Articles Posted in Employment Contracts

silhouettesWorkers asserting a cause of action against an employer under various employment statutes must establish multiple facts before any claim may proceed. Perhaps before anything else, they must demonstrate an employment relationship between the defendant and themselves. If a claimant is an independent contractor rather than an employee, the employer may have far fewer obligations, or none at all, under employment statutes and the common law. “Misclassification” involves classifying workers who meet a legal definition of an employee as independent contractors. A recent Third Circuit Court of Appeals decision allowed a New Jersey misclassification lawsuit to proceed, specifically addressing another early roadblock for complainants:  a contractual clause purportedly mandating arbitration of all disputes. Moon v. Breathless, Inc., No. 16-3356, slip op. (3d Cir., Aug. 17, 2017).

No precise definition of “employee” exists in state or federal law. The federal Fair Labor Standards Act (FLSA) defines an “employee” as “any individual employed by an employer,” and “employ” as “to suffer or permit to work.” 29 U.S.C. §§ 203(e)(1), (g). Different jurisdictions have therefore developed their own definitions of “employee” and “independent contractor.” New Jersey’s definition is quite expansive, holding that an individual is an employee unless they meet a three-part test:  (1) the employer lacks control over how the individual performs their job; (2) the individual’s job either is substantially different from the employer’s usual business activities or is not performed at the employer’s regular place of business; and (3) the individual has an “independently established trade, occupation, profession or business” that includes their work for the employer. Hargrove v. Sleepy’s, LLC, 106 A.3d 449, 458 (N.J. 2015).

Many employment contracts include clauses stating that both parties agree to arbitration of any disputes, often precluding the option of going to court. The arbitration process involves submitting a dispute to an arbitrator, a private individual with specialized training in dispute resolution. The process may involve something resembling a trial, in which each side presents arguments and evidence, and the arbitrator makes a decision. Whether the arbitrator’s decision is binding on the parties depends on the terms of the arbitration clause.

family insuranceFederal law does not require employers to provide employees with benefits like retirement plans, but it regulates employers that choose to do so. Employers may be liable to employees for failing to meet the requirements set by the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq. A federal court awarded $750,000 in damages in an ERISA claim for a failure to inform an employee of certain details of a life insurance plan. Erwood v. Life Ins. Co. of N. Am., et al., No. 2:14-cv-01284, opinion (W.D. Pa., Apr. 13, 2017). The case was in a Pennsylvania court but relied in part on New Jersey employment law claims.

ERISA covers a wide range of employment benefits, including retirement plans, deferred income plans, life insurance, and health insurance. Employers must designate an administrator, who has the duty of providing a summary of any covered plan, along with other information, to each beneficiary. 29 U.S.C. § 1021(a). Anyone who “exercises any discretionary authority or discretionary control respecting management of such plan” owes fiduciary duties to the beneficiaries. Id. at §§ 1002(21)(A), 1104(a).

If a plan does not provide any specific remedy for breaches of fiduciary duties or other violations, ERISA allows various forms of relief for aggrieved beneficiaries. Id. at § 1132(a)(3). These may include reformation of the plan and other equitable remedies, as well as “a surcharge remedy “extended to a breach of trust committed by a fiduciary.” Erwood, op. at 14, quoting CIGNA Corp. v. Amara, 563 U.S. 421, 440-42 (2011). See also Horan v. Reliance Standard Life Ins. Co., No. 3:12-cv-07802, opinion (D.N.J., Jan. 30, 2014).

SeoulIn 2015, a group of technology companies settled a class action filed on behalf of thousands of employees for about $415 million. The lawsuit alleged that the defendants violated antitrust laws by entering into “anti-poaching” agreements, by which they agreed not to solicit or hire each other’s employees. These types of agreements make it difficult, if not impossible, for workers to advance in their fields, and they also tend to drive wages downward. More recently, a putative class action that partly originated in New Jersey made similar allegations against two major electronics companies. Frost v. LG Corp., et al., No. 5:16-cv-05206, complaint (N.D. Cal., Nov. 8, 2016). A judge granted the defendants’ motion to dismiss the case in April 2017, based on pleading defects, but will allow the plaintiffs to make corrections in an amended complaint. The case remains a good example of how state and federal antitrust laws can affect employment.

The main federal antitrust statute is the Sherman Act, originally enacted by Congress in 1890 in an effort to address monopolistic practices across the country. It prohibits any “contract…in restraint of trade or commerce among the several states,” 15 U.S.C. § 1, and allows both civil and criminal penalties. The New Jersey Antitrust Act uses almost identical language to describe prohibited contracts. N.J. Rev. Stat. § 56:9-3. The attorneys general at the state and federal levels are empowered to investigate and prosecute anticompetitive practices, and both state and federal laws allow civil causes of action by aggrieved parties.

The Frost lawsuit is actually a consolidation of two lawsuits filed in California and New Jersey. It asserts claims on behalf of three classes of employees:  nationwide, in California, and in New Jersey. The two defendant employers are American subsidiaries of South Korean companies. Their parent companies are also named as defendants. The lead plaintiff for the New Jersey class worked for one of the defendants in Englewood Cliffs for about eight years, beginning in 2006.

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defense lawyerThe U.S. Supreme Court granted certiorari to three consolidated cases addressing the enforceability of class action and collective action waivers in employment arbitration agreements. Many employment agreements include provisions stating that both employees and employers will submit any employment-related dispute to a neutral arbitrator. A waiver bars employees from filing or joining a class action related to their employment. The Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., appears to authorize this type of provision, but a waiver might violate the National Labor Relations Act, 29 U.S.C. § 151 et seq. The Supreme Court has recently upheld class action waivers in consumer contracts, and it may have agreed to hear this case in order to resolve any uncertainty resulting from those rulings.

In a class action, a plaintiff or group of plaintiffs sues on behalf of a larger group of similarly situated persons. This allows people who lack the resources to file suit, or whose individual claims are too small to justify the expense of suing, to pool their claims into a single lawsuit. Federal law establishes four criteria for certifying a class:  (1) the class must be numerous enough to make individual lawsuits, or individual joinder of plaintiffs, impractical; (2) the class members must have common legal or factual questions; (3) the claims of the lead plaintiffs must be typical of the other class members; and (4) the lead plaintiffs must be able to “fairly and adequately” represent the class members and their interests. Fed. R. Civ. P. 23(a).

Arbitration is a method of alternative dispute resolution. Instead of filing suit, the parties submit their dispute to one or more arbitrators, who are usually legal professionals with knowledge of the subject matter at issue. The arbitrator will conduct a hearing, which might resemble a trial in many ways, and recommend an outcome. Employment contracts may require binding or non-binding arbitration. The results of binding arbitration are not subject to review by a court, absent evidence of misconduct by the arbitrator. A common criticism of arbitration is that the process tends to favor whomever is paying the arbitrator’s fees.

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arm wrestlingThe American economy is largely based on the principle that competition is beneficial to everyone. No system of laws is ever perfect, of course, and ours requires regular revisions to balance different interests, such as an employer’s interest in retaining its investment in an employee and an employee’s interest in choosing where—and in which field—to work. Non-compete agreements (NCAs) limit an individual’s ability, upon ceasing to work for an employer, to work in a similar job. This obviously protects the employer’s interest but can be quite damaging to the former employee. Several states have outlawed NCAs entirely, while most states, including New Jersey, have established strict criteria for their enforcement. The White House issued a call to state governments in October 2016 to restrict the enforceability of NCAs even further, in ways that benefit employees.

Laws governing the enforceability of NCAs differ considerably from state to state. Some states have enacted legislation, while others rely on court rulings based on statutory or common law. In a very general sense, NCAs prohibit an employee from working for a competitor or starting a competing business while working for the employer or after their employment ends. An open-ended NCA is almost universally unenforceable, but many states allow NCAs that are limited in time and geographic scope. For example, an NCA that bars a former employee from working for a competitor within 20 miles of the employer’s location, for a period of six months after the end of their employment, is likely to be enforceable in most jurisdictions.

At least four states, California, Hawaii, North Dakota, and Oklahoma, have banned the use of NCAs in employment contracts almost entirely. Under New Jersey law, NCAs are only enforceable if they meet a three-prong test called the Solari/Whitmyer test. The NCA must be “necessary to protect the employer’s legitimate interests,” it cannot create an “undue hardship” for the employee, and it cannot be “injurious to the public.” Community Hosp. Group, Inc. v. More, 869 A.2d 884, 897 (N.J. 2005); citing Solari Industry v. Malady, 264 A.2d 53, 56 (N.J. 1970); and Whitmyer Bros., Inc. v. Doyle, 274 A.2d 577 (N.J. 1971).

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Our economic system depends on the competition of individuals and businesses in a free market, subject to reasonable regulations. When one or more “persons”—a legal term that includes individuals and various types of businesses—take actions that make their segment of the market less competitive, they may be in violation of federal or state antitrust laws. These statutes prohibit employment practices, such as “wage-fixing” agreements among competing companies, that unfairly harm employees’ interests. The U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) recently issued a guidance document, entitled “Antitrust Guidance for Human Resource Professionals,” addressing the enforcement of federal antitrust laws. In addition to civil penalties, the DOJ has the authority to pursue criminal charges for anticompetitive practices in some situations. The guidance document advises human resources (HR) professionals to enact policies aimed at avoiding civil and criminal liability for their employers.employee

Congress passed the Sherman Antitrust Act, 15 U.S.C. §§ 1 through 11, in 1890 in order to combat the formation of monopolies that could take over control of entire markets or commodities, such as oil or steel. When a single company has control over a particular product or service within a market, consumers typically suffer because of factors like the lack of incentive to keep prices at a reasonable level. Employees can also suffer when there is no other employer who has need of their skills. Federal laws and many state laws allow state regulators to take steps to prevent actions, such as mergers of two or more formerly competing businesses, that could lead to a monopoly.

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Times SquareEmployees in the U.S. have the right to organize themselves as a union or to join an existing labor union in order to negotiate with their employers regarding working conditions and various other features of employment. At the federal level, the National Labor Relations Act (NLRA), 29 U.S.C. § 151 et seq., secures these rights and prohibits interference by employers. Laws vary from state to state, however, regarding whether union membership may be made mandatory. “Right-to-work” laws in many states allow employees to elect not to join the union, while other states allow employers and unions to enter into “union security agreements.” Neither New Jersey nor New York has right-to-work laws. A well-known restaurant in Manhattan’s Times Square offers a recent example of how labor organizing can work. Amid multiple complaints and allegations of poor working conditions, 50 restaurant employees recently announced that they had voted to form a union.

The NLRA protects workers’ rights “to self-organization,” to form their own labor organization or to join an existing one, to choose representatives to engage in collective bargaining with their employer, and to “engage in other concerted activities” directed toward these purposes. 29 U.S.C. § 157. Employers are prohibited from interfering with or restraining employees in the exercise of these rights. Id. at § 158(a)(1). The law also prohibits various coercive acts by employers and labor unions, and it protects the rights of workers engaged in strikes or other activities authorized by their union. It leaves certain matters, however, up to the states.

Right-to-work laws state that workers may not be required to join a union. The NLRA allows union security agreements between unions and employers, which may place certain obligations on employees. Federal law does not allow “closed shops,” in which the employer can only hire union members. “Union shops,” in which employees must join the union after being hired, are allowed under the NLRA but are prohibited by right-to-work laws.

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ComputerThe traditional model of “employment” in the U.S., in which individuals work for an employer long enough to establish a career and secure retirement benefits, is a reality for fewer and fewer people. In many workplaces today, employees must fight simply to secure their status as employees—who are entitled to protection under various federal, state, and local employment laws—while their employers try to classify them as independent contractors. The “gig economy” is a relatively new concept of the last decade or so, in which people work as freelancers—i.e., independent contractors—for multiple clients. Unlike misclassified employees, freelancers accept that they are independent contractors, but they often lack the means to assert their contractual rights against much larger clients. These disputes can closely resemble wage and hour disputes between employees and employers. A bill pending in the New York City Council, informally known as the Freelance Isn’t Free Act, would protect the rights of freelancers to timely payment in full.

Currently, no law in New Jersey or New York specifically addresses the circumstances faced by freelancers. Laws regarding employee misclassification offer a good starting point for understanding these issues. Employers may see an incentive in classifying workers as independent contractors. Employees are generally protected by a wide variety of laws dealing with minimum wage, overtime compensation, workplace discrimination and harassment, family and medical leave, unemployment benefits, and other matters. Independent contractors’ rights are mostly limited to whatever is addressed in their contract—assuming they have a written contract.

New Jersey has adopted a standard for employee classification that is favorable to the employee. The New Jersey Supreme Court applied a test known as the “ABC test,” based on a provision of the New Jersey Unemployment Compensation Law. An individual is an independent contractor, rather than an employee, if they are “free from control or direction” by the employer with regard to their job duties, their work is “outside the usual course of the business” or “performed outside of all the [employer’s] places of business,” and they regularly work “in an independently established trade, occupation, profession or business.” N.J. Rev. Stat. §§ 43:21-19(i)(6)(A) – (C); Hargrove v. Sleepy’s, LLC, 106 A.3d 449, 453 (N.J. 2015).

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unions mapLaws in New Jersey and many other states protect workers’ right and ability to organize for the purpose of collective bargaining with employers. Some states, however, have passed laws aimed at significantly reducing workers’ ability to unionize, ironically named “right to work” laws. These laws prohibit requiring workers who choose not to join a union to pay any sort of fee to the union, even if they benefit from working conditions only made possible by union efforts. In a bit of good news, a Wisconsin court has ruled that its state’s “right to work” law constitutes a taking of union property by the government without just compensation, in violation of the state constitution. Int’l Assoc. Of Machinists Dist. 10, et al. v. State of Wisconsin, et al., No. 2015CV000628, order (Wis. Cir. Ct., Dane Co., Apr. 8, 2016).

Unions represent employees in collective bargaining negotiations with their employers. These types of negotiations, backed by strikes and other actions, helped make possible many of the features of employment taken for granted today. Workers who do not join a union generally still benefit from the union’s activities, so unions have, in the past, sought contractual terms with employers to address this imbalance. A “closed shop” refers to an employer that, under the terms of a union contract, may only hire union members. A “union shop” is an employer that must require all employees to join the union.

Federal law has banned closed-shop clauses in union-employer contracts. States can prohibit union-shop clauses, but federal law allows unions to require the payment of an “agency fee” by non-union workers. See Communications Workers of America v. Beck, 487 U.S. 735 (1988). “Right to work” laws prohibit union-shop clauses, particularly agency fees. The Wisconsin Legislature passed a “right to work” law in 2015. See WI Stat. §§ 111.04(3)(a)(4), 111.06(1)(c).

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confidential documentIn order to remain competitive in the marketplace, most businesses rely on keeping certain types of information confidential. These might include client lists, sales leads, or computer algorithms, to name but a few. Employees often have access to information that an employer considers proprietary or otherwise secret. State laws protecting trade secrets may affect employees during and after their employment relationship. New federal legislation, the Defend Trade Secrets Act (DTSA) of 2016, Pub. L. 114-153 (May 11, 2016), expands federal courts’ jurisdiction over trade secret matters, and it could have an impact on employees in New Jersey and around the country.

Until the DTSA came along, no uniform standard for trade secret protection applied across the country. New Jersey law defines a “trade secret” as information that has value specifically because it is secret and that has been “the subject of efforts…to maintain its secrecy.” N.J. Rev. Stat. § 56:15-2. This definition is consistent with most state statutes and existing federal law. See 18 U.S.C. § 1839(3).

New Jersey’s trade secrets law prohibits the “misappropriation” of a trade secret, defined to include the acquisition of secret information by a party who knows of its confidential nature, and the disclosure of such information without permission and with knowledge of its secrecy. N.J. Rev. Stat. § 56:15-2. It allows state courts to grant injunctions to prevent “actual or threatened misappropriation.” Id. at § 56:15-3. It also allows the recovery of damages for actual losses and unjust enrichment resulting from misappropriation. Id. at § 56:15-4.

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