Michigan Anti-Employment Discrimination Statute Extends to Independent Contractors

IC AgreementMany businesses owners (wrongly) assume they can limit their company’s liability for employment discrimination claims by entering into an independent contractor agreement. But that is not always true as shown by a recent Michigan Court of Appeals decision. Specifically, this decision provides a reminder that companies must focus on compliance with employment laws for its entire workforce, including contractors.

Michigan discrimination laws: “Independent contractor” versus “employee.”

In Cook v. Farm Bureau Life Ins. Co. of Mich. (Mich. App. 2019) the plaintiff began working as a Farm Bureau “employee insurance agent” in 2000. Later, he became an independent contractor for the defendant in 2013. The company fired the plaintiff in 2016.

Plaintiff sued for age discrimination under Michigan’s  Elliott-Larsen Civil Rights Act (ELCRA). The trial court decided in favor of the defendant employer. In reaching this decision, the court concluded the plaintiff could not sue under ELCRA because he was an “independent contractor,” and not an “employee.”

Control and Not the Label of the Employment Relationship Matters.

The Court of Appeals reversed this decision. In reaching this decision, the Court reasoned:

In pertinent part, [ELCRA] provides that, ‘[a]n employer shall not . . . [f]ail or refuse to hire or recruit, discharge, or otherwise discriminate against an individual with respect to employment, compensation, or a term, condition, or privilege of employment, because of . . . age[.]’

Notably, the above does not state that an employer is prohibited from engaging in acts of discrimination only against its own employees. Rather … one may bring an action under the ELCRA against an employer if the individual can establish that an employer affected or controlled a term, condition, or privilege of his or her employment.

We find that the trial court erred in pronouncing that plaintiff’s status as an independent agent disqualified him from ELCRA protection, without first inquiring into the amount of control Farm Bureau asserted over the terms, conditions, and privileges of plaintiff’s work.

In applying the law, the Court wasted no time in concluding the independent contractor agreement established that Farm Bureau affected or controlled a term, condition, or privilege of plaintiff’s employment.  This was especially true as it related to compensation. However, this reversal was short-lived; the Court went on to decide the plaintiff failed to establish a claim for age discrimination.

HR Compliance Remains Priority for “Employees” and “Independent Contractors.”

Where a true independent contractor relationship is appropriate, it has advantages. But it is never a silver-bullet against employment discrimination claims. Instead, compliance with Michigan or federal employment laws must remain a priority for the entire workforce. And this compliance is needed regardless of whether you are employment W2 employees or contractors.

Use this link to contact Michigan attorney Jason Shinn if you have questions about this article, or complying with Michigan or federal employment laws or litigating claims under both. Since 2001, Mr. Shinn has represented companies and individuals in employment discrimination claims under federal and Michigan employment laws.

Inconsistent Non-compete Restrictions Limits Employer’s Protections

Kent County Michigan Circuit CourtA common mistake employers make in protecting their business interests is poorly drafted non-compete agreements. And frequently that mistake involves drafting inconsistencies. As explained below, inconsistencies provide a foundation for challenging the scope or outright enforceability of a company’s non-compete restriction.

In this regard, we recently defended against Christian Financial Insurance/Christian Insurance Group, Inc.’s motion for injunctive relief. The motion was filed against its former sales agents. After raising concerns about Christian Insurance Group’s business practices and sales tactics (let’s just say the agents did not believe customers were treated very Christian-like), these agents began competing against it. The suit was filed in Grand Rapids, Michigan and sought to enforce the agency’s non-compete restriction.

Differing geographic restrictions.

Enforcement problems quickly arose; One agreement called for a state-wide band on selling insurance. The other agreement called for a 65-mile restriction from the agency’s Grand Rapids office. There was no dispute the agents signed their respective non-compete restrictions and continued to sell insurance after leaving the Christian Insurance.

The non-compete restrictions (we later learned) had not been drafted by legal counsel. They were either found or recycled by Christian Insurance’s principal. And this was evident in the language and lack of consistency.

Two main arguments were made attacking the motion for injunctive relief:

  • First, Christian Insurance’s claim a state-wide band was reasonable and necessary to protect its business interests was easily undermined by the other restriction calling only for a more limited 65-mile restriction. The Court agreed and refused to enforce the state-wide band.
  • Second, the broad language of the non-compete restriction also doomed its enforcement. The prohibition on the agents selling any insurance – in or out of the restrictive area – was rejected. Instead, the Court, after some very good lawyering by Christian Insurance’s counsel, was persuaded to grant a limited injunction. That limited injunction prohibited the defendant agents from soliciting former customers and employees/independent contractors of the Plaintiff agency. It also restricted them from selling a specific insurance product Plaintiff claimed to have niche expertise in selling called “final expense insurance. But this restriction was limited to the narrow 65-mile restriction – not the state-wide band Plaintiff had sought.

Not a good return on investment when it comes to non-compete enforcement.

Whether this injunction will remain in place after the litigation dust settles remains to be seen. But Christian Insurance spent a lot of time and resources (e.g., money) in seeking to restrict its former sales agents from competing against it. It came upon short in stopping that competition. And the value of the limited injunction was later eliminated. This happened when Christian Insurance moved its office from Grand Rapids to Lansing, but Grand Rapids remained the epicenter for the 65-mile injunction.

So, what’s the takeaway for employers? If you are going to spend time, money, and other resources in having your work-force sign a non-compete agreement, spend the time, money and other resources in getting the agreement properly drafted.

Use this link to contact Michigan attorney Jason Shinn, if you have questions about this article, Michigan non-compete law, or litigation enforcing or defending against non-compete claims. Since 2001 he has represented companies and individuals in drafting, negotiating, and litigating non-compete disputes.

Governor Snyder Limits Scope of Voter Approved Measures for Increasing Minimum Wage and Requiring Paid Sick Time

Michigan Amendments Paid Sick LeaveDepending upon your perspective, Michigan voters were given a big lump of coal or Michigan businesses got an early Christmas present.

Specifically, this week Governor Snyder signed bills to delay and limit the scope of voter-approved ballot measures that would have increased the minimum wage and required employers to provide paid sick time to their employees.

Citizen groups previously collected enough signatures to put the proposals on the November ballot. However, under a procedural mechanism, the Republican-controlled legislature agreed to make the ballot initiatives Michigan law. By doing so, it opened the door for Republicans to amend the initiatives during a lame-duck session.

Again, depending upon your perspective, Republicans gutted the voter-approved employment laws or they saved businesses from job-killing initiatives. Here’s a breakdown of what Michigan voters had approved for the ballot initiatives (on the left) and what the Republican-controlled legislature delivered (on the right):

Voter Approved Ballot Proposals (Public Act 337 of 2018) Adopted by Legislature

Legislative Changes to Adopted Ballot Proposals (SB 1171)

$12 minimum wage

Increases from $9.25 per hour as follows:

  • 1/1/2019:  $10/hour
  • 1/1/2020:  $10.65/hour
  • 1/1/2021:  $11.35/hour
  • 1/1/2022:  $12/hour
  • 1/1/2023:  Increases by the rate of inflation
$12 minimum wage 
Increases from $9.25 per hour as follows:

  • 3/31/2019: $9.45/hour
  • 1/1/2020:  $9.65/hour
  • 1/1/2021:  $9.87/hour
  • 1/1/2022:  $10.10/hour
  • 1/1/2023:  $10.33/hour
  • 1/1/24:  $10.56/hour
  • 1/1/2025:  $10.80/hour
  • 1/1/2026:  $11.04/hour
  • 1/1/2027:  $11.29/hour
  • 1/1/2028:  $11.54/hour
  • 1/1/2029:  $11.79/hour
  • 1/1/2030:  $12.05/hour
Inflation 

The minimum wage would be indexed to the rate of inflation beginning in 2024 (i.e., put on autopilot). Tipped minimum wage tied to the rate of inflation beginning on 1/1/25.

Inflation
No inflationary increases.
Tipped Minimum Wage 
Increases from $3.52 per hour (38% of the minimum wage) as follows:

  • 1/1/2019:  48%
  • 1/1/2020:  60%
  • 1/1/2021:  70%
  • 1/1/2022:  80%
  • 1/1/2023:  90%
  • 1/1/2024:  100% of the minimum wage
Tipped Minimum Wage*

The minimum wage remains tied to 38% of the regular minimum wage rate.

* Under the law, all tipped employees are guaranteed to make at least the minimum wage. If their tips plus the tipped employee minimum wage does not equal or exceed the regular minimum wage, the employer must pay any shortfall to the employee or face fines and fees.

Governor Snyder also signed into law the amendments that revised the paid sick time ballot proposal that was adopted as law in the lame-duck session. The voter-approved initiative provided for workers to receive one hour of sick time for every 30 hours worked up to a maximum of 72 hours a year. This was also adopted as law in the lame-duck session in order to amend it.

The amendments (SB 1175) reduced the ballot proposal to one hour for every 35 hours worked and capped the maximum at 40 hours per year. Governor Snyder also signed this into law late Thursday.

Legal Challenges on the Horizon?

So essentially, the people – or enough of them to get it on the ballot where it was expected to pass – said one thing, and their government said, thanks but no thanks, we’ll take it from here.

But the Detroit Free Press reported that organizers of the ballot initiatives would sue in response to the above circumstances. In this regard, they argue what the Republican legislature did was unlawful under Michigan law. This is because there is a 1964 legal opinion (written by the Michigan Attorney General Frank Kelley) that specifically addresses the current situation. In response to a legislator’s question in 1964 about the new constitution, Kelley wrote that the legislature could not amend an adopted initiative law in the same legislative session.

I think it is likely there will be a legal challenge to the above amendments. Whether the 1964 legal opinion or other arguments will carry the day is anyone’s guess.

Pilot Grounded after Marijuana Edibles Found in his Plane

“It wasn’t intentional. It wasn’t deliberate. And it wasn’t reckless.”

This defense was made in response to three chocolate bars labeled “Lab tested to 100 mg of THC” (THC refers to tetrahydrocannabinol, the psychoactive chemical in cannabis) found on a private pilot’s plane after it made an emergency landing in October 2016.

According to the National Law Journal (by C. Ryan Barber), the Federal Aviation Administration (FAA) issued an emergency order in February 2018 that revoked the pilot’s certificate for having these marijuana edibles on his plane. This decision was initially changed to a suspension by an administrative law judge. However, the National Transportation Safety Board (NTSB) later reinstated the FAA’s revocation of the pilot’s license. This reinstated revocation is now on appeal (Here is a link to the appeal brief) before the U.S. Court of Appeals for the D.C. Circuit.

The pilot was not alleged to have been under the influence of cannabis and a passenger (who is now the pilot’s wife) admitted she packed the bars without the pilot’s knowledge.

While this case involves transportation safety rules applicable to pilots, it also highlights the tension between states like Michigan that have legalized marijuana and the federal government, which has not.

As we previously covered (See The Buzz About Michigan Marijuana Legalization and the Workplace) it is also an issue Michigan employers must be ready to face after a November 2018 ballot to legalize recreational marijuana. That law went into effect on December 6, 2018.

We will follow this case. But in the meantime, here is an overview of the issues implicated by recreational marijuana that employers and employees will likely face.

For more information, about best practices and recommendations for updating the workplace to handle the legalization of marijuana, contact Jason Shinn.

Since 2001, he’s worked with companies to address workplace issues. This experience includes working with companies who operate across the United States, including with operations in states that have legalized marijuana.

The Buzz About Michigan Marijuana Legalization and the Workplace

“Smoke ’em if you got ’em.” Recreational marijuana is officially legal today in Michigan. However, there are a host of budding issues that employers and employees must address with this legalization.

For background, Michigan voted in November to legalize recreational use of marijuana by adults who are 21 or older. About ten years earlier, Michigan voters approved the legalization of marijuana for medical purposes.

To help cut through the haze of confusion surrounding Michigan’s law, here is a snapshot of certain issues relevant to companies and employees:

  1. How much pot? Individuals who are 21 or older can possess or transport up to 2.5 ounces of marijuana. They can also grow up to 12 plants if they are not in public view. They may also share 2.5 ounces with others, but not for payment.
  2. Can a Drug-Free Workplaces Harsh a Buzz? Yes. Michigan law does not override employers policy for maintaining a drug-free workplace. Employers can (and should) adopt and enforce workplace policies on marijuana; have policies that prohibit marijuana use or influence on the job by employees and applicants; they must continue to comply with state or federal laws restricting the use of marijuana, and comply with marijuana restrictions in federal contracts or grants.
  3. Must Employers Accommodate Medical Marijuana? Employers generally do not have to accommodate any use of marijuana in the workplace. But be careful. We covered a court opinion that went against an employer who failed to accommodate a medical marijuana user. See Refusing to Hire Medical Marijuana User Found to be Unlawful Employment Discrimination. However, this decision is not binding on Michigan courts. And case law applicable to Michigan employers has generally found no legal obligation to accommodate medical marijuana use.
  4. Legal but still Illegal. While Michigan legalized marijuana, it is still illegal under federal law. This was a major concern when President Trump’s former Attorney General Jeff Sessions reversed Department of Justice policy to make marijuana prosecutions priority (so much for state’s rights). However, with Sessions gone it is unclear what focus if any, federal authorities will place on marijuana prosecutions. Practically, you would hope law enforcement officials will not expend taxpayer resources in going after recreational, low-level users.

Our recommendations:

The main piece of advice we are giving our business clients is to decide whether the business can remain “drug-free.” If there are no legal, contractual, regulatory or other restrictions, then decide whether it will maintain a “zero-tolerance” policy or allow legal recreational use by employees and job candidates and under what circumstances. Practically speaking, we understand many businesses are finding it impossible to fill positions or retain employees with a zero-tolerance policy.

Next, look at your company’s policies and procedures. You will likely need to update or clarify them. Here are a few areas of consideration:

  1. Clearly identify your company’s policy when it comes to legal, recreational marijuana use, especially in its hiring procedures. Because marijuana may be detected for weeks after use, one thing you want to avoid is wasting time interviewing and conducting pre-employment drug screening on a candidate who has consumed marijuana in the last couple of weeks.
  2. Remind employees that even if legal recreational marijuana use is permitted, employees must ensure that their on-the-job performance is not are not impaired. This is especially true for jobs covered by DOT regulations or involving the operation of equipment. And clarify that employees in positions covered by state or federal drug restrictions must continue to comply with those restrictions.
  3. Clarify when and under what circumstances the company may drug test. Also, make it clear anyone using alcohol or illegal drugs while on the job will be immediately disciplined up to and including termination.
  4. Educate managers and supervisors about their responsibilities for maintaining a safe and productive work environment. This education should include procedures for identifying and reporting concerns about drug use and impairment.
  5. Consistently apply your recreational marijuana policy. Otherwise, you may open your company up to an unlawful discrimination claim.

If you are a company that needs advice for how the legalization of marijuana affects your workplace, contact Michigan employment attorney Jason Shinn. Since 2001, he has represented clients, both individuals, and companies, in addressing federal and Michigan employment law issues, including issues involving medical marijuana and accommodations.

Michigan Lame-Duck Session Fast-Tracks Proposals for Altering Awards of Attorney Fees

Two bills are being fast-tracked through a Michigan lame-duck legislative session that would fundamentally alter the State’s legal system regarding awarding attorney fees to a prevailing party.

Specifically, the two bills were introduced on November 8, 2018, and are:

  1. SB 1182 Civil procedure; costs and fees; attorney fees; require the award to the prevailing party. Amends 1961 PA 236 9MCL 600.101 – 600.9947) by adding sec. 2443; and
  2. SB 1183 Civil procedure; costs and fees; attorney fee awards in frivolous civil actions; modify. Amends secs. 2442 & 2591 of 1961 PA 236 9MCL 600.2445 & 600.2591) & adds sec. 2446.

The State Bar Board of Commissioners is expected to discuss the proposals on December 4, 2018.

To greatly simplify what these two bills would accomplish, they would move Michigan’s legal system from the “American Rule” to something closer to the “English Rule.”

Under the “American Rule,” litigants are generally required to pay their attorney fees, unless a statute, contractual provision, or other source provides for the shifting of attorney fees to the losing party. In contrast, the “English Rule” defaults to the party who loses a court case must pay the other parties legal costs.

Thoughts on the proposed legislation.

As an attorney whose defended many clients in questionable lawsuits, including suits later to be deemed frivolous, the concepts embodied in these bills deserve serious consideration. I say this while presently litigating two cases that are dangerously close to crossing the file line regarding being frivolous.

In one case in Federal District Court involving trade secret misappropriation and related claims, the Plaintiff admitted in responses to Request to Admit and through its corporate representative’s deposition that the alleged trade secrets identified in the complaint (a quote and proposal provided to a potential customer) were not trade secrets. But these admissions came after three amended complaints (each iteration making the same fraudulent trade secret assertion) and about a year after Plaintiff filed the initial complaint. A pending Motion for Summary Judgment explains why these false assertions should be the basis for awarding Defendants’ attorney’s fees, which the Judge will have considerable discretion in deciding the issue.

In another case pending in Oakland County Circuit Court, the adverse party counterclaimed against my client in a breach of contract action. At court-ordered case evaluation, my client received a very favorable award on his claim, which he accepted. The counterclaims, which sought many tens of thousands of dollars, however, received an award of “$1” (that’s right, one dollar). Under Michigan’s case evaluation system, an award of zero dollars means the action is frivolous and entitles a party to recover attorney fees. This case too will be the subject of a motion for judgment because the adverse party insist upon continuing the litigation.

However, even with these examples of arguably frivolous lawsuits, the bills, as drafted, are likely not the answer and the issues deserve a more reasoned analysis than a lame-duck session of politicians deciding a fast-tracked issue.

We will continue to monitor these bills. You can follow this link if you would like to submit comments or contact our law firm about doing so.

Refusing to Hire Medical Marijuana User Found to be Unlawful Employment Discrimination

Workplace drug testingAre Michigan employers at risk of being sued for violating rights of individuals who are authorized medical marijuana users? A case from Connecticut under that state’s law suggest the answer may be yes.

Specifically, a Connecticut federal court found an employer guilty of employment discrimination after it refused to hire a medical marijuana user.

The employer, SSC Niantic Operating Company LLC, offered the plaintiff a job contingent on her passing a pre-employment drug test. The plaintiff told SSC Niantic she was a registered qualifying patient under the Connecticut Palliative Use of Marijuana Act (PUMA) and used the drug since 2015 to treat post-traumatic stress disorder.

After the pre-employment drug test came back positive, the plaintiff was not hired. In refusing to hire her, SSC Niantic relied upon federal law providing that marijuana is illegal, irrespective of state law.

The plaintiff filed a complaint in state court. She alleged, among other claims, SSC Niantic violated PUMA’s anti-discrimination provision. The court eventually agreed ruling defendant’s rescinding of plaintiff’s job offer was contrary to her right not to be subject to discrimination because of her status as a qualifying medical marijuana patient under PUMA.

High Time for Michigan Employers to Reconsider Medical Marijuana?

Like Connecticut, Michigan’s voters adopted a medical marijuana law called the Michigan Medical Marihuana Act (MMMA) (yes, Michigan spelled “Marihuana” with an “h”) and yes our acronym is considerably less cool than PUMA, but I digress).

The Connecticut opinion, Noffsinger v. SSC Niantic Operating Co., LLC, discusses many defense arguments the court rejected and is worth discussing with your company’s employment counsel. But the main thrust of the company’s defense is that under federal law, except for limited and controlled research, all undertakings involving the cultivation, distribution, and use of marijuana are criminal acts. But again, this logic and associated defenses were rejected.

The significant points we will be discussing with our business clients are (i) how to respond to an employee with an authorized medical card; an (ii) whether they should continue to rely exclusively on federal law as a basis for making hiring and firing decisions or if Michigan law should also be considered.

Michigan’s medical marijuana act may not be construed to require an employer to accommodate the ingestion of the drug in any workplace or to accommodate any employee working while under its influence. However, the Connecticut Court appeared to reject a similar argument noting the Federal Drug-Free Workplace Act did not protect the employer because it did not regulate employees who use illegal drugs outside of work while off-duty.

Additionally, Michigan voters will decide in November whether to legalize marijuana under the ballot proposal titled the Michigan Regulation and Taxation of Marijuana Act (MRTMA). This proposal would authorize the possession and nonmedical use of marijuana by individuals aged 21 and older.

Accordingly, employers must be ready to understand how these laws affect their workplaces. For more on these issues, contact Michigan employment attorney Jason Shinn. Since 2001, he has represented clients, both individuals, and companies, in addressing federal and Michigan employment law issues.

WeWorks Settles Investigation of Overbroad Noncompete Restrictions

The office share company WeWork Cos. reached a settlement with attorneys general of New York and Illinois over requiring most employees to sign over-broad noncompete agreements.

The Wall Street Journal, by Eliot Brown, reported that WeWork previously required most employees, including baristas and receptionists, to sign agreements barring them from working at similar businesses for a year after leaving WeWork.

The WSJ further reported that as part of the settlement,

WeWork agreed to release 800 rank-and-file employees in New York and an additional 600 employees nationwide from their noncompetes. A further 1,800 employees nationwide will be given less-restrictive terms on their agreements.

On 9/17/2018, we reported about the FTC and certain Democratic lawmakers calling for significant restrictions over using non-compete restrictions in employment agreements. See FTC Considers Restricting Noncompete Agreements. Those calls to limit employers forcing employees to enter into non-compete agreements go too far, including for the reasons we highlighted in our earlier post.

However, employers like WeWorks that blatantly misuse non-compete restrictions amplify the reasons underlying calls for reform. WeWorks is not alone in its misuse of non-compete restrictions: Jimmy John’s (Jimmy John’s Sued (Again) Over its Noncompete Restrictions) or Law360, Four Take-Aways from an Employer’s Misuse of Overly Broad Noncompete Agreements.

In one of the more egregious misuse cases we’ve handled, the owners of Day Break Salon sued a former stylist claiming a breach of a non-compete agreement. Before beginning her employment with DayBreak, the stylist had paid for her training (over $20,000) and was responsible for building her client base.`

Without considering the questionable circumstances surrounding the end of the employment relationship, at the time Day Break sued, the stylist was pregnant, working from home and a couple of days at another salon until she went on maternity leave in a few months. While the case was eventually dismissed – with no injunction awarded – the legal fees on both sided dwarfed the relief sought.

Will there be limits on the enforcement of non-compete restrictions?

In sum, non-competes have an important and legitimate place in your company’s operations toolbox. But non-compete abuse has become rampant. If employers don’t carefully reconsider how such restrictions are used, the enforcement pendulum may swing so far towards disfavoring non-compete restrictions that there will be no place for using them, legitimate or otherwise.

For more information about drafting, negotiating, or litigation over the enforcement of non-compete agreements, contact non-compete attorney Jason Shinn. Since 2001, he’s worked with both companies and individuals to address legal issues involving post-employment restrictions like non-solicitation and non-compete restrictions.

EEOC Data Shows Increase in Sex Harassment Claims

#MeTooAt the beginning of 2018, we advised our business clients to expect sexual harassment claims to increase. This advice was in response to various high profile sexual harassment claims and the #MeToo Movement against sexual harassment and sexual assault in the workplace.

Consistent with these predictions, it was reported on 9/17/2018 by Chris Opfer for Bloomberg’s Human Resources Report (subscription required) that the Equal Employment Opportunity Commission saw an increase in sexual harassment claims this year as compared with 2016. Notably, this increase occurred as the total discrimination and harassment claims dropped.

According to Bloomberg, this information came from EEOC data, which will eventually become public upon a final verification of the EEOC filings.

Considerations for Sexual Harassment Prevention

In the meantime, employers must continue to recognize that zero tolerance for sexual harassment and assault should be the norm.

But simply saying you have a zero tolerance workplace when it comes to discrimination is not enough. Items employers should consider in developing policies for preventing and defending sexual harassment claims include:

  • An affirmative statement of employers’ commitment to maintaining a workplace free from all forms of harassment and sexual harassment.
  • Having a good Anti-retaliation provision. Harassment and sexual harassment policies should emphasize that anyone who files a complaint about harassment or sexual harassment or is involved in related investigations are protected from retaliation.
  • Meaningful and continued employee training. While training is generally not required under federal law, training can help prevent harassment; and
  • A procedure for a fair and thorough investigation of all complaints.

Contact employment attorney Jason Shinn for more information about best practices for complying with federal and Michigan employment laws, including preventing sexual harassment claims. Since 2001, he has represented clients in claims under Title VII of the 1964 Civil Rights Act, which bans sex, race, religion, and other forms of bias in the workplace.

FTC Considers Restricting Noncompete Agreements

Will the playing field be leveled between employers and employees when it comes to non-compete agreements? Perhaps if anything comes out of the Federal Trade Commission’s (FTC) hearings held last 9/13 and 9/14, which Fair noncompete agreementfocused on how the agency’s competition and consumer protection approaches are working. One area of focus is whether enforcement practices need to be expanded or the law requires changes concerning non-compete restrictions.

Specifically, in advance of the FTC hearings, Federal Trade Commissioner Rohit Chopra released his comments  raising concerns about the use of non-compete agreements:

Take, for example, restrictive noncompete clauses in employment contracts. These agreements prevent employees from working for rival firms for a period of time after they leave. As recent studies show, these agreements – which now cover roughly 60 million Americans – deter workers from switching employers, weakening workers’ credible threat of exit and diminishing their bargaining power. In short, by reducing the set of employment options available to workers, employers can suppress wages.

Mr. Chopra’s comments urged the FTC to write rules defining when non-compete agreements for employees are permissible. His comments also followed a report released by four House Democrats, including Michigan Congresswoman Debbie Dingell, recommending that noncompete agreements be significantly restricted.

The report, The Future of Work, Wages & Labor, made the following observation:

One reason for this decrease in mobility is the increased utilization of non-compete clauses by employers. Firms do this under the premise that they are protecting intellectual property and other key investments, but this claim loses muster when considering the widespread use of noncompete clauses in the low-wage fast food industry. Employers are looking to keep training costs low by minimizing turnover and reducing the need for training, and as such, making labor markets less competitive and suppressing wages. To increase worker freedom and fairness, Congress should … Ban all non-compete clauses in employment contracts, with exceptions for senior executives who possess trade secrets.

(emphasis added).

One reason for the FTC and Congressional Democrats’ concern about the use of post-employment7 restrictions is persistent and slow wage growth. In this regard, Bloomberg, by Toluse Olorunnipa and Sho Chandra, report in Americans Are Making Less Money Despite Trump’s Promises, that,

real wages have remained mostly stagnant despite an expanding economy, record stock prices, soaring corporate profits and a giant deficit-fueled stimulus from Trump’s tax cuts… [But] [i]nflation-adjusted hourly wages dropped 0.2 percent in July from a year earlier, their worst reading since 2012 … They’ve grown at an average 0.3 percent annual pace under Trump overall, compared with 1.1 percent during Barack Obama’s second term.

Compelling evidence for this stagnant wage growth comes from research discussing the outsized influence employers have when it comes to setting wages below traditional market conditions. See Econ 101 No Longer Explains the Job Market, by  which cites to two papers (available by registration and/or subscription); the first by José Azar, Ioana Marinescu, and Marshall Steinbaum; and the second by Efraim Benmelech, Nittai Bergman, and Hyunseob Kim. Both articles provide compelling empirical evidence for why employer created monopolies have stagnated workers’ wages.

Closing Thoughts – Revising Non-compete Law is needed, but not to the extreme proposed.

In our experience, limiting the enforcement of non-compete restrictions should happen, but not to the extreme argued for by the Congressional Report. Limiting non-compete restrictions to only “senior executives” with access to trade secrets is not the answer. First, an executive – senior or otherwise – often has access to a range of information that may not rise to the level of a trade secret. This is also true of non-executives, especially in sales or marketing who rely upon an employer’s confidential information to be successful. And that sort of confidential information would provide an unfair advantage if used by a competitor.

Second and building on the preceding point, misappropriating trade secrets is already unlawful even without a non-compete restriction. But a non-compete provides essential protections not available when it comes to non-trade secret information.

However, non-compete enforcement is too often used for improper purposes. For example, we’ve represented individuals in non-compete disputes making less than $25,000.00 annually. These individuals did not have access to information or the means to engage in unfair competition.

Also, we’ve represented numerous clients in non-compete litigation, especially in disputes with staffing or employee leasing companies, where the former employer targeted the individual for litigation to merely stifle legitimate competition.

For more information about non-compete law and litigation, contact attorney Jason Shinn. He has focused on non-compete law relevant to employers and employees since 2001. His experience includes drafting, negotiating such agreements and litigating disputes in Federal and Michigan courts, including numerous preliminary injunctions.

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