Month: April 2014

FLORIDA LAW ON NON-COMPETITION COVENANTS AND CHOICE OF LAW PROVISIONS

Florida law tends to favor enforcement of non-competition covenants.  Under Florida law, non-competition covenants are enforceable if they protect one or more legitimate business interests and if they are reasonable in time, area, and line of business.  In fact, Florida law explicitly forbids courts from considering “any individualized economic or other hardship that might be caused to the person against whom enforcement is sought” when determining whether a non-competition covenant is enforceable.  Fla. Stat. § 542.335(g)(1).

For those reasons, companies might wish to take advantage of Florida’s non-competition laws even when the non-competition contract will be enforced outside of Florida.  In those situations, companies will likely include a “choice of law” provision in their non-competition covenants.  Generally, a “choice of law” contractual provision allows the parties to decide which state’s laws should apply to the contract.

Consider the following example:  A Florida corporation conducts business in New York.  To protect its legitimate business interests, the Florida corporation enters into a non-competition contract with its New York employee.  However, New York’s laws do not favor non-competition covenants to the same extent that Florida’s laws do.  New York law requires courts to consider whether the non-competition contract would impose undue hardship on the employee, a consideration that is forbidden under Florida law.  To take advantage of the Florida law, the Florida corporation includes a “choice of law” provision in the non-competition contract stating that Florida law shall apply to the contract.  That is exactly what a Florida corporation did in Brown & Brown, Inc. v Johnson, 980 N.Y.S.2d 631, 637 (N.Y. App. Div. 4th Dep’t 2014).  The New York appellate court, however, found that New York law, not Florida law, applied to the non-competition contract notwithstanding the contract’s “choice of law” provision.

Under New York law, a “choice of law” provision will be upheld if it bears a reasonable relationship to the parties or the transaction and if it is not “truly obnoxious” to New York’s public policy.  Considering New York’s public policy, the court in Brown & Brown, Inc. refused to uphold the “choice of law” provision and held that New York law will apply to the non-competition contract.  Specifically, the New York court found that “Florida law prohibiting courts from considering the hardship imposed on the person against whom enforcement is sought is ‘truly obnoxious’ to New York public policy.”  Brown & Brown, Inc., 980 N.Y.S.2d at 638.

New York was not the first state to find that Florida non-competition law was contrary to the respective state’s public policy.  In 2012, a Georgia appellate court found that “applying Florida law, the [the non-competition] covenants would almost certainly be upheld, despite the fact that they violate applicable Georgia law.”  Carson v. Obor Holding Co., LLC, 318 Ga. App. 645, 654 (Ga. Ct. App. 2012).  Consequently, the Georgia court held that the non-competition contract’s forum-selection clause selecting Florida as the forum state was unenforceable because Florida non-competition law was against Georgia public policy.

Likewise in 2008, an Illinois appellate court found that “Florida law, which specifically prohibits considering the hardship a restrictive covenant imposes upon an individual employee, is contrary to Illinois’s fundamental public policy.”  Brown & Brown, Inc. v. Mudron, 379 Ill. App. 3d 724, 728 (Ill. App. Ct. 3d Dist. 2008).  The Illinois appellate court therefore found that Illinois law applied to the non-competition contract despite the contract’s “choice of law” provision.  In 2001, a federal court in Alabama also refused to uphold a “choice of law” provision in a non-competition contract because it found that Florida non-competition law was “antithetical to Alabama’s general policy against covenants not to compete.”  Unisource Worldwide, Inc. v. S. Cent. Ala. Supply, LLC, 199 F. Supp. 2d 1194, 1201 (M.D. Ala. 2001).

As the above cases show, Florida companies seeking to enforce a non-competition covenant outside of Florida might not be able to take advantage of Florida’s non-competition laws even with a choice of law provision.  Because a choice of law provision cannot guaranty that Florida law will apply outside of Florida, proper drafting of the non-competition contract is key in those situations.

Peter T. Mavrick has successfully represented many businesses in trade secret and non-competition covenant litigation.  This article is not a substitute for legal advice tailored to a particular situation.  Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311; Email: peter@mavricklaw.com.

“INDEPENDENT CONTRACTOR” VS. “EMPLOYEE” UNDER THE FAIR LABOR STANDARDS ACT

A common dispute that arises in overtime and minimum wage litigation is whether an individual hired by the defendant is an independent contractor or an employee.  Many companies choose to hire independent contractors to perform work instead of hiring employees.  Because independent contractors are not considered “employees” under the Fair Labor Standard Act (“FLSA”), the minimum wage and overtime wage provisions of the FLSA do not apply to independent contractors.  Hiring independent contractors might also be beneficial to companies for tax purposes.  However, as many companies have learned through litigation, labeling a worker an “independent contractor” will not automatically preclude that individual from being considered an “employee” under the FLSA.

Courts look to the “economic realities” of the relationship between the company and the individual the company hired to determine whether the individual is an “employee” or an “independent contractor.”  To determine whether the individual is an employee as a matter of economic reality, courts consider the following 6 factors: (1) the degree of control exercised by the company on the individual; (2) the individual’s opportunity for profit and loss based on managerial skills; (3) the individual’s investment in equipment or personnel; (4) the skill required to perform the work; (5) the duration of the relationship between the company and the individual; and (6) whether the services performed by the individual are integral to the company’s business.

As the 6 factors suggest, the determination of whether an individual is an “independent contractor” or “employee” depends on the specific facts of each case.  Adding more complexity to the analysis, courts do not mechanically apply the six factors.  The weight that courts attribute to each factor ultimately depends on the court’s analysis and on the facts of each case.  A good example of the distinction between “employee” and “independent contractor” is detailed in recent cases regarding adult entertainers.  For example, in Stevenson v. Great Am. Dream, Inc., 2013 U.S. Dist. LEXIS 181551 (N.D. Ga. Dec. 31, 2013), a class of adult entertainers sued the nightclub that hired them (the “Nightclub”) for minimum and overtime wages.  The court analyzed the facts in the case in relation to the six factors detailed above and found that the entertainers were “employees” because 5 of the 6 factors of the economic reality test suggested “employee” status.

As to the first factor (i.e., degree of control) the court found that while the entertainers were allowed to set their own schedules, the Nightclub possessed substantial control over them.  The Nightclub made and enforced rules regarding the entertainers’ dress and makeup, the entertainers’ conduct with customers, the music that the entertainers would perform to, and the procedure for settling disputes arising with the Nightclub.

As to the entertainers’ opportunity for profit and loss, the Court found that the Nightclub bore the vast majority of the overhead costs in comparison to the entertainers.  While the entertainers paid a daily fee to the Nightclub, the Nightclub was responsible for attracting customers, and making decisions regarding marketing, promotions, location, and pricing.  The entertainers could increase their profit depending on their interactions with customers, but the court found that such opportunity for profit and loss was minimal.

The court also found that although the entertainers spent their own money on hair, makeup, clothing, and styling, the Nightclub spent substantially more money on necessary personnel and equipment.  The third factor (i.e., investment in equipment) therefore suggested “employee” status.

The Nightclub argued that because the entertainers get better as they gain more experience, the work the entertainers performed required special skill.  The court disagreed.  The court acknowledged that different entertainers may possess varying degrees of skill, but found nothing to indicate that special skill was necessary for the work.  As the court noted, “[t]aking your clothes off on a nightclub stage and dancing provocatively are not the kinds of special skills that suggest independent contractor status.”  Stevenson, 2013 U.S. Dist. LEXIS 181551, at *15.

The court found that the fifth factor (i.e., the duration of the relationship between the company and the individual it hired) was the only factor that suggested “independent contractor” status because some of the entertainers’ relationships with the Nightclub were relatively short.  However, because this was the only factor that suggested “independent contractor” status, this factor alone could not nudge the entertainers out of their status as “employees.”

Finally, the court found the last factor (i.e., whether the work performed by the entertainers was integral to the Nightclub’s business) to be “most definitive.”  Because the Nightclub was an adult entertainment club, it required adult entertainers.  Without the entertainers, the Nightclub could not conduct tis business.  The entertainers’ work was therefore integral to the Nightclub’s business.  Finding that 5 of the 6 factors suggested “employee” status, the court held that the entertainers were “employees” and not “independent contractors.”

The Stevenson case serves as an example that even when a company labels the individuals it hires “independent contractors,” courts might nonetheless consider those individuals “employees” under the FLSA.  Companies could be required to pay those individuals unpaid minimum and overtime wages dating as far back as 3 years.  The potential liability to the company can increase significantly if, as in Stevenson, several workers collectively sue the company in a class action.  It is also important for companies to note that courts will generally not consider whether the hired individual signed a contract with the company wherein he or she agreed to be an “independent contractor.”  For those reasons, companies should consider all aspects of an individual’s work and consult with an experience labor and employment attorney before deciding to treat a hired worker as an independent contractor.

Peter T. Mavrick has successfully represented many employers in labor and employment matters.  This article is not a substitute for legal advice tailored to a particular situation.  Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311; Email: peter@mavricklaw.com.

OVERTIME WAGE LAW: EMPLOYEES WORKING FROM HOME

When an employee brings a claim for unpaid overtime under the Fair Labor Standards Act (“FLSA”), the employee must prove that he or she worked overtime without proper compensation.  If the employer kept accurate records of the employee’s work hours, the employee could easily prove his or her case by referring to those records.  For that reason, the FLSA requires that employers keep proper and accurate records of the hours its employees work.  However, employers sometimes fail to keep accurate time records.  As the Supreme Court has held, “[t]he solution … is not to penalize the employee by denying him any recovery on the ground that he is unable to prove the precise extent of uncompensated work.  Such a result would place a premium on an employer’s failure to keep proper records.”   Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680, 687 (1946).  Instead, when the employer fails to maintain accurate records, the employee could prove its case by (1) proving that he or she has in fact performed work without proper compensation and (2) producing sufficient evidence to show the amount and extent of that work as a matter of just and reasonable inference.

In Brown v. ScriptPro, LLC, 700 F.3d 1222, 1230 (10th Cir. 2012), the employee, Mr. Brown, claimed that he worked overtime hours from home.  Neither ScriptPro, LLC, (“ScriptPro”) the employer, nor Mr. Brown kept time records for the hours that Mr. Brown allegedly worked from home.  Through his and his wife’s testimony, Mr. Brown provided uncontroverted evidence that he worked overtime at home.  However, Mr. Brown also had to prove the amount and extent of the overtime worked.  Mr. Brown argued that because ScriptPro violated its statutory duty to maintain proper and accurate time records, Mr. Brown’s burden prove the amount and extent of his uncompensated overtime work should be relaxed.  The court disagreed.

As the court noted, “courts only relax the plaintiff’s burden to show the amount of overtime worked where the employer fails to keep accurate records.”  Brown, 700 F.3d at 1230.  The court held that ScriptPro did not fail to maintain proper and accurate time records because ScriptPro had implemented a time-keeping system that employees were required to use to record their hours worked, and becuase ScriptPro’s time-keeping system was accessible to employees from their respective homes.  “Mr. Brown easily could have entered his hours; in fact, he was required to do so. … There was no failure by ScriptPro to keep accurate records, but there was a failure by Mr. Brown to comply with ScriptPro’s timekeeping system.”  Brown v. Scriptpro, LLC, 700 F.3d 1222, 1230 (10th Cir. 2012).  Under those circumstances, the court found that ScriptPro did not violate the FLSA.

Although the Brown case was decided in the Tenth Circuit—covering Colorado, Kansas, New Mexico, Oklahoma, Utah and Wyoming—it nonetheless should encourage all employers with workers who allegedly work from home to implement a time-keeping system that its employees can readily access from home.

With the proliferation of overtime wage law cases in Miami-Dade, Broward, and Palm Beach counties, it is critical that employers be aware of the record-keeping requirements of the Fair Labor Standards Act.

Peter T. Mavrick has successfully represented many employers in labor and employment matters.  This article is not a substitute for legal advice tailored to a particular situation.  Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311; Email: peter@mavricklaw.com.

ARBITRATION AGREEMENTS AND THE FLSA: THE EFFECT OF FEE-SPLITTING AND FEE-SHIFTING PROVISIONS

Because arbitration usually is cheaper and faster than litigation, employers often include arbitration agreements in their employment contracts.  However, courts do not always enforce arbitration agreements.  Although federal law favors arbitration, state and federal courts may find an arbitration agreement unenforceable for several reasons.  One such reason is when the arbitration agreement contains a provision that contrary a federal statutory remedy.

Generally, a “fee-splitting” provision is a contractual provision requiring that the parties to an arbitration agreement share (or “split”) the costs of arbitration.  Moreover, a “fee-shifting” provision is a contractual provision that requires the losing party in an arbitration proceeding to pay the prevailing party’s fees and costs associated with the arbitration, i.e., the costs of arbitration “shifts” to the losing party.  “Fee-splitting” and “fee-shifting” provisions would normally not render an arbitration agreement unenforceable.  However, the analysis changes when federal statutory rights are subject to arbitration.  The rule is as follows: an arbitration agreement is unenforceable if the cost of arbitration effectively precludes the employee from vindicating his federal statutory rights.  One such federal statutory right is the right to payment of minimum and overtime wages under the Fair Labor Standards Act (FLSA).

In Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000), the U.S. Supreme Court held that the “risk” that a party will be saddled with prohibitive arbitration costs is too speculative to render an arbitration agreement unenforceable.  Following Green Tree, several federal court have upheld the validity of arbitration agreement containing fee-splitting provision.  For example, in Maldonado v. Mattress Firm, Inc., 2013 U.S. Dist. LEXIS 58742 (M.D. Fla. Apr. 24, 2013), an employee argued that the arbitration agreement’s fee-splitting provision rendered the agreement unenforceable against his FLSA claim.  The federal court held that in order to prevail on his argument, the employee was required to present evidence of (1) the amount of costs he is likely to incur and (2) his inability to pay those costs.  A showing of the “possibility” of incurring prohibitive costs is not sufficient.  The federal court held that the arbitration agreement was enforceable despite the employee’s FLSA claim.

Several months later, a Florida state court held that a fee-shifting provision rendered an arbitration agreement unenforceable against the employee in an FLSA case.  In Hernandez v. Colonial Grocers, Inc., 124 So. 3d 408 (Fla. 2d DCA 2013), the Florida state court held that an arbitration agreement containing a fee-shifting clause was unenforceable because the fee-shifting provision was directly at odds with the FLSA’s remedial purpose.  The FLSA allows the prevailing employee to recover his attorney’s fees and costs.  However, the FLSA does not have a similar provision favoring the employer.  Therefore, the Florida state court in Hernandez held that the fee-shifting provision “renders the potential cost of arbitration to be far greater to [the employee] than the potential cost of civil litigation” and that the arbitration agreement exposes the employee “to a potential liability to which he would not be exposed if the litigation occurred in civil court because the federal statute specifically protects him from such liability.”  Hernandez, 124 So. 3d at 410.  The state court therefore found that the arbitration agreement was unenforceable.

Arbitration can be a much cheaper and quicker alternative to litigation.  However, arbitration is a creature of contract.  If not properly drafted, a court may find that the arbitration agreement is unenforceable and require that the parties litigate their case in court.  Although every case is different, proper drafting is essential to an enforceable arbitration agreement.

Peter T. Mavrick has successfully represented many employers in labor and employment matters.  This article is not a substitute for legal advice tailored to a particular situation.  Employment attorney Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311; Email: peter@mavricklaw.com.

 

UNPAID OVERTIME: THE RETAIL SERVICE COMMISSION EXCEPTION AND TIPPED EMPLOYEES

The Fair Labor Standards Act (FLSA) requires that all employers covered by the FLSA pay their employees overtime wages for hours worked over 40 hours per workweek.  Generally, “overtime” wages are 1.5 times the regular wage.  The FLSA, however, identifies several classes of employees who are exempt from the overtime provision.  One such class of exempt employee is the “retail service commission” employee.

To qualify as an exempt “retail service commission” employee, three elements must be satisfied: (1) the employer is a retail or service establishment; (2) the employee’s regular rate of pay exceeds 1.5 time the applicable minimum wage; and (3) more than half of the employee’s compensation in a “representative period” must consist of commissions.  If the employee does not satisfy all three elements, the employer must pay overtime wages for those hours worked over 40 per workweek.

To satisfy the first element, the employer must be a retail or service establishment.  A retail or services establishment is one which sells goods or services to the general public.  Under federal regulation, typical retail or services establishments are as follows: “Grocery stores, hardware stores, clothing stores, coal dealers, furniture stores, restaurants, hotels, watch repair establishments, barber shops, and other such local establishments.”  29 C.F.R. § 779.318(a).  If the employer falls under any of those categories, the employer will likely qualify as a retail or service establishment.

Next, the employee’s regular rate of pay must exceed 1.5 times the applicable minimum wage.  The minimum wage may vary from year to year and from state to state.  Furthermore, while federal law establishes a federal minimum wage, states including Florida have established a minimum wage higher than the federal requirement.  If the employee’s regular hourly rate is greater than 1.5 times the applicable minimum wage, then the second element of the “retail service commission” exemption is satisfied.

Finally, more than half of the employee’s total compensation must be composed of “commissions” for a “representative period.”  A representative period can be anywhere from one month to one year.  If the employee is paid entirely by commission, then he or she will satisfy the third element of the exemption.  If the employee is paid a salary plus commission, then the commission must make up more than half of the employee’s total compensation to satisfy the third element.

Tips do not count as commission for the purpose of the retail service commission exception.  However, it is important to keep in mind that mandatory “tips” are not true tips.  Under the FLSA, a mandatory “tip” is considered a service charge and will count as “commission” for the purpose of this exemption.  While the FLSA has considered mandatory “tips” to be service charges for some time, effective January 2014, mandatory “tips” are also considered service charges for tax purposes.

Peter T. Mavrick has successfully represented many employers in labor and employment matters.  This article is not a substitute for legal advice tailored to a particular situation.  Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311; Email: peter@mavricklaw.com.