Earlier this week, the Wall Street Journal reported that Senators are considering a tax on employer-sponsored health insurance plans to raise revenue.  It is not my intention to discuss the politics of this proposal, and instead, I write to consider how such a proposal would alter the economics of recruiting and retaining employees.
 
Until now, it went without question that those who secured health insurance through their employers did so on a pre-tax basis.  Employers, for their part, can deduct the cost.  This incentivizes employers to offer health insurance coverage to employees as part of a compensation package.  Health benefits are hugely important to employees when deciding whether to accept new positions.  As such, these plans are powerful recruitment and retention tools. 

In my practice, time and again, I hear that talented and experienced employees do not want to leave their current employment, not because of well-drafted restrictive covenants (as many employers believe), but because of their compensation package, that includes health insurance.  Spouses and children may have medical conditions that require care, and employees resist the stress of leaving behind good coverage for new jobs or self-employment. Employees believe, in many cases correctly, that the cost of health insurance is cheaper through employer-subsidized plans than in the individual market, and that they can get better coverage for their dollar through their employer. 

This is particularly true right now, as the healthcare debate rages on, and employees feel insecure about how their health insurance will work in the future.  The Senate’s proposal would remove a tool from an employer’s recruitment arsenal, and dramatically change the economics of recruiting and retaining talented employees.  Of course, employers have other tools, and should not rely totally on health insurance, but it is hard to overstate the importance of this coverage to employees.  The implementation of such a tax would mean that employers would need to reconfigure compensation packages and rethink the manner in which they provide health insurance coverage to employees.

Lawmakers have referred to the tax-favored treatment of employer-sponsored health insurance plans as discriminatory to those who purchase their health insurance individually.  Interestingly, removing these tax protections would also remove the incentive for employers to provide such healthcare.  It would be interesting to know from these lawmakers if that is what they intend.  A move away from employer-sponsored health insurance does not just change the economics of the employment relationship; it changes the economics of healthcare. 

Of course, the healthcare debate impacts employer / employee relationships even as the status of the Affordable Care Act and employer-sponsored health insurance remains unclear.  It is simply impossible for employers, or for their lawyers for that matter, to plan for changes in healthcare while proposals are floated and then rejected by lawmakers.  However, the proposal to end the tax-favored treatment of employer-sponsored health insurance would mark a radical change.  It will be interesting to see if it makes its way out of the pages of the Wall Street Journal. 

Let’s check in with the January 2017 case filed in the United States District Court for the Eastern District of Texas challenging the Obama Administration’s proposed changes to overtime regulations.  Those regulations would have required employers to reclassify many employees considered exempt from overtime rules to non-exempt status, requiring the employer to now pay overtime to those employees. The rule was widely considered a boon to employees, but a burden for small businesses and nonprofits. 

Those rules would have required that in addition to meeting certain requirements with regard to an employee’s duties, the employee must also earn a minimum salary of $47,476 to qualify for “exempt” status.  The current rule requires that the employee earn a minimum salary of $23,660.  The dramatic increase in the salary requirement caused employers to reevaluate classifications and to generate new policies regarding overtime and work hours in advance of a December 1, 2016 deadline.

As previously discussed on this blog, on November 22, 2016, the Eastern District of Texas entered an injunction prohibiting enforcement of the new rules.  Many clients have asked me, dreading the answer, whether that injunction remains in place.  On December 1, 2016, the United States Department of Labor appealed the injunction order, and sought a stay of the Court’s order prohibiting enforcement.  The Court denied the stay, and the matter is now on appeal.  During the appeal, the Department of Labor cannot enforce the new rules.  The appeals court granted a request submitted by the Department of Justice to extend time to file appellate briefs while “incoming leadership personnel” considered the issues.  That brief is now due on June 30. 

The Trump Administration has three choices: defend the rule, withdraw the rule, or rewrite the rule.  Labor Secretary Alexander Acosta has telegraphed that a review of the rule was necessary, but that the salary increase was too dramatic.  However, the Department of Labor’s repeated requests for extensions to file a brief indicate that it is not necessarily an easy call.  For example, because the Eastern District’s order granting the injunction called into question the rulemaking authority of the Department of Labor, there may be good reason for the administration to challenge the court’s injunction order, even though it does not necessarily agree with the rule. 

The overtime rules will remain in limbo until at least June 30, 2017.  We will continue to monitor the situation.  In the meantime, employers are not required to change their overtime policies or the classifications of their employees. 
 

By Patricia Collins, Esquire
 

On May 2, 2017, the House passed the Working Families Flexibility Act.  The purpose of the Act is to give employees flexibility in how they choose to be paid for overtime: in wages or in compensatory time off.  The Act crystallizes a tension I see often in my representation of employers. 

 Presently, the Fair Labor Standards Act (“FLSA”) requires employers to pay nonexempt employees overtime compensation for work hours in excess of 40 in a workweek.  Employers cannot compensate employees for those overtime hours in compensatory time off (“comp time”).  Such a policy violates the FLSA, exposing the employer to liability for the unpaid overtime hours as well as penalties and attorney’s fees.

 The FLSA prohibition against payment in comp time is intended to protect employees from abusive overtime demands by employers.  The statutory obligation to pay additional wages for hours over forty in a workweek, so the argument goes, forces the employer to base the decision to require overtime hours on business and financial considerations.  The FLSA’s ban on comp time legislates a policy determination that offering comp time will not protect employees from abusive demands by employers.

 Republicans this week argued otherwise.  They argue that permitting employees to take comp time rather than payment for overtime work gives employees flexibility.    Democrats who opposed the bill countered that the Act’s provision allowing employers the final say does not adequately protect employees. 

 Practically, the Act sits at the tipping point of many competing considerations:  employers want to establish policies that comply with the law, protect the business, and benefit employees.  Employees want flexibility, but they also need to be paid for their work.  The reality is that banked comp time can be a liability for employers because there are jobs for which attendance is extremely important, and unscheduled or unpredictable time is off is sometimes expensive or interferes with the progress of work.  Further, employees might not be free to use that comp time in the manner they would like if it interferes with the employer’s business.  Most employers offer paid time off in a set amount, in order to create predictability as to an employee’s attendance.  While this proposed rule might create flexibility and reduce overtime costs, I do wonder whether it is really a savings in the long run. 

 It will be interesting to see how the Senate balances these concerns, and whether employers will create policies that allow comp time.  The bill now goes to the Senate – no word yet on whether they will vote on it. Stay tuned!

By Patricia Collins

Reprinted with permission from the February 28th edition of the The Legal Intelligencer © 2017 ALM Media Properties, LLC. All rights reserved.Further duplication without permission is prohibited

The Pennsylvania Superior Court, in Metalico Pittsburgh v. Newman, et al (No. 354 WDA 2016, April 19, 2017), dealt a blow to employees attempting to avoid the application of a non-solicitation covenant. 

In Metalico, two employees, Newman and Medred, executed employment agreements containing a covenant not to solicit customers, suppliers and employees during the “Post-Employment Period.”  The Post-Employment Period varied depending upon the manner of the termination of employment, and commenced upon the last day of employment with Metalico.  At the end of the three-year period, Metalico terminated the employment agreements, but continued to retain Newman and Medred as “at-will” employees, and recited new compensation and other terms of employment.  These terms differed from those contained in the employment agreement.  Newman and Medred were terminated one year later.  Metalico filed suit against Newman and Medred, alleging that they were violating the non-solicitation covenant in their subsequent employment. 

On the eve of a preliminary injunction hearing, Newman and Medred filed a Motion for Partial Summary Judgment, arguing that the employment agreements containing the non-solicitation covenants had terminated, and therefore the non-solicitation provisions no longer applied.  They argued that the agreement to continue as “at-will” employees acted as a novation of the employment agreement.

The trial court agreed with Newman and Medred, and granted their motion for partial summary judgment.  But the Superior Court did not agree.  Instead, the Superior Court found that the covenant remained in place pursuant to a survival provision in the employment agreement.  That provision stated that if employment under the agreement “expires,” the agreement continues in effect “as is necessary or appropriate to enforce” the non-solicitation covenant. 

The trial court found that upon converting Newman’s and Medred’s status to “at will” employees, the parties had stated new terms for the employment relationship going forward.  In so doing, the parties did not recite that the non-solicitation provision would stay in place.  The failure to continue the compensation and benefits provided in the employment agreement, in the trial court’s view, invalidated the non-solicitation covenant.  The trial court justly noted: “Metalico cannot claim the benefits of its bargain while denying its employees the same.” 

The Superior Court disagreed, noting that because the survival language was included in the employment agreement, it constituted the bargained-for benefit for the employees.  The Superior Court rejected any argument that there was a failure of consideration, because failure of consideration only applies if the consideration was never received – the employees here did receive three years of the promised compensation and benefits under the agreement.  The Superior Court refused to find that the parties to the employment agreement intended to terminate and extinguish the previous agreement, thus extinguishing the non-solicitation covenant as well.  In so doing, the Superior Court relied upon Boyce v. Smith-Edwards-Dunlap Co., 580 A.2d 1382 (Pa. Super. 1990).  However, the Boyce case dealt with the use of the restrictive covenant as a defense to a claim raised by the employee.

It is well-settled that restrictive covenants in employment agreements are disfavored under Pennsylvania law.  Courts, including the Superior Court, have refused to enforce such agreements on technicalities.  For example, in Socko v. Mid-Atlantic Systems of CPA, Inc., 99 A.3d 928 (Pa. Super. 2014), the Superior Court refused to enforce a covenant not to compete in an employment agreement entered into after the commencement of employment and not accompanied by any beneficial change in the employee’s status, but which recited that it was signed “under seal” under the Uniform Written Obligations Act.  The Court found that a seal does not provide adequate consideration to enforce a restrictive covenant.  Instead, the Superior Court noted, there must be “actual valuable consideration.”  The holding in Socko left employment law practitioners and litigators with the belief that there are no “gotchas” when it comes to restrictive covenants. 

Metalico appears to change that.  Metalico voluntarily agreed to let the employment agreement terminate and to continue employment on an “at-will” basis.  This change of status benefits Metalico, leaving it free to terminate the employees or change their compensation and benefits at will (thus the name) and without concern about the terms of a written agreement.  The employees lost these protections.  The practical result of the Superior Court’s holding is that the employees lost the protections of the agreement, but retained their post-employment obligations.  This is inconsistent with Pennsylvania’s historical animosity towards these restrictive covenants, and appears to truly represent a “gotcha” for these employees. 

Metalico expands the universe of enforceable restrictive covenants.  This is not an uncommon fact pattern, and one which might have given an employer’s attorney pause prior to filing for a preliminary injunction in the past.  The holding could have the impact of reducing the care required in drafting, terminating and enforcing disfavored restrictive covenants, and eliminating some of the defenses available to employees seeking to avoid the covenant.  Interestingly, nowhere in the opinion does the Superior Court recite the oft-cited language that such covenants are disfavored in the law.  It will be interesting to see if the Supreme Court takes the opportunity to do so on appeal. 

Patricia Collins is a Partner with Antheil Maslow & MacMinn, LLP, based in Doylestown, PA. Her practice focuses primarily on commercial litigation, employment and health care law. To learn more about the firm or Patricia Collins, visit www.ammlaw.com.

Employers have been working to comply with new overtime rules issued by the United States Department of Labor that raise the salary level in order to meet certain exemptions from overtime rules before a December 1, 2016 deadline.  Those rules require that in addition to meeting certain requirements with regard to an employee’s duties, the employee must also earn a minimum salary of $47,476.  The old rule required that the employee earn a minimum salary of $23,660.  The dramatic increase in the salary requirement caused employers to reevaluate classifications and to generate new policies regarding overtime and work hours.

 On November 22, 2016, the United States District Court for the Eastern District of Texas issued a preliminary injunction, temporarily barring the Department of Labor from enforcing the new overtime rule.  The order will remain in place pending a full hearing on the issue.  While the order is temporary, as a prerequisite to entering the order, the Court was required to find that there was a substantial likelihood of success on the merits of the argument that the DOL exceeded its authority in promulgating the rule.  So, there is some indication that the Court may bar enforcement of the new rules permanently. 

 For now, employers are temporarily relieved of the obligation to comply with the new rules by the December 1, 2016 deadline.  Because the outcome is not guaranteed, employers should have their new policies ready to go, but do not need to implement them on December 1.  It is simply too early to say whether employers should “shelve” those new policies.  We will have to wait for the Court’s final ruling.   Stay tuned to this space as the case unfolds. 

Patricia Collins is an employment and litigation Partner at Antheil Maslow & MacMinn, LLP and chair of the labor and employment practice group.

Patty Collins, a Partner with Antheil, Maslow & MacMinn, will be joined by Cindy Bergvall, CPA,  of Bee, Bergvall & Co. for a panel discussion on new Department of Labor overtime regulations and their impact on employers.  This informative breakfast seminar is hosted by The Catalyst Center for Nonprofit Management on October 7th at Aldie Mansion in Doylestown.  There is no charge for this event, but registration is required. 

These new regulations will require action from almost every for-profit and not-for-profit organization with employees earning less than $47, 476 per year. Participants will learn about the changes in the law and what organizations will need to do when the law goes into effect on December 1, 2016.

Employers are now using a new strategy in an effort to keep their employees from leaving the company and working in a competitive enterprise. Traditionally, employers used restrictive covenant agreements, almost always built in to the employee’s written employment agreement. These covenants prohibit employees from engaging in competition with a former employer. Courts tend not to favor restrictive covenants because they impinge on the ability of a worker to earn a living – they are a restraint of trade.

To limit the scope of restrictive covenants, courts impose a reasonableness standard. Restrictions for a limited time, such as a year, and a small geographical area, such as a five mile radius, were favored. Long-term and broad covenants were not. The employee’s skill set and knowledge of the original employer’s enterprise are also key factors in assessing the business need for any restrictions. The more skill needed to do the work, the more knowledge an employee has of the employer’s business strategies, the more justifiable the non-compete clause becomes.

Why Employers Like the Employee Choice Doctrine

The strategy that employers are now using in some states, including Pennsylvania, is a little more artful. Employers are offering employees post-employment benefits such as stock options and deferred compensation with a condition – a catch. The catch is that the benefits are only available if the employee who leaves the company does not compete with the employer providing the benefits. The employee is given a choice to either accept the benefits and not compete, or compete, but forfeit the benefits and be subject to repayment, or "clawbacks” of benefits already paid. The choice has become known as the employee choice doctrine.

The employee choice option works better for the employer than the typical restrictive covenant because it enables the employer to shift the burden to the employee. In the classic non-compete case, the employer's remedy was to seek an injunction against the competing former employee ordering him or her to cease the competition. In employee choice cases, the employer can still seek an injunction. Better still, the employer can just terminate the benefits (the stock option or other post-employment benefit) thus shifting the burden to the employee to seek redress in the courts by demanding payment of the benefit.

In some states, like New York, there is no review of the employee choice option to assure that the choice offered to the former employee is reasonable. That is not the case in Pennsylvania. Pennsylvania law currently does allow employees to craft employment benefits that are tied to non-competition, but the tie has to be reasonable. The cases in Pennsylvania are evolving. As with restrictive covenants, the more reasonable, meaning less strict, the choice is - the more likely Pennsylvania courts will uphold it.

Key Drafting Issues in Employee Choice Benefit Contracts

When drafting employee choice benefit provisions, employers should keep in mind the following points:

• The Employee must have a real choice. The choice between competing in the new position and forfeiting the benefit or not competing and keeping the benefit should be clear. In short, the employee should understand that there is a trade-off.

• The Employee has to leave voluntarily. The choice option is likely only valid if the employee controls the decision about leaving the current employer. Some courts reason that the employee choice doctrine is not really a choice if the employer fires the employee without cause. In such a circumstance, the employer has little or no legitimate business interest in enforcing the non-compete obligation.

• Consideration.  For the employee to be forced to make a choice between forfeiting assets and working with a competitor, the employer has to give the employee additional consideration over and above that which the employee would have been entitled to receive in the normal course of working for the employer, including severance or other payments normally paid upon termination.

Why Legal Counsel Can Help

Experienced business counsel understand the evolving nature of the employee choice doctrine.  In particular, they keep current with the Pennsylvania and federal court decisions so they can craft documents which have the best chance of surviving attack by employees who seek to avoid them by claiming that the choice is invalid as a restraint of trade.

Before drafting, and certainly before presenting an employee benefit with a forfeiture provision – employers should seek to have their business counsel review the language of the benefit contract.

In Socko v. Mid-Atlantic Systems of CPA, Inc., the Pennsylvania Supreme Court held that the Uniform Written Obligations Act (“UWOA”) could not render a restrictive covenant not supported by adequate consideration enforceable nonetheless.  In so doing, the Court emphasized that such restrictive covenants – agreements that restrict an employee’s ability to compete against an employer after termination - are disfavored restraints on trade.  As the dissent noted, the opinion does appear contrary to the plain language of the UWOA, but this dissonance highlights the disfavored nature of restrictive covenants. 

As part of his employment with Mid-Atlantic, Socko signed three restrictive covenants:  one upon the beginning of his employment, a second upon return to Mid-Atlantic after terminating his employment, and a third, more restrictive, agreement signed during his employment.  Along with the third restrictive covenant, Socko did not receive a bonus, promotion or other consideration.  The document recited the magic words of the UWOA that “the parties intended to be legally bound.”  Socko resigned from Mid-Atlantic and went to work for a competitor, and Mid-Atlantic filed suit for breach of the restrictive covenant. 

Pennsylvania law requires that restrictive covenants must be accompanied by adequate consideration.  To meet this requirement, the employee must sign the agreement at the commencement of employment, or the employer must supply new consideration for restrictive covenants signed after the commencement of employment.  “New consideration” includes a benefit to the employee or a beneficial change to the employee’s status.  Socko did not receive any new consideration for the new restrictive covenant that Mid-Atlantic sought to enforce.  Importantly, the new restrictive covenant also included language superseding all previous restrictive covenants, thus rendering the second restrictive covenant, which was supported by sufficient consideration, ineffective. 

To address this problem, Mid-Atlantic argued that Socko was barred from challenging the restrictive covenant on the basis that it was not supported by new consideration because it contained the UWOA language.  Mid-Atlantic asserted that the “magic words” foreclosed the usual analysis of consideration for restrictive covenants signed after the commencement of employment.  The Supreme Court, affirming the Superior Court’s holding, held that the UWOA language does not foreclose such an analysis as it relates to restrictive covenants.  In so doing, the Supreme Court rejected Mid-Atlantic’s framing of the issue.  The issue was not, as Mid-Atlantic asserted, that the UWOA foreclosed Socko from challenging the validity of the agreement based on a lack of consideration.  Instead, the Supreme Court stated that the issue was whether the UWOA acted as a substitute for consideration.  

The Supreme Court relied on principles of statutory construction and the body of case law holding that restrictive covenants are disfavored restraints of trade to find that the UWOA language would not act as a substitute for consideration to support a restrictive covenant.  The Supreme Court noted that the unique treatment of restrictive covenants in the law, including rigorous judicial scrutiny, required this outcome. 

While this holding will not shock employment lawyers, as it is consistent with the court’s jaundiced approach to restrictive covenants, it does highlight important considerations for the use of such documents.  Employers strive to foster their entry level employees into valuable positions, and such a practice benefits employer and employee.  Employers must consider when and whether to require those employees to execute restrictive covenants, the consideration they will provide for new restrictions, and whether there are other, more productive, ways to retain a valuable employee and protect the business.  The Supreme Court’s decision does not change the analysis, but it does clarify that no mere technicality will encourage a court to set aside the rigorous scrutiny of restrictive covenants required by the case law. 

In Roman v. McGuire Memorial, the Pennsylvania Superior Court announced a new basis for challenging terminations of at-will employees.  While Pennsylvania law has always recognized a “public policy” exception to at-will employment, the case law has limited that exception.  Roman expands the exception to include terminations of health-care workers who refuse to work mandatory overtime.
 
Roman worked as a direct care worker, subject to McGuire Memorial’s mandatory overtime requirement.  She was an at-will employee.  The mandatory overtime policy allowed for termination of employees who refused to work mandatory overtime on four occasions. McGuire terminated Roman’s employment after her (disputed) fourth refusal, and Roman sued for wrongful termination in violation of public policy.  After a nonjury trial, the trial court found in Roman’s favor, awarded her $121,869.93 in back pay and lost benefits, and ordered reinstatement to her former position.
 
Relevant to the dispute is Pennsylvania’s Prohibition of Excessive Overtime Act (43 P.S. § 932.1 et seq.).  The Act prohibits a health care facility from requiring employees to work in excess of an “agreed to or previously determined and regularly scheduled daily work shift.”  43 P.S. § 932.3(a)(1).  Further, the Act prohibits retaliation against an employee who refuses to accept work in excess of those limitations.  43 P.S. § 932.3(b).  The Act does not provide for a remedy for employees terminated in violation of its requirements.  It does contemplate a regulatory scheme to address complaints by employees, but those regulations are not yet final.
 
The Superior Court held that the Act established a public policy that healthcare facilities should not require its direct care workers to work overtime hours, and, as such, Roman’s termination for refusing to work overtime hours amounted to wrongful termination in violation of public policy.  Further, the Court distinguished cases in which it had refused to recognize a public policy exception to the at-will doctrine because a statute had already created a remedial scheme to address violations of the particular policy identified in that statute, such as the Pennsylvania Human Relations Act.  In the case of the Prohibition of Excessive Overtime in Health Care Act, there existed no remedial scheme to address the wrong.
 
The Superior Court has thus used The Act to identify a new public policy exception to the at-will doctrine.  Health care entities should be mindful of this exception in creating and enforcing overtime policies for direct care workers. 

Federal law (Title VII of the Civil Rights Act of 1964) prohibits, among other matters, a covered employer, from discriminating against an employee because of such individual’s sex.  Generally, a private employer with 15 or more employees, engaging in interstate commerce, is covered by Title VII.  The Pregnancy Discrimination Act (PDA) passed in 1978, added discrimination based on “pregnancy, childbirth, or related medical conditions” to this prohibition.

The PDA also provides that employers are required to treat  “women affected by  pregnancy… the same for all employment-related  purposes … as other persons not so affected but similar in their ability or inability to work” .

In the recent case of Young v. UPS, the Supreme Court, in interpreting the provision above, announced a new test for analyzing pregnancy discrimination claims. The relevant facts of the case are as follows:

Plaintiff Young worked as a part-time driver for defendant United Parcel Service (UPS). Her duties included pickup and delivery of packages. While employed by UPS she became pregnant and was told by her doctor that she should not lift more than 20 pounds during her first 20 weeks of pregnancy and no more than 10 pounds thereafter. Drivers in Young’s position were required to lift up to 70 pounds. UPS therefore advised Young that she could not work while under a lifting restriction. As a result Young remained home without pay during most of her pregnancy and ultimately lost her employee medical coverage.