Yesterday, Judge Ada E. Brown of the U.S. District Court for the Northern District of Texas in Ryan v. The Federal Trade Commission upheld a challenge by business groups to the FTC’s non-compete ban. In addition to confirming her earlier ruling that the FTC non-compete ban was not a valid exercise of agency power, the judge also expanded the limited, temporary injunction entered on July 3, 2024 to hold unlawful and set aside the noncompete-ban in a ruling with a “nationwide effect” that is not limited to the parties in the lawsuit. In other words, the FTC’s non-compete ban will not take effect on September 4 for anyone. The Court concluded that: (1) the FTC lacked statutory authority to promulgate substantive rules concerning unfair methods of competition, i.e. the non-compete ban; and (2) the non-compete ban is arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation.” As a result, the Court found the non-compete ban to be an unlawful agency action. In deciding the appropriate relief, the Court relied on recent precedent from the Fifth Circuit to conclude its ruling must have a “‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects persons in all judicial districts equally.’” Thus, the Court’s ruling prevents (1) the FTC from taking any action to enforce the non-compete ban against anyone; and (2) the FTC non-compete ban from taking effect on September 4, 2024—effectively vacating it. What happens next? In the wake of the ruling, the FTC’s spokesperson stated, “[The FTC is] seriously considering a potential appeal.” If the FTC decides to appeal, the decision would be reviewed by the U.S. Court of Appeals for the Fifth Circuit in New Orleans. Any decision rendered by the Fifth Circuit would likely be appealed to the U.S. Supreme Court—meaning the final fate of the FTC’s non-compete will be revisited and could change. Importantly, even though the FTC non-compete ban will likely not go into effect in the immediate future, the FTC still has the power in the interim under Section 5 of the FTC Act to pursue enforcement actions on a case-by-case basis. In reacting to the ruling, an FTC spokesperson stated, “Today’s decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.” If the FTC is to be taken at its word, it appears ready to amplify such enforcement actions in the future. The FTC’s posture could change after the November election depending upon the policies of the next administration. How should employers approach non-competes? Notwithstanding yesterday’s ruling, employers should still be mindful of the enforceability of their non-competes now and in the future. Several states have limited or outright banned the use of non-competes. The move by the FTC could spark additional state legislatures to revisit state-level restrictions as they return from recess and begin new legislative sessions this Fall. The U.S. Congress could also decide to enact legislation of its own; and, it’s conceivable that yesterday’s ruling will serve as a catalyst for Congress to revisit such legislation. Polsinelli attorneys are continually monitoring the evolving landscape of restrictive covenant law and are available to help you evaluate your use of non-competes and other restrictive covenants to protect competitive information.

Yesterday (July 23), a Pennsylvania judge—in ATS Tree Services, LLC v. Federal Trade Commission—upheld the legality of the FTC's non-compete ban. This ruling contradicts the ruling recently issued in a parallel proceeding in Texas. Earlier this month, a Texas judge—in Ryan, LLC v. Federal Trade Commission—temporarily enjoined the FTC’s non-compete ban from going into effect against the named plaintiff/intervenors. Although the Texas judge declined to implement a nationwide injunction, she signaled an intent to uphold the challenge to the non-compete ban in a future ruling based on her finding that the FTC had likely exceeded its statutory authority and a categorical ban on non-competes would be arbitrary and capricious.  The ruling sides with the FTC, creating a divide in the judiciary on the scope of the FTC's regulatory powers and the legality of the FTC’s upcoming non-compete ban (scheduled to take effect on September 4). While the Court’s ruling partially denied a preliminary injunction based on a finding of no irreparable harm, the crux of the opinion held that plaintiff was unlikely to succeed in establishing that the FTC’s non-compete ban is unlawful. In so finding, the judge endorsed the FTC’s interpretation of its procedural and substantive rulemaking authority and concluded that the FTC has the authority to promulgate a rule that effectively bans non-competes nationwide. What comes next? While the Pennsylvania judge's decision provides a lifeline to the quickly approaching non-compete ban, the FTC's win may be short-lived. By August 30, the Texas judge intends to rule on the ultimate merits of the challenge to the non-compete ban, at which time she could issue more expansive, nationwide relief. Additionally, briefing is underway in a third challenge to the non-compete ban filed in Florida (Villages, Inc. v. Federal Trade Commission). It is expected that yesterday’s developments could spur additional legal challenges by employers. We will continue to monitor and report new developments.   What should employers do now? Given the uncertainty of whether the FTC’s non-compete band will go into effect on September 4, employers should consult with counsel about their options and the appropriate steps and contingencies to explore in the interim.

On July 3, a Texas judge in the bellwether lawsuit, Ryan, LLC v. The Federal Trade Commission, became the first to weigh in on the legality of the FTC’s non-compete ban that is set to take effect on September 4. As was widely anticipated, the Court concluded that a preliminary injunction was appropriate, and it temporarily enjoined the non-compete ban from going into effect against the named plaintiff/intervenors to the Ryan lawsuit. Less anticipated, the Court declined to issue a nationwide injunction to non-parties—meaning that the FTC’s non-compete ban currently remains set to take effect on September 4 for all employers who are not named parties in the Ryan lawsuit. In reaching its conclusion, the Court held that the FTC’s rule banning most non-competes is likely unlawful for two reasons: (1) the FTC likely exceeded its statutory authority because it does not have substantive rulemaking authority to craft rules regarding unfair methods of competition; and (2) a categorial ban on nearly all non-competes would likely be arbitrary and capricious because it is overly broad without any reasonable explanation. While these findings are a clear rebuke of the FTC’s actions, the Court expressed doubt about whether it would be appropriate for it to issue a nationwide injunction that would extend to non-parties because such relief is unnecessary to protect the interests of the named parties (which is the focus at the preliminary injunction stage). The implications of this ruling are going to evolve over the next two months. The Court has ordered the parties to submit a joint status report by July 9 to determine the case’s next steps, and it has committed to issuing a final decision on the merits of the entire lawsuit by August 30. This forthcoming merits-based decision could result in a more expansive nationwide injunction that would extend to non-parties; however, many employers may view this as providing little reprieve in the interim because of the anticipated rulings timing with the looming September 4 effective date and actions needed to prepare for that effective date. For now, employers will need to revisit how they intend to approach the FTC’s Final Rule in the days leading up to September 4. Attention will also likely shift to the parallel lawsuit in Pennsylvania, ATS Tree Services, LLC v. The Federal Trade Commission, which leaves open the possibility of a nationwide injunction still being issued by that Court later this month.

Yesterday (May 29), in Ryan, LLC et al. v. The Federal Trade Commission, the FTC filed its response in opposition to Plaintiffs’ request to stay/enjoin the FTC Rule banning non-competes from taking effect on September 4. The Court has committed to issuing a decision on Plaintiffs’ request no later than July 3. Consistent with commentary to the Rule, the main thrust of the FTC’s response argues it has authority to issue the Rule pursuant to the Federal Trade Commission Act’s directive that Congress “empowered and directed” the FTC to prevent the use of unfair methods of competition through rulemaking. The FTC also devotes significant briefing to dispelling the application of the “major questions doctrine” to curtail its regulatory ability. We anticipate the Court’s decision will most likely hinge on whether the Court applies the major questions doctrine – articulated in the U.S. Supreme Court’s 2022 decision in West Virginia v. Environmental Protection Agency – to grant a nationwide injunction enjoining the Rule. In the West Virginia decision, the Supreme Court found the EPA’s policy involved a “major question” and that the agency went too far in its attempt to regulate absent explicit permission from Congress to do so. The U.S. Court of Appeals for the Fifth Circuit employed that same rationale to affirm a preliminary injunction blocking enforcement of President Biden’s COVID-19 federal contractor vaccine mandate. The Fifth Circuit’s decision likely drove the filing of the two lawsuits challenging the Rule in Texas federal courts, which sit in the Fifth Circuit. Plaintiffs' reply briefs are due June 12. Your Polsinelli Restrictive Covenant and Trade Secret Group will continue to monitor these cases and will keep you updated with any major litigation developments.

On April 23, 2024, the Federal Trade Commission (“FTC”) conducted a special Open Commission Meeting to vote on a Final Rule (the “Rule”) banning most non-compete clauses as an “unfair method of competition.” By a vote of 3-2, the Rule was approved for publication in the Federal Register. The Rule becomes effective 120 Days from Publication in the Federal Register (the “Effective Date”). Here is what you need to know: What clauses are impacted by the Rule? The Rule defines a prohibited “non-compete clause” to include any contract term, workplace policy, or term or condition of employment, written or oral, that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from seeking work, accepting work, or operating a business after prior employment ends. Other types of post-employment covenants (e.g., non-solicitation) could be attacked under the Rule if they have the effect of a non-compete. What employers and workers are impacted by the Rule? Generally, the Rule will impact all employers other than certain banks, savings and loan companies, non-profits, and common carriers, which are not subject to the FTC’s authority by law. The Rule applies to paid and unpaid workers, including employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors. The Rule does not apply to the franchisee in a franchisor relationship. What conduct is prohibited by the Rule? The Rule prohibits employers from (1) entering into or attempting to enter into a non-compete clause, (2) enforcing or attempting to enforce a non-compete clause, and (3) representing that a worker is subject to a non-compete clause. The Rule applies to non-compete clauses entered before the Effective Date unless the non-compete clause is with a “Senior Executive”. The exception for “Senior Executives”: Unlike the proposed rule, the final version of the Rule provides an exception for non-compete clauses entered into with Senior Executives before the Effective Date. A Senior Executive means a worker receiving total annual compensation (excluding fringe benefits) of at least $151,164 in the preceding year, and was “in a policy-making position”—meaning the entity’s president, CEO, officer, or other person who has final authority to make policy decisions that control significant aspects of the entity (and not just a subsidiary or affiliate). The exception for “bona fide sales of business”: The Rule does not apply to non-compete clauses entered into “pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” The Rule does not limit this exception to only those holding at least 25% ownership interest in a business, like the proposed rule did. What does the Rule require employers to do now? On or before the Effective Date (unless the Rule is enjoined), employers are required to provide all workers with impacted non-compete clauses clear and conspicuous notice to the worker that the non-compete clause will not be, and cannot be, legally enforced against the worker. The notice must be provided in writing by hand deliver, mail, email or text message, and group communications are permissible. The Rule provides model notice language. What happens to existing lawsuits? The Rule does not apply to causes of action related to non-compete clauses that have accrued prior to the Effective Date. Put another way, the Rule likely will not change cases involving alleged violations of non-compete clauses occurring before the Effective Date. What do we expect next? Lawsuits challenging the Rule were filed within hours of the vote, including a lawsuit filed in the United States District Court for the Eastern District of Texas by the U.S. Chamber of Commerce. Given the scope of the Rule and its impact, it is anticipated that at least some courts will enjoin the Rule from taking effect until the U.S. Supreme Court has an opportunity to weigh in on the Rule’s validity and constitutionality. Is there still risk when hiring a competitor’s employees? Yes. The Rule does not take effect for months and may never take effect if the court challenges are successful. The Rule also does not apply to conduct occurring before the Effective Date, so actions taken now still have risk. More importantly, the Rule generally does not eliminate all risk to hiring employees from a competitor because even without non-compete clauses, employers can bring suit based on other contract terms (non-solicitation and non-disclosure clauses), trade secrets, and legal theories to protect their interests when former employees go to work for a competitors. Contact your Polsinelli attorney if you need guidance reviewing your non-compete agreements or strategy around restrictive covenants.

FTC Final Rules Banning Non-Competes Vote Next Tuesday As you know, last year, the FTC issued a proposed rule banning virtually all non-compete agreements (which does not include non-solicitation agreements, confidentiality agreements and the like). Yesterday, the FTC announced that a special Open Commission Meeting will be held virtually on Tuesday, April 23, 2024, at 2 p.m. EDT at which time the FTC is expected to vote on a Final Rule. Here is what you need to know for now: When is the vote on the Final Rule to ban non-competes? Tuesday, April 23, 2024 at 2 p.m. EDT. The Open Commission Meeting will be available to view here.  What is expected to happen? The consensus among Polsinelli’s Restrictive Covenant and Trade Secret Practice Group, other experts, and scholars is that the FTC will vote to implement a Final Rule substantially similar to the Proposed Rule. In short, that means that it will vote to ban essentially all non-competes with limited exceptions (some form of ownership in the entity being sold – the Proposed Rule had a 25% threshold). When will the Final Rule be effective? The Final Rule is expected to become effective 60 days after publication in the Federal Register. (The FTC has the ability to implement the Final Rule sooner if necessary due to an “emergency situation” but we do not anticipate that in this instance.) What can you do now? Understand that the vote will be Tuesday; that does not mean the Rule will be effective Tuesday. Understand that the Rule likely will not be effective until 60 days after publication in the Federal Register and that we anticipate that there will be litigation seeking to block the Rule from going into effect, as discussed below. Evaluate your use of non-competes, and develop strategies for navigating the uncertainties of the time. Strategically and thoroughly analyze your trade secret protocols and protections. What do we expect next? Experts and scholars (and we) fully expect the Final Rule will be challenged in Federal Court with the challenging parties seeking immediate injunctive relief preventing implementation of the Final Rule, based upon the FTC exceeding its authority. Contact your Polsinelli attorney if you need guidance reviewing your non-compete agreements or strategy around restrictive covenants.

As we reported last month, effective January 1, 2024, non-compete agreements in California are unenforceable regardless of where the contract is signed. This means employees who sign non-competes outside California, then move to California and seek new employment in violation of the non-compete, can rely on California law to invalidate the non-compete. Practically speaking, this creates unpredictable challenges for employers with mobile or largely remote workforces. More importantly, AB 1076 makes it unlawful for employers to include a non-compete clause in an employment contract or require an employee to enter a non-compete. Any employer who uses, or attempts to use, a non-compete with employees working in California can now be sued by those employees, and the law entitles the employee to an injunction, damages, and attorneys’ fees in the lawsuit. In addition, by February 14 – next week – employers must provide notice to any current or former employee employed after January 1, 2022, that their non-compete clause or non-compete agreement is void. This notice must be individualized and, in writing, sent to the employee’s last known mailing and email address. Employers who fail to provide the required notice on time may be assessed a civil penalty of up to $2,500 per violation. Members of Polsinelli’s Restrictive Covenant and Trade Secret Practice Group are available to assist employers in mitigating the risks of using non-competes and other restrictive covenants with employees.

On January 9, 2024, Shareholders in our Restrictive Covenant and Trade Secret Practice Group conducted a webinar covering “What Employers Need to Know About Non-Competes in 2024.” A recording of that webinar is available here. Below, the Team addresses some of the additional questions concerning the status of the FTC Proposed Rule, anticipated challenges to the Proposed Rule, FTC Lawsuits Against Employers for Imposing Non-Competes, Exceptions to Non-Compete Bans, Employee “Theft,” and Hiring Employees Subject to Non-Competes that were posed during the webinar. 1. The Status of the FTC Proposed Rule Banning Non-Competes The comment period ended on April 19, 2023, and we are now waiting on the FTC to issue a Final Rule. There is no deadline for the FTC to issue a Final Rule, though the general consensus is that the FTC will issue a Final Rule in April 2024. No one knows with certainty what the Final Rule will say, and the FTC is not restricted by the proposed rule or comments. It can adopt the proposed rule as is, modify, or even implement an entirely different rule without any additional rulemaking process. The FTC’s advocacy for a full ban since the comment period closed suggests it does not intend to change course, and employers would be wise to prepare for a Final Rule substantially similar to the proposed one. 2. Anticipated Challenges to the FTC Final Rule Regardless of what the Final Rule looks like, it will be immediately challenged in court (similar to the vaccine mandate challenges), with the Final Rule taking effect unless and until it is enjoined. The prevailing opinion is that there are very strong arguments to attack the FTC’s authority to issue the rule, primarily that the FTC exceeded its rule-making authority. Regardless of the ultimate success of the legal challenges, it will still generate uncertainty in the interim and give rise to public policy arguments against enforcement in current disputes (which some judges may find persuasive). Moreover, the rulemaking effort is merely another example of growing hostility towards non-compete covenants, and we will likely see Congress and states, including New York, revisit this issue. 3. FTC Lawsuits Against Employers for Imposing Non-Competes During 2023, even without the authority of a Final Rule, the FTC filed three complaints against employers over their use of non-competes. The claims alleged the employers imposed non-competes on employees in an unfair manner that tended to harm competition, consumers, and workers, thus violating antitrust laws. The Complaints were unrelated to any enforcement efforts by the employers at issue, but the FTC argued that the noncompetition agreements at issue had the effect of prohibiting workers in the affected industries from earning higher wages and were therefore unfair labor practices. This ties into the cooperation agreements entered into between the FTC, the NLRA and DOL in 2023, which make it more likely that employers’ non-competes may come under scrutiny as a result of an unrelated audit or investigation. 4. Exceptions to Non-Compete Bans in the Proposed Final Rule The FTC Proposed Rule is very broad and applies to all kinds of paid and unpaid workers, while some state laws are more narrow (bans for employees only) or are less clear in whether they are intended to apply to other categories of workers beyond employees. Similarly, the FTC Proposed Rule did not contain a carve out for highly compensated workers. Other state laws, like Illinois, Colorado, Maryland, Maine, Nevada, Oregon, Rhode Island, Virginia, Washington and Washington D.C., allow for non-competes if an employee makes above a certain salary threshold. It is best practice to evaluate each case based on its facts and review the applicable law, since there is no one-size-fits-all approach to non-compete guidance at this time. 5. Employee “Theft” Most of the laws voiding non-competes do not impact the enforceability of non-solicitation clauses, though some do (e.g., Colorado and Illinois). However, with the federal government’s recent focus on antitrust, non-solicitation clauses purporting to prohibit the hiring of employees by a competitor or business partner may come under closer scrutiny. Employers should be wary of any agreement that could be interpreted as restricting the ability to hire employees. 6. Hiring Employees Subject to Non-Competes Even with the changes in the law, hiring employees subject to non-competes can still be risky. Generally, non-competes are not per se invalid, and lawsuits to enforce non-competes can be made even if the covenant in question is likely to ultimately be found overbroad or unenforceable. Unfortunately, the path to proving a non-compete is unenforceable in court, and arbitration is disruptive, time-consuming and expensive. Polsinelli attorneys are available to help you evaluate the facts of each particular situation on a case-by-case basis to develop a risk management strategy for hiring and retaining employees.

To ring in the 2023 new year, the Federal Trade Commission (“FTC”) has taken multiple actions targeting the use of non-compete agreements, all of which are consistent with President Biden’s July 2021 Executive Order on competition in the labor market. The FTC has proposed both a rule banning the use of non-compete agreements with employees and independent contractors, and it also took legal action under its existing authority against three companies for their use of non-competes. The FTC’s proposed rule would ban employers from entering into, maintaining, or enforcing non-compete clauses with their workers, including employees, independent contractors and unpaid workers. The FTC’s notice does not mince words about its effect, as the agency states its intention to “categorically ban employers from using non-compete clauses.” The rule defines a non-compete clause as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” Though the rule does not target non-solicitation or non-disclosure clauses, it proposes a functional test to determine whether a clause meets the definition, meaning that a non-disclosure or non-solicitation covenant that effectively bars an employee from seeking employment in their chosen industry could be considered a non-compete. Non-compete clauses that require the employee to pay liquidated damages to the employer in the event of competition are also prohibited. The rule would apply retroactively and require employers to rescind any existing non-compete contracts within 180 days after publication of the final rule. Employers would also be required to provide individualized notice to the employees within 45 days of rescinding the non-compete clause. Importantly, the rule would not apply in the context of a sale of a business or ownership interest of at least 25%. The FTC also brought an enforcement action against three different companies to invalidate their respective worker non-compete agreements pursuant to its broad authority under Section 5 of the FTC Act. In the respective legal actions, the FTC ordered the companies to cease enforcing their agreements and to notify all employees they were no longer bound by the agreements. This comes on the heels of the FTC’s major policy announcement that the agency would vigorously enforce Section 5’s prohibition on unfair methods of competition and that this enforcement effort would cover areas that may otherwise not be within the purview of other antitrust laws, such as the Sherman and Clayton Acts. If ultimately published as a final rule, employers can anticipate the non-compete ban will face immediate legal challenge on numerous grounds, as noted in FTC Commissioner Wilson’s lone dissent to the proposed rule. Given the importance of non-compete agreements to many employers’ efforts to protect their competitive information and relationships, employers should carefully monitor these developments. Now is the time to re-evaluate strategies for protecting competitive information by focusing on other avenues available by contract or under law that do not rely on non-competes. This includes careful examination and identification of protectable information (trade secrets), the measures in place to keep such information secret, and employees’ access to such information. Employers can contact their Polsinelli attorneys to assist with drafting comments to the proposed rule and guidance on auditing and re-tooling these strategies in the wake of these FTC developments.

The Department of Justice (DOJ) and federal government continue to aggressively pursue antitrust violations and promote the federal government’s interest in heavily limiting the use of non-competition agreements.  While the DOJ has recently been unsuccessful in its target of “no poach” and “no hire” agreements and wage-fixing issues in antitrust trials, employers should not interpret this as a sign the government will back off its efforts to limit the use of non-competition agreements by employers across all industries. With the DOJ taking a more active role in prosecuting antitrust matters, there is a real risk antitrust claims will increasingly gain traction in restrictive covenant litigation.  In fact, the DOJ recently filed a Statement of Interest in a Nevada state court case regarding the enforceability of post-employment restrictive covenants of anesthesiologists.  The DOJ encouraged the state court to consider antitrust principles when evaluating the restrictive covenants, and further asserted its position that post-employment restrictive covenants may constitute impermissible restraints of trade under the Sherman Act, while providing a roadmap for the court to declare the agreements unenforceable on this basis. While the validity of non-competition agreements currently remains controlled by state law, the federal government’s attention to such agreements may ultimately limit the use of such agreements to situations where the agreement is truly necessary to protect a well-defined category of trade secrets.  Employers should keep this in mind when preparing new agreements and take the time to carefully evaluate existing non-compete agreements and hiring practices to determine any potential issues.  And, for employers who have or are contemplating “no hire” agreements with competitors, it is wise to consider how these may be scrutinized if challenged. Polsinelli attorneys continue to monitor actions taken by the federal government involving non-competition agreements and are prepared to assist employers with navigating this everchanging landscape.

On December 14, 2021, the Equal Employment Opportunity Commission (“EEOC”) supplemented its guidance concerning COVID-19, the Americans with Disabilities Act (“ADA”), the Rehabilitation Act, and other Equal Employment Opportunity (“EEO”) Laws to confirm that COVID-19 can qualify as a disability under any of the three “disability” definitions in the ADA. COVID-19 can be—but is not always—an actual disability under the ADA if it causes a physical or mental impairment that substantially limits one or more major life activities. Similarly, a person with a history of COVID-19 may qualify as a person with a “record of” a disability under the ADA. Pre-existing conditions worsened by the virus may also qualify an employee for protection under the ADA. The EEOC cautioned that an individualized assessment is always necessary to determine whether the effects of a person’s COVID-19 substantially limit a major life activity, such as breathing, concentrating or interacting with others. However, the limitations from COVID-19 do not necessarily need to be consistent or long-term to be substantially limiting. For example, an individual who experiences ongoing intermittent headaches, dizziness and brain fog attributed to the virus may qualify as disabled. An individual diagnosed with COVID-19 who experiences heart palpitations, chest pain and shortness of breath attributable to the virus may also qualify as disabled. However, an employee diagnosed with COVID-19 who is asymptomatic or whose symptoms resolve within a few weeks with no further effects likely does not qualify as disabled, even if the employee is subject to isolation during the period of infectiousness. Employers should be aware that employees may be unlawfully “regarded as” an individual with a disability if they have COVID-19 or if the employer mistakenly believes they have COVID-19. The guidance provides that individuals must meet either the “actual” or “record of” definitions of disability to be eligible for a reasonable accommodation under the ADA. Individuals who only meet the “regarded as” definition are not entitled to receive reasonable accommodation. While employers can voluntarily provide accommodations beyond what is required by the ADA, it may be a violation of the ADA to prevent an employee diagnosed with COVID-19 from returning to the workplace once they are no longer infectious. The EEOC also reiterated the need for flexibility in accommodations, including schedule changes, physical modifications, telework or special equipment. The guidance confirms the importance for employers to carefully evaluate COVID-19’s effects on its workforce on a case-by-case basis.  If you have questions or would like more detailed information, Polsinelli’s Labor & Employment team is here to assist.

Employers now have a clearer picture of how to determine whether a worker is classified as an employee or independent contractor under the Fair Labor Standards Act (FLSA) thanks to a new final rule from the U.S. Department of Labor (DOL), effective March 8, 2021. This test is significant for employers because under the FLSA, independent contractors are not eligible for minimum wage or overtime compensation. Many state courts and agencies have already adopted tests similar to this “economic reality” test codified by the DOL’s new rule. The “economic reality” test is a multi-factor test that has been used by the DOL in the past to determine whether a worker is an employee or independent contractor. This final rule is similar to the initial rule proposed by the DOL last September. Ultimately, the key question is whether the worker is dependent on the employer, indicating the worker is an employee, or is in business for the worker’s benefit, indicating the worker is an independent contractor. This final rule “sharpens” the economic reality test by enumerating five factors to determine whether a worker is considered an employee under the FLSA: The nature and degree of the worker’s control over the work (e.g., the worker’s ability to set a schedule, select projects and work for others). The worker’s opportunity for profit or loss (e.g., through the exercise of personal initiative, skill or business acumen, and through investments or capital expenditures). The amount of skill required for the work (e.g., whether the work requires a specialized skill or the worker depends on the employer for training). The degree of permanence of the working relationship between the worker and the potential employer (e.g., whether the work is definite or indefinite in duration). Whether the work is part of an integrated unit of production (or is segregable from the employer’s production process). The first two factors are given the most weight. If both of these “core factors” indicate the same classification, then there is a “substantial likelihood” that the resulting classification is correct. However, if the application of the first two factors leads to different conclusions, the remaining three factors should be considered, as well. With this additional guidance, employers have more information to help structure their relationships with workers and define which workers qualify as independent contractors, though it may not necessitate many immediate practical changes.  Employers should continue to be cognizant of and comply with any state and local laws regarding worker classification, which may not be identical to the DOL’s rule. It is also possible that the Biden administration will affect changes to this new rule or its implementation.  Please contact your Polsinelli attorney if you have any questions about the new final rule.

It seems everything in the world right now somehow revolves around COVID-19. Stay-at-home orders; the debate over students returning to the classroom; “essential” versus “non-essential” workers; college and professional sports; and the list goes on. In the legal world, one coming boom caused by the pandemic should not be overlooked: trade secret litigation. Consider how much of the workforce is working remotely. Recent statistics show that in the past few months alone, even after many businesses have begun reopening, 70% of the workforce reported working remotely at least one day a week, and 59% reported working remotely more than half of the week. Some businesses have planned for their workforce to work remotely through the end of year and beyond, even permanently. What does this mean in terms of trade secret protection for employers? Just think of all information that has been shared electronically as a result of the new “work from home” normal. How many shared drives have been accessed remotely? How many documents have been sent to and downloaded in home offices? How many employees have accessed their employer’s data using a shared home or personal device? And in some instances, the uncertainty caused during the initial days of the pandemic caused companies to roll out programs and grant access to their information under rushed conditions, with concerns for privacy taking a backseat to the urgency of ensuring continuity of operations using a remote workforce. As if that is not enough reason for concern regarding the protection of trade secrets, consider also how many remote workers had access to trade secrets but have since been laid off or furloughed? What precautions, if any, were taken to ensure trade secrets and confidential information were guarded from theft by these former and furloughed employees? If a laid off employee had access to their employer’s competitive information, what will prevent them from opening their own business and competing directly with their former employer, using its methods and client information? To the extent they have not already done so, employers should immediately: Ensure access to shared files is on a need-to-access basis only; Limit access to client information to only those clients whom a particular employee services; Limit access to research and development information to only those individuals in research and development who are working on the particular project; Republish policies forbidding use of personal email accounts for business purposes; Implement safeguards for the electronic mailing and sharing of confidential documents; Have employees acknowledge/reaffirm their understanding that company competitive information is owned by the company and only certain people are allowed access; Ensure computer systems are only accessed through private, reliable and secure WiFi networks. A trade secret litigation boom is coming – are you ready?

In light of CDC Interim Guidelines stating antibody test results “should not be used to make decisions about returning persons to the workplace,” the EEOC released guidance on June 17, 2020 indicating that employers should not require antibody tests before permitting employees to return to the workplace. According to the EEOC, an antibody test constitutes a medical examination under the Americans with Disabilities Act (ADA), and employers can only require ADA medical examinations of employees if the examination is “job related and consistent with business necessity.”   Consistent with the CDC’s Interim Guidelines, the EEOC has determined an antibody test is not “job related and consistent with business necessity”, and therefore, any such testing required by an employer violates the ADA.  However, the EEOC was quick to note that a viral test, i.e. testing for an active case of COVID-19, is permissible, and the prohibition on antibody testing could be revised in the future if the CDC’s recommendations change. The EEOC’s COVID-19 guidance continues to evolve.  For example, the EEOC recently updated its guidance to address other topics and provided the following: Employees are not entitled to an accommodation under the ADA in order to avoid exposing a family member who is at higher risk of severe illness from COVID-19 due to an underlying medical condition. Employers should be diligent in responding to and addressing pandemic-related harassment, such as demeaning, derogatory, or hostile remarks directed to employees who are, or are perceived to be, of Chinese or other Asian national origin. Employers may send a general notice to all employees designated to return to the workplace noting that the employer is willing to consider requests for accommodation or flexibilities on an individualized basis. Requests for an alternate method of screening before entering the worksite due to a medical condition are reasonable accommodation requests, and should be handled as such. Employers cannot involuntarily exclude older workers from the workplace, even if for benevolent reasons such as protecting employees at a higher risk of COVID-19. Employers should evaluate sex discrimination considerations when providing flexibilities, such as telework or modified schedules to employees with school-aged children. A full text of the most current “What You Should Know About COVID-19 and the ADA, the Rehabilitation Act, and Other EEO Laws” can be found here.  COVID-19 continues to create new and unique situations for employers, especially as businesses begin to reopen.  Polsinelli’s Labor and Employment team is available to help navigate these challenges and ensure compliance with the numerous laws that apply to employers managing a workforce during these unprecedented times.

Employers have faced many questions as they prepare for the effective date of the Families First Coronavirus Act (FFCRA).  Many of those questions remained unanswered after the Department of Labor issued its “Families First Coronavirus Response Act: Questions and Answers” on Tuesday, February 23, 2020.  The DOL added to its guidance late Thursday, February 25, addressing some of these outstanding issues: What does it mean to be “unable to work” to qualify for leave under the FFCRA?  An employee is unable to work if the employer has work available for the employee to perform, either at a worksite or remotely, and the employee is unable to perform that work because of a COVID-19 qualifying reason.  A common example is if an employer has telework available, but the employee cannot perform the telework because the employee has a young child who needs supervision because the school is closed due to COVID-19. On the other hand, if the employer’s worksite is shut down, for example under a stay at home order, and the employee’s work cannot be performed remotely, the employee likely does not qualify for leave—the employee is able to work, the work is just not available.  Note, though, that a stay at home order is different from a quarantine or self-isolation order.  Employees under a quarantine/isolation order might be entitled to leave. Do laid off or furloughed employees qualify for leave?  No.  Once an employee is laid off or furloughed, whether before or after April 1, that employee is no longer eligible for leave under the FFCRA.  The same is true even if the employee is laid off or furloughed while on leave provided by the FFRCA.  The same is also true if an employer closes the worksite, before or after April 1, even for a brief or temporary period.  In sum, an employee is not entitled to leave under the FFCRA during the period while the business is closed, even if the closure was caused by a federal, state, or local order.  Similarly, an employee cannot use leave under the FFCRA for hours reduced by an employer, even if the reduction in hours was related to COVID-19. Can an employer require documentation showing an employee’s need for leave?  Yes.  An employer can and should require an employee to provide documentation showing the COVID-19 qualifying need for leave, such as a closure notice on a school website or a copy of a government order placing the employee under quarantine.   Indeed, an employer must require and retain documentation to claim for the tax credit available under the FFCRA.  There are no designated FFCRA forms.  However, an employee requesting emergency FMLA for a COVID-19 qualifying reason that rises to the level of a “serious medical condition” must continue to provide the medical certifications required under the FMLA. Click here for the fact sheet. Can FFCRA leave be used intermittently?  It depends.  If an employee is teleworking, the employee may use emergency FMLA or paid sick leave in any increment the employer agrees to.  If an employee is performing work at the employer’s worksite, the employee may use emergency FMLA or paid sick leave intermittently to care for the employee’s child(ren) whose school is closed or childcare is unavailable because of COVID-19 related reasons with the employer’s permission.  However, an employee must use emergency paid sick leave continuously in full day increments if the employee is subject to an isolation or quarantine order, has been advised by a healthcare professional to self-quarantine, is experiencing COVID-19 symptoms, or is caring for someone isolated because of or suffering from COVID-19 symptoms.  In these situations, the employee must use the emergency paid sick leave continuously until the employee exhausts the leave available or no longer has a qualifying reason for the leave.  Note the DOL’s guidance encouraged flexible, voluntary arrangements when the employee needs leave to care for a child who is out of school or does not have childcare due to COVID-19. Can FFCRA leave be used in conjunction with unemployment benefits?  Not under federal law.  Under federal law, an employee receiving paid leave under the FFCRA is not eligible for unemployment insurance benefits.  However, benefits may be available under state law as states have the authority to offer unemployment benefits to workers whose pay has been reduced. The full text of the DOL’s Q&A is available here.

Since 2011, the number of Fair Credit Reporting Act (FCRA) lawsuits filed annually has continued to climb. The data demonstrates that employers struggle with compliance, especially regarding the FCRA’s disclosure requirements. Under the FCRA, an employer must provide an applicant or an employee with a “clear and conspicuous” disclosure that a “consumer report” -- commonly referred to as a background check -- may be obtained for employment purposes.  Importantly, before running the background check, the disclosure must be provided in a document that consists solely of the disclosure.  These disclosure requirements have proven problematic for employers in practice. In 2017, the U.S. Ninth Circuit Court of Appeals clarified that a FCRA disclosure cannot contain a liability waiver. Just last month in Gilberg v. California Check Cashing Stores LLC, the Ninth Circuit ruled that the FCRA disclosure cannot contain any additional disclosures that may be required by applicable state law. In that case, the Court reinstated class claims that the employer’s disclosure violated the FCRA because the disclosure provided to job applicants was not clearly written, nor was it contained in a “standalone” document. The Gilberg case makes clear that a court will closely scrutinize any extraneous information contained in the FCRA-required disclosure, regardless of the purpose for its inclusion. The offending language in Gilberg contained disclosures mandated by separate state laws. Stated simply, if the language included in the disclosure is not necessary to clearly and conspicuously advise an applicant or employee of FCRA rights, it likely should be excluded. Employers should take care to review any FCRA disclosures with legal counsel to ensure compliance, as any mistake, no matter how small, may expose the employer to liability on an individual or class-wide basis. Employers with questions regarding the FCRA would do well to consult with able counsel.

Employers should be able to definitively identify their “trade secrets” and non-public information.  Indeed, employers may miss out on opportunities for relief from misappropriation of their trade secrets by former employees and competitors if they do not take time to specifically identify and understand their trade secrets.  Before an employer can effectively protect against the theft, disclosure, and misuse of its trade secrets, it must first clearly understand what is—and what is not—a trade secret.  Once the trade secrets are identified, employers should take careful steps to protect trade secrets and confidential information from competitors, as well as departing employees. What are trade secrets? To begin, anything that gives an employer a competitive advantage may be a trade secret.  Trade secrets are a subset of an employer’s confidential information, and can include information about customers or clients, business methods, pricing data, machinery, marketing strategies, techniques, formulas, processes, or virtually anything else that is secret, unique,  and valuable to the employer.  Considered this way, every employer inevitably has some potential trade secrets. Another way to recognize possible trade secrets is by evaluating who has access to the information.  For example, if the information is subject to measures to maintain its secrecy, such as limited physical or electronic access, it may be a trade secret.  Alternatively, if the employer uses contracts with its employees and business partners to protect the confidentiality and limit the disclosure of the information, said information may very well be a trade secret, too. What qualifies as a trade secret? To qualify as a trade secret, the information must generally 1) be subject to measures to maintain its secrecy and 2) derive independent value from being secret.  If the trade secret is not sufficiently protected or becomes public -- even inadvertently -- it could lose its status as a trade secret, decreasing its worth to the employer.  But an employer cannot realistically be expected to adequately protect its trade secrets if it does not first know what it must protect.  That is why it is so important for employers to regularly audit their trade secrets and update their protective measures, as needed. Employer takeaways Departing employees with access to trade secrets pose a significant threat to an employer’s trade secret security, thus necessitating a consistently-enforced protocol to off-board those employees and ensure compliance with any continuing post-employment obligations owed to the employer.  However, upon discovering that a departed employee may be misappropriating trade secrets, courts expect swift action from the employer to protect its assets—including, early, specific identification of exactly what the employer considers as its stolen trade secrets. With proper planning, including routine auditing of its trade secrets and protective measures, an employer can position itself for greater success if it chooses to pursue relief for the theft in court.  Employers with questions regarding trade secret identification or protection should consult with competent counsel.

Restrictive covenants, such as non-competition and non-solicitation agreements, typically assist employers to protect their legitimate business interests.  When properly drafted and implemented, an employer can use these types of agreements to limit an employee’s ability to unfairly compete after he or she concludes employment. However, restrictive covenants cannot be used to prohibit regular, ordinary competition.  While some employers may be deterred from considering an otherwise qualified applicant who is subject to post-employment restrictive covenants, there are steps employers can take to limit their exposure to claims of unfair competition when interviewing and hiring employees subject to these kinds of restrictions. Ask about restrictions at the earliest reasonable and possible opportunity.  Be specific when asking about any agreements in which these provisions might be contained.  However, take care to avoid discussing the applicant’s former employer’s confidential information. Obtain a copy of the agreement or agreements if a decision to hire is likely and  review and analyze the enforceability of the restrictive covenants at issue, as well as whether the applicant can perform the position without violating the restrictions. Clearly instruct the applicant not to disclose any confidential information, even if volunteered.  Depending on the restrictions at issue, the new employer may also need to instruct the applicant not to solicit any of the former employer's customers, clients, or employees. Consider also including an attestation to that effect in the offer letter or employment agreement. Evaluate the likelihood of litigation.  Assess the circumstances of the employee’s departure, the similarities between the former position and the new role, the nature of the industry and proprietary information or trade secrets at issue, the business relationship (if any) between the hiring employer and the former employer, and the former employer’s propensity for litigation, among other things. Employers that determine that hiring an applicant subject to restrictive covenants justifies the risks of doing so would do well to discuss proactive options with an attorney.  In some situations, opening the line of communication with the former employer prior to – for example – receipt of a cease-and-desist letter demanding the termination of new hire’s employment can be very productive. The existence of restrictive covenants, standing alone, should not in all cases discourage employers from hiring an otherwise qualified candidate.  With careful planning, a savvy employer can substantially limit its exposure to interference and misappropriation claims and position itself with a strong defense should the former employer decide to pursue action against it.

In a post-Defend Trade Secrets Act world, employers have a host of civil remedies available to them for the misappropriation of trade secrets under both state and federal law. To obtain relief, an employer must establish that the information it claims is subject to trade secret protection is, in fact, protected as confidential and secret. Below we outline five actions an employer might consider to demonstrate it has taken the necessary measures to protect the secrecy of its confidential information. Written agreements with employees who have access to trade secrets.These agreements may contain confidentiality, non-disclosure, non-solicitation, or non-competition provisions. To be effective, it is critical that such agreements define clearly what constitutes “confidential information,” and include a clause affirmatively requiring the return of such “confidential information” upon the termination or resignation of the employee. Written policies governing employee conduct.Employers should set forth clear rules for marking and maintaining confidential information, such as written instructions related to copying and sharing of confidential information. Employers can also include restrictions on the sharing or disclosure of confidential information in employee handbooks or other policies that are shared with all employees. Limiting employee access to trade secrets.This may include limiting physical access to documents stored in hard copy, by, for example, limiting locations where the confidential information is maintained, locking those locations, and tracking individuals accessing the information. Employers should also take care to protect electronically-stored information by, for example, employing password protection on documents and databases containing confidential information, restricting access to such documents on external devices, and implementing security monitoring measures. Limiting outsiders’ access. Similarly, employers should limit outsider access to areas housing confidential physical documents and devices with access to electronically stored information. Depending on the information, this may include the use of security guards or cameras, perimeter fencing, visitor badges with log in and out procedures, and security card access to certain areas. Controls on public dissemination.Employers may consider designating an employee to review and approve publicly disseminated information, including publications, presentations, promotional materials, and website content to ensure trade secret information is not inadvertently disclosed. Employers should also carefully evaluate the scope of information shared in meetings with potential partners or customers, and may further consider requiring meeting participants to enter into non-disclosure agreements if confidential information must necessarily be shared. Employers should remember that any security measures should be regularly monitored, audited, and updated to maintain their effectiveness. Efforts to maintain these procedures may pay dividends should the employer have to pursue a former employee for trade secret theft.

The discussion in the wake of the United States Supreme Court’s ruling in Spokeo Inc. v. Robbinshas focused on an employer’s ability to obtain dismissal of a claim under the Fair Credit Reporting Act (“FCRA”)—where the plaintiff or class alleges nothing more than a “bare procedural violation,” absent of any concrete injury or real harm. As detailed in prior posts, Spokeo clarified that a statutory violation of the FCRA alone does not create an injury in fact sufficient to support standing; a plaintiff must allege something more by way of real harm resulting from the purported violation. Some courts, including the Fourth Circuit Court of Appeals, have followed Spokeo to the letter and dismissed such claims, concluding no discernable concrete injury to the plaintiff existed, and, therefore, the plaintiff lacked Article III standing to pursue the claim. However, courts in California, Missouri, and Washington have recently accepted a tangential, aggressive argument that could be troubling for employers defending FCRA claims: that upon removal, a court must remand the case to the state court from which it originated because the plaintiff or class has not alleged a concrete injury in fact sufficient to establish Article III standing to allow the case to proceed in federal court. And because the removing party bears the burden of establishing federal jurisdiction, with all doubts being resolved against removal, this argument is gaining some traction, resulting in the remand of FCRA claims to proceed in state court. Even more problematic for defendants is the result if remanded to state court. Because the state courts are not constrained by the Article III requirements for standing, and state standing requirements can be less demanding, a claim for a “bare procedural violation” of the FCRA may survive a motion to dismiss in state court where it may not have in federal court, or in certain state courts, but not others. With the growing popularity of this maneuver among FCRA plaintiffs, it is important that employers ensure compliance with the FCRA in all employment decision-making processes involving consumer reports. If litigation should result, employers should work with counsel to make strategic decisions regarding removal or early-filed motions to dismiss to allow for the strongest defense possible to these “no-injury” FCRA claims.

An earlier post noted an internet search of “FCRA Settlement 2016” returned over 1,800 results. In the three months since that post, that number has grown exponentially—to nearly 55,000 results—demonstrating the current popularity of both individual and class FCRA claims. This is particularly important for employers. The FCRA’s restrictions on the use of background checks (known as “consumer reports”) applies to any employer obtaining a background check on an applicant or existing employee through a consumer reporting agency, for employment purposes. Background checks can be particularly useful for employers when vetting applicants, but (1) the employer must provide proper disclosures and (2) the employee must provide lawful authorization before the background check is run.      I.  Disclosure by the Employer The FCRA requires that the employer provide a written clear and conspicuous disclosure to the applicant that a consumer report may be obtained for employment purposes. Importantly, this disclosure must be in a document that consists solely of the disclosure. If using a paper application, the disclosure should be included on its own separate page. If using an electronic application, the disclosure should be separated or isolated from other parts of the application in some discernable fashion. Additional disclosures may be necessary if the consumer reporting agency is running investigative consumer reports (consulting references personally as part of the background check) or proscribed by applicable state law.   II.  Authorization by the Employee The FCRA also requires the employer obtain the consent of the applicant or employee for the employer to have the background check run. Notably, this authorization, if obtained in writing, may be contained in the same document as the previously mentioned disclosure. The FCRA permits oral authorization, although a written or electronically obtained authorization will be more effective if the authorization is later challenged by, for example, an applicant who was denied employment on the basis of information contained in the background check. There are additional requirements under the FCRA if an employer intends to take adverse action against an employee or applicant based on the contents of the background check. But even before the background check is run, an employer can expose itself to extensive liability, including attorneys’ fees and punitive damages, if it fails to properly disclose and obtain consent for the background check. Employers most commonly face problems when their disclosure and authorization form contains too much information, potentially violating the requirement that the disclosure consist solely of the disclosure. Many employers assume (incorrectly) that more language in the disclosure equals more protection. Employers should take care to work with their consumer reporting agency and legal counsel to ensure they are compliant with the FCRA’s technical disclosure and authorization requirements.

Earlier this month, the Ninth Circuit further confirmed the importance of strict compliance with the Federal Credit Reporting Act’s (FCRA) disclosure requirements. In Syed v. M-I, LLC, the Ninth Circuit held that the employer willfully violated the FCRA by including a liability waiver in its disclosure form. The FCRA specifically requires an employer to provide a disclosure form to a prospective employee consisting “solely of the disclosure” in advance of the background check if the results of the background check will be used or considered for “employment purposes.” The FCRA separately provides that the disclosure form may also include the employee or applicant’s written authorization, which the employer must also obtain in advance of the background check. As detailed in an earlier post, the simpler the form, the more likely the form is compliant with the FCRA’s technical requirements. The employer argued that because the FCRA allows a disclosure form to include an employee authorization, the term “solely”, as used in the statute, did not really mean solely, and thus the disclosure could also include a liability waiver signed by the employee. The court explicitly rejected this argument, and highlighted the fact that the FCRA expressly provides for a singular exception to include the employee authorization in the disclosure form, which reflected Congress’s intent to exclude any implied exceptions. The court further determined that the inclusion of a liability waiver in the disclosure form constituted a willful violation of the FCRA, which exposes an employer to punitive damages in addition to damages assessed per violation (per employee or applicant receiving a defective disclosure form), plus attorneys’ fees. Although Syed is a case of first impression, the decision confirms the strict approach district courts across the country have taken in interpreting the provisions of the FCRA. Seemingly innocent violations of the FCRA—such as extraneous language in the FCRA-mandated disclosure form—can expose an employer to extensive liability. Employers cannot simply rely on the forms provided to them by consumer reporting agencies, and should consult legal counsel for a review of their processes related to background checks.

With the holiday season approaching, now is a good time to review some practical tips for an employer when addressing suspected abuse of FMLA leave by an employee, although these tips represent best practices year round. An earlier post provided insight into measures an employer can take to prevent the abuse, but what is an employer to do when it receives information indicating the abuse is ongoing or has already happened? 1. Conduct a thorough investigation before contacting the employee. Employers may receive information, directly or indirectly, from other employees which raise suspicions about another employee’s abuse of leave. Those co-workers can be a valuable source of information to the employer. Employers can also use resources such as social media or private investigators, subject to any state law limitations, to gather information. 2. Schedule a meeting with the suspect employee. During this meeting, the employer should inquire about the employee’s reason for absences on the dates in question and whether the employee can provide any information or documents corroborating legitimate FMLA use on those days. The employee’s use of FMLA leave should track the employee’s medical certification upon which FMLA leave was approved. The employer should provide the employee a fair opportunity to account for his or her leave without “accusation” of abuse from the employer. If the employer has evidence suggesting FMLA fraud or abuse, the employer may ask the employee to explain. The employer may then assess the credibility and truthfulness of the employee’s explanation. An employer should take caution when scheduling this meeting with the suspect employee. While an employer may be anxious to address suspected abuse of leave, contacting an employee while on leave may lead to an interference claim. Counsel can advise an employer about when and how to address suspected leave abuse with the offending employee. 3. In the event of termination, document everything.Clearly worded employment policies, including social media and leave abuse policies, can legally support an employer’s decision to terminate an employee’s employment for FMLA fraud or abuse. The employer’s investigation and subsequent meeting with the employee should be documented to demonstrate the full and fair investigation conducted by the employer, and that the employer’s ultimate decision was made in good faith, based upon evidence then available to the employer. Such documentation is important for defending against any FMLA interference or retaliation claims that may follow.

In 2013, the U.S. District Court for the Southern District of New York held that two employees were improperly classified as unpaid interns, relying on the Department of Labor’s six-factor test (previously discussed here), and granted another unpaid intern’s motions for class and conditional certification in Glatt et al. v. Fox Searchlight Pictures, Inc. et al.  Last week, a three-judge panel of the Second Circuit Court of Appeals rejected the six-factor test, vacated the district court’s orders, and remanded the case. The Second Circuit rejected the DOL’s six-factor test as too rigid and not persuasive because the factors resulted from the agency’s attempt to interpret case law, as opposed to statutory language or its own regulations.  In its place, the Second Circuit adopted a version of the defendant’s proposed “primary beneficiary test,” where “the proper question is whether the intern or the employer is the primary beneficiary of the relationship.”  The Court articulated the following “non-exhaustive set of considerations” for this new test: The extent to which the intern and the employer clearly understand that there is no expectation of compensation.  Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.   The Court reasoned that the primary beneficiary test focuses on what the intern receives in exchange for his or her work, while according courts the flexibility to examine the economic reality as it exists between the intern and the employer. The recent decision has been criticized for placing too much value on the internship’s association with academic programs and institutions and for replacing the Department of Labor’s six factors with a novel test supported by minimal legal authority.  However, while not foreclosing the possibility of successful motions for class or conditional certification, it seems that this new test will make it more difficult due to its requirement that courts “consider individual aspects of the intern’s experience.”  For now, the intern’s case heads back to the district court for evaluation of the plaintiff’s internship program under new Second Circuit standard.  The ruling demonstrates how the law concerning intern compensation is constantly evolving and why it is critical for employers to be cognizant of how their internship programs are structured and administered.

While many employers see summer as the primary season for interns, these temporary employees are frequently placed throughout the school year, and the employment considerations that accompany them must be front of mind all year long. Through internship programs, employers can educate and recruit future employees, while offering students valuable experience. But this mutually beneficial relationship can present unforeseen consequences for employers that do not carefully consider the tasks interns perform and whether the law requires interns to be paid. Under the Fair Labor Standards Act, an individual who is “employed” must be paid at least minimum wage for all hours worked. However, an employer—limited for purposes of this discussion to mean a for-profit private sector business—may be exempt from minimum wage laws if the internship serves the interest of the intern. The United States Department of Labor uses the following six factor test: The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an education environment; The internship experience is for the benefit of the intern; The intern does not displace regular employees, but works under close supervision of existing staff; The employer that provides the training derives no immediate advantage from the activities of the intern; The intern is not necessarily entitled to a job at the conclusion of the internship program; and The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship. Some jurisdictions, such as New York and California, have developed additional factors for consideration, such as intern training, screening, and benefits. In a competitive job market, many interns are grateful for any internship opportunity, paid or unpaid. In the past few years, interns have successfully pursued claims for unpaid wages and liquidated damages against several high-profile companies. In 2013, a federal court held that unpaid interns were in fact employees of Fox Searchlight Pictures, Inc., entitled to compensation for their work on movies like Black Swan and 500 Days of Summer. More recently, similar class action lawsuits have resulted in multi-million dollar settlements with Warner Music Group Corp., Viacom, and NBCUniversal. Prudent employers should regularly evaluate their internship programs to ensure that any unpaid interns’ responsibilities do not entitle them to minimum wages. In addition to the aforementioned six factors and any state law requirements, employers should consider: Is the internship structured similar to an academic experience (i.e., job shadowing)? Are existing employees required to work additional hours to perform the intern’s responsibilities in the intern’s absence? Does the intern receive the same level of supervision as existing employees? Is the internship for a fixed duration? Is the internship understood to be a “trial period”?