Massachusetts SJC Strikes Down Employer’s Wage Deduction Policy

A recent decision by the Massachusetts Supreme Judicial Court holds that an employer may not deduct money from an employee’s paycheck to compensate it for damage the employee has done to its property without running afoul of the Massachusetts Wage Act, G.L. c. 149, § 148.

In Camara v. Attorney General (SJC-10693) (January 25, 2011) (slip opinion here), the Court was faced with the following facts: ABC Disposal Services, Inc. (ABC) provides waste collection and recycling services in the New Bedford, Massachusetts area. Its employees have occasionally caused damage to company trucks and to the personal property of others while driving their routes. In an effort to promote safety and to reduce the number of accidents caused by its employees, ABC established a policy by which employees who were determined to be at fault for causing damage were given the option of either accepting disciplinary action or agreeing to set off the cost of the damage against their wages. Under the policy, determination of an employee’s fault was made exclusively by the company and was not subject to appeal. For those employees who agreed to a setoff, the average amount was between $15 and $30 per paycheck.

Apparently, one or more employees weren’t too happy about the setoff policy because in early 2006 the Attorney General’s office showed up and conducted an audit of payroll deductions for the previous two years. The audit revealed that under its setoff policy, ABC had deducted more than $21,000 from the wages of 27 different employees during the two-year period. Finding that the setoff policy violated the Wage Act, the Attorney General issued a civil citation against ABC, requiring it to make restitution to the employees and pay a civil penalty of almost $9,500. ABC appealed the Attorney General’s finding to the Superior Court, where the judge ruled in ABC’s favor and invalidated the citation.

The SJC reversed the Superior Court. In ruling against ABC, the Court reiterated that the Wage Act – the purpose of which is to protect employees and their right to wages – requires prompt and full payment of wages due an employee. To advance its underlying purpose, the Act prohibits “special contracts” between an employer and an employee by which the employee agrees to accept less than the full amount of wages due. The Court agreed with the Attorney General’s position that under the Act, “regardless of an employee’s agreement, there can be no deduction of wages unless the employer can demonstrate, in relation to that employee, the existence of a valid attachment, assignment, or setoff ….” The Court found that ABC’s setoff policy constituted the type of “special contract” generally prohibited under the Act.

The Court then turned to the question of whether the wage deductions ABC took constituted a valid setoff . The Attorney General argued that valid setoffs “implicitly involve some form of due process through the court system, or occur at an employee’s direction and in the employee’s interests.” In finding that ABC’s deductions were not a valid setoff, the Court held that ABC failed to establish that any of the employees in question were legally liable for damages, or that ABC was legally required to make payments to third parties on behalf of the employees. The Court found that even though the employees agreed to the wage deductions, they did not owe ABC a “clear and established debt,” which is a prerequisite for a valid setoff. The Court was particularly troubled by the fact that ABC was the “sole arbiter” of whether an employee was liable for damage caused to a company truck or to a third party’s property. The Court held that such unilateral decisionmaking, without any appellate process, did not establish that the employees owed ABC a clear and established debt. Consequently, the Court struck down the setoff policy.

The Camara decision is another example of the wage and hour minefield that employers must navigate on a daily basis. Before implementing a policy or procedure that affects employee pay, employers are encouraged to consult with experienced employment counsel.


Supreme Court Upholds Third Party Retaliation Claims Under Title VII

In one of several employment-law decisions expected to be handed down this term, the United States Supreme Court on Monday issued its decision in Thompson v. North American Stainless, LP, 562 U.S. ___ (2011), upholding the right of third parties to bring retaliation claims under Title VII without actually engaging in protected activity. In a unanimous decision authored by Justice Scalia (Justice Kagan did not participate in the case), the Court held that it is unlawful for an employer to harm one employee in an effort to retaliate against another employee who engages in protected activity.

The plaintiff Eric Thompson and his fiancée Miriam Regalado both worked at the defendant, North American Stainless (NAS). Three weeks after NAS learned that Regalado had filed a sex discrimination complaint against it at the EEOC, it fired Thompson (ostensibly because of poor performance). Thompson, in turn, filed an action against NAS for retaliation. The trial court dismissed Thompson’s complaint on the ground that he had not engaged in any protected activity. The Sixth Circuit Court of Appeals eventually upheld the dismissal. Thompson then appealed to the Supreme Court.

The Supreme Court was faced with two questions. First, did Thompson’s firing constitute unlawful retaliation? Second, if it did, did he have a cause of action under Title VII? The Court answered both questions in the affirmative.

In answering the first question, the Court looked at the anti-retaliation provision of Title VII and concluded that it “prohibits any employer action that well might have dissuaded a reasonable worker from making or supporting a charge of discrimination.” The Court found “it obvious that a reasonable worker might be dissuaded from engaging in protected activity [e.g., pursuing a sex discrimination charge] if she knew that her fiance would be fired.” The Court acknowledged the company’s argument that allowing third party retaliation claims would lead to difficult “line-drawing problems concerning the types of relationships entitled to protection.” Must there be a spousal (or near-spousal) relationship, or does protection extend to those in a dating relationship, friends, or even coworkers? But the Court declined to “identify a fixed class of relationships for which third-party reprisals are unlawful.” It wrote, “Given the broad statutory text and the variety of workplace contexts in which retaliation may occur, Title VII’s anti-retaliation provision is simply not reducible to a comprehensive set of clear rules.” Accordingly, each case must be decided on its own set of facts. Under the facts presented, the Court concluded that Thompson’s firing constituted unlawful retaliation.

In deciding the second question – whether Thompson could sue NAS for retaliation under Title VII – the Court adopted a “zone of interests” standard. Under this standard, “a plaintiff may not sue unless he falls within the zone of interests sought to be protected by the statutory provision whose violation forms the legal basis for his complaint.” The Court concluded that Thompson fell with the zone of interests protected by Title VII. He was employed by NAS, and was, therefore, protected under Title VII from the company’s unlawful actions. Hurting him was the unlawful act by which NAS punished his fiancée for filing her sex discrimination charge. The Court, therefore, concluded that Thompson had standing to sue NAS.

In some respects, Thompson represents another arrow in a plaintiff’s quiver to be aimed at his or her employer under the right circumstances, But, as Justice Ginsburg pointed out in her concurring opinion (in which Justice Breyer joined), the EEOC already has long held that Title VII “prohibits retaliation against someone so closely related to or associated with the person exercising his or her statutory rights that it would discourage or prevent the person from pursuing those rights.” According to the EEOC Compliance Manual, “such retaliation can be challenged by both the individual who engaged in the protected activity and the relative, where both are employees.”

So, while Thompson will undoubtedly spark discussion within the employment-law bar, it doesn’t really break new ground. Nevertheless, employers must remain vigilant in ensuring that terminations and other disciplinary actions must be carried out for legitimate business reasons and not for some other unlawful purpose.


Massachusetts Noncompete Bill Re-Filed

A bill to codify, clarify, and modernize Massachusetts law regarding employee noncompete agreements was re-filed today in the Massachusetts legislature. The bill has several significant changes from the prior version.

Summary of the bill:

(1) The bill, if enacted, will not apply retroactively. Of course, lawyers seeking to help their clients avoid existing noncompete agreements will likely argue that the bill provides guidance that should be followed in interpreting existing agreements.

(2) The bill does not affect nondisclosure agreements, nonsolicitation agreements, anti-piracy agreements, other similar restrictive covenants, or noncompete agreements outside of the employment context (for example, in the context of the sale of a business). Such agreements are specifically exempted from the scope of the bill.

(3) The bill codifies current law, insofar as noncompete agreements may be enforced if, among other things, they are reasonable in duration, geographic reach, and scope of proscribed activities and necessary to protect the employer’s trade secrets, other confidential information, or goodwill. Similarly, courts may continue to reform noncompete agreements to make them enforceable and refuse to enforce such agreements in certain circumstances.

(4) The bill requires that noncompetes be in writing, signed by both parties, and, in most circumstances (i.e., if reasonably feasible), provided to the employee seven business days in advance of employment. If the agreement is required after employment starts, the employee must be provided with notice and “fair and reasonable” consideration (beyond just continued employment).

(5) The bill restricts noncompete agreements to one year, except in the case of garden leave clauses, which may be up to two years.

(6) The bill identifies certain restrictions that will be presumptively reasonable and therefore enforceable (if all other requirements are met).

(7) The bill requires payment of the employee’s legal fees under certain circumstances, primarily where the court does not enforce the agreement or where the employer acted in bad faith. The bill does, however, provide safe harbors for employers to avoid the prospect of having to pay the employee’s legal fees, specifically, where the noncompete is no more restrictive than the presumptively reasonable safe harbors set forth in the bill – or if the employer objectively reasonably tried to fit within the safe harbors. Similarly, an employer may receive its legal fees, but only if otherwise permitted by statute or contract, the agreement falls within the safe harbor, the noncompete was enforced, and the employee acted in bad faith.

(8) The bill rejects the inevitable disclosure doctrine (a doctrine by which a court can stop an employee from working for a competitor of the former employer even in the absence of a noncompetition agreement).

(9) The bill places limitations on forfeiture agreements (agreements that can otherwise be used as de facto noncompetition agreements).

Principal changes from the prior bill:

(1) The requirement that a noncompete be housed in a separate document has been eliminated.

(2) The salary threshold has been eliminated. Instead, courts must simply factor in the economic circumstances of, and economic impact on, the employee.

(3) Garden leave clauses have been added back in. Thus, if an employer needs a noncompete for more than one year, it may – at its option – use a garden leave clause, which can last for up to two years.

(4) The consideration for a mid-employment noncompete has been changed to simply that which is “fair and reasonable.” The presumption that 10 percent of the employee’s compensation is “reasonably adequate” (the old standard) has been eliminated.

(5) The circumstances in which an employer can avoid paying mandatory attorneys’ fees have been expanded to include when the employer objectively reasonably attempted (even if unsuccessfully) to fit within the applicable safe harbors.

(6) The rejection of the inevitable disclosure doctrine has been further clarified to ensure that employers can still protect themselves if an employee has disclosed, threatens to disclose, or is likely intentionally disclose the employer’s confidential information.

(7) The scope of restrictions placed on forfeiture agreements has been limited. Incentive stock option plans and similar plans will have fewer requirements placed on them.

Other information:

It’s important to note that the bill is just that, a bill and not law (yet).  Additional changes may be made in the future. The bill is the product of input reflecting many different points of view and strives to balance those needs in order to improve the state of the law as to all of those affected. The bill is not, nor is it intended to be, a substitute for proper drafting of a noncompete (or any other restrictive covenant, for that matter).

We will continue to provide close and timely coverage of the bill, so please feel free to do any or all of the following:

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NLRB Proposes New Rule Requiring Notice to Employees of Their NLRA Rights

In a December 21, 2010 press release, the National Labor Relations Board announced that it was proposing a new rule that would require most private-sector employers to notify employees of their rights under the National Labor Relations Act (NLRA). According to the Board, the new rule is necessary because “many employees protected by the NLRA are unaware of their rights under the statute. The intended effects of this action are to increase knowledge of the NLRA among employees, to better enable the exercise of rights under the statute, and to promote statutory compliance by employers and unions.”

The proposed rule requires that employers conspicuously post and maintain the notice wherever similar labor and employment-law notices are posted. The content and appearance of the notice is dictated by the rule. If a significant number of employees do not speak English, employers must post the notice in the language(s) the employees speak. If an employer customarily communicates with its employees electronically, it must also post the notice electronically. Employers would be required to email all employees with a link to the notice. The link must read, “Important Notice About Employee Rights to Organize and Bargain Collectively with Their Employers.”

Failure to post the notice will be treated as an unfair labor practice under the NLRA. The Board expects that most violations of the rule will stem from employers’ lack of awareness that the rule exists. It believes that most employers will comply when notified about it, at which point the matter would be closed without further action. But employers that knowingly fail to post the notice may find their failure used as evidence of unlawful motive in an unfair labor practice case involving other alleged violations of the NLRA. The Board may also sanction an employer that knowingly fails to post the notice by extending the six-month statute of limitations for filing a charge involving other unfair labor practice allegations against the employer.

Regardless of which side of the labor/management divide you’re on, it’s hard not to see this proposed rule as the Board’s blatant attempt to help increase union membership among private-sector workers. It’s no secret that union membership has been on a steady decline for many years. Since 1973, union membership in the private sector has dropped from 24.2% to 6.9%. (Source: Union Membership and Coverage Database.) With the Employee Free Choice Act dead in the water, the Board is attempting to achieve through rule-making what Congress failed to accomplish through the legislative process; namely, helping employees unionize. It’s impossible to draw any other conclusion, since the proposed rule conveniently ignores any reference to the corollary right in the NLRA of employees not to unionize. By proposing a rule that is so obviously pro-union, the Board has eschewed any semblance of neutrality in handling labor/management matters.

The end result of the rule will at best be limited to a flurry of inquiries from employees to employers about their rights under the NLRA. Management must be prepared to handle such inquiries in a manner that lawfully discourages further union activity. At worst, the new rule will result in increased union organizing activity throughout the private sector, forcing employers to expend money and resources on campaigns, elections, and litigating unfair labor practice charges in an attempt to remain union-free.

The period for commenting on the proposed rule closes on February 22, 2011. Interested parties – particularly employers wishing to remain union-free – are encouraged to submit comments critical of the proposed rule. Comments can be posted here.