1“Working day” is generally computed by counting the number of employees maintained on the payroll in a given week, as opposed to the number of employees who work on any one day. This calculation provides for a more expansive definition of “employer” since it includes hourly and part–time workers. Walters v. Metropolitan Educational Enterprises, Inc., 72 FEP Cases (BNA) 1211 (1997). Note, however, that this form of calculation is merely the majority approach; other courts have found that part–time employees who work for any part of each day of the workweek should be counted, while part–time employees who work full days for only a portion of the workweek should not be counted.

2The order exempts (1) employers with contracts of less than $10,000 from the requirement to include an equal employment opportunity clause in each of their contracts; (2) contracts for work performed outside the United States by employees not recruited within the United States; (3) contracts with state and local governments by providing that the EEO requirements do not apply to any agency of that government that is not participating in the work of the contract; (4) religious educational institutions that hire only people of that religion; (5) preferences offered to Native Americans living on or near a reservation in connection with employment on or near the reservation; and (6) certain contracts on the basis of national interest or security reasons.

The “Freedom” to Contract in the Regulatory Employment Environment
In the age of increasingly complex regulations governing the workplace, the relationship between employer and employee essentially is still based on an agreement. As you will see throughout this text, terms and conditions of employment may be subject to regulation or open to contractual negotiation and either expressed or implied. Though an employer is generally free to design contract terms of any kind, the terms and conditions set by an employer cannot violate the letter or the spirit of the applicable laws we have discussed or will discuss in chapters to come. In addition, you will learn that courts and legislatures sometimes determine that certain types of agreements between employer and employee are unenforceable. The focus of our discussion, therefore, is how the employment relationship is regulated, in general. Covenants Not to Compete (Non–Compete Agreements)

LO6 Describe the permissible parameters of non–compete agreements.

One employment constraint that has received varying degrees of acceptance by different states is the covenant not to compete or non–compete agreement. While individuals in positions of trust and confidence already owe a duty of loyalty to their employers during employment, even without a non–compete agreement, a non–compete agreement usually includes prohibitions against disclosure of trade secrets, soliciting the employer’s employees or customers, or entering into competition with the employer if the employee is terminated. non–compete agreement (or covenant not to compete) An agreement signed by the employee agreeing not to disclose the employer’s confidential information or -enter into competition with the employer for a specified period of time and/or within a specified region. Non–compete agreements are pervasive in U.S workplaces. At least 27 percent of the private sector workforce in 2019 is subject to non–competes (130 million workers), compared with 18 percent in 2014.52
In 2018, the Workforce Mobility Act (WMA) was introduced in the U.S. Senate and the U.S. House of Representatives. However, since it was not enacted by January 2019, it failed in Congress. If it had passed, it would have abolished covenants not to compete nationwide and also would have provided the Department of Labor (DOL) with broad enforcement power. If it is reintroduced and enacted, the legislation will empower the DOL to enforce the ban through fines on employers who either fail to notify employees that non–compete agreements are illegal or who require employees to sign covenants not to compete.53 While this act did not make it out of the Senate, Florida Senator Mark Rubio introduced the Freedom to Compete Act in January 2019, which continued to be considered at time of publication. In addition, currently all states allow employers some level of control over the extent to which an employer can restrict a former employee from competing. States vary widely, from explicitly permitting non–compete agreements to permitting agreements under certain circumstances to strictly prohibiting agreements that limit for whom a former employee can work and where he or she can work. Notably, California, Colorado, Idaho, Massachusetts, Montana, North Dakota, Oklahoma, and Utah severely restrict the use of non– competes in their page 30entirety.54 Bills pending in the Vermont and New Jersey legislatures would generally ban non–competes (with limited exceptions). The Vermont bill would only permit non–competes in the context of the sale of a business or dissolution of a partnership or interest in a limited liability company.55 Meanwhile, Georgia voters enacted a state constitutional amendment specifically expanding the enforcement of reasonable non–competes in order to make that state more economically attractive to business.56 In some states, certain professions are exempted from prohibitions against non–competes. For example, in certain states, prior employers can enforce non–competes against “management personnel,” while they may not enforce the agreements against other types of workers; some regions instead specifically exempt security guards and physicians. In many states, an employer may restrict a past employee based on location, the length of time, and the type of work she or hemay conduct, as long as the restrictions are reasonable and necessary to protect a business interest.57 Some states restrict non–compete clauses for entire industries. For example, in 2018, Utah modified its laws to limit the enforcement of non–competes against employees in the broadcasting industry. If an employer seeks to enforce a non–compete against an employee in the broadcasting industry, the employer must confirm that (1) the employee is paid a salary of at least $913 per week, (2) the non–compete provision was part of a written employment agreement, and (3) the employee must have been terminated for cause or must have breached the employment agreement to result in termination.58 Because of these state–by–state differences, it is critical to have forum selection clauses in contracts that stipulate the state law that will apply to the contract in question.

Forum selection clauses
A clause in a contract that identifies the state law that will apply to any disputes that arise under the contract. But how do you know what will be considered reasonable restrictions on an employee’s ability to compete after the employment relationship has ended? The common law generally prohibits the restriction if it is more broad than necessary to protect the employer’s legitimate interests or if the employer’s need is outweighed by the hardship to the employee and likely injury to the public.59 Employees also are sometimes prohibited from entering into non–compete agreements with certain groups of people, such as low–income earners. Illinois prohibits non–competes with “low–wage” employees, and there is legislation in New York City that seeks to do the same.60
(See Exhibit 1.7, “Low–Wage Employees.”)

Exhibit 1.7 Low–Wage Employees
The Illinois Freedom to Work Act went into force on January 1, 2017. The act bars certain Illinois employers from entering into non–compete agreements with “low–wage employees.” The act defines a low–wage employee as a person who earns less than $13.01 per hour. If the federal, state, or local minimum wage is raised above $13.01, then the act applies to any person earning the minimum wage. The act prohibits employers from entering into non–competition clauses that would restrict low–wage employees from performing: Any work for another employer for a specified period of time; Any work in a specified geographical area; or Work for another employer that is similar to such low–wage employee’s work for the employer included as party to the agreement.

Source: Illinois Freedom to Work Act, 820 Ill. Comp. Stat. Ann. 90.
To determine reasonableness, courts look to the location and time limitations placed on the employee’s ability to compete. The definition of competition under the non–compete agreement is also relevant: Is the employee prohibited from working in any capacity with a competitor or merely restricted from entering into direct competition with the employer? Restrictions that are for an indefinite period of time or that prohibit the employee from working “anywhere in the United States” would likely be considered unreasonable. However, as an example, restricting an employee from engaging in direct competition with the employer for one year from the end of their employment relationship within the same county may be considered reasonable. Generally, in order to be considered reasonable, the restrictive covenant should not prevent the employee from earning a living of any sort under its terms.

It is generally accepted that a valid restrictive covenant will meet the following qualifications:

  • It protects a legitimate business interest.
  • It is ancillary to a legitimate business relationship.
  • It provides a benefit to both the employee and employer.
  • It is reasonable in scope and duration.
  • It is not contrary to the public interest.61

Consider the example of the rental space company WeWork, headquartered in New York. WeWork tried to enforce a very broad non–compete clause against its 3,300 employees nationwide.62 WeWork used non–compete agreements that prohibited all employees from working for competitors after leaving the company, regardless of job duties, knowledge of confidential information, or compensation. The agreement applied not only to executive and senior staff but also to all levels of employees. After an investigation and threat of litigation by both the New York Attorney General’s and the Illinois Attorney General’s offices, WeWork agreed torelease over 1,400 rank–and–file employees nationwide from non–competes. These 1,400 employees included cleaners, mail associates, executive assistants, baristas, and more, some of whom were paid as little as $15 an hour. Another nearly 1,800 employees, composed of employees who were community leads, community managers, interior designers, architects, senior software engineers, and others, had their previous non–competes replaced with far less restrictive terms. These terms included a non–compete period shortened from one year to six months after employment ends; a dramatically smaller geographic restriction, from any geographic areas in which WeWork operated to just a 15–mile radius of only those WeWork locations engaged in the business lines in which the employee worked; and a much more narrowly defined scope of competition, limiting the ban to the specific business lines in which the employee worked.63

Management Tips Additional Considerations

Always evaluate the status of your workers; do not assume employee or independent–contractor status for any worker.
Employment status is relevant to employer payroll and other financial issues; therefore, misclassification may be costly to the employer.
While an employer is not liable to independent contractors for discrimination based on Title VII, the independent contractor may have other causes of action. Therefore, hiring an independent
contractor is not a safe harbor from liability. Monitor staffing firms with which you contract for temporary or other contingent workers to ensure that the workers are being properly paid and that the firm provides workers’ compensation coverage. Since statements in an employment policy manual may be construed in some circumstances as contractual promises, review all documentation as if you will be bound to it as a contract. Draft non–compete agreements that strive toward reasonableness. Reasonableness requires a balance among the business interests that you seek to protect, employee interests, and the public’s interest as well as a balance between a restraint that is not overly harsh or oppressive to the employee and no more broad than necessary to protect the company’s legitimate interests. A lesson learned from WeWork applies to all employers considering the use of non–compete agreements: reasonableness is measured by the realities of the industry and the nature of the employee’s occupation. As mentioned above, covenants not to compete sometimes also include provisions with regard to trade secrets or confidentiality with regard to other elements of employer intellectual property. This property might also include, for instance, customer relations and goodwill, specialized training, or particular skills unique to the workplace. The agreement often depends on what an employer considers to be trade secrets versus information in the public domain or commonly known in an industry. Confidential customer lists or customer preferences are often the source of trouble since they are usually maintained by individual workers based on professional relationships; however, most courts deem them property of the employer. Pricing, revenue, and other projections and marketing strategies are also commonly considered to be trade secrets. On the other hand, processes that are known by many in a particular industry and other information that is otherwise available through external sources are not considered to be company property.

Note that customer lists, if accessible through public means, would therefore no longer fall under the rubric of trade secrets.

Under the theory of inevitable disclosure, employers are protected against disclosure of trade secrets even if no non–compete applies. A court may prohibit a former employee from working for an employer’s competitor if the employer can show that there is imminent threat that a trade secret will be shared. The courts look to (1) whether the employee’s knowledge is exceptionally specialized and technical, (2) which would give either business (former or new) a significant page 33advantage in the market, and (3) whether the employee could perform her or his work without it. It might be highly unlikely, if not impossible, in some instances for some of these workers to conduct their work without disclosing the trade secret.

Inevitable disclosure
Theory under which a court may prohibit a former employee from working for an employer’s competitor if the employer can show that it is inevitable that the former employee will disclose a
trade secret by virtue of her or his position.
In one of the landmark cases in the area, for instance, Continental Aviation tried to purchase a very particular type of fuel injector pump from Allis–Chalmers, one of only three companies that marketed the pump in the world. When they were unable to reach terms, Continental instead simply hired the original designer of the pump from Allis–Chalmers to design the pump for Continental. In finding inevitable disclosure and imposing an injunction that prohibited the engineer from working at Continental, the court pointed out the “virtual impossibility of Mr. Wolff [the engineer] performing all of his prospective duties for Continental to the best of his ability, without in effect giving it the benefit of Allis–Chalmers’ confidential information.”64 The Uniform Trade Secrets Act (UTSA) is a model act that strives to provide guidance to states developing statutes in this and other related areas; by 2019, 49 states and the District of Columbia had adopted its structure. New York is the only state that has not adopted the UTSA and relies on common law.65 The UTSA provides relief in the form of monetary damages, attorney’s fees, and injunctive relief for misappropriation of trade secrets and does include a provision for inevitable disclosure. The Seventh Circuit’s decision in PepsiCo, Inc. v. Redmond66 is the seminal case to address inevitable disclosure after adoption of the UTSA. In that case, PepsiCo sought an injunction (a prohibition) against its employee, William Redmond, Jr., from accepting a position with a competitor, Quaker. Although Redmond had signed a confidentiality agreement relating to PepsiCo’s financial goals and strategic planning, the court granted the injunction for a period of five months, concluding that “a plaintiff may prove a claim of trade secret misappropriation by demonstrating that [the] defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.” After PepsiCo, the inevitable disclosure doctrine gained popularity; however, despite a workable standard presented by the Seventh Circuit, state applications of the doctrine have remained inconsistent.67 While most states enforce it, some, like California, Kentucky, Maryland, and Massachusetts, have rejected inevitable disclosure as inconsistent with public policies favoring employee mobility.68 Others, like Louisiana or Virginia, require actual or threatened disclosure of trade secrets or “bad faith” on behalf of the employee.69 Once a non–compete agreement has been found to be valid, in order to be enforceable, it must also be supported by consideration offered in a bargained–for exchange. In other words, the agreement by the employee not to compete with the employer is only enforceable if the employee also receives something in exchange for this agreement. Often, non–competes are signed at the time an employee is first hired, so the offer of employment on its own is considered sufficient consideration. However, if an employee is asked to sign a non–compete agreement after being hired and is not offered any additional consideration, some states do not treat continued at–will employment as sufficient.70 It depends on the state in which the agreement is signed.71

Chapter Summary
No matter the size of your organization, as long as you have hired one individual to work for you, you are considered an employer and potentially subject to numerous federal and other
regulations as well as to wrongful termination liability.
Why is the definition of “employee” important? The distinction between employees and independent contractors is crucial from a financial perspective. Because many regulations require different responsibilities from employers of employees and independent contractors, it is imperative that an employer be confident of the classification of its employees.

How does an employer make the distinction between employees and independent contractors? The classification of employees may vary depending on the statute that is to be applied or on the court in which a given case is scheduled to be heard. However, the common thread is generally the right of the employer to control the actions of the worker. Where this is present, the worker is likely to be considered an employee. Other factors to be considered include those that are part of the economic realities test, which evaluates the economics of the employment situation. Finally, some workers may be classified statutorily as employees, making the distinction all the easier. Who is an “employer”? The definition of employer is generally agreed on. An employer is usually thought to be one who employs or uses others (either employees or independent contractors, or both) to do its work or to work on its behalf.

Chapter–End Questions
Grace Cathedral Church owns a for–profit restaurant in Ohio called Cathedral Buffet. The buffet has both employees and volunteers that staff the restaurant. Volunteers perform many of the same restaurant–related tasks as employees: cleaning, washing dishes, serving cake, chopping vegetables, and manning the cash register. However, there is one meaningful distinction between employees and volunteers. Employees receive an hourly wage; volunteers do not. The pastor often announces before his Sunday sermon that the buffet is short–handed and needs more volunteers from the parish, claiming it is the “Lord’s Buffet” and that church members who repeatedly refuse to volunteer at the restaurant are at risk of “blaspheming against the Holy Ghost.” The pastor never promises any compensation. Restaurant managers work around volunteers’ schedules, ensuring they are free during their assigned shifts. If you were the Sixth Circuit, would you find that the volunteers are employees or independent contractors? What variables would help you in reaching your decision? [Acosta v. Cathedral Buffet, Inc., 892 F.3d 819 (6th Cir. 2018).] A staffing firm provides landscaping services for clients on an ongoing basis. The staffing firm selects and pays the workers, provides health insurance, and withholds taxes. The firm provides the equipment and supplies necessary to do the work. It also supervises the workers on the clients’ premises. Client A reserves the right to direct the staffing–firm workers to perform particular tasks at particular times or in a specified manner, although it does not generally exercise that authority. Client A evaluates the quality of the workers’ performance and regularly reports its findings to the firm. It can require the firm to remove a worker from the job assignment if it is dissatisfied. Who is the employer of the workers?page 35 Uber Technologies, Inc., develops, markets, and operates the Uber app. The app allows consumers to request an Uber driver to pick them up and drop them off at the nearest location.

Uber drivers use their own personal cars and are viewed by Uber as independent contractors. Uber views the app as a conduit between the transportation providers and passengers. A passenger brought action against Uber after the Uber driver stabbed the passenger following an alteration. The passenger alleged that Uber was liable for negligent hiring, training, and
supervision. Should Uber be held liable for the actions of its driver? What must the passenger prove to win this case? [Search v. Uber Techs., Inc., 128 F. Supp. 3d 222 (D.D.C. 2015).] Former student athletes at the University of Pennsylvania sued the university and also the National Collegiate Athletic Association (NCAA), alleging that they were employees entitled to a minimum wage under the Fair Labor Standards Act. Student participation in collegiate athletics is entirely voluntary, and the court pointed out the “long tradition of amateurism in college sports [which], by definition, shows that student athletes—like all amateur athletes—participate in their sports for reasons wholly unrelated to immediate compensation.” The Seventh Circuit, along with several courts in the past, ruled that student athletes are not employees. What do you think? Given the extreme amount of required time in training, the large amount of money earned by the universities where the students play, the potential for injury, and perhaps other factors you might identify, make an argument that student athletes should be viewed as employees. [Berger v. NCAA, 162 F.Supp.3d 845 (2016).]

Sandwich shop chain Jimmy John’s was investigated by the New York and Illinois Attorneys General Offices for forcing its employees to sign a non–compete agreement. The non–compete agreement prohibited workers from working at any other business that sells “submarine, hero– type, deli–style, pita, and/or wrapped or rolled sandwiches” within two miles of any Jimmy John’s shop in the United States during their employment and for two years thereafter. Jimmy John’s agreed to stop making its employees sign the agreements as part of a legal settlement. Illinois and New York are two states that seek to protect low–wage workers from non–compete clauses. Why do you think some states are particularly concerned for low–wage workers having to sign non–compete agreements? What are the strongest arguments in favor of employers, such as Jimmy John’s and others, being permitted to enforce non–compete clauses such as these?72 Licensed taxicab drivers in Boston brought an action against cab companies, alleging that they were misclassified by the companies as independent contractors. The taxicab drivers alleged that they were deprived of minimum wages, overtime pay, tips, and the protections afforded by the Wage Act. In Boston, the police commissioner is given the task of creating a comprehensive system of rules and regulations governing the ownership, leasing, licensing, rate setting, and operation of taxicabs in the city. In order for a qualifying taxicab to be put into service, the owner must obtain a license, called a “medallion,” for each such taxicab.