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 Agrees To Decide Burden of Proof for Reverse Discrimination Based on Ohio case.

Last December, in a per curiam decision, the Sixth Circuit affirmed an employer’s summary judgment on a female employee’s Title VII claim that she was discriminated against for being a heterosexual.  Ames v. Ohio Department of Youth Services, 87 F.3d 822 (6^th Cir. 2023).    Judge Marbley had found that she had failed to prove sufficient “background circumstances” to support a reverse discrimination failure-to-promote claim or pretext to rebut the employer’s explanation regarding her demotion for merely satisfactory job performance.  The Supreme Court has granted certiorari to determine whether “background circumstances” are required in a reverse discrimination claim when there is no statutory basis for such a requirement.  2024 U.S. Lexis 3065 (Oct. 4, 2024). 

According to the Court’s opinion, the plaintiff was hired in 2004, was promoted in 2014 to an Administrator position, was given a satisfactory performance evaluation in 2019, applied for a Chief position, was suggested by her new supervisor that she retire and was demoted by the Assistant Director back to her former position with a substantial cut in pay. Although the Director and Assistant Director of the Department were heterosexual, in 2017, a gay woman was promoted to be the plaintiff’s direct supervisor.  The Department ultimately hired in 2019 a gay woman for the Director position that plaintiff was denied and a gay 25-year old man was promoted to replace her as Administrator.

The Court noted that the plaintiff, as a heterosexual, “must show ‘background circumstances to support the suspicion that the defendant is that unusual employer who discriminates against the majority.’”  While she easily was able to prove the typical prima facie case, where her failure to promote case

founders, however, is on the requisite showing of “background circumstances.” Plaintiffs typically make that showing with evidence that a member of the relevant minority group (here, gay people) made the employment decision at issue, or with statistical evidence showing a pattern of discrimination by the employer against members of the majority group. . . . . First, [she] was terminated as PREA Administrator by [the Assistant Director] and [HR Director], who are both heterosexual. [She] does argue that [her supervisor], a gay woman, was the person who denied her the position of Bureau Chief and who instead chose Frierson, who is also gay. But [she] argued in the district court that [two hetereosexuals] were the decisionmakers for that position, which means that [her] argument that [her gay supervisor] was the decisionmaker is forfeited.  . . .  Second, [her] only evidence of a pattern of discrimination against heterosexuals is her own demotion and the denial of the Bureau Chief position. Under our caselaw, however, a plaintiff cannot point to her own experience to establish a pattern of discrimination.

As for her demotion claim, again the Court agreed that she sufficiently proved a prima facie case.  However, she could not rebut the employer’s explanation that the new (heterosexual) Director wanted someone in her Administrator position who exceeded expectations instead of merely meeting them.  While her prior evaluation had been satisfactory, she only exceeded one benchmark and showed room for improvement in three others. 

The plaintiff attempted to show pretext by the employer’s shifting explanation.  First, it said nothing to her when she was demoted.  Then, to the EEOC, it stated merely that she was at will.  However, in his deposition, the Director finally explained that she was not sufficient to fulfill his “vision” of exceeding minimum expectations. However, while the employer’s explanation changed over time, these different explanations did not conflict with each other.   “Absent some conflict between an employer’s nondiscriminatory reasons for an adverse employment decision, however, that the employer offers more than one of them—even at different times—is not enough to create a genuine issue of fact as to pretext.”

Finally, the Court did not find evidence that her successor’s promotion was procedurally irregular or that her qualifications were “objectively superior” to his.

One judge indicated that the “background circumstances” rule should be revisited because it is inconsistent with the statutory language, although it is binding precedent in the Sixth Circuit. 

The “background circumstances” rule is not a gloss upon the 1964 Act, but a deep scratch across its surface. The statute expressly extends its protection to “any individual”; but our interpretation treats some “individuals” worse than others—in other words, it discriminates—on the very grounds that the statute forbids. Yet five circuits (including our own) have adopted the “background circumstances” rule since the D.C. Circuit first adopted it in 1981. . ..

 . . . If the statute had prescribed this rule expressly, we would subject it to strict scrutiny (at least in cases where plaintiffs are treated less favorably because of their race). And nearly every circuit has addressed this issue one way or another. . . . .

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.

Sixth Circuit Rejects Enforcement of Non-Compete and Trade Secret Claim Based on Information in Employee Cell Phone

Yesterday, the unanimous Sixth Circuit Court of Appeals affirmed a divided decision concerning the enforcement of a non-compete, trade secret and non-solicitation agreement which the employee was required to sign as a condition of being hired.  Total Quality Logistics LLC v. EDA Logistics, LLC, No. 23-3713 (6^th Cir. 10-2-24).   First, it refused to prevent the employee from working in the logistics industry because it agreed that the employer had failed to produce specific evidence of the “special” training it had allegedly provided to support such a broad restriction even though the employee had absolutely no prior logistics experience.  Second, while it agreed that the employee could not solicit the employer’s customers, it refused to impose any damages because the employer failed to show what efforts it made to keep those customers after the employee’s resignation or what specific profit it lost.  Merely relying on the revenue generated for the employee’s new business was insufficient to justify monetary damages.  Third, it refused to find that the employee misappropriated trade secrets based on contacting specific customer contacts based on his personal knowledge from his prior employment or already in his cell phone. “[I]nformation retained in the [employee’s] cell phone could not support a trade-secret claim.”  There was no evidence that he had taken or used any confidential master customer list or could not have re-created his customer list from cold calling, etc.  Finally, the court refused to enforce the one-sided prevailing party attorney fees provision because it found the provision to be unenforceable in a contract of adhesion. 

Readers may recall that this same employer was able last year  to enforce the same types of restrictions against a former employee even though that employee had been placed on paid leave by her new employer for one year while waiting out the non-compete.  The Clermont County Court of Appeals found that to undermine the purpose of the contract.  In this case, the employee removed the case to federal court in Cincinnati.    The federal courts observed that while the employer was frequently successful in litigating its agreement, it was dissatisfied with the lack of evidence it presented in this particular case.

According to the Court, the employee had been hired with no prior logistics experience.   Prior to starting work, he signed a restrictive covenant protecting trade secrets and preventing him for one year from working in the industry or soliciting customers.  There was testimony that the employer had never once modified the agreement at an employee’s request.   After working for over 4 years, he resigned because of the employer’s COVID return-to-work policies due to his son’s respiratory issues.   He quickly found a job with a small logistics company, working only with that company’s customers, with the plan to take over when the owner died.  However, the owner died earlier than expected just 60 days later.  He then formed his own logistics company and obtained business from customers – particularly one customer -- he formerly served while employed by the employer.  Although the employer had reassigned his accounts to other employees, it noticed that it had lost some business and investigated whether he was responsible.   It then filed suit against him in state court, which the employee removed to federal court.

The trial court refused to award monetary damages because the employer failed to introduce evidence of what business it would have continued to receive from particular customers and what profit it would have made from those customers. Although some courts would find it sufficient to rely on its diminished revenue and the employee’s admission of what profit he made from those customers, the Court indicated that it was not enough in this case where in other cases the employers had utilized experts on the issue of retainage and turnover, etc. :

[The employer] failed to produce evidence that [his] unlawful competition (rather than, say, his mere departure and [its] failure to meaningfully pursue its customers) caused [it] lost profits. [It] continues to ask for the entire profit that [he] made by servicing the at-issue customers, $148,821.80. Yet a factfinder could reasonably conclude that [it] did not demonstrate that, had [he] not serviced those loads, the work would have flowed to [it]. . . .

 . . .  [Its] request for the entirety of [his] total profit, by contrast, does not even account for the commission that [it] would owe [him] in the counterfactual in which [he] secured those loads while still employed for [it].

The Court also affirmed the decision to not enforce an industry-wide non-compete because non-competes can only be enforced to the extent necessary to protect an employer’s legitimate interests, such as confidential information, customer good will and the expense of providing valuable training.  Employers are required to prove with clear and convincing evidence the legitimate interests which require protection by the non-compete’s scope.  In this case, the courts found that the non-solicitation clause was sufficient to protect the customer’s good will.   Because the employer failed to produce evidence regarding (1) the content or extent of the training to the employee, (2) how the training was proprietary or trade secret or (3) how the employee used that training to hurt it or even the cost of the training, it could not rely on that training to support a nationwide and industry-wide non-compete clause.

The courts also rejected the employer’s trade secrets claim based on its pricing and customer information.  There was no evidence that the employee took a confidential master compilation of customer names and information.  Rather, he relied on his own memory of the customers he served.  Although “it is true that Ohio law treats customer lists as presumptively entitled to trade-secret protection,” it is also true that “Ohio limits that protection when the identity of the customers is “readily ascertainable through ordinary business channels.’” “Though [he] retained contact information for some customers that he directly serviced, the district court noted that “telephone numbers for a small number of companies are ‘readily ascertainable by proper means,’” and “easily discovered as part of the cold-calling process.’”  Moreover, “to be a protectable trade secret under Ohio law, a customer list “must contain information not generally known to or readily ascertainable by the public.” Id. (emphasis added). Ohio courts have applied this principle in declining to recognize a protectable trade secret in customer-contact information that a departing employee retained in a cell phone.”

While the court agreed that knowledge of its pricing margins and ”pricing policies can rise to the level of a protectable trade secret under Ohio law”  and enable a departing employee to better compete against it, the employer “failed to articulate precisely what concrete “pricing information” it thinks [he] misappropriated. The record is unclear whether [it] had any standard route pricing or margin expectation that [he] could have misused.”  In addition, its employees had wide latitude in setting prices, even authority to price at a loss to maintain a client relationship.

The Court also affirmed that “the fee-recovery provision was unilateral, allowing only [the employer] to recover fees” and thus, was “unenforceable under Ohio law because it resulted from a “contract of adhesion,” in which [the employee] had little or no bargaining power and no realistic choice as to terms.”   The Court also agreed that “unenforceability under Ohio law is not limited to instances of duress.”

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.

Ohio's Minimum Wage Set to Increase on January 1, Except for Small Employers.

 The Ohio Department of Commerce has announced the new minimum wages which commence on January 1, 2025:  

Ohio’s minimum wage is scheduled to increase Jan. 1, 2025, to $10.70 per hour for non-tipped employees and $5.35 per hour for tipped employees. The minimum wage will apply to employees of businesses with annual gross receipts of more than $394,000 per year.

The current 2024 minimum wage is $10.45 per hour for non-tipped employees and $5.25 per hour for tipped employees. The 2024 Ohio minimum wage applies to employees of businesses with annual gross receipts of more than $385,000.

The Constitutional Amendment (II-34a) passed by Ohio voters in November 2006 states Ohio’s minimum wage shall increase on January 1 each year by the rate of inflation. The state minimum wage is tied to the Consumer Price Index (CPI-W) for urban wage earners and clerical workers over the 12-month period prior to September. The CPI-W index increased by 2.4 % over the 12-month period from Sept. 1, 2023, to Aug. 31, 2024.

For employees at smaller companies with annual gross receipts of $394,000 or less per year after Jan. 1, 2025, and for 14- and 15-year-olds, the state’s minimum wage is $7.25 per hour. For these employees, the state wage is tied to the federal minimum wage of $7.25 per hour, which requires an act of Congress and the President’s signature to change.

Employers can access the 2025 Minimum Wage poster for display in their places of business by visiting the Ohio Department of Commerce’s Division of Industrial Compliance’s Bureau of Wage and Hour website.

Franklin County Court of Appeals Enforces Non-Compete Agreement Except When Employee Was Hired by Unrelated Entity Which Served Same Customers

Earlier this month, the Franklin County Court of Appeals affirmed a preliminary injunction and summary judgment against a former department head for breaching his non-compete agreement when he formed his own competing business and performed work for his former employer’s customers.  Capital City Mechanical, Inc. v. Bartoe, 2024-Ohio-4550.   While the court agreed that the employee could perform work for the employer’s customers if he was hired by an unrelated company which also provided services to the same customer, he was barred from performing services for his employer’s customers for two years even without a geographic limitation.  He also could not prevail on a tortious interference claim when the employer was permitted to inform entities that he had a non-compete agreement and when he could not show a firm expectation of being hired for any work.

According to the Court’s opinion, the defendant employee was hired shortly after the employer started business in 2001, became a key employee and was responsible for submitting bids and procuring supplies, etc. Customers would contact him through the employer-provided cell phone he had been issued.   He had no prior experience in this trade, but “had access to confidential information relating to company operations, strategy, logistics, trade secrets, customer lists, pricing, and margin information.” In 2019, in connection with an incentive compensation agreement, he was given an agreement containing confidentiality, non-solicitation and non-compete clauses. Similar agreements were signed several times thereafter.  In 2020, the employer was contacted about submitting a bid for construction work and to inform the general contractor that it would be performing the backflow work.  A few weeks, later, he formed his own competing business and he resigned from the employer a few months later.  He submitted a bid and then was hired by the general contractor the following month to perform work for the same customer of his former employer.  The employer learned a few months later and filed suit.   A TRO was quickly entered and a preliminary injunction was issued about eight months later.  Two years after the lawsuit had been filed the trial court granted the employer summary judgment.  The employer was awarded over $15K in damages.  This appeal followed, but by then, the agreement had expired.

The Court agreed that the employee had breached the non-compete agreement by using his knowledge gained from the employer to submit competing bids and performing work for its customers during the two-year restricted period.   The parties had disputed whether the end-user of the employer’s services could be considered as its customer when its invoices were submitted to and paid by the general contractor.  The courts agreed that end-users could be customers, but that the employee would not have breached the agreement if he had been hired by a different general contractor who had a pre-existing relationship with the same customer.  In other words, he “may work for an unrelated general contractor at an end-user without breaching the non-compete provisions, even if the end-user is a CCM customer. The objective of the non-compete agreement was to prevent unfair competition, but not all competition.”

There was evidence that he had turned down jobs offered directly by his former employer’s customers/end-users, but then would accept for the same end-user if they came through an unrelated general contractor that had never been a customer of his former employer.  No damages were awarded for work which he performed after being hired by a non-customer even if it was for an end-user that was also a customer of his former employer.

The court found the terms of the non-compete to be reasonable with a two-year restricted period and no geographic limitations. “The agreement was able to safeguard [the employer’s] protectable interest and allow [the employee] to earn a living in the plumbing trade.”

The Court also rejected the employee’s tortious interference claim because he could not prove that he had a pre-existing relationship with any non-customer or definite expectation of revenue:

The trial court determined that [the employee] did not identify any business relationships that were interfered with and was not able to identify any revenue that he lost as a result of interference. [One company] was [his former employer’s] customer, and [he] was already precluded from doing business with them pursuant to the non-compete agreement. [A second company] never solicited any bids from [him], and he had no firm expectation of receiving work. Without any evidence that [his former employer] cost [him] business from [the second company], recovery on a tortious interference claim is precluded.

[The employer] was allowed to inform people in the trade of the non-compete clause and that a preliminary injunction against [him] was in place. Summary judgment was proper on the tortious interference claim [in favor of the employer].

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.