News and Articles

When Your Intern is Really an Employee: Avoiding Triple Liability After Glatt v. Fox Searchlight Pictures, Inc.

Erin Lloyd - Friday, October 02, 2015

Many businesses work with interns at one point or another, using them for special projects or hiring them on an annual or other regular basis to work side by side with traditional staff members. Often, businesses do not pay their interns, reasoning that it is an educational experience and, in fact, students sometimes get school credit or even compensation from their school for an unpaid internship. In a landmark case this summer, a Federal court for the Second Circuit (which covers New York) clarified the circumstances in which an interns is excluded from basic employee protections, and all businesses should take note of the new rules that apply to unpaid interns.

Generally speaking, with the exception of “professional” and other highly compensated, salaried workers, most employees must be paid at least minimum wage for every hour worked up to 40 hours in a week, and must also be paid overtime for all hours worked beyond 40 in any given week, at a rate of time and a half of their usual hourly rate. These requirements are mandated by both the Federal Fair Labor Standards Act (“FLSA”) and New York Labor Law (“NYLL”), and employees cannot waive these statutory rights.

In the past, there has been much disagreement about whether “interns” qualify as “employees”—and thus, whether the FLSA and NYLL even apply to interns. The U.S. Supreme Court, in 1947, held that individuals participating in a training program were not employees and the FLSA did not apply to them because they did not displace regular workers, were not promised employment after the training program, which was similar to training offered by a vocational school, and the employer did not receive any immediate advantage to its business from the work performed by the trainees. (Walling v. Portland Terminal Co., 330 U.S. 148). Based in part on this decision, the U.S. Department of Labor published guidance setting for six criteria which, if all were met, allowed for the trainee/worker to be treated as exempt from FLSA.

However, while the DOL required all six criteria to be met, courts—and specifically, the district court in Glatt v. Fox Searchlight Pictures, Inc., No. 11 Civ 6784 (WHP) (SDNY June 11, 2013)—employed more of a balancing test, evaluating whether most of the factors, on balance, indicated the individual was an employee or an intern/trainee.

On appeal, the Second Circuit declined to adopt either the DOL’s strict six-factor test or the lower court’s balancing test and, instead, adopted its own balancing test which it referred to as the “primary beneficiary test”. The Court wrote, “The primary beneficiary test has two salient features. First, it focuses on what the intern receives in exchange for his work. Second, it also accords courts the flexibility to examine the economic reality as it exists between the intern and the employer.” Glatt v. Fox Searchlight Pictures, Inc., Nos. 13-4478-CV, 13-4481-CV at p. 14 (2d Cir. July 2, 2015) (internal citations omitted).

The Court set forth a list of “non-exhaustive factors” that it said courts (and therefore, employers) should evaluate and consider when determining whether an intern should be considered an employee for purposes of the FLSA (and NYLL), including:

1. 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.

2. 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.

3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.

4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.

5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.

6. 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.

7. 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 noted that “[t]he purpose of a bona-fide internship is to integrate classroom learning with practical skill development in a real-world setting,” and the non-exhaustive list of considerations is thought to reflect that purpose as well as balance it with economic realities of today’s workforce. The overarching concern for employers, based on Glatt, should be to develop an internship program that clearly provides the primary benefit to the student-intern and has the student-intern’s educational and experiential experience at its core.

It is important to note that if an intern is not paid—or is paid less than minimum wage, or is not paid for overtime pursuant to the law—and a court later determines that the intern should have been classified as an employee, a violation of the FLSA and NYLL will likely be found. In that case, courts can award back pay based on what the employee should have been paid, as well as up to 100% of that amount under each of those statutes. In other words, in the worst-case scenario, employers could be forced to pay three times what they should have paid in the first instance. On top of that, in most cases the employer is responsible for paying the employee’s attorneys’ fees, which can be in the tens of thousands for even a simple case. For these reasons, it is essential that employers and interns take a hard look at the Glatt factors and their own internship program to ensure compliance and seek legal guidance, when appropriate. Our attorneys can help you if you have not been properly paid as an intern, or if you are an employer who wants to maintain or develop a strong internship program that will steer clear of any legal liability.

For more information, employees and employers can contact us here

Employee or Independent Contractor? You May be Surprised by the Answer.

Erin Lloyd - Friday, October 02, 2015

For years now, businesses have been hiring independent contractors at increasing rates, in part reflecting the shift in our economy over the last decade, and in part reflecting attempts by businesses to limit costs and have a more flexible work force. We often hear from clients, “Our independent contractors use their own computer and work from home, so they supply their own tools work independently,” or “We have an independent contractor agreement, so they’ve agreed they are independent contractors.” What many of our clients don’t know is that none of these facts—and, indeed, many others cited by our clients—will turn an “employee” into an “independent contractor” under the law. Recently, the U.S. Department of Labor (“DOL”) issued an interpretation that clarified both the standard used to determine if someone is truly an employee or an independent contractor, and the extent to which the Federal and State Departments of Labor and other agencies are cracking down on misclassification.

Why Does This Distinction Even Matter?

Before discussing how courts and the DOL (as well as the IRS and other government agencies) define employee versus independent contractors, it is worth taking a moment to consider some of the reasons the distinction between the two is important. This issue affects the rights of individuals, the obligations of employers, and can also shed some light on the various factors courts and the government find important in this determination.

First, only “employees” are entitled to a minimum wage and overtime pay.[1] Independent contractors are entitled to offer their services at any rate they wish, and a business is free to negotiate lower rates with independent contractors or even alternative payment arrangements, such as in-kind payments.

While this may seem like a great benefit to any business, keep in mind that if an employee is misclassified as an independent contractor and the business did not conform to the wage and hour laws that apply to an employee, the employer runs the very real risk of facing a lawsuit in state or federal court. The Fair Labor Standards Act, a federal law, allows covered, non-exempt employees who were either 1) not paid for all hours worked, 2) paid less than minimum wage, or 3) not paid for overtime, to collect all the back pay they are entitled to plus 100% of those damages on top of the back pay for 2 to 3 years. Likewise, in New York, the New York Labor Law may permit the same employee to receive another 100% on top of that, and can go back 6 years. Further, both statutes allow the employee’s attorney(s) to recovery their reasonable attorney’s fees from the employer on top of the employee’s damages. That kind of judgment will very quickly cancel out any savings the business enjoyed by misclassifying the employee.

Of course, in an economically competitive environment, workers can sometimes face the Hobson’s choice between being unemployed or taking a position that they know is misclassified as “independent contractor,” overlooking the wage and hour violations of the employer. However, this is precisely the kind of work environment that the Fair Labor Standards Act was enacted to avoid in the early part of the 20th Century.

Beyond wage and hour protections, many other worker protections apply only to “employees,” including anti-discrimination statutes, family leave protections, disability and unemployment statutes, and more.

For example, businesses do not have to purchase unemployment insurance in New York for independent contractors, and independent contractors are likewise not entitled to receive unemployment benefits when their contract with a business ends. This is because independent contractors are thought of as individuals who are in business for themselves, whether they are acting as a sole proprietor or under a corporate form. But an individual who is truly an employee is entitled to collect unemployment if they qualify and, therefore, their employer is expected to pay into the system to provide that coverage.

The DOL and Courts Balance a Series of Factors, and No Single Factor is Determinative

When conducting an inquiry into whether a worker or group of workers has been misclassified by an employer as independent contractors, the U.S. DOL and Federal Courts, and to some extent the New York State DOL, apply what has been referred to as the “economic realities” test.[2] This test evaluates and weighs various factors in an attempt to answer the question whether the worker is economically dependent upon the employer or is truly in business for him or herself:

  •    1. Is the work performed an integral part of the employer’s business?
    •    2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
      •    3. How does the worker’s relative investment compare to the employer’s investment?
        •    4. Does the work performed require special skill and initiative?
          •    5. Is the relationship between the worker and the employer permanent or indefinite?
  •    6. What is the nature and degree of the employer’s control?
  •  

The DOL and Courts have made it very clear that applying the economic realities test, most workers are employees. True independent contractors are the exception, not the rule.

Enforcement Efforts Have Increased in Response to Lawsuits and DOL Complaints

The DOL has entered into memoranda of understanding with the Internal Revenue Service, as well as with 26 states, including New York, to facilitate information sharing and cooperate on enforcement efforts. In New York, both the Attorney General’s Labor Bureau and the New York State Department of Labor are sharing data and coordinating efforts with the U.S. DOL, and according to the DOL, these efforts are paying off: in fiscal year 2014, it recovered more than $79 million in back wages for more than 109,000 employees who were misclassified and, therefore, improperly compensated.

As a result, employers could see an investigation initiated by any number of agencies, State or Federal. If an employer has properly maintained records and documented the legal basis for classifying any workers as independent contractors, such investigations or audits can be relatively painless. If it has not, however, just the investigation alone can be extraordinarily costly to the business.

For this reason, employers should regularly consult with legal counsel to evaluate their employee and independent contractor relationships, to review documentation efforts, to modify contracts as necessary to keep up with changing law, and to otherwise engage in compliance reviews.

For more information, employees and employers can contact us here



[1] Note: Not all “employees” are entitled to overtime pay or minimum wage. This article does not address the difference between those who are entitled to such benefits (known as “non-exempt” employees) and those who are not (known as “exempt” employees). If you have questions about how these distinctions apply to your employees or to yourself, one of our attorneys can help you conduct that analysis.

[2] While the New York State DOL’s test has some variances, it is substantially similar to the Federal test.

Another Tool for the New Entrepreneur: Non-Qualified Stock Options

Kyle Carraro - Friday, October 02, 2015

Many entrepreneurs, especially those who are new to running a business, often find themselves low on cash reserves while desiring to retain the services of industry experts. When a business owner does not have cash to pay for services, a useful alternative is to offer equity instead. While exchanging equity in lieu of cash can be a wise, necessary business decision, it does come with its risks. When one purchases equity in a company, she is entering into a relationship that binds her to the company and can grant her certain rights as a shareholder.

This type of arrangement can be mutually beneficial, but business owners are rightfully reluctant to offer equity to an outside professional without having an opportunity to test whether the expert is a good fit for the business. Likewise, an expert may not want to be tied to a company before first seeing its inner workings for herself. But stock options—specifically non-qualified stock options—can assuage the concerns of both parties and offer a great solution for the business owner and expert advisor.

Non-Qualified Stock Options Defined

Generally speaking, an option is the right to buy or sell a security or other asset at an agreed-upon fixed price. A non-qualified stock option (“NQSO”) gives the holder of the option the right to purchase shares in a company at a fixed price, usually for a specified period of time. In exchange, instead of cash, the party receiving the option can offer services to the issuer of the option (the company). If the option-holder believes the value of the business is bound to increase, or the stock price does in fact go up, she can buy the stock at the fixed-price and reap the difference in profit.

For example, Smith & Assoc. engage Ms. Johnson to work in an advisory capacity. In exchange for agreeing to provide advising services on a part-time basis, Ms. Johnson receives the right to purchase up to 50,000 shares in Smith & Assoc. at a fixed-price of $0.10 per share. If Ms. Johnson believes the stock price will increase or actually sees the price increase, Ms. Johnson can exercise her right to purchase the Smith & Assoc. shares at $0.10 per share and enjoy the profit.

While this arrangement is at the core of the relationship between the parties, there are additional restrictions and limitations involved that are designed to protect the interests of both parties.

Vesting

The primary concern for a business owner offering equity is that the holder of the option might exercise her purchasing rights and then quit providing services. To mitigate this possibility, non-qualified stock options are made subject to certain “vesting” periods during which time the option holder’s right to purchase stock accrues. Typically, option holder will not have the right to purchase stock for a certain period of time, after which the amount of stock she may purchase will accrue in increments, up to the maximum amount under the option contract.

In our example above, it would not benefit the company to allow Ms. Johnson to purchase any shares in Smith & Assoc. on the first day she began providing services; rather, the option contract would ideally be crafted to allow Ms. Johnson to purchase equity only after advising Smith & Assoc. for a substantial period of time. Additionally, even when Ms. Johnson gains the right to purchase stock, she might only be able to buy a small percentage of the 50,000 shares contemplated by the agreement. Although each company’s needs will differ, in this example, the parties could agree that Ms. Johnson be permitted to purchase 5% of the total shares after the first six months, and then each month after that up to 5% more, so after 20 months she would be “fully vested” and able to buy up to 50,000 shares at the fixed price of $0.10 per share.

Vesting allows an entrepreneur to vet an expert before giving up equity in her business. If the relationship appears to be mutually beneficial, the business owner should be happy to exchange equity for the value that the expert advisor brings to her business. In the end, the exact vesting schedule is a major point of negotiation, and the exact terms will depend on the circumstances of each party.

Don’t Forget About Taxes

When an option holder decides to exercise her rights to purchase shares, she must also be careful to consider the tax consequences. The difference in option purchase price and the stock price when the option is exercised generates income on which taxes must be paid. For example, if Ms. Johnson purchases 50,000 shares at $.10 per share but the value of the shares increases to $.50 per share, she will have paid $5,000 for shares worth $25,000. The difference, $20,000, is generally treated as taxable income. Of course, any further increases in stock price after exercising the option could also be subject to long-term capital gain taxes.

Because of these tax consequences, the party exercising the option will need to plan ahead to make sure she has enough cash to cover the taxes she will owe. While this is primarily a concern for the receiver of the option, it might also be a point for negotiation. All individuals considering such financial transactions should obtain advise from a well-qualified tax advisor to understand the full consequences.

Conclusion

Overall, offering non-qualified stock options in exchange for expert services can be a great tool for the entrepreneur, especially one whose cash flow is limited. While this article is intended to provide a basic introduction to non-qualified stock options, it does not cover every facet of non-qualified stock options and is not to be construed as legal advice. As with any major business decision, owners are best advised to speak with an attorney to make sure their needs and obligations are being fulfilled, and to review other potential provision to include in a stock purchase agreement. To consult with one of our attorneys, please contact us here.

September 2015 NEWSLETTER

Yogi Patel - Wednesday, September 09, 2015

Dear valued clients and supporters: This month's newsletter will focus on: (1) the NLRB's restatement of the joint-employer standard, expanding the right to unionize; (2) the New York City ban on employers using or requesting credit information of employees and job applicants; and (3) Businesses' need to keep trade secrets safe, methods for protecting them, and actions to take when they are misappropriated.

NLRB Expands Right to Unionize 
Under the National Labor Relations Act, employees have the right to collectively bargain (unionize) only against their employer. The joint-employer doctrine recognizes that in circumstances where two separate entities each have the right to exercise a certain degree of control over a set of employees' working conditions, that both entities should be considered employers. In a recent decision, Browning-Ferris Indus., the NLRB "restated" its standard for evaluating the existence of a joint-employer relationship in a way that expanded its scope. The decision particularly impacts the franchise industry.  (FULL ARTICLE)
 

NYC Ban on Employer use of Credit Information 
As of September 3, 2015, NYC employers will be prohibited from using or requesting the consumer credit history of an applicant or employee pursuant to Local Law 37. Under the new law, it will be considered an unlawful discriminatory practice to ask applicants or employees about their credit information, such as their credit score, missed payments, and collections. Any use of such credit information with regard to hiring, compensation, or the terms, conditions, or privileges of employment will also be considered an unlawful discriminatory practice. Employees and applicants who suffer credit discrimination will be protected by New York City Human Rights Law, which allows them to file a claim against the employer and seek compensatory and punitive damages, as well as discretionary costs and attorney's fees. Employers should be aware of this development and work with their counsel to ensure their employment practices are not in violation of this new law.  (FULL ARTICLE)

Trade Secrets 
Trade Secrets are the key to many business's success, especially in the absence of a patent or other forms of intellectual property protections in place. Proprietary information that entities exclusively know and use is what allows them to compete in their industries. When trade secrets become publicly known or known to a competitor, an entire business may be at stake. That is why any business that operates in reliance upon trade secrets must take specific precautions to limit the number of people who access such information and to place restrictions on those with whom it is shared. Requiring employees to agree not to disclose trade secrets and to follow certain protocols when accessing or using trade secrets is vital to a business's security. When a business shares its secrets with potential investors or partners, the interaction should be subject to a non-disclosure agreement. Security measures are the front line defense against the leaking of trade secrets, and imposing affirmative obligations not to disclose or use trade secrets gives businesses specific remedies against those who misappropriate their proprietary information. (FULL ARTICLE) 

Readers are encouraged to follow us on Twitter (@lloydpatelllp) and Facebook to receive updates on this and other issues throughout the month.

Workers Right to Unionize Gets Boost From National Labor Relations Board

Yogi Patel - Tuesday, September 08, 2015

 

Intro

The National Labor Relations Board (“NLRB”) recently issued a major decision making headlines everywhere that both advocates and opponents say greatly expands workers’ right to unionize. The decision, Browning-Ferris Indus., restated the standard for determining whether a joint-employer relationship exists where more than one entity exercises some degree of control over workers. In a joint-employer relationship, employees have more than one employer and can exercise their rights against both employers. Because workers only have the right to collectively bargain (unionize) with their employer, by expanding the definition of a joint-employer relationship, the NLRB expanded the rights of employees to unionize. Given the recent decision and other pending actions before the Board, there is much speculation as to the scope of the impact the Browning-Ferris restated rule will have.

What Exactly is a Joint-Employer Relationship?

In a joint-employer relationship, two or more entities that have a business relationship each exercise a certain degree of control over a set of employees such that they should each be considered their employer. A common example of a joint-employment relationship is where a temporary placement agency provides employers to an employer; under such circumstances, both the agency and the business where the employees are placed would be considered employers. Determining whether or not a joint-employer relationship exists does not rely one a single concrete definition, but rather requires analyzing several factors relating to the control and supervision of employees. Overall, the general idea is that while two business entities that are involved with one another may be separate, when they share or codetermine matters governing the essential terms and conditions of employment, they should both be considered employers. What the NLRB did in Browning-Ferris was alter the factors used in the joint-employer analysis such that they expanded the relationship’s definition.

So What Exactly Happened in Browning-Ferris?

Browning-Ferris Industries was the operator of a recycling plant. BFI maintained their own employees who were responsible for operating forklifts and other machinery within the plant, but they hired a separate company, Leadpoint, to provide workers to operate conveyor belts within the plant that sorted recycled materials. The Leadpoint workers also performed other tasks, such as cleaning the facility. Eventually, the union that represented the BFI workers tried to represent the Leadpoint workers as well. Since employers may only unionize against their employer, this raised the issue as to whether or not BFI should be considered the Leadpoint employees’ employer as well, thus creating a joint-employer relationship.

 

In its decision, the Board explained that the rapid growth of the employment placement services industry required that it revisit its previous standard for assessing whether or not a joint-employer relationship exists. The Board emphasized that it has the obligation to apply the law to the “complexities of industrial life,” and to adapt the law “to the changing patterns of industrial life,” and that given the record numbers of workers employed through temporary agencies and other placement services, the Board was compelled to restate the joint-employer standard to address its shortcomings.

Under the previous rule, a company like BFI who was not the primary employer would only be considered a joint employer if it exercised “direct and immediate” control over certain working conditions if the employees. Under the “new” rule, which advocates claim already existed prior to the 1980s, the Board will determine that two or more entities are joint employers if they:

are both employers within the meaning of the common law, and if they share or codetermine those matters governing the essential terms and conditions of employment. In evaluating the allocation and exercise of control in the workplace, we will consider the various ways in which joint employers may “share” control over terms and conditions of employment or “codetermine” them, as the Board and the courts have done in the past.


The Board retained an “inclusive” approach to defining the essential terms and conditions of employment, which contain, hiring, firing, discipline, supervision, direction, setting wages and hours, dictating the number of workers, controlling scheduling, seniority, and overtime, assigning work, and determining the manner and method of work performance. However, the Board expressly held that it would no longer require an entity to actually directly exercise control over workers to be considered a joint employer, but rather that the essential determination would be based upon whether the entity had the right to exercise such control, directly or indirectly. To put it more plainly, an entity that has the right to indirectly control the essential terms and conditions of employment of certain workers should be considered their joint employer.

In the Browning-Ferris case, Leadpoint had its own supervisors at the plant, managed its employees schedules, evaluated its employees’ work, had its own HR, made all hiring decisions, made discipline and determination decisions, and set pay rates. However, Leadpoint’s control was limited and/or influenced by BFI in that BFI set the job qualifications and criteria, required drug and skills tests, insisted on some discharges, set an indirect cap on pay by limiting the amount it would reimburse Leadpoint, and set the hours or operation of the plant and shift times. The Board found that because of the control BFI held over the Leadpoint employees, whether direct or indirect, authorized or not, BFI was a joint-employer under the restated rule.


Why This is Such a Big Deal

One of the biggest areas of business that pundits are speculating the Browning-Ferris decision will have the greatest impact is over the franchise-franchisee relationship. Prior to Browning-Ferris, a franchisor, such as McDonald’s, would not be considered the employer of each franchise’s employees because McDonald’s the corporation did not exercise direct and immediate control over the working conditions of the employees. Under the new rule, most analysts assert that McDonald’s would be considered the joint-employer of all of its franchises’ employees, thus granting the employees the right to collectively bargain with McDonald’s itself. Previously, franchise employees had no such right, and if they tried to form a union, it was perfectly legal for the parent corporation, such as McDonald’s, to have the franchise such down.


Generally, analysts see the Board’s ruling as an opening for employees across many industries to attempt to unionize where it was previously forbidden, which would expand the rights of workers everywhere to collectively bargain. Naturally, advocates see this ruling as a welcome expansion of workers’ rights and opponents argue that the ruling will be disastrous for business and destroy the franchise model altogether.


Conclusion

Perhaps the most poignant argument the Board put forth in defending its decision attacked the disparity that arises when an entity can retain a certain degree of control over workers without workers having any rights against the entity: “It is not the goal of joint-employer law to guarantee the freedom of employers to insulate themselves from their legal responsibility to workers, while maintaining control of the workplace.” Given the rise of employment placement agencies by businesses, the Board was concerned that far too many employees would be left powerless against entities that profited from their labor and exercised control over them, which, it argues, the National Labor Relations Act was put in place to prevent. While time will tell what the true impact of the decision will have, especially given that it will almost certainly be approved, the Board did sent a clear message to employers that it would no longer tolerate business who seek to reap the benefits of labor it controls without any corresponding obligations.


This article is not intended to be nor should it be construed as legal advice. As with any legal inquiry, both employees and employers should seek the advice of council before taking any action pursuant to the information discussed above.

New York City Bans Credit Checks By Employers

Yogi Patel - Tuesday, September 08, 2015

On May 6, 2015, New York City Mayor Bill de Blasio signed into law a general ban on employers from using or requesting the credit history of their employees or prospective employees. Local Law 37, which goes into effect September 3, 2015 as part of New York City Human Rights Law, specifically prohibits most employers with four or more employees from requesting or using an applicant or employees credit history for employment purposes. Employers may also not use the credit history of an applicant or employee to discriminate against her when it comes to hiring, compensation, or the terms, conditions, or privileges of employment. There are several exceptions to the prohibition, but employees and applicants should know their rights, and employers should take care to know their obligations as promulgated by the new law.

Local Law 37 adds language to Sections 8-102 and 8-107 of the administrative code of the city of New York, which incorporates the new prohibitions into New York City Human Rights Law and grants victims of credit discrimination its protections. Local Law 37 states:

[I]t shall be an unlawful discriminatory practice for an employer, labor organization, employment agency, or agent thereof to request or use for employment purposes the consumer credit history of an applicant for employment or employee, or otherwise discriminate against an applicant or employee with regard to hiring, compensation, or the terms, conditions or privileges of employment based on the consumer credit history of the applicant or employee.

The law defines “consumer credit history” to include “an individual’s credit worthiness, credit standing, credit capacity, or payment history, as indicated by (a) a consumer credit report; (b) credit score; or (c) information an employer obtains directly from the individual” regarding credit accounts, missed payments, collections, bankruptcies, judgments, or liens. Any written report or other communication made by a consumer-reporting agency bearing consumer credit information is considered a consumer credit report under the new law.

Exceptions to the new ban include:

-Jobs in the securities industry;

-Police and peace officers;

-Jobs that require a federal or state security clearance;

-Non-clerical positions that have access to trade secrets, intelligence information, or national security information;

-Positions (i) with signing authority over third party funds or assets of $10,000 or more; or (ii) involving a fiduciary responsibility to the employer with the authority to enter financial agreements valued at $10,000 or more;

-Employees required to modify digital security systems established to prevent the unauthorized use of the employer’s or client’s networks or databases.

-Requests for consumer credit information pursuant to a subpoena, court order, or law enforcement investigation.

What this all means, in effect, is that if an employer takes an adverse employment action against an applicant or an employee using or requesting the information protected by Local Law 37, then the applicant or employee would have the right to bring a complaint for discrimination against the employer under New York City Human Rights Law. An adverse employment action includes firing, reducing an employee’s pay, deciding to not hire someone, or otherwise discriminating against an employee or applicant because of his or her credit history. In a private action brought by an aggrieved party, he or she may recover compensatory and punitive damages, and upon prevailing and at the court’s discretion, costs and reasonable attorney’s fees.

Overall, employees and employers alike should seek to understand this new law, respectively to know their rights and to understand their obligations. Employers should work with counsel to review their hiring and other employment practices, including any forms they require applicants or employees to fill out to ensure they are in compliance before the effective date.

This article is not intended to be nor should it be construed as legal advice. Any employee who believes she has suffered a violation under this or any other law, or any employer seeking guidance should speak directly with an attorney.

Protecting Your Business Trade Secrets

Yogi Patel - Tuesday, September 08, 2015

Intro

Generally speaking, a trade secret is a valuable piece of information used by a business that is not known to the public. A trade secret can be a business plan, pricing model, or almost any other method or process with a proprietary value that is used and exclusively known by a business. While New York is one of the few states that has not adopted the Uniform Trade Secrets Act, its definition of a trade secret, which is taken from Section 757 of the Restatement of Torts is still quite broad: “A trade secret consists of a formula, process, device, or compilation which one uses in his business and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.”

Trade secrets are granted certain protections under the law, and while virtually anything can be considered a trade secret, once information becomes publicly known, it is fair game for anyone to use. That is why it is not only integral that business take necessary measures to protect their trade secrets on paper, but that they are also cautions as to whom they disclose their secrets and risk them becoming public.

Document Your Trade Secrets

As an initial measure, businesses should document information they wish to be classified as trade secrets in order to show that they view and treat the information as such. In documenting trade secrets, businesses should mark the information as confidential information and include a notice of confidentiality expressly stating that the information is protected and owned by the company, is not to be reproduced, and should not be disclosed outside the company or to unauthorized persons within the company unless expressly by the company.

Additionally, businesses should promulgate internal rules and procedures for their employees with regards to the accessing, protecting, and disclosing of company trade secrets. The business should create step-by-step processes, clear definitions of what is considered protected information, and require acknowledgement by employees that they understand them.

Finally, businesses should log any disclosures and uses of trade secrets. Tracking such disclosure and use can be vital for investigating any unauthorized disclosure of use in the future and holding the responsible party accountable.

While these measures are appropriate for documenting the status of information as trade secrets, they do not alone necessarily protect trades secrets from disclosure. Businesses should take additional steps to impose affirmative obligations on anyone who may access the trade secrets not to disclose them, and should diligently protect trade secrets from corporate espionage.

Contractual Protections

Under New York Law, the two most common means for protecting trade secrets from being disclosed by parties with who may access them are through
non-disclosure agreements and agreements not to compete.

Employers routinely require their employees to enter into contracts in which they agree not to compete with the employer for a specified period of time. While the enforceability of non-compete agreements can vary with the circumstances of employment, the need to protect trade secrets is a factor that weights heavily in favor of upholding a covenant not to compete. The reasoning applied by New York Courts, known as the inevitable disclosure doctrine, is that even though no inappropriate disclosure of a trade secret has occurred, a former employee should be prevented from working for a competitor under the theory that she will inevitably disclose the trade secrets of her former employer. Courts reach this conclusion where, among other factors, an employee would be unable to perform her job with the new employer without using her former employee’s trade secrets, the new employer is a competitor of the former employer, and the overall nature of the industry and the secrets themselves. Employers are strongly encouraged to have all employees who have access to their trade secrets to sign non-compete agreements.

In a non-disclosure agreement, a person or entity is agreeing not to reveal confidential information that another entity is sharing with them. Typically, an employer will require its employees to sign a non-disclosure agreement as a condition to their employment that prohibits the employees from disseminating trade secrets and other confidential information both while they are working for the employer and once their employment is terminated. Employers necessarily need to allow certain employees access to information that they wish to protect, and a non-disclosure agreement recognizes this reality and provides employers with express remedies, including an injunction, for instances where employees breach these agreements.

Another scenario in which a non-disclosure agreement is used is where a business is sharing a trade secret with another entity or person to discuss the prospect of entering into a joint venture, investment, or other business arrangement. An investor or potential partner would need to know what she is getting into before agreeing to anything, but the business has the need to protect its trade secrets, particularly where no subsequent relationship is created between the parties. A non-disclosure agreement allows an investor or other entity to discuss a business’s trade secrets for an express purpose and prohibits any future disclosure under the threat of substantive penalties and an injunction. While in most circumstances a non-disclosure agreement serves as an adequate deterrent, some unscrupulous actors may still decide to disclose trade secrets as a form of espionage or theft, which in turn renders the information public. This is why, in addition to having iron-clad agreements, businesses must perform due diligence on any party to whom they are considering disclosing a trade secret.

Due Diligence

Before disclosing any information to anyone, businesses should always look into anyone to whom they are potentially going to entrust with their proprietary information. While it may be the exception to the rule, there are unfortunately some individuals and entities who have no limits to what they will do to gain an advantage over the competition. Business should investigate whether or not a prospective party has ever been accused of stealing trade secrets in the past, has committed any other acts of dishonesty previously, and what his or her general reputation is in the industry.

Additionally, a business should limit the number of persons to whom the trade secrets are disclosed, especially with regards to non-employees and other competitors. It’s common sense that the more people there are that know something, the greater the chances are that it is disclosed. Even though a business may require all parties to each individually sign a non-disclosure agreement, you can never know who will violate its terms.

Remedies for Trade Secret Theft Under in New York

Under New York law, the cause of action against a person or entity that improperly uses or discloses a trade secret is misappropriation. Misappropriation is the improper use or disclosure of a trade secret that a party obtained through employment or other relationship in which he or she had a duty not to disclose such information. Misappropriation also includes the use or disclosure of trade secrets obtained through improper means, such as fraud or theft.

Pursuant to a claim for misappropriation, a business may receive what is known as injunctive relief in addition to damages (monetary compensation). An injunction is a court order prohibiting a party from further sharing a business’s trade secrets. Damages include the economic losses a business suffers as a result of the misappropriation and can include any profit the defendant made from the inappropriate disclosure. While punitive damages are available, they are rarely granted.

Conclusion

Businesses must do everything they can to prevent the misappropriation and publication of their trade secrets. Public disclosure can be devastating to a business’s livelihood, and although there are legal remedies for the improper use or disclosure of a businesses trade secrets, once they become public, they are no longer unique to the entity that owned them. Non-disclosure agreements, non-compete clauses, internal processes, and due diligence are all essential steps a business should take in protecting its secrets and minimizing the chance they are disclosed.

This article is not intended to be nor should be construed as legal advice. Businesses looking to protect trade secrets should seek the advice of counsel.

August 2015 Newsletter

Yogi Patel - Tuesday, August 04, 2015

Dear valued clients and supporters: This month's newsletter will focus on: (1) the EEOC’s declaration that workplace discrimination based on sexual orientation is illegal; (2) the New York State Wage Board's unanimous vote to raise the minimum wage for restaurant workers in the fast food industry to $15 an hour; and (3) the Second Circuit's decision in Glatt v. Fox Searchlight Pictures, Inc., providing valuable clarity on the question of whether interns are "employees" -- and therefore entitled to minimum wage and overtime pay under the Federal Fair Labor Standards Act and New York Labor Law.

 

Sexual Orientation and the Workplace
Title VII of the Civil Rights Act of 1964 is at the heart of Federal anti-discrimination law. It prohibits employers with at least fifteen employees from discriminating on the basis of race, color, religion, sex, or national origin. Sexual orientation discrimination is not expressly included on the list and several federal courts, both at the district court and appellate level, have previously held that the statute’s ban on sex discrimination did not encompass sexual orientation discrimination. But on July 15, 2015, the Equal Employment Opportunity Commission (EEOC) issued a ruling finding that sexual orientation discrimination is “associational discrimination on the basis of sex.” Thus, adverse actions taken by employer on account of an employees sexual orientation will now be considered illegal by the EEOC and LGBT employees will have an independent, stand-alone basis to lodge a discrimination complaint before the EEOC under Title VII. It is too early to know how courts will view this new development, and of course most employers are also governed by State and local laws that may already prohibit discrimination on the basis of sexual orientation.


Minimum Wage and Fast Food Industry Workers
The New York State Wage Board recently recommended raising the minimum wage for restaurant workers in the fast food industry to $15 an hour. In the event the Wage Order is accepted by the Commissioner in its current recommended form, the mandate would apply to all workers in fast-food restaurants that are part of chains with at least 30 outlets. More specifically, the change will apply to workers who cook, clean, serve customers, make deliveries, or perform routine maintenance work as part of their day-to-day duties. The proposed Wage Order, if implemented as is, will apply to all fast food restaurants associated with a chain of 30 or more outlets, irrespective of how many restaurants the individual employer owns. The proposal, once officially published, will then be followed by a 15-day public comment period. Comments will be accepted online and by mail. Based on those comments, the Commissioner may accept, reject or modify the Board's recommendations and file a Wage Order. The Wage Order must be filed within 45 days once the report is filed. The Order is then subject to an additional regulatory process thereafter. We will continue to monitor the situation and provide updates as the process progresses, but if you have specific questions about how this may affect you as an employee or an employer, please contact us.


Interns v. Employees
In Glatt v. Fox Searchlight Pictures, Inc., the action was brought by former production interns who worked on the Oscar-winning movie Black Swan, as well as a publicity intern at the company’s New York corporate office, all of whom were unpaid. The interns argued they should have been classified as employees and, thus, should have been compensated for their efforts. The law surrounding this issue has been unclear for several decades due to the guidance offered by the U.S. Department of Labor and conflicting interpretations by courts across the country, making it difficult for an employer to know how to comply. The Second Circuit, which covers New York, observed in Glatt that the question of an intern’s employment status is a highly individualized inquiry and not subject to a bright line rule. To assess whether interns are “trainees” under the Fair Labor Standards Act (“FLSA”) (and therefore “exempt” from overtime and minimum wage rules) or “employees" (and therefore entitled to the laws’ protections), the court adopted what it calls the “primary beneficiary” approach. Under the "primary beneficiary" test, there are at least seven independent factors that should be analyzed under the new approach to determine whether the position is truly an internship or an employment situation. Employers are advised to fully understand their obligations under Glatt prior to hiring an intern.


A more in-depth article on this issue, including the seven factors under the primary beneficiary approach will be posted here on our website shortly and readers are encouraged to follow us on Twitter (@lloydpatelllp) and Facebook to receive updates on this and other issues throughout the month.

July 2015 NEWSLETTER

Yogi Patel - Tuesday, June 30, 2015

Dear valued clients and supporters: This month's newsletter will focus on: (1) proposed changes to the overtime rules by the U.S. Department of Labor that could potentially extend overtime protection to 5 million white collar workers; (2) New York City's passage of the The Fair Chance Act impacting an employers ability to inquire about a job applicants criminal history prior to hiring and (3) a closer look at selling a company or buying back shares in the context of our continuing series of articles on start-up entrepreneurs.

Proposed changes to overtime rules

The U.S. Department of Labor announced today that it was proposing a rule change that would effectively make millions of white collar employees who are currently considered "exempt" from over-time - eligible for overtime. One of the many factors that currently determines whether an employee is exempt or not from overtime is the total amount of wages earned annually. Today, certain professionals and managers are exempt from overtime if they make more than $23,660 a year and perform specific duties. The proposed rule would now set the overtime threshold to $50,440.00. Additionally, the proposed rule would simplify the identification of nonexempt employees, thus making the executive, administrative and professional employee exemption easier for employers and workers to understand and apply. Both employers and employees are advised to consider the implications of these changes in the event the rule is adopted and implemented as proposed.

The Fair Chance Act

New York City's newly passed Fair Chance Act (the “Act”), which will go into effect on October 27, 2015, prohibits employers from inquiring about a job applicant’s criminal history, including arrest and conviction records, during interviews before a conditional offer of employment is made. In addition, the Act prohibits employers from conducting pre-offer searches of public records and certain consumer reports that contain criminal conviction information. Once a job applicant is given a conditional offer of employment, the employer can do a background check and ask for information about convictions that may be relevant to the job. For more information about the Act, please visit our article here.

Start-up ventures and selling or expanding the business

We invite you to read our last article in the three-part series of articles on start-up ventures and entrepreneurs now posted here. The last article focuses on decisions an entrepreneur who has successfully grown a company and is looking to retire, cash-out, or start a new venture may make. The entrepreneur who is looking to sell should consideration whether the sale should be structured as a stock sale or an asset sale. There are tax and control ramifications that the seller must consider, depending on what they decide to do. The entrepreneur may also decide to buy back the shares that are were issued during the capital raising stage and consolidate control before selling to a third party or simply holding on to the company for a future sale after the buy-back occurs. We invite you to read the full series of articles: Attracting Investment for the Amateur Entrepreneur Part IAttracting Investment for the Amateur Entrepreneur Part II: Additional Capital, and Attracting Investment for the Amateur Entrepreneur Part III: Selling the Business or Buying Back Stock

The New York City Fair Chance Act Requires Employers to More Carefully Evaluate Applicants With Criminal Records

Yogi Patel - Monday, June 29, 2015

The newly passed Fair Chance Act (the “Act”) will prohibit employers from inquiring about a job applicant’s criminal history, including arrest and conviction records, during interviews before a conditional offer of employment is made. In addition, the Act, which Mayor Diblasio is expected to sign shortly, will ban employers from conducting pre-offer searches of public records and certain consumer reports that contain criminal conviction information. Once a job applicant is given a conditional offer of employment, the employer can do a background check and ask for information about convictions that may be relevant to the job. 

The reasoning behind proponents of the Fair Chance Act is simple: job applicants should not be automatically screened out of the hiring process based solely on past mistakes before they’ve had an opportunity to prove their qualifications for the position they seek.  Under the Fair Chance Act, employers will now be required to evaluate these applicants’ fitness for the job, just like any other applicant, instead of screening them out before they’ve even had a chance. The Fair Chance Act passed the New York City Council by a vote of 45-5-1.

New York State law already limits when employers can inquire about or make employment decisions based on past arrests that never led to any conviction. The law also already requires employers with four or more employees to do a careful analysis of any applicant with a criminal record before they rule out the applicant on that basis. Employers unfamiliar with those restrictions should seek legal guidance to develop a consistent procedure and policy for handling applications by individuals with criminal histories. 

Let’s be clear: the Fair Chance Act is not a requirement that employers hire individuals with criminal convictions and does not change existing law; it simply requires them to judge these applicants on their merits before considering their prior convictions. 

The Fair Chance Act takes the criminal record question off the table until a conditional offer of employment is made, leveling the playing field for job seekers with criminal histories and ensuring that all New Yorkers have a “fair chance” at employment, especially if the applicant’s past conviction really has no bearing on the job they are applying for. The Fair Chance Act does not apply to employers with less than four employees. However independent contractors who are not employees are considered persons in the employ of the employer if they are hired to carry out work in furtherance of the employer’s business enterprise, so small businesses that use independent contractors should still take note.

After making a conditional offer of employment, the employer must notify the job applicant that a background inquiry will be performed; this is a new requirement. If the applicant has a prior conviction, the employer must first perform the careful analysis required under previously existing law—evaluating the particular crime the applicant was convicted of and its potential relationship with the position and the job—and then provide a copy of its inquiry and analysis to the applicant. If, after receiving information regarding the applicant’s record, the employer no longer wants to employ the applicant, the employer must explain why and provide a copy of the record it relied on in making that decision. The position must then be held open for three days so the employer and applicant can engage in an interactive discussion, considering the employer’s requirements and the applicant’s evidence of good conduct, if the applicant so chooses. This time also allows the applicant to question any inaccuracies on the record, which is not as uncommon as one might assume.

Failure to adhere to the strict notice procedure will result in an automatic presumption that the employer has engaged in unlawful discrimination based upon the applicant’s criminal history in any future litigation. The presumption can only be overcome by “clear and convincing” evidence presented by the employer. Of course, this means that like all employment decisions, employers must keep very good records of their decision-making process and have a solid and consistent policy and procedure in place that is closely followed.

Other laws currently in place still require background checks and prevent people with certain serious convictions from working in daycares and as home health aides, among other positions. The Fair Chance Act does not affect these jobs or change the background check requirements. These employers are allowed to tell applicants that the jobs are subject to a background check. Employers that are required by law to conduct background checks and exclude people with specific convictions may still do so. Employers may still conduct criminal background checks and deny employment to workers with conviction histories that are directly related to the job or pose an unreasonable risk.

The attorneys at Lloyd Patel LLP are available to help employers develop or modify their employment manuals and policies to comply with the law and to consult with employees who believe they have been the victim of unlawful discrimination. Contact us at info@lloydpatel.com or (212) 729-4266.


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