NLRB Takes Aim at Employee Reimbursement Agreements and Financial Penalties for Non-Compete Agreements

Earlier this month, the NLRB’s General Counsel issued Memorandum 25-01 explaining how she intends to enforce her existing position that non-compete agreements generally violate the NLRA.   She expands upon this policy to also target as “presumptively unlawful” common agreements where employees must repay their employer if they resign before a certain date, such as educational reimbursement, relocation reimbursement and signing bonuses.  Nonetheless, if the employer shows that the agreement was truly voluntary and optional, and does not require repayment if the employee is terminated without cause, it may still be enforced.    She also expands “make whole” remedies by requiring employers to compensate employees upon a simple showing that there was a better paying job elsewhere for which they were qualified – regardless of whether they would have been the best qualified or actually hired.   In short, an unlimited number of employees may be entitled to compensation even if there was only one potential job opening.   Nonetheless, she does not intend to begin enforcement against stay-or-pay provisions for 60 days in order to give employers the opportunity to rescind or modify such provisions that do not satisfy her four-part test below). 

According to the Memorandum, these types of provisions (non-competes and stay-or-pay) chill employee’s rights to seek better paying jobs regardless of whether the employer seeks to enforce them in court.  They may forgo seeking or obtaining a better paying job or accept a lower-paying job outside their field or in a different geographic area. 

The Memorandum recommends that employers be required to compensate employees whose rights were chilled as long as the employee can identify a single job vacancy for which they were qualified which offered better pay and/or benefits than their current job but which they were discouraged from seeking because of the non-compete or stay-or-pay provision.   Worse still, even if the employee cannot identify such a position – because they presumably were not looking for another job because of the non-compete, the NLRB can still order the employer to compensate the employee:

If the individual cannot point to specific comparator job opportunities within the industry because they were not pursuing them as a result of the non-compete, the Region may use other evidence to provide a within-industry earnings estimate.

There is no limit on the number of employees who could seek compensation from a single job opening.   This same compensation system would exist for employees who (i) obtained lower paying jobs outside their industry within the geographic scope of the non-compete clause, or (ii) moved to a job outside the geographic scope of the non-compete clause.

As for stay-or-pay agreements, the GC targets agreements requiring the repayment of tuition, training, relocation expenses or signing bonuses which are tied to a mandatory stay period.   However, she concedes that narrowly tailored agreements which are truly voluntary can be enforced, except which the employee is involuntarily terminated without cause.  She will be seeking the NLRB to find these types of agreements to be presumptively unlawful.  However, the

employer may rebut that presumption by proving that the stay-or-pay provision advances a legitimate business interest and is narrowly tailored to minimize any infringement on Section 7 rights, that is, the provision: (1) is voluntarily entered into in exchange for a benefit; (2) has a reasonable and specific repayment amount; (3) has a reasonable “stay” period; and (4) does not require repayment if the employee is terminated without cause. . . .

 . . . employees must be permitted to freely choose whether to do so and may not suffer an undue financial loss or adverse employment consequence if they decline—and must be in exchange for a benefit conferred on the employee.35 Ensuring that employees choose, of their own free will, to enter into such provisions is essential to minimizing any interference with Section 7 rights. If a stay-or-pay arrangement is optional, employees who are worried about retaliation for engaging in protected activity may opt not to enter into such an arrangement, thereby allowing them to exercise their statutory rights as freely as any other employee. In contrast, if employment is conditioned on a stay-or-pay arrangement, employees have no ability to preserve their Section 7 rights in this manner. . . .

Training repayment agreements with a stay-or-pay provision satisfy this proposed criterion so long as the training is optional. In many cases, an employer offers to pay for training or educational opportunities that an employee voluntarily elects to pursue with the understanding that the employee will “pay” costs back through continued employment for a given time period instead of paying for the program out of their own pocket (and repay the employer if the employee does not stay for the requisite period). . . . For example, if an employee needs a certain credential to be eligible for promotion, a stay-or-pay arrangement to finance that undertaking would be permissible. Likewise, subsidies covering the cost of classes or courses necessary to obtain or maintain a mandatory credential for an employee’s current job, such as a degree, license, or certification (“credential”), may be conditioned on a stay-or-pay provision if the classes are selected at the employee’s discretion from any third-party vendor, that is, the employee is not forced to take the classes through the employer. A stay-or-pay is voluntary in such situations because an employee could pay out of pocket in lieu of entering into a stay-or-pay arrangement. Doing so would amount to a justifiable financial burden since employees expect to bear such costs to gain and keep a credential that is portable to other jobs within the industry, and they can shop around based on price. Additionally, where educational degrees are concerned, employees typically have other financing options beyond becoming indebted to their employer and, thus, employees would not be compelled to accept a stay-or-pay to fund their educational pursuits. While not strictly required, it would be advisable to make the voluntary nature of the arrangement explicit in the contract, e.g., by stating that the training or credential is not mandatory or that the employee has the option of obtaining a mandatory credential from a third-party vendor instead of via the employer.

In contrast, a stay-or-pay arrangement that is tied to mandatory training—that is, orientation sessions, on-the-job training or other specific instruction that the employer requires an employee to attend—cannot satisfy this proposed criterion. In practice, employees are typically given no choice as to whether to enter into stay-or-pay agreements in exchange for training their employer mandates. The only way to inject “choice” into such an arrangement is to give employees the option of paying for the mandatory employer-specific, employer-provided or employer-arranged training upfront instead of entering a stay-or-pay—a choice that would be illusory. . . .

With respect to cash payments, such as a relocation stipend or sign-on bonus, in my view a stay-or-pay provision can only be considered fully voluntary if employees are given the option between taking an up-front payment subject to a stay-or-pay or deferring receipt of the same bonus until the end of the same time period. Only in this way can employees who anticipate possibly engaging in protected concerted activity avoid becoming indebted to their employer without a significant financial downside. If the only alternative was to decline the cash payment outright, that “choice” would be illusory because no reasonable employee would do so, and if they did, it would amount to paying their employer in order to safeguard their Section 7 rights by foregoing money that will remain in the employer’s account. . ..

 . . .

A reasonable and specific repayment amount: In order to be lawful, the repayment amount must be reasonable, that is, no more than the cost to the employer of the benefit bestowed, and the debt amount must be specified up front. Where the repayment amount is greater than the cost to the employer, the true purpose of the provision is no longer legitimate recoupment but rather coercive restriction of employee mobility, which, as noted above, is not a legitimate business interest. . . .

“Where the repayment requirement appears to be for the purpose of recouping the cost of bestowed benefits based on the contract language, but the surrounding circumstances undercut that legitimate justification and demonstrate that the real purpose is to force employees to stay against their will, the provision is unlawful without further analysis.”

Finally, the GC recommends that the NLRB amend its notices to alert current and former employees who are or were subject to non-compete agreements that they may be entitled to compensation.  They would have 6 months to file an unfair labor practice charge with the NLRB. 

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Supreme Court: Two 5-4 Decisions On FLSA and ERISA

This morning, the United States Supreme Court issued two employment decisions which had two things in common.  They both were both 5-4 decisions and they both reversed the Third Circuit Court of Appeals.  Justice Kennedy was the swing vote.  In the first case, Justice Thomas’ opinion found that a FLSA lawsuit brought by a single plaintiff on behalf of herself other others similarly situated could not proceed after her individual claim was mooted by her failure to accept an offer of judgment from the defendant hospital employer.  In the second lawsuit, Justice Kagan’s opinion found that an employer’s ERISA plan could properly recover in a lawsuit from its employee/beneficiary funds which employee recovered in a personal injury lawsuit from a third-party based on the equitable lien in the ERISA plan to recover funds already paid by the plan to the employee for his injuries.  However, because the ERISA plan was silent on the subject of attorney fees, the common law doctrine concerning a common fund would be applied to reduce the ERISA’s plan’s recovery by the 40% contingency fee that the plaintiff paid his personal injury attorney to recover the funds.

In the FLSA lawsuit, the plaintiff employee alleged that she and other similarly situated employees were not paid in accordance with the FLSA because her hospital employer automatically deducted 30 minutes each day from their paycheck for lunch whether they worked through lunch or not.   Genesis Healthcare Corp. v. Symczyk, No. 11-1059 (4-16-13).  No other employees joined her lawsuit.  Upon filing its answer to her complaint, her savvy employer made an offer of judgment under Civil Rule 68 – i.e., offered her the full requested relief of $7500 of unpaid wages plus any attorney fees, costs and expenses that the court might deem appropriate.  She was given 10 days to accept the offer, which she ignored.  The trial court, however, was impressed.  By offering her full relief, the employer mooted her individual claim (under the law of the Third Circuit – which is not universally accepted on this point), which was dismissed.  Because no one else had joined her lawsuit, and she had no personal interest in the pending lawsuit,  the case was dismissed.  The Third Circuit reversed, objecting to allowing employers to cherry pick cases by paying off the representative plaintiff.  However, the Supreme Court reversed.

While the FLSA authorizes an aggrieved employee to bring an action on behalf of himself and “other employees similarly situated,” 29 U. S. C. §216(b), the mere presence of collective-action allegations in the complaint cannot save the suit from mootness once the individual claim is satisfied.

                . . . . .

The Court of Appeals concluded that respondent’s indi­vidual claim became moot following petitioners’ Rule 68 offer of judgment. We have assumed, without deciding, that this is correct.

Reaching the question on which we granted certiorari, we conclude that respondent has no personal interest in representing putative, unnamed claimants, nor any other continuing interest that would preserve her suit from mootness. Respondent’s suit was, therefore, appropriately dismissed for lack of subject-matter jurisdiction.

The Court distinguished this case for damages from equitable cases where the fleeting nature of the underlying claim (such as the lawfulness of pre-trial detentions) would almost always render a case moot before it could be heard.  Notably, the Court did not address the larger issue of whether a rejected offer of judgment renders the case moot, which is an unsettled issue of law.  The lower courts held that it did and the plaintiff did not appeal that issue to the Supreme Court.

In the second case, an employee was injured in a car accident and his employer’s health plan paid $66,866 in medical costs.  US Airways, Inc. v. McCutchen, No. 11-1285 (4-16-13).   The employee then retained a lawyer to sue the driver of the car which injured him.  That driver had also killed and/or seriously injured 3 other people, had limited insurance coverage and settled for $10,000.  However, the employee’s own insurance carrier paid $100,000.  Of the $110,000  recovered by the employee, 40% of it went to his attorney’s contingency fee.  Although he was left with only $66,000, the employer’s health plan then sued him under §502(a) of ERISA to recover reimbursement of the $66,888 in medical expenses it paid on his behalf. The terms of the health plan provided:

“If [US Airways] pays benefits for any claim you incur as the result of negligence, willful misconduct, or other actions of a  third party, . . . [y]ou will be required to reimburse [US Airways] for amounts paid for claims out of any monies recovered from [the] third party, including, but not limited to, your own insurance company as the result of judgment, settlement, or otherwise.”

The health plan’s right to reimbursement is an equitable lien by agreement on the proceeds of the personal injury litigation.   Nonetheless, it is a contractual right and is not subject to common law rules concerning equitable liens.  Therefore, the plan’s contractual rights could not be defeated by the common law doctrines of unjust enrichment, double recovery, or common fund.  However, because the plan was silent on the allocation of attorney fees, the Court’s majority (and the point on which the minority dissented because the terms of the plan were plain and uncontested), concluded that the silence would be filled by the common law doctrine of the common fund.  The plan did not specify whether its right to recovery went to the first dollar or only to the dollars recovered (i.e., after deduction for attorney fees).  

The majority found that the plan’s contractual right to recovery was reduced by the 40% attorney contingency fee.   Otherwise, the plan would receive a full ride at the employee’s expense.  The employee here would be out of pocket for bringing the lawsuit that the plan failed to bring or contribute towards. To rule otherwise, would also create a disincentive for the employee to have brought the personal injury lawsuit in the first place.    Of course, employers could avoid having to share with personal injury attorneys in the future by revising the terms of their ERISA plans to explicitly avoid responsibility for those fees and/or specify how its recovery would be calculated.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.