Employment Law Update
By Christina M. Jepson
FTC Non-Compete Ban Off the Table for Now
The Federal Trade Commission’s (FTC) non-compete ban is a mess. As you are probably aware, the FTC enacted a rule (16 C.F.R. Section 910.1-6) banning most non-compete agreements beginning Sept. 4, 2004. The rule also requires employers to notify current or former employees who are affected by the ban. A number of employers have sued the FTC seeking an injunction of the ban arguing that the FTC exceeded its authority in enacting the rule. There have been limited injunctions on the ban that apply only to the litigants. See e.g. Properties of The Villages, Inc. v. Federal Trade Commission, No. 5:24-CV-316 (M.D. Fla. Aug. 14, 2024) (enjoining FTC non-compete ban but only as applied to plaintiff Properties of The Villages, Inc.). However, on Aug. 20, 2024, a federal judge in Texas ruled that the FTC ban is unlawful and enjoined the FTC rule nationwide. Ryan LLC v. Fed. Trade Comm’n, No. 3:24-CV-00986 (N.D. Tex. Aug. 20, 2024). The ruling means the ban will not go into effect on Sept. 4, 2024. There will likely be an appeal, but that appeal will take a while to unfold.
In the Ryan case, the Northern District of Texas held that the ban failed on two bases: (1) the FTC exceeded its statutory authority in issuing the ban; and (2) the ban is arbitrary and capricious. The court explained that the “Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation. The Rule imposes a one-size-fits-all approach with no end date . . ..” The court continued by saying “the Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes—instead of targeting specific, harmful non-competes, render the Rule arbitrary and capricious.” The court found that the “Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.”
The Ryan case relied on Loper Bright Enterprises v. Raimondo, 144 S. Court 2244 (2024), which is the case that overruled Chevron deference in favor of agency interpretations. We should all expect Loper Bright Enterprises to be cited by more parties seeking to overrule agency interpretations by the Department of Labor, the Equal Employment Opportunity Commission and other federal agencies.
It is assumed that the FTC will appeal to the Fifth Circuit Court (the circuit court with jurisdiction over Texas). We will keep you updated on any developments.
Fifth Circuit Vacates a Department of Labor Rule Regarding Tip Credit
Speaking of the Fifth Circuit and agency action, the court just ruled that a tip credit rule promulgated by the Department of Labor (DOL) is not enforceable. In Restaurant Law Center v. U.S. Dept. of Labor, No. 23-50562 (5th Cir. Aug. 23, 2024). In this case, two restaurant associations from Texas (yes, Texas again) sued the DOL challenging a 2021 rule that restricts when employers may claim a tip credit for tipped employees under the Fair Labor Standards Act (FLSA). Under the rule, known as the 80/20 rule, an employer can only take a tip credit (which allows an employer to pay less than minimum wage to a tipped employee) if the employee spends at least 80% of their time performing the tipped job (such as waiting tables) and 20% or less of their time performing related non-tipped work, such as setting tables in the restaurant. The non-tipped work also cannot exceed 30 minutes at one time.
Using a similar analysis to the non-compete ban case, the court found that the 80/20 rule was inconsistent with the text of the FLSA, arbitrary and capricious and unlawful. The court explained that all the FLSA required to claim the tip credit was that an employee’s occupation receive more than $30 a month in tips and that it did “not ask whether duties composing the given occupations are themselves each individually tip-producing.” Accordingly, the Fifth Circuit vacated the 80/20 rule nationwide. The Fifth Circuit (which tends to be conservative and pro-business) relied on Loper Bright Enters. V. Raimondo, 144, S. Ct. 2244, 2273 (2024), the case overruling Chevron deference towards agency interpretations. The Fifth Circuit’s ruling will make it easier for employers to pay less than minimum wage to tipped employees like servers.
The tip credit is complicated and has many moving parts. If you have tipped employees and need guidance regarding complying with the law, please contact employment counsel.
The Fifth Circuit Stays the Lower Courts “Religious Training” Requirement
Speaking of Texas, we have been following a religious liberty case that involves some unusual contempt rulings. In Carter v. Southwest Airlines, No. 3:17-CV002278 (N.D. Tex.), a flight attendant was fired for publicly posting, and privately messaging another flight attendant, images of aborted fetuses. A jury found that her Title VII religious freedoms were violated. As part of its ruling, the district court ordered Southwest Airlines to post the verdict on the company bulletin board (do people still use those?) and email the decision to all flight attendants. Southwest Airlines did so, but also published an internal memo stating that the abortion messages were inappropriate and that they were disappointed in the court’s ruling. The plaintiff moved for contempt sanctions which the court granted. As part of its contempt ruling, the court ordered three in-house attorneys to attend religious-liberty training conducted by the Alliance Defending Freedom, an organization that provides “litigation services, funding, and training to protect First Amendment freedoms and other fundamental rights.” Obviously, the attorneys were not about to attend this “training.”
On appeal, the Fifth Circuit held that there is strong likelihood that the contempt order exceeded the district court’s contempt authority and stayed it pending until Southwest’s appeal of the case was concluded. Carter v. Southwest Airlines, No. 23-10536 (5th Cir. June 7, 2024).
Isolated Act of Racial Harassment Could Support a Claim of Hostile Work Environment
Meanwhile in California, the California Supreme Court held that a race harassment claim (under California, not federal law) brought by Twanda Bailey against the San Francisco District Attorney's Office could go forward even though the employee alleged that a coworker used the N-word only one time. Bailey v. San Francisco District Attorney’s Office, No. S265223 (Cal. Supreme Ct. July 29, 2024). The court found that the single incident could be enough under the totality of circumstances. Obviously, the use of the N-word was significant in the case. The court held that: "We join the chorus of other courts in acknowledging the odious and injurious nature of the N-word in particular, as well as other unambiguous racial epithets." The case will now go to a jury to decide if there was a hostile work environment.
One thing has not changed: employers should always take claims of harassment seriously, investigate, and take appropriate action. Employers should make sure they have legally compliant policies and procedures.
Question Corner
Recovering a Sign- On Bonus: Legal Guidelines for Employers
By Patrick M. Ngalamulume
Q. A new hire was given a $5,000 sign-on bonus but has been a no-show for numerous days, and we haven’t been able to contact them. Can we withhold and/or deduct from this employee’s final paycheck to recoup some of the sign-on bonus?
A. The decision on whether you can deduct from this employee’s final check to recoup some of the sign-on bonus is contingent upon whether the bonus is structured as a discretionary or non-discretionary bonus. Under the Fair Labor Standards Act (FLSA), discretionary bonuses are excludable from the regular rate of pay. The Department of Labor has stated that a bonus is discretionary if it satisfies this criteria: (1) the employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine whether to pay the bonus; (2) the employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine the amount of the bonus; and (3) the bonus payment is not made according to any prior contract, agreement, or promise causing an employee to expect such payments regularly. If the bonus fails any of these prongs, it is considered nondiscretionary.
Under these criteria, a sign-on bonus is non-discretionary because it fails to meet the statutory requirements of a discretionary bonus under the FLSA. Furthermore, non-discretionary bonuses are included in the employee’s regular rate of pay. In most cases, a sign on bonus is considered non-discretionary because it is usually promised to the employee as an incentive to accept a job offer and is dependent on the employee starting work.
If your employment agreement explicitly states that the sign-on bonus is contingent upon the employee remaining with the company for a specified period, you have contractual grounds to recoup the bonus. Common terms might include a provision that the bonus must be repaid if the employee leaves the company before a specific date. However, even if you have the right to recoup the sign-on bonus, any deductions from the employee’s final paycheck must comply with federal and state wage laws. Specifically, the deduction must not reduce the employee’s pay below the minimum wage for hours performed. To proceed, review the employment agreement to determine the specific provisions related to the sign-on bonus and continued employment requirements. Finally, consult with your legal counsel to ensure that any deductions comply with applicable wage laws and that you are not exposing your company to the possible liability of a wage claim. By following the proper legal protocols, you can minimize the financial impact on your company while complying with all relevant employment laws.
