Employment Developments and Considerations at the Start of 2015January 2015 – Employment Update
- The New York Wage Theft Prevention Act's Annual Notice Requirement Is Rescinded Effective Immediately
- Employers May No Longer Be Able to Depend on New York Courts to Revise Overly Broad Restrictive Covenants
- EEOC's Heightened Scrutiny of Separation Agreements
Critical Amendments to New York's Wage Theft Prevention Act Are Now Law, Eliminating the Annual Notice Requirement Effective Immediately
On December 29, 2014, Governor Andrew Cuomo signed into law a bill that amends the N.Y. Wage Theft Prevention Act ("WTPA").
As we have previously reported, the amendments to the WTPA were passed by the New York State legislature on June 19, 2014, and were awaiting Governor Andrew Cuomo's signature. The new law repeals the requirement that employers send annual WTPA wage rate and pay date notices to current employees between January 1 and February 1 of each year. According to the signing memorandum issued by the Governor's office, the annual notice requirement for employers is eliminated for the 2015 calendar year.
Moreover, an announcement on the N.Y. Department of Labor's website provides that the Department will not require annual statements in 2015.
As for the other amendments to the WTPA, including the amendment to increase penalties for violations of the wage payment provisions, the amendment to the limited liability company law to provide for liability for individual members, and the amendments to the N.Y. Finance Law to create a "Wage Theft Prevention Account," these amendments will take effect February 27, 2015.
Employers Can No Longer Rely on New York Courts to Save Overly Broad Restrictive Covenants
New York courts have traditionally bailed out employers by narrowing, rather than voiding, restrictive covenants found to be unreasonable and overboard. In such instances, courts would revise or "blue-pencil" the covenant, striking out or modifying the overly broad components, so that the covenant could be enforced.
However, several New York decisions issued last year suggest a trend in which courts are moving away from "blue-penciling" overly broad restrictive covenants, and instead are striking them entirely.
In Brown & Brown,1 New York's appellate court refused to blue-pencil an employment agreement that contained an overly broad non-solicitation provision. The non-solicitation provision did not distinguish between clients with whom the plaintiff acquired relationships during her employment and those with which she did not. Thus, when Brown & Brown tried to enforce this provision against the employee following her termination, the court determined that the provision was overbroad and unenforceable.
The court explained that blue-penciling should not be undertaken as a matter of standard procedure. Relying on the seminal 1999 Court of Appeals case in BDO Seidman governing enforceability of restrictive covenants2, the court stated that partial enforcement of an overbroad restriction may only be justified where "the employer demonstrates an absence of overreaching, coercive use of dominant bargaining power, or other anti-competitive misconduct, but has in good faith sought to protect a legitimate business interest, consistent with reasonable standards of fair dealing."
Similarly, a New York federal court in Veramark Technologies v. Bouk3, refused to blue-pencil an overbroad non-compete provision. The restriction at issue in Veramark prohibited a former employee from "directly or indirectly performing services for any enterprise that engages in competition with the business conducted by Veramark or its affiliates." The court refused to modify this restriction since "[o]n its face, the non-compete is overreaching and coercive, and partial enforcement would not be appropriate."
Citing Brown & Brown, the court explained that blue-penciling the restrictive covenant would allow employers to "use their superior bargaining positions to impose unreasonable anti-competitive restrictions, uninhibited by the risk that a court will void the entire agreement."
The court rejected Veramark's argument that the restriction was necessary in order to protect "customer goodwill," finding that the agreement's non-solicitation provisions adequately provided this protection. This aspect of the decision is particularly noteworthy since, while the court refused to blue-pencil the non-compete restriction, it severed this provision and enforced the other restrictive covenants in the agreement.
What This Means for You
Given the recent trend against blue-penciling, New York employers should review their restrictive covenants to ensure they are narrowly tailored and consistent with the standards of enforceability:
- Client-based restrictions must distinguish between those clients with which the employee developed a relationship due to his or her employment -- which are enforceable -- as opposed to clients with which the employee had a pre-existing relationship or never acquired such a relationship -- which are much less likely to be enforced.
- Restrictions should be agreed to in "good faith." Employers should avoid presenting restrictive covenant agreements to an employee on his or her first day of work, after the employee has already resigned from his or her prior employment.
- When drafting restrictive covenant agreements, each restriction (e.g. non-competition, client non-solicitation, employee non-solicitation) should be set forth in a stand-alone provision so that, in the event a court refuses to blue-pencil an unenforceable restrictive covenant in the agreement, the separate restrictions may still be enforced.
The EEOC's Recent Focus on Overbroad Releases
Two lawsuits filed by the Equal Employment and Opportunity Commission ("EEOC") in 2014 highlight the agency's recent focus on challenging separation agreements that discourage or prohibit individuals from exercising their rights to file charges of discrimination and to participate in EEOC investigations or enforcement efforts.
CVS and CollegeAmerica
In February 2014, the Chicago District Office of the EEOC filed a lawsuit in Illinois federal court against CVS Pharmacy, Inc., alleging that a severance agreement used by the company was "overly broad, misleading and unenforceable" ("CVS"). The EEOC argued that the agreement violates Title VII because it interferes with the employees' rights to file charges, communicate voluntarily, and participate in investigations with the EEOC. In the CVS case, the EEOC challenged several "standard" provisions:
- A cooperation clause requiring the employee to notify the company's general counsel of any interview request or "inquiry" relating to legal proceedings including an "administrative investigation;"
- A non-disparagement clause prohibiting the employee from making any disparaging statements about the company and its officers, directors and employees;
- A non-disclosure clause, prohibiting the employee from disclosing any "confidential information" about the company to any third party without prior written permission;
- A general release provision, releasing all claims including "any claim of unlawful discrimination of any kind...;" and
- A covenant not to sue clause prohibiting the filing of "any action, lawsuit, complaint or proceeding" asserting the released claims, and requiring the employee to promptly reimburse "any legal fees that the Company incurs" for breach of the covenant not to sue. This provision also included a carve out, stating that nothing contained in the covenant not to sue was "intended to or shall interfere with Employee's right to participate in a proceeding with any appropriate federal, state or local government agency enforcing discrimination laws, nor shall this Agreement prohibit Employee from cooperating with any such agency in its investigation."
The EEOC maintained that these provisions violate Title VII because they interfere with the employee's ability to communicate voluntarily with the EEOC and other enforcement agencies. Significantly, the EEOC noted that the above referenced carve out in the covenant not to sue was insufficient since it is not repeated anywhere else in the agreement.
In late April 2014, the Phoenix District Office of the EEOC sued CollegeAmerica Denver, Inc. in Colorado federal court, making similar allegations as those raised in the CVS case ("College America"). The EEOC argued that provisions of CollegeAmerica's severance agreements requiring release of claims, cooperation with the company, and non-disparagement violate the Age Discrimination in Employment Act because those provisions allegedly "chill" the rights of individuals to file charges of discrimination and participate in EEOC and state agency investigations.
The Decisions: EEOC's Claims Challenging The Separation Agreements Are Dismissed
In October 2014, the court in the CVS case granted CVS' motion to dismiss, dismissing the EEOC's lawsuit against CVS in its entirety. The court dismissed the EEOC's claims against CVS since it determined that the EEOC failed to engage in conciliation procedures which were required under Title VII. Since CVS was dismissed on procedural grounds, the court did not make a specific ruling on the substance of the EEOC's claim. The EEOC has filed an appeal of the court's decision to the Seventh Circuit Court of Appeals. The appeal remains pending.
On December 2, 2014, the court in the CollegeAmerica case dismissed the EEOC's claims relating to the company's separation agreement. The court found that the EEOC failed to satisfy its statutory obligation to engage in conciliation efforts. Like the court in CVS, the court based its decision on procedural grounds and did not rule on any of the EEOC's substantive claims. The court permitted the EEOC's retaliation claims, alleging that CollegeAmerica's lawsuit was filed in retaliation for the employee's breach of the settlement agreement, to proceed.
What This Means for You
With the CVS case and the CollegeAmerica case, the EEOC has shown a continued willingness to challenge separation agreements that, it asserts, chill employees' rights to file charges and that discourage employees from cooperating with investigations. It is expected that the EEOC's effort will continue.
While CVS and CollegeAmerica successfully defended the EEOC's claims, neither case addressed the merits of the EEOC's challenges regarding the validity of standard provisions used in separation agreements.
Therefore, until this issue is resolved on the merits, we recommend that employers review their separation agreements and releases and take the following actions:
- Review provisions which preserve the employee's right to file administrative charges and participate in agency investigations. To avoid potential claims, we recommend that this provision specifically preserve the employee's rights to apply to any government agency which enforces any laws (not just the EEOC and NLRB).
- Include a statement of the employee's protected rights in a stand-alone provision of the separation agreement in bold font. Additionally, to avoid any confusion, we recommend that employers begin each paragraph that contains restrictions on an employee's rights (e.g. confidentiality and non-disparagement provisions) with language stating "Except as otherwise provided in paragraph [refer to paragraph protecting employee's right to file charges and participate in investigations]," thereby reiterating that nothing in any section of the agreement restricts those rights.
- Separation agreements should continue to state that, while the employee retains the right to file a discrimination charge, the employee is waiving the right to recover monetary damages or other individual relief in connection with any such charge.
Special thanks to Daniella M. Muller, an associate in the Employment Practice Group, for her assistance preparing this alert.
1 Brown & Brow, Inc. v. Johnson, 115 A.D.3d 162, 980 N.Y.S.2d 631 (4th Dep't 2014).
2BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 690 N.Y.S.2d 854, 712 N.E.2d 1220 (1999).
3Veramark Technologies, Inc. v. Bouk, 10 F. Supp. 3d 395 (W.D.N.Y. 2014).
Mara B. Levin at [email protected] or +1 212 592 1458 or
Carol M. Goodman at [email protected] or +1 212 592 1465.
Copyright © 2015 Herrick, Feinstein LLP. This alert is published by Herrick, Feinstein LLP for information purposes only.
Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.