Baltimore Business Journal Article on Non-compete Agreements (Subscription Required)

The Baltimore Business Journal recently published a pro-non-compete piece directed at small businesses.  No surprise there:  the BBJ is a business oriented publication.  The reporter, Jack Lambert, called me for the employee perspective on non-competes.  Here is the part of the interview that made it into the article:

When drafting non-compete contracts, employers should consider how great of a burden to put on their employees, said Jim Rubin, a principal of the Rubin Employment law Firm in Rockville. He said some businesses include jury waivers. Those are clauses that dictate where the case can be litigated. They also include requirements that employees pay the company's legal fees if they lose the case."All sorts of provisions are put in there that are really unfair," said Rubin, who represents employees in non-compete contract matters.

I wrote about unfair non-compete contract provisions in my last post.

What to look for (and avoid) in a Maryland Non-Compete Agreement

Employers often use their economic leverage to force one-sided non-compete agreements on employees.  Below is a list of the top 5 unfavorable contract terms I  look for when I review non-compete agreements.

1.    One-sided attorney fee-shifting.  In a normal breach of contract lawsuit, each side pays its own fees.  Employers often get around this rule by including in a non-compete agreement, a clause that states the employee will pay for the employer's attorneys fees if the employer is successful in enforcing the agreement.  

2.   Over-broad restrictions on working.  An Employer  can only enforce non-compete agreement against a narrow class of employees and only when it can state a legally protectable interest.   Employers nevertheless  often define competition so broadly that, if enforced, the employer could not work in an  entire industry (even if the employee is not competing).   

3. Liquidated damages.  It is often very difficult to prove damages when an employee is accused of violating a non-compete agreement.  Employers sometimes attempt do away with the necessity of proving actual damages by stating  that amount of liquidated damages is presumed.  A Maryland Court decision suggests that liquidated damages provision are  invalid in most situations involving non-compete agreements.   

4. Court Selection and Choice of Law.   Parties to a contact are generally allowed to choose the Court that will hear their dispute and the law that applies to those disputes.  Employers often use their leverage to pick the Court and the Law believed to be the most favorable to them.   

5.  Jury-Waivers and Arbitration Clauses.  In non-compete litigation, employers generally prefer to be in front of judges (not juries).  As such, employers often use their leverage to make employees waive their right to a jury or require that all disputes be resolved in arbitration (and not Court).

 Here are a few articles that discuss  ways to combat one-sided contract terms:

What to do if you are threatened with a non-compete lawsuit.

Maryland Non-Competes: Things to Consider Before You Sign One.

Q: Can you leverage your way out a Maryland Non-Compete? A: Maybe.

A Non-compete Success Story.

  

You May Not Be Within the Class of Employees That Can Be Covered by a Non-Compete Agreement.

  Maryland Employers often require employees to sign non-compete agreements as a condition of employment.  But just because you signed a non-compete agreement does not mean that it is enforceable as to you.  Only a narrow class of employee may lawfully be covered by such an agreement. 

  The case, Ecology Services, Inc. v. Clym Environmental Services, LLC, illustrates the point.  There, the Maryland Court of Special Appeal refused to enforce a non-compete agreement applied to “Radioactive Waste Specialists” and “Radioactive Waste Technicians.”  The Employer bringing the action could not prove that the employees possessed (a) any truly unique skills or (b) exploited any specialized personal contact at their new job. Truly unique skills are those that would make it difficult to find a substitute employee with the same skills.  Specialized personal contacts are generally limited to proprietary sales opportunities.

  In sum, an employer can only enforce non-compete agreement against a narrow class of employees and only when it can state a legally protectable interest. 

   See this post and contact an attorney if you are threatened with enforcement of a non-compete in Maryland.

Top Five Ways Employers Violate Maryland's Wage Laws

I am amazed at how creative employers can be when it comes to violating Maryland's wage laws. However, as my law practice continues to grow, several consistent wage violations continue to recur. In no particular order, here is what I see.

1. Employers fail to pay their non-exempt employees overtime when they work more than 40 hours in a week.
2. Employers misclassify their non-exempt employees as exempt from receiving overtime.
3. Employers misclassify their employees as independent contractors.
4. Employers fail to pay salespeople commissions in their pipeline when their employment terminates.
5. Employers fail to pay accrued vacation at termination.

A Non-Compete Success Story

I recently defended an individual salesperson accused of violating a non-compete agreement. (The individual, the companies involved, and the result are confidential.) What I believe played a major role in the favorable result was establishing who can and who cannot be subject to a non-compete in Maryland. Here are two paragraphs (slightly modified) from the papers in the case:

Because non-compete agreements by their nature conflict with the “natural and inherent” right of individuals to pursue their livelihoods and with the right of the “general public . . . to have the energy, industry, skill and talents of all individuals freely offered upon the market,” they are closely scrutinized and narrowly enforced by Maryland's courts . . .

Furthermore, to be enforceable a non-compete agreement must protect a legitimate interest. With regard to salespeople generally the only legitimate interest is preventing a former employee from using a list of unique customers. Non-competition agreements are not enforceable against a relatively unskilled worker who does not actually solicit his or her former employer’s customers. . .

Overtime Calculator

Calculating your overtime premium can be a pain. Now the U.S. Department of Labor has an overtime calculator on its website to help with your calculations. Are you owed overtime? Check the calculator to see. (Thanks to Michael Fox at Jottings by an Employer's Lawyer for the link)

Maryland Department of Labor to add Wage investigators

An employee who is owed wages from his or her employer can pursue an action to collect those wages under the Maryland Wage Payment and Collection Law. The employee has two options: (1) hire a private attorney to sue his or her former employer; (2) report the employer to the Maryland Department of Labor, Licensing and Regulation ("DLLR"), Employment Standards Division.

Under Governor Ehrlich, by 2006, the Employment Standards Division had zero investigators devoted to wage payment claims. (For this reason I was reluctant to send employees to the DLLR).

According to the new DLLR Secretary, Thomas Perez, the O'Malley administration added budget money to hire six investigators. As of the ariting of the article cited here, the Department had filled three positions.

Of note:

1. The investigators' starting salary is $24,000 per year.
2. O'Malley's transition teams suggested that Maryland hire 11 investigators.

Are You Really an Independent Contractor?

Monday is tax day. Is the individual responsible for payroll taxes or is the employer? Is the individual entitled to overtime for working more than 40 hours in a week. It may depend on whether the individual is an independent contractor or an employee. How can you tell?

One place to start is Maryland's unemployment law. That law provides a narrow (perhaps the narrowest) definition of an independent contractor. The law states an individual is an independent contractor if:

(1) the individual who performs the work is free from control and direction over
its performance both in fact and under the contract;

(2) the individual customarily is engaged in an independent business or occupation of the same nature as that involved in the work; and

(3) the work is: (i) outside of the usual course of business of the person for whom the work is performed; or (ii) performed outside of any place of business of the person for whom the work is performed. (emphasis added)

The Court of Appeals interpreted the statute in DLLR v. Fox. There the Court held that hygienists (and other professionals) were employed by the agency that placed them in temporary positions in the Baltimore area. Why? The hygienists were not "free from control" by the agency. The agency "controlled" the hygienists' placement and pay rate. (As a result the agency had to pay back unemployment tax premiums for hygienists).

Again, the Maryland unemployment law independent contractor test is one of the most restrictive. The IRS and common law tests are slightly different. But, if your employer controls your work and sets your pay you may well be an employee entitled to unemployment benefits.

Do you believe you have been misclassified as an independent contractor? Contact me.

Medex v. McCabe and Accrued Vacation

The Maryland Court of Appeals seminal wage payment and collection law decision is Medex v. McCabe. The rule of Medex is:

If an employee earns compensation he or she is entitled to it and an employer cannot arbitrarily require an employee to forfeit those wages.

The Court of Appeals reinforced Medex's holding in a severance case, Stevenson v. BB&T. The Court distinguished between severance an employee earns and severance an employer gives the employee for something other than his or her labor (such as in exchange for a covenant not to compete or in exchange for a waiver of claims). Earned severance is subject to the Wage Payment and Collection Law; unearned severance is not subject to the Wage Payment and Collection Law. (Coverage matters because the Wage Payment and Collection Law allows an employee to recover up to triple the amount owed and his or her attorney's fees.)

Is the law any different for vacation pay. I think not. Medex nearly says as much. The Court citing a series of out of state decisions comes to the conclusion:

[A]n employee’s right to compensation vests when the employee
does everything required to earn the wages

If an employer allows employee to accrue or earn vacation based the time they work such vacation "vests."

Note the idea of vesting vacation pay exists in other states, most notably California.

Non-Competes Are Only Enforceable if Directed at a Legally Protected Interest

Not all employees can be covered by non-compete agreements. For example, if you are an administrator with little contact with customers or your employer's secrets, a court is unlikely to enforce any non-compete you signed. Non-compete agreements generally can only be enforced if directed at a legally protectable interest. Maryland Courts have found there to be a only a few (perhaps only two) legally protectable interests. Foremost among those interests are an employer's relationship with its customers and an employer's trade secrets.

No access to customers or secrets = no non-compete.

The Maryland Court of Appeals summarized the concept of what is a protectable interest forty years ago in Silver v. Goldberger. The concepts stands to this day. The Court stated:

There is a line of cases which holds that restraint is justified if a part of the compensated services of the former employee consisted in the creation of the good will of customers and clients which is likely to follow the person of the former employee. And there is another line of cases which holds that restraint is not justified if the harm caused by service to another consists merely in the fact that the former employee becomes a more efficient competitor just as the former employer did through having a competent and efficient employee.

Maryland Non-Competes: Things to consider before you sign one.

Starting with the assumption that reasonable non-compete agreements are enforceable in Maryland, what should you do if your employer asks you to sign one? If possible, you should do the following:

1. Try to get out of signing the agreement in the first place.

2. Try to narrow the agreement's terms. Find out which competitors and geographic ares your employer really cares about. Limit the agreement's reach to those terms.

3. Suggest that what your employer really wants is a non-solicitation agreement, i.e., your promise not t0 raid the company of its key employees.

4. Demand compensation. If your employer wants you to get out the industry for a period, your employer should pay for it.

5. Hire a lawyer to review your agreement and meet with you before signing away your right to a livelihood. Employers get legal advice -- so should you. Employers often put highly unfavorable terms -- such as attorney-fee shifting provisions -- in non compete agreements. Consult counsel to know your rights.