary requirement will advance to $43,680, up from $41,600.

For employers with smaller workforces, the $41,600 amount of the exempt salary requirement will remain in place until Jan. 1, 2018, when it will move up to $43,680. With each escalation, the required salary also will rise. At a $15 state minimum wage, the exempt salary requirement will be $62,400.

Also affected by SB 3 is the retail, inside-sales exemption, which requires employees be paid at least 1.5 times the state minimum wage, and at least half of their other earnings be from commissions.

At the same time, the trend of municipalities creating and increasing their own minimum wage for companies that have employees working in their jurisdiction continues. For example, by July 1, the city and the County of Los Angeles require employers with 26 or more employees to raise the local minimum wage to $12 per hour, up from $10.50, and then comply with other scheduled annual increases up to $15 per hour by July 1, 2020. Los Angeles employers with fewer employees, or nonprofit corporations who obtain approval to pay a deferred rate, do not start paying more than the state minimum wage until July 1, 2018.

Minimum wage for employees in San Francisco will increase to $14, up from $13, on July 1, 2017. Many other cities—including Berkley, Oakland, Malibu, Santa Monica, El Cerrito and San Diego—have enacted local minimum wage laws. In addition, living-wage laws may require higher minimum wages be paid as a condition of contracting with local, state or federal agencies. Employers should monitor each of the requirements to assure compliance.

As of press time, a federal court enjoined implementation of a new federal rule that would have increased by Dec. 1, 2016, the salary basis requirement for exempt workers status under the Fair Labor Standards Act to $47,476. This would have been higher than the California exemption salary amount will be for at least two years. For now, California employers are not legally required to either increase salaries to satisfy this federal exemption rule or to reclassify employees as non-exempt.

No Sunset on Overtime Pay for Personal Attendant Domestic Workers
The Domestic Worker Bill of Rights (AB 241) added Labor Code Sec. 1454, effective Jan. 1, 2014, (and caused amendment to Wage Order 15-2001). It entitles a domestic work employee who is a “personal attendant” overtime pay at the rate of one-and-one-half times their regular rate of pay for hours worked in excess of nine hours in any workday or more than 45 hours in any workweek. A domestic worker who spends at least 80 percent of his or her time supervising, feeding and dressing a child or person who needs assistance due to advanced age, physical disability or mental deficiency is considered a personal attendant. SB 1015 removes a Jan. 1, 2017, sunset provision from the law. As such, these overtime rules will remain in effect into the future.

Immigration Related Unfair Practices Expanded
SB 1001 adds Labor Code Sec. 1019.1 to existing prohibitions of unfair immigration practices. This bill constrains employers, who are verifying that workers have the necessary documentation to lawfully work in the United States, from requesting of such workers more or different documents than are required under federal law, refusing to honor documents tendered that on their face reasonably appear to be genuine, refusing to honor documents or work authorization based upon the specific status or term of status that accompanies the authorization to work, or reinvestigating or re-verifying an incumbent employee’s authorization to work using an “unfair immigration practice.” Applicants and employees may file a complaint with the Division of Labor Standards Enforcement. Any person who is deemed in violation of this new law is subject to a penalty imposed by the labor commissioner of up to $10,000, among other relief available.

Wage Anti-discrimination Law Now Applies to Race and Ethnicity
Under the Fair Pay Act in effect since Jan. 1, 2016, employers are prohibited from paying an employee at wage rates less than the rates paid to employees of the opposite sex in the same establishment for equal work on jobs the performance of which requires equal skill, effort and responsibility, and which are performed under similar working conditions.

The Fair Pay Act provides for exceptions such as, the wage differential is based upon one or more of the following factors:

  1. A seniority system;
  2. A merit system;
  3. A system that measures earnings by quantity or quality of production; and
  4. A bona fide factor other than sex, such as education, training or experience.

The later factor will apply if the employer shows that the factor is not the result of a sex-based differential in compensation, is job related to the position, and is consistent with business necessity.

SB 1063 amends Labor Code secs. 1197.5 and 1199.5 to expand requirements of the Fair Pay Act to employees’ race or ethnicity, in addition to gender. In other words, the same rules now apply to prohibit wage differential based on race or ethnicity. Like existing Fair Pay Act sex-based prohibitions, the amendment bans employers from discriminating or retaliating against employees who report or assist with others’ affected by race or ethnicity-based wage differentials; provides the same enforcement rights; and includes protections for employees to disclose, inquire or discuss wages.

AB 1676 amends the Fair Pay Act (Labor Code Sec. 1197.5) to provide that an employee’s “prior salary shall not, by itself, justify any disparity in compensation” under the bona fide factors above.

Non-California Choice of Law and Forum in Employment Contracts Voidable
SB 1241 adds Labor Code Sec. 925 to prohibit employers from requiring an employee who primarily resides and works in California, as a condition of employment, to enter into agreements (including arbitration agreements) to:

  • Adjudicate claims arising in California in a non-California forum; or
  • Deprive the employee of the substantive protection of state law during a controversy arising in California.

Any provision of a contract that violates this new law is voidable by the employee, the dispute will be adjudicated in California under California law and the employee is entitled to recover reasonable attorneys’ fees incurred enforcing Sec. 925 rights. This section applies to any contract entered into, modified or extended on or after Jan. 1, 2017.

There’s an exception to Sec. 925: It does not apply to any contracts with an “an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.” Thus, in the case of more executive-level employees, who often retain independent counsel to negotiate employment agreements, employers may still be able to make use of forum-selection and choice-of-law provisions.

Workplace Smoking Restricted Further
California law already prohibited smoking of tobacco products inside an enclosed place of employment for certain employers. ABX2-7 amends Labor Code Sec. 6404.5 to expand that enclosed space prohibition to all employers of any size, including a place of employment where the owner-operator is the only employee. “Enclosed space includes covered parking lots, lobbies, lounges, waiting areas, elevators, stairwells and restrooms that are a structural part of the building.” A “place of employment” does not include:

  • 20 percent of the guestroom accommodations in a hotel, motel or similar transient lodging establishment;
  • Retail or wholesale tobacco shops and private smokers’ lounges;
  • Cabs of “motortrucks” or truck tractors;
  • Theatrical production sites, if smoking is an integral part of the story in the theatrical production;
  • Medical research or treatment sites, if smoking is integral to the research and treatment being conducted;
  • Private residences, except licensed family day care homes; and
  • Patient smoking areas in long-term health care facilities.

Violations are punishable by a fine not to exceed $100 for a first violation, $200 for a second violation within one year and $500 for a third and for each subsequent violation within one year.

Overtime Pay Increasing for Agricultural Workers
Existing law affords ag workers who work more than 10 hours per day overtime pay at one-and-one-half times the regular rate of pay. AB 1066 (Phase-In Overtime for Agricultural Workers Act of 2016) amends Labor Code Sec. 554 to, among other things, provide a gradual phase-in of overtime pay expansion to agricultural workers.

For employers with 26 or more employees, beginning Jan. 1, 2019, and continuing until Jan. 1, 2022, the phase-in provides for annual reduction of the daily overtime threshold by a half-hour per day until reaching eight hours, and the weekly overtime trigger by five hours per week until reaching 40 hours. As such, on Jan. 1, 2019, agricultural workers working more than 9.5 hours per day or in excess of 55 hours in any one workweek are to receive overtime pay at one-and-half times their regular rate of pay.

By Jan. 1, 2022, the annual phase-ins will conclude with agricultural workers working more than eight hours per day or in excess of 40 hours in any one workweek receiving overtime pay at one-and-half times their regular rate of pay. In addition, beginning Jan. 1, 2022, agricultural workers working more than 12 hours per day are to receive overtime pay at twice their regular rate of pay.

Finally, this bill authorizes the governor to delay the implementation of the phase-in schedule if he or she also suspends the implementation of the scheduled increase in the California minimum wage (see, Minimum Wage Ascending, above). For employers with 25 or fewer employees, the phase-in schedule begins on Jan. 1, 2022, and continues annually through Jan. 1, 2025.

All-gender, Single-user Restrooms
By March 1, 2017, AB 1732 requires all single-user toilet facilities in any business establishment, place of public accommodation or government agency to be identified with signage as all-gender toilet facilities. For the purposes of this section, “single-user toilet facility” means a toilet facility with no more than one water closet and one urinal with a locking mechanism controlled by the user. This bill also allows inspectors, building officials or other local officials responsible for code enforcement to inspect for compliance.

More Restriction on Criminal History Inquiry of Job Applicants
Under existing law, an employer cannot ask an applicant about an “arrest or detention that did not result in conviction, or information concerning a referral ;to, and participation in, any pretrial or post-trial diversion program, or concerning a conviction that has been judicially dismissed or ordered sealed pursuant to law.”

AB 1843 amends Labor Code Sec. 432.7 to prohibit employers from asking applicants to disclose, or using as a factor in determining any condition of employment, information concerning or related to “an arrest, detention, process, diversion, supervision, adjudication or court disposition that occurred while the person was subject to the process and jurisdiction of juvenile court law.”

This bill also alters the definition of “conviction” to exclude “any adjudication by a juvenile court or any other court order or action taken with respect to a person who is under the process and jurisdiction of the juvenile court law.” In addition, this bill contains some exceptions for health care facilities involving final adjudications of recent sex crimes and specified controlled substances crimes.

More Talent Services Act Artist Protection
AB 2068 amends Labor Code secs. 1703 and 1703.4 to provide further protect of artists’ information and photographs in any form of communication, such as “an online service, online application, or mobile application of the talent service or one that the talent service has the authority to design or alter.” AB 2068 also requires:

  • The talent service to act, within 10 days, on requests of the artist made by any form of electronic communication, including text messages, to remove information or photographs from the talent service’s website, online service, online application or mobile application (collectively “electronic medium”) or an electronic medium the talent service has the authority to design or alter; and
  • That the artist may cancel the contract within 10 business days from the date of the talent service contract or the date on which the artist commences utilizing the services under the contract, whichever is longer.

Domestic Violence, Sexual Assault or Stalking
By July 1, 2017, AB 2337 requires employers with 25 or more employees to provide specific information in writing to new employees upon hire, and to other employees upon request, of their rights to take off time from work and not suffer adverse employment action from doing so under Labor Code Sec. 230.1 (relating to victims of domestic violence, sexual assault or stalking). This bill also requires that, on or before July 1, 2017, the labor commissioner develop and post on its website a compliant form of notice that employers may elect to use. Employers are not required to comply with the notice requirement until the labor commissioner posts the form.

Wage Statement Requirement for Exempt Employees
Labor Code sec. 226 requires employers to provide their employees along with each paycheck an accurate itemized statement in writing containing information listed in the statute, including hours worked, unless the employees are paid solely a salary and are properly exempt from overtime.

AB 2535 clarifies that hours worked are not required to be recorded on wage statements of employees exempt from minimum wage and overtime under a specified exemption for: executive, administrative or professional employees; the “outside sales” exception; salaried computer professionals; parents, spouses, children or legally-adopted children of the employer; directors, staff and participants of a live-in alternative to incarceration rehabilitation program for substance abuse; crew members employed on commercial passenger fishing boats; and national service program participants. This bill does not change the requirement to include total hours worked by non-exempt employees in their itemized wage statements for each pay period.

Bond Required to Contest Minimum Wage Citation
Labor Code Sec. 1197.1 authorizes the labor commissioner to issue, upon inspection or investigation, a citation against an employer who has paid its employees less than the minimum wage. The citation must specify the nature of the violation, and the labor commissioner is to take steps to enforce the citation and to recover the civil penalty assessed, wages, liquidated damages and waiting time penalties.

An employer can contest a citation through the superior court. AB 2899 amends the statute to require that, prior to contesting a citation, the employer must post a bond with the labor commissioner in an amount equal to the unpaid wages assessed under the citation, excluding penalties. The bond must be in favor of the employee and will be forfeited to the employee if the employer fails to pay the amounts owed within 10 days from the conclusion of the proceedings if the citation is not reversed.

What’s Next?
Employers should consider how these new laws impact their workplaces, and then review and update their personnel policies and practices with the advice of experienced attorneys or human resource professionals.

Recent Scrutiny of Non-Competes

Larry Del Rossi published an article for Today’s General Counsel titled, “Recent Scrutiny of Non-Competes.” Larry provides an overview of non-compete agreements (also known as restrictive covenants) and discusses a recent uptick in government activity that may regulate or challenge private businesses’ use and enforcement of non-competes.

Larry says “one major challenge for national companies is that enforcement of non-competes varies from state to state, so that there is no uniform standard.” In May 2016 the White House issued “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses,” a document intended to identify areas where implementation and enforcement of non-competes may present issues, put forward a set of best practices, and serve as a call to action for state reform.

Larry advises companies to consider whether all employees within the company should have non-competes, evaluate the scope and structure of their agreements, and document the business rationale for requiring employees (including at-will employees) to sign any non-compete.

Read “The Recent Scrutiny of Non-Competes.”

Read Larry’s previous post, “What Employers Need to Know about the Government’s Recent Scrutiny of Non-Competes.”