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California Court of Appeal Strikes Down Non-Solicitation of Employees Restrictive Covenant

Decision: In AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., the California Court of Appeal for the Fourth Appellate District ruled that a non-solicitation agreement violated the broad prohibitions on restrictive covenants contained in California Business and Professions Code 16600 and was the unenforceable. AMN and Aya are competitors in the business of providing temporary medical professionals, including “travel nurses,” to medical care facilities throughout the country. AMN sued Aya and several of AMN’s former “travel nurse recruiters” whose job it was to recruit the travel nurses that AMN placed. In connection with those individual defendants’ employment with AMN, they had executed agreements that included a one-year prohibition on soliciting any employee of AMN to leave the company. After the individual defendants resigned from AMN, they went to work as recruiters for Aya and began soliciting AMN’s travel nurses.

AMN’s suit alleged, inter alia, breach of contract and misappropriation of confidential information, including trade secrets. The trial court had granted summary judgment in favor of Aya, ruling that the non-solicitation of employees provision was an unlawful restraint of trade in violation of section 16600. The court of appeal affirmed, finding that the restrictive covenant “clearly restrained [the] individual defendants from practicing with Aya their chosen profession—recruiting travel nurses.” The court went on to say that it doubted the “continuing viability” of the court of appeal’s 1985 decision Loral Corp. v. Moyes, which had upheld a non-solicitation covenant restraining an executive officer from “raiding” the plaintiff’s employees because it was reasonable. The court nevertheless found AMN distinguishable from Moyes because the executive in Moyes was still able to perform his job duties, while the travel nurse recruiters in AMN who “were in the business of recruiting” and placing nurses in medical facilities would be “restrained . . . from engaging in their chosen profession, even in a ‘narrow’ manner or a ‘limited’ way.”

Impact: The AMN court’s decision makes clear that a non-solicitation restrictive covenant that effectively precludes an individual from performing his or her job is void under Business and Professions Code Section 16600. The facts of the AMN case are specialized in that the employees subject to the non-solicitation covenant were employed for the purpose of recruiting and soliciting talent, and the non-solicitation covenant thus precluded them from performing the primary function of their jobs. Accordingly, while the AMN court’s decision, especially its comments regarding the continued validity of Moyes, casts doubt on the enforceability of non-solicitation covenants in California more generally, the decision does not more broadly foreclose enforcement of all restrictive covenants. When entering into restrictive covenants, employers should carefully consider the nature of the employee’s position to determine whether the restriction would preclude the employee from doing his/her job and should remove the covenant if it does.

Department of Labor Issues Opinion Letters on Wage and Hour Issues

Development: On November 8, 2018, the US Department of Labor (DOL) issued two opinion letters addressing Fair Labor Standards Act (FLSA) wage and hour issues.

The first, FLSA2018-25, clarifies how a salaried employee who is otherwise exempt from the FLSA’s minimum wage and overtime requirements can be paid by the hour, day or shift without losing the FLSA exemption. Ordinarily, under 29 CFR § 541.600(b), an executive, administrative or professional employee is only exempt from the FLSA’s minimum wage and overtime requirements if he or she receives a weekly, biweekly, semimonthly or monthly salary above a certain amount. However, under 29 CFR § 541.600(b), an exempt employee’s earnings “may be computed on an hourly, a daily or a shift basis” if the employee is guaranteed to receive at least that minimum salary and if “a reasonable relationship exists between the guaranteed amount and the amount actually earned.” The regulation states that a “reasonable relationship” exists if the guaranteed salary is “roughly equivalent” to the employee’s “usual earnings.” The DOL further opines that the guaranteed amount and “usual earnings” (paid on an hourly, daily or shift basis) are “roughly equivalent” so long as the usual earnings are at most 50 percent greater than the guaranteed amount. For example, if an employee receives a guaranteed weekly salary of $2,100, then any usual weekly earnings of up to $3,150 satisfy the “reasonable relationship” test. The DOL further concludes that it is reasonable to compare the guaranteed and “usual earnings” amounts by comparing the guaranteed weekly amount to the particular employee’s average weekly earnings throughout the year.

The second letter, FLSA2018-27, clarifies what constitutes a “related duty” when considering how much an employer must pay a tipped employee. The FLSA and its implementing regulations allow an employer to pay its tipped employees $2.13/hour plus a “tip credit” to make up the difference between $2.13 and the federal minimum wage rate. Under 29 C.F.R. § 531.56, that tip credit can be applied for work performed on “related duties” in a tipped occupation (e.g., a waitress’ duties setting tables or washing dishes), but it cannot be applied to the non-tipped portion of a “dual job” (e.g., a position that requires a hotel employee to work as both a waiter and maintenance person). In the opinion letter, the DOL states that only the core and supplemental job duties listed in the “Tasks” for specific occupations in the Occupational Information Network (O*NET) qualify as “related duties,” and employers may not take a tip credit for time spent on other duties.

Impact: While these DOL opinion letters are not binding in court, they reflect the policy of the DOL’s Wage and Hour Division, and they are a helpful authority for courts in wage and hour cases. By relying on these letters as guidance for determining their minimum wage obligations, employers may substantially reduce their risk of liability and help to establish that they made good-faith efforts to comply with the FLSA, which can be an important showing should litigation ensue.

Seventh Circuit Sets a High Bar for Awarding Attorneys’ Fees to Prevailing Defendants in Title VII Suits

Decision: The Seventh Circuit recently issued a decision in EEOC v. CVS Pharmacy, Inc., concerning an employer’s entitlement to an award of attorneys’ fees under Title VII after prevailing on summary judgment. The underlying dispute centered on CVS’s standard severance agreements, which included a broad release of claims and covenant not to sue, but which expressly preserved employees’ right to “participate in a proceeding with any appropriate federal, state or local government agency enforcing discrimination laws.” After signing such a severance agreement, a former CVS employee filed a US Equal Employment Opportunity Commission (EEOC) charge that alleged that she was fired because of her race and sex. During the administrative proceedings, CVS provided the EEOC with a copy of the signed severance agreement as a defense to her claim. 

The EEOC dismissed the employee’s underlying charge of discrimination but then sued CVS contending that its use of the severance agreement constituted an unlawful “pattern or practice” under Title VII because it “condition[ed] the receipt of severance benefits on . . . employees’ agreement to a Separation Agreement that deters the filing of charges and interferes with employees’ ability to communicate voluntarily with the EEOC.” The district court granted summary judgment for CVS, holding that the EEOC’s suit was procedurally improper because it had failed to engage in pre-suit conciliation as required under Sections 706 and 707(e) of Title VII. The district court also awarded attorneys’ fees to CVS, reasoning that the EEOC should have realized before filing the lawsuit that initial conciliation is required before filing suit. 

The EEOC appealed the district court’s award of attorneys’ fees to CVS, arguing that Section 707(a) permitted the EEOC to file suit challenging a “pattern or practice of resistance” to the full enjoyment of Title VII rights without participating in pre-suit conciliation. According to the EEOC, the pre-suit conciliation process was only required when challenging a pattern or practice of “discrimination.” The Seventh Circuit reversed the district court’s award of attorneys’ fees to CVS, explaining that “[f]ee shifting [under Title VII] is unwarranted for a suit implicating an issue of first impression in an unsettled area of the law.” The court found that the EEOC had a “textual foothold,” “modest support in [] prior case law” and that “no [prior] case squarely foreclosed the EEOC’s legal interpretation” of Section 707(a). The court emphasized that a fee award can be assessed against a losing Title VII plaintiff “only if its arguments were squarely blocked by controlling and unambiguous precedent.” Therefore, although the EEOC’s position was novel and ultimately unsuccessful, it was not frivolous. 

Impact: The threat of an award of attorneys’ fees can be a powerful deterrent against frivolous claims under Title VII. However, under the Seventh Circuit’s decision, a finding of “frivolity” will be more difficult to achieve.

EEOC Publishes 2018 Performance and Accountability Report Highlighting Its Recovery of $505 Million from Employers in Enforcement Actions in 2018

Report: On November 15, 2018, the US Equal Employment Opportunity Commission (EEOC) issued its annual Performance and Accountability Report (PAR). The purpose of the PAR is to provide a summary of the EEOC’s annual performance results and statistics as a way to assess the EEOC’s accomplishments each fiscal year (October 1 to September 30). This year’s PAR reported that employers paid more than $505 million to resolve discrimination claims on behalf of more than 67,860 workers—a $21 million increase from 2017. That total was comprised of approximately $354 million in recoveries through mediation, conciliation and settlements for private sector, state and local government workers; $53.6 million from charging parties in litigation; and $98.6 million for federal workers and applicants whose claims were resolved through the EEOC’s hearing and appeal process. In addition, the EEOC reported that it successfully reduced the number of pending private sector charges by almost 20 percent to its lowest level in more than 12 years (49,607 charges), fielded more than 200,000 inquiries about discrimination claims and filed 199 lawsuits. The lawsuits included 117 suits on behalf of individuals, 45 non-systemic suits with multiple victims and 37 systemic discrimination suits involving multiple victims or discriminatory workplace policies. Notably, the PAR revealed that the EEOC has increased its focus this year on sexual harassment claims, reporting a 55-percent increase in recoveries, from $47.5 million last year to $70 million this year. 

Impact: Although it was widely believed that the EEOC would be less aggressive under the Trump administration than it had been in recent years, the EEOC has continued to increase its enforcement efforts and outreach programs in 2018. For example, following the launch of its online “Public Portal” in November 2017, the EEOC conducted more than 40,000 intake interviews and experienced a 30-percent increase in discrimination inquiries from workers. Given that the EEOC continues to dedicate substantial resources to its enforcement activities and outreach programs, including sexual harassment, employers would be wise to carefully review the 2018 PAR and other EEOC publications that provide insight into the EEOC’s areas of focus and enforcement trends.