Common Employment Law Mistakes

for Illinois Employers and

How to Avoid Them

E. Jason Tremblay

(312) 876-6676

ejtremblay@arnstein.com

This Evening’s Topics

I. FLSA Compliance Tips and

Strategies

II. Independent Contractor v.

Employee

III. Protecting Your Trade Secrets and

Competitive Advantage

Are You Classifying

Your Employees Correctly?

FLSA Compliance Tips and Strategies

Agenda

I. Introduction to the FLSA

II. What Does the FLSA Require?

III. Who Is Exempt From Overtime?

IV. Hot FLSA Topics

V. Take Away Strategies & Tips

I. Introduction to the FLSA

(History Lesson)

Enacted in 1938, the FLSA

established minimum wage and

overtime standards for a large

segment of the US workforce.

Department of Labor’s Wage &

Hour Division was created to

enforce the FLSA.

Largely unchanged since 1938.

(Coverage Under the FLSA)

All employers that engage

in interstate commerce or

in the production of goods

for interstate commerce.

Only employers who are

exempt are those small

businesses not engaged in

interstate commerce and

who have an annual gross

revenue under $500,000.

(Why Plaintiffs’ Attorneys Love

Wage and Hour Lawsuit)

Payout is extremely large.

Average federal class action

settlement is $23.5 million.

Attorney’s fees are available.

Some of the regular burdens of

proof are shifted to the

employer.

Individual liability.

(Government Is Getting Proactive Too)

Bridge to Justice Program

DOL Wage & Hour Division received

18% budget increase in 2010.

New field investigators have been

hired (350).

New smartphone application that

helps employees track their time.

(Explosion of FLSA Cases)

FLSA is now the most popular employment

collective action.

FLSA litigation doubled from 2004 to 2007

and becoming more pervasive.

Record # of FLSA suits filed in 2011 (7,064)

DOL estimates that 80% of employers are

out of FLSA compliance.

One of the states with the largest growth in

wage and hour litigation is Illinois.

II. What Does the FLSA

Require?

1. Exempt or non-exempt?

2. Accurately and fairly capture and

record the hours worked by non-

exempt employees.

3. Pay at least minimum wage for the

first 40 hours of work during a work

week.

Federal Minimum Wage = $7.25

Illinois Minimum Wage = $8.25

* 3rd highest in the country

4. Pay at least 1.5 a non-exempt

employee’s regular rate of pay for

hours worked in excess of 40 hours

per work week.

5. Regulates the minimum wage and

work hours for minors.

III. Who Is Exempt For Overtime?

Threshold Inquiry

Must be paid a salary of at least

$455/week (approximately $23,700

per year).

Must fall into recognized exemption.

Most Common FLSA Overtime

Exemptions

Executive

Administrative

Learned Professional

Computer Professional

Outside Sales

Specific Job Exemptions

1. Paid on “salary” basis of at least

$455/week.

2. Primary duty must be management. interviewing, selecting and training of

employees, setting and adjusting their rates

of pay and work hours, appraising work

productivity and disciplining employees, etc.

3. Must have 2 full-time direct report

employees.

4. Must have authority to hire, fire and

promote. Reference: WHD’s Fact Sheet #17B

(Executive Exemption)

1. Same “salary basis” pay.

2. Primary duty must be to perform office or

non-manual work directly related to the

management or business operations.

3. Use discretion and independent judgment regarding matters of significance.

Examples: labor relations/HR, finance directors, public relations, legal officers, insurance claims representative, etc.

Reference: WHD’s Fact Sheet #17C

(Administrative Exemption)

1. Same “salary basis” pay.

2. Employee’s work requires higher

education to perform the job and

must have academic training or

degree.

Examples: RNs, doctors, attorneys, accountants,

engineers, etc.

Reference: WHD’s Fact Sheet #17D

(Learned Professional Exemption)

1. Same “salary basis” pay.

2. Employee’s work requires invention,

imagination, originality, or talent in a

recognized artistic or creative

profession.

Reference: WHD’s Fact Sheet #17D

(Creative Professional Exemption)

Examples: actors, musicians,

composers, soloist, certain

painters, writers, cartoonists,

novelists, etc.

(Computer Professional Exemption)

1. Must be paid on “salary basis”

(or hourly rate of $27.63/hour).

2. Must be a systems analyst, programmer,

engineer or skilled worker whose primary

duties consist of:

• using systems analysis techniques and procedures to determine hardware, software or system functional specifications;

• designing, developing, documenting, analyzing, creating, testing or modifying computer systems or programs based on user or system design specifications;

• designing, documenting, testing, creating or modifying computer programs related to machine operating systems; or

• combination of these duties.

(Computer Professional Exemption)

General Rule of Thumb: The employee

must be writing code versus repairing

hardware or troubleshooting.

1. No salary threshold.

2. Primary duty is “making

sales” or obtaining

orders.

3. Customarily engaged

away from employer’s

place of business.

(Outside Sales Exemption)

Note: Any fixed site, whether home or office,

used as “headquarters” is considered one of

the employer’s place of business

(Who is Not Exempt No Matter What)

1. Manual laborers such as plumbers,

mechanics, carpenters.

2. Fire fighters, police and other first

responders.

3. Those paid hourly – not receiving a

salary.

4. Those receiving a salary below

$455/week.

IV. Hot FLSA Topics

Improper Deductions From Exempt

Salary.

– very limited situations where you can

dock an employee’s salary.

– absence for full day or more for

personal reasons other than illness or

disability.

– violation of major safety rule.

– absence for full day or more for

sickness in accordance with bona fide

plan, policy or practice.

Problems With After Hours Work.

– “work suffered or permitted to be

performed is work time.”

– be careful when issuing non-exempt

employees Blackberry or smartphones.

– “catching up” on emails at home can

be compensable.

“On Call” Time.

– “engaged to wait” (generally

compensable) vs. “waiting to be

engaged” (generally not compensable).

Example: on call every 3rd Saturday,

cannot drink, need to be within 10

minutes of work.

Record Keeping Requirements.

– 29 CFR § 516

– DOL Fact Sheet #21

Name and SSN

Address, including zip

Birth date, if < 19

Sex and occupation

Time and day when

workweek begins

Hours worked each day

Total Workweek hours

Regular hourly rate

Total daily or weekly straight-

time earnings

Total workweek overtime

earnings

Additions or deductions

Total wages paid each pay

period

Date of payment and pay

period covered by payment

V. Take Away

Strategies & Tips

Know and Pay Minimum Wage.

Pay Overtime.

Double Check Your Exempt vs. Non-

Exempt Classifications.

Do Not Rely on Titles for

Classification.

Duties, not Titles, Matter.

Ensure Time and Pay Records Are

Properly Kept.

Be Careful About Independent

Contractors.

Know Proper Deductions for Exempt

Employees.

Ensure You Follow State Wage and

Hour Laws.

Implement FLSA Safe Harbor Policies

and Procedures.

– prohibit improper deductions, off the clock

work and complaint procedures.

Require employees to certify that they

have been accurately paid

Require employees to obtain approval

before working overtime

Control “after hours” work by non-

exempt employees

If Ever In Doubt, Treat

Employee as Non-Exempt

(and call your attorney).

Independent Contractor v. Employee -

Why it Matters and What You Can Do

About It

Agenda

I. Why Is This Topic Important?

II. Benefits of Independent Contractors.

III. Drawbacks of Independent Contractors.

IV. What Is an Employee and Independent Contractor?

V. What Can You Do to Protect Your Company?

VI. Recent Legislation/Trends/IRS Guidance.

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I. Why Is This Topic Important?

“Few problems in the law have given greater variety of application and conflict in results than the cases arising in the borderland between what is clearly an employer-employee relationship, and what is clearly one of independent entrepreneurial dealing.”

NLRB v. Hearst Publications, 322 U.S. 111, 121 (1944).

39

Every employment law statute contains its own unique definition of the term “employee.”

State and federal agencies use different tests.

An individual who may qualify as an independent contractor under one test may, in fact, be deemed an employee under a different test.

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No “one size fits all” answer

Fact specific inquiry

Leave today with a better

understanding of how to identify the

issues and help determine worker’s

proper classification

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II. Benefits of Independent

Contractors.

Decreased FICA Contributions

No Workers’ Compensation Premiums

No Unemployment Insurance

Premiums

No FLSA Overtime Pay

No Requirement to Provide Employee

Benefits

Reduction of Training and Other

Administrative Costs 42

Expertise in Specific Area

Flexibility in Increasing and

Decreasing Workforce

No Liability Under Federal

Employment Laws (Title VII, ADA,

ADEA, FMLA, WARN Act, IRCA,

NLRA)

-Caveat: Still Do Not Allow Harassment

(Section 1983, 1985).

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III. Drawbacks of Independent

Contractors.

1. Loss of Control Over the Contractor.

Contractors generally set their own hours

Lack of uniformity in process

Not trained in a specific way

Potential restrictive covenant enforcement problems

2. Increased Liability for Injured Contractors.

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3. Significant Liability for Misclassification.

IRS can re-characterize the relationship and seek back federal taxes plus penalties

IDES can seek unemployment insurance compensation

Entitlement to insurance and other benefit plans (ERISA)

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4. Potential Loss of Intellectual Property.

Absent a written agreement, intellectual property created by the independent contractor belongs to the contractor, and not the employer.

5. Joint Employer Liability

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IV. What Is an Employee and

Independent Contractor?

Labels DO NOT Matter.

You can call a worker anything you

want, but if a company treats the

worker like an employee, the worker will

be deemed an employee.

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There are 4 primary tests used to determine whether a worker is an employee or independent contractor:

1. The Right to Control Test

2. Economic Reality Test

3. The Hybrid Test

4. 20-Factor IRS Test

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Right to Control Test

Standard common law test

traditionally used.

Emphasizes the importance of the

employer’s control over the worker.

Generally found to be rigid, so other

tests have been implemented largely

replacing the Right to Control Test.

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Economic Reality Test

This test is most often used to determine worker status for purposes of federal remedial statutes, like the FLSA, FMLA, Equal Pay Act, etc. There are many factors to consider in this test, none of which is dispositive or conclusive (totality of circumstances):

50

Economic Reality Test (cont’d)

1. Nature and degree of the alleged

employer’s control as to the manner in

which the work is to be performed.

2. The alleged employee’s opportunity for

profit or loss.

3. The alleged employee’s investment in

equipment or materials required for

his/her tasks.

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Economic Reality Test (cont’d)

4. Whether the services rendered are a

part of the employer’s regular

business.

5. Whether the services rendered require

a special skill.

6. The degree of permanency and

duration of the working relationship.

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Hybrid Test

Courts have also evaluated employment relationships in the context of Title VII and the ADEA using a hybrid test, basically a combination of the Right to Control test and the Economic Reality test.

53

IRS 20-Factor Test

For federal tax purposes, some

administrative agencies may

sometimes look to the 20 factors

originally generated by the IRS to

determine what kind of relationship

exists between employer and worker.

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IRS

The 20-Factor test which used to be

outlined in the CFR has been removed

and the IRS now focuses on 3 main

categories:

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IRS (cont’d)

1. Behavioral Control. Is there evidence that indicates whether the employer has the right to control or direct the worker in performing the responsibilities for which the worker was hired? Example: training given to worker,

instructions given to worker, hours and location of work set by employer, etc.

56

IRS (cont’d)

2. Financial Control. Is there evidence that would indicate that the employer has the right to direct and control the business aspects of the worker’s activities? Example: whether the worker has

other engagements, whether the worker incurs any personal expenses in the business operations, etc.

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IRS (cont’d)

3. Relationship of the Parties. Is there any evidence that would indicate how the parties view their relationship?

Example: whether the parties are free to terminate the relationship at will, the duration of the relationship, etc.

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V. What Can You Do To Protect

Your Company?

I have developed a Checklist – The

Tremblay Test – you can use at your

company to ascertain whether or not

you are on good footing to argue your

workers are independent contractors.

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Tremblay Test

• Does the worker provide services to the

public at large?

• Does worker have his or her own office?

• Does the worker advertise his or her

services in newspapers, yellow pages,

journals or other media?

• Does the worker maintain a separate

business bank account?

• Is the worker able to retain helpers and

assistants without the employer’s

approval?

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Tremblay Test (cont’d)

• Does the worker furnish his or her own

tools and equipment?

• Does the worker have certificate of

incorporation, partnership or other

business filings?

• Does the worker file his or her own federal

income tax schedules every year?

• Does the worker pay his or her own

workers’ compensation and/or provide a

waiver of workers’ compensation

coverage?

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Tremblay Test (cont’d)

• Has the worker made a significant

investment in the business, for example,

purchasing or leasing of a building or

office space?

• Does the worker hold any particular

license or other specific skills that the

company does not maintain?

• Is the worker performing special, unique

skills for the company?

• Does the company file and submit 1099

forms for the worker’s pay?

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Tremblay Test (cont’d)

• Does the worker get paid on a project

basis rather than on a hourly, weekly or

monthly basis?

• Does the worker invoice the company for

the services provided?

• Is the worker allowed to dictate the when,

where and how of the particular project?

• Does the worker generally set his or her

own hours?

• Is the worker allowed to work off the

company’s premises?

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Tremblay Test (cont’d)

• Is the worker allowed to work for more

than one company at a time?

• Is the worker insulated from being

terminated as long as he or she produces

the result under the contract’s

specifications?

• Does the worker have his or her own

business cards and marketing materials?

• Is the worker free from training by the

company?

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Tremblay Test (cont’d)

• Does the worker perform a function for the

company that other employees at the

company are unable to perform?

• Does the worker have his or her own

federal identification or IDES number?

• Is the employee not entitled to benefits

from the company?

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VI. Recent Legislation/Trends/IRS

Guidance

The U.S. Department of Labor has entered into agreements with the IRS, as well as some state agencies (including Illinois agencies), to share information regarding employers who have improperly classified employees.

66

DOL/IRS Information Sharing Agreement

The VCSP is intended to encourage employers who have misclassified workers, for a relatively small payment to the IRS, to reclassify those workers as employees for federal employment tax purposes.

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Voluntary Classification Settlement Program

Allows employers to avoid all but 10% of the past employment tax liability that they would have owed for prior years. The IRS will also not conduct employment tax audits of the companies for prior years with respect to the classification of the workers.

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Potential Problems with VCSP

• Reclassifying workers as employees raises

other issues, including state tax issues,

unemployment and workers’ compensation

tax issues and health and welfare benefit

plan issues.

• Must provide benefits and comply with

state and federal wage hour laws

• No amnesty for other laws, such as federal

or state overtime laws

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California “Job Killers” Act California law provides for fines on employers who misclassify workers as independent contractors, as well as provides joint and several liability for any person who “knowingly advises” an employer to misclassify a worker as an independent contractor. As a result, any company with workers located in California, especially those with workers that are classified as independent contractors, should be extremely careful as to how they classify those workers.

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Protecting Your Trade Secrets and

Competitive Advantage

Agenda

I. What Is a Trade Secret?

II. Importance of Restrictive Covenants.

III. How to Get the Most from Your

Restrictive Covenants.

IV. How to Protect Assets in Absence of

Restrictive Covenants.

V. Steps to Take When Employees Resign.

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I. What Is a Trade Secret?

Information that:

• Has economic value;

• Based on its secrecy (e.g., not publicly available); and

• Is protected by reasonable efforts.

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Not everything is a trade secret.

Illinois courts look at the following to determine existence of a trade secret: 1. Extent to which info is known outside the

business.

2. Extent to which info is known within business.

3. Extent of measures to guard secrecy of info.

4. Value of info to business and competitors.

5. Amount of effort or resources used to develop information.

6. Ease or difficulty with which info could be properly acquired or duplicated by others.

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Examples:

• Production/technical methods and processes

• Research and analysis

• Strategic plans

• Customer information

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II. Importance of Restrictive Covenants

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What are restrictive covenants?

Provisions that restrict an

employee’s conduct during and

after employment.

Three primary types:

• Covenants not to compete.

• Covenants not to solicit.

• Covenants not to disclose

confidential information.

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When are restrictive covenants enforceable?

To be valid, a restrictive covenant

must:

• Reasonably/narrowly tailored;

• Protect legitimate business interests; and

• Supported by adequate consideration.

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When are restrictive covenants reasonably tailored?

Geographic scope.

Temporal scope.

Prohibited activity.

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Case by case analysis.

Area should correspond with where

the employer conducts business.

Nationwide restrictions enforced.

Local restrictions not enforced.

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Geographic Scope

Fact specific.

Determined by amount of time to

develop relationship.

Generally, restrictions of 1-2 years

are enforced in Illinois.

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Temporal Scope

Activities must be limited and

specified.

• Restricting an employee from

working in any capacity for a

competitor would be invalid.

• Restricted activity should be

narrowly tailored to employee’s job

or similar duties.

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Prohibited Activity

What is a legitimate business interest?

Totality of facts and circumstances

Customer information and customer lists are generally held to be protectable interests.

A“near-permanent” relationship with customer with whom employee would not have had contact but for employment.

Employee acquired trade secrets or confidential information by virtue of employment.

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Adequate Consideration

All contracts, including restrictive covenants, must be supported by consideration.

Examples of adequate consideration:

• Part of initial offer of employment.

• Increase of pay, promotions, bonuses conditioned on execution of restrictive covenant.

• Continued employment in some states and under some circumstances.

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III. How Can Employers Get the Most from Their Restrictive Covenants

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First Things to Decide

Determine whether you need non-

solicitation, non-compete, non-

disclosure or all of them.

Ensure the covenant is enforceable

under state law.

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Bad Non-Compete

Employee agrees that, during his employment and for 3 years thereafter, whether termination is voluntary or involuntary, he will not become employed by any person or entity who competes with employer in the state of Illinois.

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Better Non-Solicitation

Employee agrees that, during her employment and for 18 months thereafter, she will not directly or indirectly solicit or accept business from any person that (1) was a customer of employer during the last year of employee’s employment with employer and (2) with whom employee had contact or about whom employee had confidential information during the last year of her employment.

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Other Suggestions

Secure restrictive covenant during

pre-hire negotiations.

Draft restrictive covenant with

enforcement in mind.

Venue & forum selection clauses.

Choice of law provision.

Savings clause.

Avoid arbitration.

Attorney fee & injunction provision.

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Other Suggestions

Take immediate action (“First-Filed”

Rule).

Employment agreement must be

executed by proper parties.

Do not materially breach employment

contract.

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IV. How to Protect Assets in Absence of Restrictive Covenants

91

Legal Theories to Protect Company Assets

Illinois Trade Secrets Act.

Tortious Interference with Prospective

Economic Advantage.

Employee’s Breach of Fiduciary Duty

of Loyalty.

Tortious Interference with Contract.

Tort of Unfair Competition.

Computer Fraud & Abuse Act.

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Internal Security Measures

Fine line between being too

protective and not protective enough.

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Internal Security Measures

What is necessary?

• Confidentiality/Non-Disclosure Agreement.

• Restrictive Covenants (and enforce them).

• Policies providing for monitoring of computers and other company assets.

• Intellectual Property Assignments/ Other Protections.

• Keep trade secrets under lock & key/limited disclosure.

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Other Internal Security Measures

Surveillance of employee email.

Monitoring employee’s

use of computers.

Security cameras.

Surveillance of telephone

calls and usage.

Installation of software on remote computers to wipe

data out, if necessary. 95

Practical Pointers

Draft provision in employee

handbook addressing trade secrets

and confidential information.

Have employee execute an

acknowledgement form.

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Practical Pointers (cont’d)

Limit access to trade secrets &

confidential information.

Tighten computer security.

Implement document handling

procedures.

Train company employees on security

measures.

Conduct annual trade

secret/confidential information audit.

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V. Steps to Take When Employees Resign

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Almost 60% of employees steal

company information when they leave.

Protective measures are needed before

and after employee departs.

Steps can be modified/reduced based

on company/industry/position.

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Practical Pointers

1. Ensure return of records and

property.

2. Discontinue remote electronic

access.

3. Discontinue local electronic access.

4. Escort from premises at termination.

5. Quarantine employee’s computer if

misconduct is suspected.

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Practical Pointers (cont’d)

6. Inform and transition employee’s

clients quickly.

7. Interview co-workers.

8. Pay final compensation.

9. Social media research.

10.Exit interview – remind employee of

obligations.

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E. JasonTremblay Arnstein & Lehr LLP

120 South Riverside Plaza Suite 1200

Chicago, Illinois 60606 Work: (312) 876-6676 Cell: (773) 710-3438

ejtremblay@arnstein.com

QUESTIONS?