Michael C. Sullivan, Editor-in-Chief
ICE I-9 Audits: Are You and
Your Clients Prepared?
By Kimberley Best Robidoux
Introduction
The United States Department of Homeland Security’s Immigration and Customs Enforcement’s (‘‘ICE’’) Homeland Security Investigations (‘‘HSI’’) has increased its auditing of employers to review their Form I-9 Employment Verification compliance within the last few years.1Cracking down on the employment of undocumented workers through audits of employers has been a priority for the Obama Administration.2ICE has advised that more audits are to be expected in the coming months. An ICE audit starts with a knock on the door by an HSI agent and/or auditor who are visiting the company to serve the Notice of Inspection (‘‘NOI’’). As of the writing of this advisory, statistics for Fiscal Year 2013 have not been released, but will likely be similar to or greater than those for Fiscal Year 2012. For FY 2012, ICE released the following ‘‘accomplishments’’:
HSI made 520 criminal arrests tied to worksite enforcement investigations.
Of the individuals criminally arrested, 240 were owners, managers, supervisors or human resources employees. They face charges such as harboring or knowingly hiring illegal aliens. The remaining workers who were criminally arrested face charges such as aggravated felony identity theft and Social Security fraud. Inside This Issue
ICE I-9 Audits: Are You and Your Clients Prepared?
KIMBERLEYBESTROBIDOUX...117
Nationwide ‘‘Ban the Box’’ Trend Comes to a City Near You: San Francisco Adopts Broad Prohibitions on Criminal History Inquiries CAROLYNRASHBY& JOCELYNCHAN...126
Covenants Not to Compete With Independent Contractors May Not Be Enforceable Under California Law TYLERM. PAETKAU...131
Supreme Court Enforces Limitations Period Established by ERISA Plan N. PETERLAREAU...137
CASE NOTES...141
Disability Retirement Benefits...141
Exhaustion of Administrative Remedies...142
Federal Preemption...143
Family and Medical Leave Act (FMLA)....144
Occupational Safety...145
Reimbursement For Emergency Services...146
Retirement Benefits...147
Unemployment Compensation Benefits....150
Vicarious Liability...151
Whistleblowing...152
CALENDAR OF EVENTS...154
EDITORIAL BOARD AND AUTHOR CONTACT INFORMATION... 156
1
Doris Meissner et al., Immigration Enforcement in the
United States: The Rise of a Formidable Machinery, Migra-tion Policy Institute (Jan. 2013) (‘‘MPI Report’’), at 6.
2
MPI Report,supranote 1, at 82; Amy Sherman,
Truth-O-Meterä, Obama Holds Record for Cracking Down on
Em-ployers Who Hire Undocumented Workers,Says Wasserman Schultz, MIAMIHERALD(July 3, 2013).
EDITORIAL BOARD
Michael C. Sullivan, Editor-in-Chief Matthew Jedreski, Executive Editor Deborah J. Tibbetts, Associate Editor Paul, Plevin, Sullivan & Connaughton LLP
San Diego Ray Bertrand Paul Hastings LLP
San Diego Nicole A. Diller Morgan, Lewis & Bockius LLP
San Francisco Barbara A. Fitzgerald Morgan, Lewis & Bockius LLP
Los Angeles Joshua Henderson Seyfarth Shaw LLP
San Francisco Lynne C. Hermle Orrick, Herrington & Sutcliffe LLP
Menlo Park Alan Levins Littler Mendelson, P.C.
San Francisco Tyler M. Paetkau Hartnett, Smith & Paetkau
Redwood City William B. Sailer QUALCOMM Incorporated
San Diego Charles D. Sakai Renne, Sloan, Holtzman & Sakai
San Francisco Arthur F. Silbergeld Norton Rose Fulbright LLP
Los Angeles Walter Stella Miller Law Group
San Francisco Peder J. Thoreen Altshuler Berzon LLP
San Francisco Bill Whelan
Solomon Ward Seidenwurm & Smith, LLP San Diego
M. Kirby Wilcox Paul Hastings LLP San Francisco
A NOTE ON CITATION: The correct citation form for this publication is: 2014 Bender’s Calif. Lab. & Empl. Bull. 117 (April 2014).
EBOOK ISBN 978-0-3271-6747-1
REPORTERS Michael J. Etchepare
Paul, Plevin, Sullivan & Connaughton LLP San Diego April Love Littler Mendelson, P.C. Houston Brit K. Seifert Paul Hastings LLP San Diego COLUMNISTS Brian M. Ragen Mitchell Silberberg & Knupp LLP
Los Angeles Phyllis W. Cheng
Director, Dept. of Fair Employment and Housing
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HSI served 3,004 NOIs and 495 Final Orders, which issued $12,475,575.00 in administrative fines.
ICE debarred 376 business and individuals for administrative and criminal violations.
HSI conducted 2,421 IMAGE (i.e., ICE Mutual Agreement Between Government and Employ-ers) outreach presentations to 15,906 employers.3 ICE emphasizes that HSI investigations are a result of leads and tips gained from multiple sources, and that HSI prioritizes the investigations based on critical in-frastructure and key resources.4
The NOI is just the beginning of the I-9 audit process. It provides an employer with three days to collect its I-9 forms as well as any additional documentation req-uested by ICE/HSI in the administrative subpoena. The employer is required to turn these documents over to ICE/HSI for inspection. Thus begins a journey that could result in massive fines and potential criminal prosecution. Employers, and the attorneys who repre-sent them, need to be even more vigilant and informed about workplace compliance issues, especially with regard to penalties for I-9 violations, as well as discri-minatory practices. So, what should an employer do to make it through this journey as unscathed as possible?
Preparing for a Potential I-9 Audit
In preparation for potential audits, counsel should advise employers to keep the following in mind:
1. Do not waive your right to the three day
time period provided to collect the requested
documentation. It is in the company’s interest to utilize those three days to ensure that all documentation is in order. If a company does not have an attorney to assist with the I-9 process, now may be a good time to enlist the services of an attorney familiar with the I-9
audit process. An attorney experienced in this area can negotiate with the HSI agent on behalf of the company to attempt to obtain more time to respond to the NOI, if necessary. Extensions are not always granted as it depends on the specific agent/auditor, the location of the audit, and the reason for the extension.
2. Have a plan in place to handle service of
process. Many of these NOIs are accompanied
by a list of required documents or an adminis-trative subpoena. Acceptance of the NOI should be treated as any other service of process and, as such, it is advisable for employers and their counsel to discuss the process, especially given that there are only three days to respond to the NOI. It is important that the procedure developed by the employer with its counsel include notification to the employees at the front desk or reception area of the steps they should take if an HSI agent/auditor arrives to serve the company with an audit notice. Only a designated company representative should meet with the agent/auditor to accept the NOI. This representative should be the only one to answer questions asked by HSI, as information provided during service of process could very likely come up during the audit, and the employer will be held responsible for the information provided. The employer should never turn over the I-9s or any other documen-tation at the time the NOI is served, even if the agent/auditor asks for such. All documentation should be provided at the later date with the I-9 forms. An HSI agent/auditor is not the com-pany’s friend, no matter how pleasant they are when serving the NOI. In fact, agents/ auditors have been known to obtain information adverse to the employer during the course of a friendly chat.
3. Make sure that the company has all of its I-9s
available and accessible. If the I-9 forms are
not already organized and centrally located, it is recommended that this be a priority for the company prior to receiving an NOI because it is easier to gather the documentation before the
ICE I-9 Audits: Are You and Your Clients Prepared?
By Kimberley Best Robidoux
(Continued from page 117)
3
ICE HSI Fact Sheet:Worksite Enforcement(‘‘HSI
Fact-sheet’’), available at www.ice.gov/news/library/factsheets/
worksite.htm.
4
three-day clock starts ticking. The company should have I-9s in two separate binders – one for current employees and one for terminated employees, preferably arranged alphabetically by last name. I-9s (and accompanying docu-ments if the company copies identity and em-ployment authorization documents presented by employees in the I-9 process) should not be maintained in employee personnel files or in storage.
4. The company should ensure that it has a valid
I-9 form on file for every employee hired after
November 6, 1986. Prior to the issuance of an
NOI, it is a good practice to remind employers to ensure that they have I-9 forms completed for all of their employees. The best way to ensure this is to compare the list of employees from the current payroll list against the I-9 forms on file with the company. If any I-9s for employees hired after November 6, 1986 are missing, the company should discuss this with an attorney experienced with the I-9 process so as to obtain legal guidance on how to properly address the situation. In most cases, a new I-9 form will need to be completed for the em-ployee. Depending on how many I-9 forms may be missing for current employees, a strategy may need to be developed to notify the employees of the employer’s planned actions, especially if the employees are represented by a union.
5. A company should not purge any documents
once an NOI is issued or if the company is
currently working with ICE, United States Citi-zenship and Immigration Services (‘‘USCIS’’), or any government agency on any type of audit. However, if an NOI has not been issued and no official government audits are underway, the company may be eligible to purge some older I-9 forms for terminated employees. Remind employers that they can neverpurge I-9s for current employees. If a company wishes to purge I-9 files of terminated employees, the employer must systematically review each of the I-9s of the terminated employees and deter-mine when the documentation may be purged. The regulations provide that an employer is required to maintain the I-9s of terminated employees for three years from the date of hire or one year from the date of termination, which-ever is the later date. The USCIS’ M-274 Handbook for Employers includes a ‘‘purging worksheet’’ that is helpful in ensuring that an
I-9 is scheduled to be purged on the appropriate date, and not sooner.5
6. An employer has the right to assistance of legal
counselin an audit. Prudent employers exercise
this right and retain an attorney familiar with the I-9 audit process.
Mechanics and Practice Pointers of an ICE I-9 Audit Section 274A(b) of the Immigration and Nationality Act (‘‘INA’’)6requires employers to verify the identity and employment eligibility of all individuals hired in the United States after November 6, 1986. The Code of Federal Regulations7 designates the Employment Eligibility Verification Form I-9 as the way for em-ployers to document this required verification. The law requires employers to maintain for inspection original I-9 forms for all current employees and for terminated employees for only a specified period of time as noted above.
The following describes the typical I-9 audit process by HSI:
1. I-9 audits by HSI, for the most part, have been unannounced. The visit by the HSI agent/auditor may occur at the employer’s principal place of business and/or any other worksite locations in the United States. The service of a NOI by an HSI agent commences the administrative inspection process and compels an employer to produce its I-9 forms. The NOI will notify the employer that it has three business days to present the I-9 Forms and, often, HSI will request that the employer produce certain supporting documentation, such as a copy of the payroll, a list of current employees, Articles of Incorporation, business licenses, and ‘‘Social Security No Match Letters.’’ The documents required may vary by location of the HSI office, as well as by individual agent/auditor. 2. The company should have a policy/plan in
place to direct the front office/receptionist to contact a designated company representative from legal, human resources or operations (there should also be a designated backup rep-resentative) to meet with the HSI agent when he/she presents the NOI. It is important to note
5
U.S. Citizenship and Immigration Services, Handbook
for Employers, M-274 (USCIS) (Apr. 30, 2013), at 27, avail-able atwww.uscis.gov.
6
8 U.S.C. § 1324a(b).
7
that the HSI agent will always have another HSI employee with him/her – usually the I-9 auditor. The company representative should request that the HSI agent/auditor show his/her govern-ment credentials and provide a business card if his/her name and contact information are not provided on the NOI. The company representa-tive should NEVER waive the three day notice. Moreover, the company representative should not disclose any information about the com-pany’s I-9 forms and/or processes. Any dis-cussion with the HSI agent/auditor should be kept to a minimum. The NOI will be addressed to a specific entity and, in many instances, will not be addressed to the correct legal name of the company, but rather to the ‘‘common’’ name or the name under which the company is doing business (‘‘dba’’). The company’s attorney should address this with the agent/ auditor after the NOI is received. If a company has multiple worksites, the NOI may or may not list all worksites. It is advisable not to mention multiple sites at the time that the NOI is deliv-ered, as it will be a strategic matter to be discussed with the company’s attorney – who will generally try to limit to scope of the NOI and subpoena, thereby keeping the potential fines to a minimum. It is also advisable that the company representative not speak with the HSI agent/auditor without a witness present. The company representative should review the NOI, sign the Certificate of Service and Ac-knowledgement of Receipt and then contact the company’s attorney immediately.
3. The NOI should be reviewed with the company’s counsel, and a strategy for responding developed quickly in order to respond to the NOI in a timely fashion. HSI will not recognize an attorney un-less and until a Notice of Entry of Appearance as Attorney (Form G-28) signed by the company representative and the attorney has been submitted to the HSI agent/auditor. The attorney will need to forward this Form G-28 to the HSI agent/auditor, along with any request for an extension and/or clarification of requests in the NOI, list of documents and/or subpoena. The submission of the Form G-28 and contact with the agent/auditor may be conducted via e-mail. 4. The company should collect all of its I-9 forms
and the supporting documentation requested in the NOI list of documents and/or subpoena for review, including a current payroll list as of the date of receipt of the NOI. The company, in
conjunction with its counsel, should ensure that there is a completed I-9 form for every current employee – hired after November 6, 1986 – listed on the payroll. If it is unclear what is being asked with respect to certain documents, it is essential to obtain clarification from the HSI agent/auditor as the agent/auditor could argue that the employer was put on notice, and refuse to issue a second request for documentation. 5. All I-9 forms should be reviewed for accuracy,
and any correctable defects fixed appropriately, in coordination with counsel, prior to turning the documentation over to HSI. It is important to note that some HSI offices do not permit any corrections to be made after service of the NOI, so it is imperative that counsel confirm local HSI practices before advising a client to make any corrections to the I-9 forms. Any correc-tions must be clearly visible by using different color ink than that used to initially complete the I-9 form, and all corrections must be initi-aled and dated by the person making the changes/edits so that it is clear when the correc-tions were done. Employers should be reminded that only the employee can make changes to Section 1, and only a company representative may make corrections to Sections 2 and 3. 6. All supporting documentation should be
re-viewed and discussed with counsel to ensure that accurate information is provided to HSI in response to the NOI. Again, if it is unclear what is being requested in the NOI, the company’s attorney should seek clarification from the HSI agent/auditor.
7. The NOI does not explain that the audit takes place at the HSI office and not at the company site, which surprises many employers and less experienced counsel. Because the I-9 forms and documentation is retained by HSI – poten-tially for several months – it is extremely
important that the company retain copies of everything provided to HSI. That includes all I-9 forms and supporting documentation that will be turned over to HSI.
8. At the time of the inspection of the I-9 forms, the HSI agent/auditor may perform a cursory review of the original forms I-9 and supporting documentation at the company prior to re-moving such documentation from the com-pany’s premises. Alternatively, counsel may ask if he/she can bring the documents to the HSI office or have the HSI agent/auditor
pick up the documentation from counsel’s office. The HSI agent/auditor will count the I-9 forms and issue a receipt indicating the number of I-9 forms taken for inspection. It is extremely important to obtain this receipt from the HSI agent/auditor.
9. The HSI agent/auditor will review the I-9 forms and supporting documentation and then notify the company – typically within 60 days – of the results of the inspection.
HSI Follow-up After Review of the I-9 Forms The initial part of the I-9 audit review will likely result in the issuance of a notice or notices that will need to be quickly addressed by the company. In most instances, an employer will have ten business days to comply with the subsequent notice(s). The follow-ing are the most common notices issued by HSI following its initial review of the I-9s and supporting documentation:8
1. Notice of Inspection Results: This is also referred to as a ‘‘Compliance Letter’’ and is used to notify the company that they were found to be in compliance. Such notices are very rare and should be cause for celebration! However, it does not relieve the employer of its continuing obligation to complete and maintain the I-9 forms in compliance with the appropriate regu-lations and policy guidance.
2. Notice of Suspect Documents: This notice advises the company that based on the HSI review of the I-9 forms and documentation submitted by an employee, HSI has determined that an individual – or usually, multiple indivi-duals – are unauthorized to work. The notice also advises the company of the possible crim-inal and civil penalties for continuing to employ such individual(s). HSI does provide the com-pany and employee an opportunity to present additional documentation as evidence of work eligibility if the company and employee believe that the HSI finding is erroneous. In fact, an employer should not automatically terminate the employment of any individual included in this notice unless the employer has construc-tive knowledge that the individual does not
have authorization to work. Upon receipt of a Notice of Suspect Documents, the employer should coordinate with counsel to develop a strategy to notify the entire workforce of the continued audit being conducted by HSI, as well as the notification procedure for the in-dividuals referenced in the notice. The em-ployer must make a good faith effort to notify the individuals that HSI believes that they may not have valid authorization to work and must request that the individuals provide documen-tation to prove their authorization to work. Such documentation cannot be that which was previously provided when the I-9 form was completed. If the employees are represented by a union, the employer should abide by its union agreement while ensuring that it com-plies with the HSI request.
3. Notice of Discrepancies: This notice advises the company that based on a review of the I-9 form and documentation submitted by an employee, HSI is unable to determine such in-dividual’s authorization to work due to a discrepancy in the records. Unlike a Notice of Suspect Documents where HSI suspects that the documentation provided by an employee is fraudulent, the Notice of Discrepancies is is-sued when there is conflicting information or insufficient information to confirm that the individual is who he/she holds himself/herself out to be based on the information provided to HSI in the course of the audit. For instance, HSI’s review may result in its finding that the Social Security Number being used by an employee is also being used by another indivi-dual. In some instances the employee could be the victim or perpetrator of identity theft, or could be a naturalized citizen whose name has changed and the new name is not reflected in the government’s database. The company will be required to provide the HSI Notice of Discrepancies to the employee and have the employee sign a Receipt Notice evidencing acknowledgement of the Notice of Discre-pancies. This Receipt Notice – signed by the company representative and the employee – will need to be submitted to the HSI auditor within ten business days. The employer must allow the employee an opportunity to present HSI with his/her additional documentation and/or information to resolve the discrepancy. The employee should not be terminated during the course of HSI’s review unless the employer
8
ICE, Worksite Enforcement - Guide to Administrative Form I-9 Inspections and Civil Monetary Penalties
has constructive knowledge that the individual does not have valid authorization to work. 4. Notice of Technical or Procedural Failures: This
notice will identify technical violations found during the I-9 audit and provide the company with ten business days to correct the I-9 forms. The auditor will give the employer copies of the I-9 forms that need to be corrected and, in many instances, the issues that need to be corrected will be highlighted on the copies of the forms or a spreadsheet will be provided listing the violation on each I-9 that needs to be corrected. After ten business days, uncorrected technical and procedural failures will become substan-tive violations (higher fine amounts). If an I-9 cannot be corrected in a timely manner due to circumstances beyond the employer’s control, the company’s counsel should contact the HSI auditor to determine how to address that specific situation. And, if it is unclear what correction needs to be made to an I-9 form or how to make the correction, counsel should seek clarification from the HSI agent/auditor.
Warning Notice Versus Notice of Intent to Fine Unless a rare Compliance Letter was issued, the I-9 audit does not end with a ‘‘pat on the back’’ following the initial review or after the issuance of the notices described above. The I-9 audit phase with HSI ends with a Warning Notice or a Notice of Intent to Fine. Although a Warning Notice may be issued after the initial review of the I-9 forms, typically it is served on the employer after the employer has responded to a Notice of Suspect Documents, Notice of Technical or Procedural Failures and/or Notice of Discrepancies. The Warning Notice is issued when HSI identifies substantive verification violations, but circumstances do not warrant a monetary penalty and there is ex-pectation of future compliance by the company. An employer will be held to a higher standard when audited again. Thus, counsel may want to discuss vulnerabilities with the employer and establish prac-tices and policies to minimize any errors going forward. The alternative to the Warning Notice is the Notice of Intent to Fine (‘‘NIF’’). HSI will issue a NIF for substantive and uncorrected technical violations, as well as for knowingly hiring or continuing to employ individuals without employment eligibility. A com-pany may receive monetary fines for such violations, and in the case of having hired and/or continued to employ individuals without employment eligibility,
will be required to cease such unlawful activity. In certain circumstances, the company may be pro-secuted criminally. In addition, an employer may be prevented from participating in future federal con-tracts and from receiving other government benefits. Monetary penalties for knowingly hiring and conti-nuing to employ violations range from $375 to $16,000 per violation, with repeat offenders receiving penalties at the higher end. Penalties for substantive violations, which include failure to produce an I-9 Form, range from $110 to $1,100 per violation. In de-termining the penalty amounts, ICE considers five factors: size of the business; good faith effort to comply; seriousness of the violation; whether the vio-lation involved unauthorized workers; and history of previous violations.
If the HSI agent/auditor is going to issue a NIF, the agent/auditor will provide such document to the ICE Office of Chief Counsel (‘‘OCC’’), which will have 30 days to review the NIF for legal sufficiency. Once the NIF has been cleared by OCC, it will be served on the company or its attorney by the HSI agent/ auditor. The receiving party will be required to sign a certificate of service. The NIF will advise the company that it has the right to be represented by counsel, that any statements given may be used against the company, that the company has the right to a hearing before an Administrative Law Judge (‘‘ALJ’’), and that such request must be made within 30 days of receipt of the NIF.
ICE will issue a Final Order within 45 days of service of the NIF if a written request for a hearing is not timely received. There is no appeal from this Final Order. Upon receipt of the NIF, the company may enter into negotiations with ICE to reach a settlement regarding the charges and/or fines imposed. All such negotiations will be conducted with OCC and not an HSI agent/auditor. If a settlement is reached, a Final Order is issued by the OCC and served on the company by the ICE Special Agent. Within five days of the service of a Final Order, the company must submit a completed financial package to the govern-ment. If a settlement is not reached, the matter will proceed to a hearing before an ALJ from the Office of the Chief Administrative Hearing Officer (‘‘OCAHO’’). A Notice of Hearing will be issued, which will specify the procedural requirements. The complexities of the legal issues and strategy for responding to a NIF and preparing for a hearing are best left for another article.
Conclusion
I-9 audits are not going away any time soon and given the increased number and frequency of such audits, it may only be a matter of time before your client is served with an NOI. Attorneys advising clients re-garding I-9 compliance can stay on top of the issues by reviewing the USCIS website, especially the I-9 Central section, as well as reading OCAHO decisions,9 so that they can determine how best to counsel their clients when it comes to pre- and post-I-9 audits
conducted by HSI. After all, the potential penalties – both monetary and criminal – are no laughing matter.
Kimberley Best Robidoux is an attorney with Larrabee | Mehlman | Albi | Coker LLP in San Diego, California. She practices immigration law with an emphasis on employment-based immigration, including employer compliance with employment verification matters. Kimberley may be reached at: [email protected].
9
OCAHO decisions are available at www.justice.gov/ eoir/OcahoMain/ocahosibpage.htm#GeneralInformation.
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Also from Matthew Bender:
California Employers’ Guide to Employee Handbooks and Personnel Policy Manuals,by Morrison & Foerster LLP
2013 Revisions by Paul Hastings LLP
This handy volume and accompanying CD offers an all-inclusive roadmap to writing, revising and updating employee handbooks. More economical than competing guidebooks, this volume is a vital reference that helps you draft appro-priate content, speeding additional research with cross-references to the Wilcox treatise,California Employment Law. Sample policies cover the following: tech-nology use and security; blogging; cell phone use; company property, proprietary and personal information; employment-at-will; anti-harassment policies; work schedules and overtime; and much more. Order online at Lexis.com or by calling 1-800-223-1940.
Nationwide ‘‘Ban the Box’’ Trend Comes to a City Near
You: San Francisco Adopts Broad Prohibitions on
Criminal History Inquiries
By Carolyn Rashby & Jocelyn Chan
Introduction
Effective August 13, 2014, San Francisco Ordinance 131192 will bar employers that have 20 or more employees and operations in San Francisco from inquiring into a job applicant’s criminal history during the preliminary stages of the hiring process.1The San Francisco measure – approved by Mayor Ed Lee on February 14, 2014 – is just the latest in a string of ‘‘Ban the Box’’ laws that are springing up around the country at the state and local levels – and leaving employers, public and private, to piece together a patchwork of requirements around the timing and content of criminal history inquiries. This article will examine the nationwide ‘‘Ban the Box’’ legislation trend and the new San Francisco ordinance in parti-cular, and provide a roadmap for employers and their counsel on how ‘‘Ban the Box’’ requirements impact their recruitment and hiring practices.
Background Behind ‘‘Ban the Box’’ Legislation ‘‘Ban the Box’’ is a reference to eliminating the check box asking about an applicant’s criminal record on an employment application. ‘‘Ban the Box’’ laws seek to prohibit employers’ collection and use of criminal record information in the early stages of the hiring process, with the goal of reducing the potential for discrimination. Depending on the measure, employers may be barred from asking about criminal history on the job application, in job interviews, and even until after a job offer is made to an applicant.
Proponents of ‘‘Ban the Box’’ legislation believe that it reduces hiring obstacles for individuals with a criminal record by allowing them to, at least, get their foot in the door, and demonstrate their skills and qualifications
before consideration of their criminal histories. Propo-nents further argue that expanding employment opportunities for those with criminal histories is a major factor in lowering recidivism rates.
The United States Equal Employment Opportunity Commission (‘‘EEOC’’) favors the principles behind the ‘‘Ban the Box’’ movement. In April 2012, the EEOC issued updated guidance2 on the use of arrest and conviction records in employment under Title VII of the Civil Rights Act of 1964.3 The guidance re-commends as a ‘‘best practice . . . that employers not ask about convictions on job applications and that, if and when they make such inquiries, the inquiries be limited to convictions for which exclusion would be job related for the position in question and con-sistent with business necessity.’’4
‘‘Ban the Box’’ legislation is a growing trend throughout the United States, and numerous states and municipalities have enacted such laws. As of January 1, 2014, 56 local jurisdictions, including New York City, Chicago, Jacksonville, Philadelphia, Memphis, and Baltimore, have adopted ‘‘Ban the Box’’ ordinances. Fifteen of these cities and counties extend the ban to private city contractors, and a handful, including Buffalo, Seattle, Philadelphia, and Newark, extend the prohibitions to private employers as well. In addition, 10 states have adopted ‘‘Ban the Box’’ laws applicable to public employers, and four of those – Hawaii, Massa-chusetts, Minnesota, and Rhode Island – also cover private employers. At one end of the spectrum, for example, Richmond, Virginia’s policy5 only applies
1
San Francisco’s Board of Supervisors approved Ordi-nance 131192 – introduced by Supervisors Jane Kim (District 6) and Malia Cohen (District 10) – on February 4, 2014, and Mayor Ed Lee signed the Ordinance on February 14, 2014. The text of San Francisco Ordinance 131192 is
available at https://sfgov.legistar.com/View.ashx?M=
F&ID=2900827&GUID=9D53E17A-4EE3-489D-A2B6-421D722B0592.
2
U.S. Equal Employment Opportunity Commission,
Enforcement Guidance: Consideration of Arrest and Convic-tion Records in Employment Decisions Under Title VII of the Civil Rights Act of 1964 (Apr. 25, 2012) (‘‘Enforcement
Guidance’’), available at http://www.eeoc.gov/laws/
guidance/upload/arrest_conviction.pdf.
3
42 U.S.C. § 2000e et seq.
4
Enforcement Guidance,supranote 2.
5
The text of Richmond Resolution No. 2013-R, 87-85 is available at http://eservices.ci.richmond.va.us/applications/ clerkstracking/orDetail.asp?NAV=2&PN=.
to employment with the city and only bars asking about criminal histories on the job application; at the other end, Newark, New Jersey’s policy6applies to the city as well as private employers, and prohibits asking about criminal history until a conditional offer of em-ployment has been extended.
‘‘Ban the Box’’ in California
Not surprisingly, California has jumped on the band-wagon. In October 2013, Governor Jerry Brown signed Assembly Bill 218 (‘‘AB 218’’), adding new Labor Code section 432.9 to ‘‘Ban the Box’’ for local and state government jobs. The law, which takes effect on July 1, 2014, will prohibit public employers from asking job applicants about criminal convictions until after the employer has determined that the applicant meets the minimum qualifications for the job. The law makes an exception for any position where a criminal back-ground investigation is required by law, such as for teachers in public schools or employees in community care facilities, and excludes criminal justice agencies. Note that California law has long prevented employers, public and private, from asking about arrests that did not lead to conviction and certain types of convictions,7 but new Labor Code section 432.9 will impose much broader restrictions for public employers.
At California’s local level, Alameda County, Berkeley, Carson, Compton, East Palo Alto, Oakland, Richmond, San Francisco, and Santa Clara County have all adopted ‘‘Ban the Box’’ policies. Of these, Richmond’s policy is the broadest; in particular, in July 2013, Richmond’s City Council voted to expand its existing ‘‘Ban the Box’’ policy to companies with more than 10 em-ployees that do business with the city, as well as their subcontractors.8 Richmond’s new ordinance expan-sively prohibits inquiry into an applicant’s criminal history at any time unless a background investigation is required by state or federal law or the position has been defined as ‘‘sensitive.’’
San Francisco’s New ‘‘Ban the Box’’ Ordinance Since 2006, San Francisco has prohibited public employers from asking about an applicant’s arrest or conviction record until after the applicant has been identified as a finalist for a position. The exception is for those jobs where state or local laws expressly bar individuals with convictions from employment, in which case the City may conduct its background review at an earlier stage of the hiring process. Now, San Francisco’s Ordinance 131192 (the ‘‘Ordinance’’) will expand that policy to private employers with 20 or more employees regardless of location, although it only applies to employment situations located in whole or in substantial part in San Francisco. The Ordinance completely prohibits employers from inquiring about or considering, in any manner or at any time, the following, with respect to applicants and employees:
An arrest not leading to a conviction (other than an arrest that is still the subject of a criminal investigation or trial);
Participation in or completion of a diversion or deferral of judgment program;
A conviction that has been expunged or other-wise made inoperative;
A conviction or other determination in the juvenile justice system;
A conviction that is more than seven (7) years old (measured from the date of sentencing); and
Criminal offenses other than felonies or mis-demeanors (such as infractions).
6
The text of Newark Ordinance #12-1630 is available at https://newark.legistar.com/LegislationDetail.aspx?ID= 1159554&GUID=6E9D1D83-C8D7-4671-931F-EE7C8B 2F33FD&Options=&Search.
7 California Labor Code section 432.7 prohibits an
employer, whether public or private, from asking an applicant for employment to disclose, or from utilizing as a factor in determining any condition of employment, information concerning an arrest or detention that did not result in a conviction, or information concerning a referral or
partici-pation in any pretrial or post-trial diversion program. See
Cal. Lab. Code § 432.7(a). Additionally, Senate Bill 530 (‘‘SB 530’’), which took effect on January 1, 2014, amended section 432.7 to prohibit employers from asking an applicant to disclose, or from utilizing as a factor in determining any condition of employment, information concerning a convic-tion that has been judicially dismissed or ordered sealed unless 1) the employer is required by law to obtain that in-formation, 2) the applicant would be required to possess or use a firearm in the course of his or her employment, 3) an indi-vidual who has been convicted of a crime is prohibited by law from holding the position sought by the applicant, regardless of whether that conviction has been expunged, judicially ordered sealed, statutorily eradicated, or judicially dismissed following probation, or 4) if the employer is prohibited by law from hiring an applicant who has been convicted of a crime. Cal. Lab. Code § 432.7(a).
8
The text of Richmond’s Ordinance 2.65.010 et seq. is available at http://library.municode.com/index.aspx?clientId= 16579&stateId=5&stateName=California.
The Ordinance also sets forth in detail the appropriate process for consideration of an applicant’s criminal history. Specifically, an employer can only inquire9 into an applicant’s criminal history after the first live10 interview with the person or, at the employer’s discretion, after a conditional offer of employment. At this point in time, the employer may receive infor-mation through a background check report, provided all other federal and state consumer report requirements are followed. The employer must, however, follow a process that emphasizes relevance, inclusion, and accountability. Specifically, only those convictions and unresolved arrests that directly relate to the job in question may be considered. ‘‘Directly relate’’ means that the underlying conduct in the conviction or unresolved arrest to be considered has a direct and specific negative bearing on the person’s ability to perform the duties of the particular job. Furthermore, the employer must consider the time that has elapsed since the occurrence giving rise to the conviction or unresolved arrest, as well as any evidence of inaccu-racy or of rehabilitation or other mitigating factors. If the employer decides to deny employment based on an applicant’s criminal history, the employer must give the applicant notice of the prospective adverse action and the information in the background check report upon which it would be based, and provide the applicant an opportunity to present evidence that the criminal history record is inaccurate, or to present evidence of rehabilitation or other mitigating factors. If, notwithstanding the applicant’s presentation of evidence, the employer decides to deny employment, it must notify the applicant of that decision.
In addition to abiding by the process outlined above, the Ordinance also sets forth several additional require-ments for employers:
Employers must post a notice informing in-dividuals of their rights under the Ordinance, and must provide an individual with a copy of the notice prior to making any criminal history inquiries covered by the Ordinance;
Employers are required to maintain, for a period of three years, records of their employment decisions, in a manner that will be sufficient
for the Office of Labor Standards Enforcement (‘‘OLSE’’) to monitor compliance as to em-ployment decisions;
Employers must include a statement in all employment solicitations or ads (where reason-ably likely to reach individuals who are likely to seek employment in San Francisco), that the employer ‘‘will consider for employment qualified applicants with criminal histories in a manner consistent with the requirements of the [Ordinance].’’ Likewise, employers are prohibited from issuing solicitations or adver-tisements that indicate that persons with an arrest or conviction will not be considered for employment; and
Employers are prohibited from retaliating against persons for exercising their rights under the Ordinance.
Action Steps
Given the many ‘‘Ban the Box’’ laws that have sprung up throughout California and around the nation – and the fact that each law has different requirements, prohibitions, and timing – employers and their legal counsel should be alert to any such laws that apply in the areas in which the employer operates, and ensure that the employer’s policies and procedures are modified to ensure full compliance. Specific action steps, including for employers subject to the new San Francisco Ordinance, include:
Advise managers, recruiters, and employees that are involved with the interview and hiring process about any criminal history inquiry restrictions that apply where they are hiring, and ensure that they understand any applicable timing requirements. For example, some laws, such as San Francisco’s, only permit limited inquiries after the first live interview or after a conditional offer of employment.
Review employment applications and related forms and materials to determine whether they need to be modified to comply with ‘‘Ban the Box’’ jurisdictions where the company is hiring. This may include, for example, removing questions regarding criminal history from em-ployment application and interview forms.
Ensure that employment advertisements do not run afoul of any ‘‘Ban the Box’’ provisions and, where applicable, remove from job solicitations and/or advertisements any language indicating that persons with an arrest or conviction will not
9 The Ordinance broadly defines ‘‘inquire’’ to mean any
direct or indirect conduct that is intended to gather informa-tion from or about the applicant or employee, using any type of communication including, but not limited to, application forms, interviews, or background check reports.
10
The Ordinance indicates that a ‘‘live’’ interview may be in person or via phone, videoconferencing, or other technology.
be considered for employment. And, for hiring in San Francisco, ensure that ads include a state-ment that the employer will consider for em-ployment qualified applicants with criminal histories in a manner consistent with the req-uirements of the Ordinance.
Post appropriate workplace notices that may be required under a ‘‘Ban the Box’’ law, and provide notices to applicants if required.
Maintain records as required, generally for a period of at least three years.
Carolyn Rashby is Special Counsel with Miller Law Group, where she represents and counsels management
on a wide range of employment matters, including wage and hour, leaves of absence, discrimination, harass-ment, and employee handbooks and personnel practices. She has written hundreds of articles and employer compliance materials touching on all aspects of California employment law and is a regular presenter in the firm’s Employment Law Update webinar series.
Jocelyn M. Chan is an associate with Miller Law Group, where she represents employers in litigation and also advises employers with respect to compliance issues arising under California and federal labor and employment laws.
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Covenants Not to Compete With Independent
Contractors May Not Be Enforceable Under
California Law
By Tyler M. Paetkau
Introduction
The poor economy, the mobile modern workforce, and increased government regulation of the employment relationship have prompted some employers to enter into more ‘‘independent contractor’’ relationships with individuals who provide personal services. Most employers understand the risk of claims by purported independent contractors that they were ‘‘misclassified’’ and should have been paid and treated as W-2 employees. But there is another, less obvious, legal risk. Many employers who enter into such independent contractor relationships include covenants not to compete (‘‘non-competes’’) during the term of the contract. Even California employers can lawfully prohibit current employees from competing during the employment relationship.1 So, can’t they enforce non-competes with independent contractors? This Article explores that question, which surprisingly has received little treatment in the case law to date. There is perhaps a prevailing assumption that non-competes with independent contractors are legally enforceable. A simple Internet search reveals many opinions that such agreements are ‘‘presumptively enforceable,’’ and sample independent contractor agreements containing non-compete provisions abound. Not so fast. There is a paucity of case law on point, and none of it is controlling in California. What little authority that exists suggests that non-competes are incompatible with the very nature of the independent contractor relationship, i.e., a true independent con-tractor has substantial freedom to pursue other clients, even (or maybe especially) in his or her chosen field of specialty, and frequently has other clients in the same industry. Such provisions may be void and un-enforceable ab initio as an illegal contract because the employer improperly misclassifies the individual
providing personal services as an independent con-tractor in violation of California employment law. Moreover, even assuming, arguendo, a valid and lawful independent contractor relationship, a non-compete is unenforceable because it violates the cate-gorical prohibition against such broad restraints on competition under California Business and Professions Code section 16600. Finally, there is a substantial risk that a court or administrative agency would conclude that a non-compete is fundamentally at odds with the nature of an independent contractor relationship, and refuse enforcement.
Analysis
An Independent Contractor Agreement May Be Void and UnenforceableAb InitioIf It Unlawfully
Misclassifies a W-2 Employee as an Independent Contractor.
Illegal contracts are void and unenforceable ab initio. California Civil Code section 1608 codifies this prin-ciple and provides that ‘‘[i]f any part of a single consideration for one or more objects, or of several considerations for a single object, is unlawful, the entire contract is void.’’ Civil Code section 1667 defines ‘‘unlawful’’ broadly to include that which is contrary to an express provision of law; contrary to the policy of express law, though not expressly pro-hibited; or, otherwise contrary to good morals. California courts interpret Section 1608 to include contracts whose purpose is unlawful. The principle that a ‘‘contract which has for its object an illegal purpose will not be enforced, either in law or in equity’’ is ‘‘an elementary rule in the law.’’2 Under this ‘‘elementary’’ rule of law voiding contracts with an unlawful purpose, a contract that purports to treat
1
SeeCal. Lab. Code § 2863 (employee’s duty of loyalty:
‘‘[a]n employee who has any business to transact on his own account, similar to that entrusted to him by his employer, shall always give the preference to the business of the employer’’).
2
Duntley v. Tutt, 48 Cal. App. 2d 367, 369-70 (1941);see
also Asher v. Johnson, 26 Cal. App. 2d 403, 415 (1938)
(agreement unenforceable if it is ‘‘directly in aid of, or in the advancement or encouragement of, acts in violation of the law’’).
as an independent contractor someone who is, in fact, an employee, is void and unenforceable.
InGipson v. Davis Realty Company, a California appel-late court held that a contract between a broker and a real estate salesman working for the broker that purported to change the salesman’s relationship to the broker from agent to that of an independent contractor was invalid due to a provision of in the real estate law requiring a salesman to act as the agent of the broker under whom he is licensed.3 The court found the purported independent contractor agreement between the broker and the salesman to be void as an agreement with an unlawful purpose.
The same is true of an agreement that purports to treat as an independent contractor someone who must be classified as an employee under the basic tenets of California employment law. A written agreement purporting to establish an independent contractor relationship is not determinative; ‘‘the parties’ label is not dispositive and will be ignored if their actual conduct establishes a different relationship.’’4 More-over, an ‘‘employer cannot change the status of an employee to one of an independent contractor by illegally requiring him to assume a burden which the law imposes directly on the employer.’’5 When an employer executes an ‘‘independent contractor agree-ment’’ for the unlawful purpose of treating as an in-dependent contractor someone who is, in fact, an employee, the unlawful purpose of the purported contract voids it in its entirety.
Whether a worker is an employee or independent contractor depends upon a number of factors, all of which must be considered, and none of which is controlling by itself. In S.G. Borello & Sons, Inc. v. Department of Industrial Relations,6 the Supreme Court of California adopted a multi-factor ‘‘economic realities’’ test to evaluate a worker’s status. In applying the economic realities test, the most significant factor to consider is whether the person or entity to whom the worker provides services has control over or the right to control the worker, both as to the
work done and the manner and means in which he performs the work:
1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
2. Whether or not the work is a part of the regular business of the principal or alleged employer; 3. Whether the principal or the worker supplies the
instrumentalities, tools, and the place for doing the work;
4. The worker’s investment in the equipment or materials required by his or her task, or his or her employment of helpers;
5. Whether the service rendered requires a special skill;
6. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
7. The worker’s opportunity for profit or loss depending on his or her managerial skill; 8. The length of time for which the services are
to be performed;
9. The degree of permanence of the working relationship;
10. The method of payment, whether by time or by the job; and
11. Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.7
Even where there is an absence of control over work details, the relationship between worker and prin-cipal is an employer-employee relationship if (1) the principal retains pervasive control over the operation as a whole, (2) the worker’s duties are an integral part of the principal’s operation, and (3) the nature of the work makes detailed control unnecessary.8
The language used in independent contractor agreements (‘‘ICAs’’) can make defense of ‘‘misclassification’’ claims even more difficult. For example, some ICAs
3 215 Cal. App. 2d 190, 204-05 (1963).
4
Estrada v. FedEx Ground Package Sys., Inc., 154 Cal. App. 4th 1, 10-11 (2007); S.G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 48 Cal. 3d 341, 349 (1989).
5 Toyota Motor Sales v. Superior Court, 220 Cal. App. 3d
864, 877 (1990).
6
48 Cal. 3d 341 (1989).
7 S.G. Borello & Sons, 48 Cal. 3d at 350-51. 8
Yellow Cab Coop. v. Workers’ Comp. Appeals Bd., 226 Cal. App. 3d 1288, 1295 (1991).
require the purported ‘‘independent’’ contractor to use his or her ‘‘best efforts’’ to complete the assigned work. Some ‘‘red flags’’ for employers evaluating their mis-classification exposure are whether the putative in-dependent contractor:
Works a regular, full-time work schedule, i.e., like a regular, full-time employee.
Reports to the same supervisor as regular, full-time employees.
Works exclusively for the putative employer, at the putative employer’s place of business and using the putative employer’s tools and equip-ment (e.g., same email account, telephone system, and computers).
Works lengthy, never-ending ‘‘temporary assignments’’ for the putative employer.
Previously or subsequently worked as a W-2 employee of the putative employer.
Performs work or provides services that are ‘‘integral’’ to the putative employer’s operations or business.
Has his or her own separate business, business license, equipment, employees, workers’ com-pensation insurance, etc.
Independent contractors, by definition, have a specia-lized skill and/or experience that cannot be performed by the putative employer’s regular, full-time em-ployees. To the extent that the putative independent contractor performs the same job duties and functions under the policies and procedures established by the putative employer; uses the putative employer’s computers, telephones and equipment; and works under the supervision and with the assistance of employees of the putative employer, there is a substan-tial risk that a court or administrative agency would find an employment relationship. The key is whether the putative employer exercises sufficient control over the independent contractor’s work.9 ‘‘If an employment relationship exists, the fact that a certain amount of freedom is allowed or is inherent in the nature of the work involved does not change the char-acter of the relationship, particularly where the employer has general supervision and control.’’10
Noncompetes Are Inconsistent With the Nature of an Independent Contractor Relationship Aside from the misclassification question, restrictive covenants in independent contractor agreements are inconsistent with the nature of the independent
contractor relationship itself. For example, the tradi-tional noncompete typically prohibits the independent contractor from providing similar services to the puta-tive employer’s competitors (and sometimes suppliers, vendors and other business partners), effectively binding the independent contractor exclusively to the putative employer. Such a considerable restriction on the independent contractor’s work for others in the chosen specialized industry flies in the face of the most basic characteristic of an independent contractor relationship.
The court inYellow Cab Coop v. Workers’ Compensa-tion Appeals Board11 recognized this incongruity, stating:
[The company] exercised control over various other aspects of the relationship. Perhaps
most significant was the prohibition on driving cabs for other companies. A mere lessor has no interest in restricting the lessee’s freedom to render service to another. Nor is the paradigmatic independent contractor bound to serve one principal exclusively. By imposing such a restriction, [the company] exerted a form of control typical of employ-ment and not of other relationships.12
The putative employer’s insistence on a noncompete in a purported independent contractor agreement serves to bind the independent contractor to the putative employer exclusively, and prevents the independent contractor from practicing his or her chosen profession outside of the putative employer, without affording him or her the benefits and protections of an employ-ment relationship.
A Restrictive Covenant Prohibiting an Independent Contractor From Rendering Services to Other Individuals or Entities Is an Unlawful Restraint
on Competition
Even assuming,arguendo, a valid and lawful independent contractor relationship, noncompetes may nonetheless be unenforceable because they violate California’s cate-gorical prohibition against restraints on competition. California Business and Professions Code section 16600
9 SeeTorres v. Reardon, 3 Cal. App. 4th 831, 837 (1992)
(freedom to hire own employees is characteristic of indepen-dent contractor).
10
Air Couriers Int’l. v. Employ. Dev. Dep’t., 150 Cal. App. 4th 923, 934 (2007).
11
226 Cal. App. 3d 1288 (1991).
12
broadly prohibits ‘‘any’’ agreement ‘‘by which anyone is restrained from engaging in a lawful profession, trade or business of any kind.’’13
[T]he California courts have been clear in their expression that section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat. Rather, the Cali-fornia courts have repeatedly held that section 16600 should be interpreted as broadly as its language reads.14
The protections of Section 16600 apply with equal force to independent contractors as well as employees. ‘‘[A]n agreement by an employee or independent contractor not to compete with his employer after leaving that employment is void.’’15
Although no California case law to date has applied Section 16600 to specifically prohibit a restrictive cove-nant or noncompete that prevents an independent contractor from performing services on his own or for other entities during the duration of the independent contractor agreement, both the broad language of Section 16600 and the fundamental characteristics of an independent contractor relationship point to the inevitable conclusion that such a provision would be unlawful. Unlike an employee, an independent con-tractor has no legal duty of loyalty that requires him to give preference to the business of his employer.16 To the contrary, as discussed above, the ‘‘paradigmatic
independent contractor’’ is not ‘‘bound to serve one principal exclusively.’’17Thus, a broad restrictive cove-nant, such as a noncompete, that prohibits the in-dependent contractor from engaging in his or her profession for any entity or individual other than the putative employer during the duration of his in-dependent contractor agreement or relationship is incompatible with both Section 16600 and the claimed ‘‘independent contractor’’ status.
Moreover, the putative employer’s day-to-day treat-ment of the ‘‘independent contractor’’ as an employee also is arguably a material breach of a contract that purports to classify the worker as an independent contractor. On that basis, the putative employer’s mate-rial breach relieves the independent contractor of his or her purported obligations under the contract, in-cluding his ostensible obligation not to compete. To the extent that the putative employer exercises control over the worker in a manner inconsistent with an in-dependent contractor relationship, such conduct may also constitute a breach of an independent contractor agreement.
‘‘When a contract creates an illegal restraint on trade, [t]here is nothing which the parties to the action [can] do which would in any way add to its validity. . .. [it] cannot be ratified either by right, by conduct, or by stipulated judgment.’’18 Just as an individual cannot contract away his or her right to the protections of an employment relationship by signing an unlawful independent contractor agreement, he or she cannot contract away his or her right to compete by signing an unlawful noncompete.
Case Law From Other Jurisdictions Suggests that Noncompetes Are Inconsistent with Independent
Contractor Relationships
A recent New Hampshire state court decision,Brian’s 1:1 Fitness, LLC v. Woodward,19 held that a non-compete imposed restraints on an independent contractor ‘‘greater than necessary to protect the legit-imate interests’’ of the plaintiff-company, ‘‘based on the nature of its relationship’’ with the independent con-tractor. The defendant-independent contractor, Jeremy Woodward (‘‘Woodward’’), was a personal trainer. The
13
Cal. Bus. & Prof. Code § 16600.
14
Scott v. Snelling and Snelling, Inc., 732 F. Supp. 1034,
1042 (N.D. Cal. 1990);see alsoEdwards v. Arthur Andersen
LLP, 44 Cal. 4th 937, 949 (2008); Continental Car-Na-Var Corp. v. Moseley, 24 Cal. 2d 104, 110 (1944) (‘‘Every indi-vidual possesses, as a form of property, the right to pursue any calling, business or profession he may choose.’’).
15
Bosley Med. Group v. Abramson, 161 Cal. App. 3d 284, 288 (1984) (emphasis added) (independent contractor agree-ment between medical facility and doctor that limited doctor’s right to compete in a specified geographical area after
termi-nation of agreement is invalid);see also Scott, 732 F. Supp. at
1042 (finding covenant restraining competition in franchise
agreement invalid);In reGault South Bay Litig., No. C
07-04659 JW, 2008 U.S. Dist. LEXIS 65913, at *12 (N.D. Cal. 2008) (sales representative agreement between two compa-nies that restricts competition not only by company, but also
by its ‘‘employees, independent contractors, and agents’’ is
unlawful restraint on competition) (emphasis added).
16
See Cal. Lab. Code § 2863 (employee ‘‘who has any
business to transact on his own account, similar to that intrusted to him by his employer, shall always give the prefer-ence to the business of the employer’’).
17
Yellow Cab, 226 Cal. App. 3d at 1298.
18
South Bay Radiology Med. Assoc. v. Asher, 220 Cal. App. 3d 1074, 1080 (1990).
19
No. 2012-CV-00838, Merrimack, SS (NH) Superior
Court, slip op. (Aug. 8, 2013), available at http://www.
courts.state.nh.us/superior/orders/bcdd/Brians-Fitness-v-Woodward.pdf.
plaintiff, Brian’s 1:1 Fitness, LLC (‘‘Brian’s’’), a training facility, originally hired Woodward as an employee. Subsequently, Brian’s and Woodward executed annual independent contractor agreements. Woodward paid Brian’s a ‘‘rental’’ fee in exchange for use of the Brian’s space and equipment for training his clients. Woodward set the training regimen of his clients, he kept 100 percent of the fees they paid, and he was not subject to any control by Brian’s. Brian’s independent contractor agreement with Wood-ward contained a noncompete, which provided that for two years after the end of his relationship with Brian’s, Woodward would not compete within 25 miles of places where it conducted business. In addi-tion, the contract precluded Woodward from providing personal training services to any client who had been served by Brian’s within two years prior to his termi-nation. Brian’s required identical noncompetes with all of its independent contractor-trainers.
Shortly after he resigned from Brian’s, Woodward opened his own facility. Three trainers and some clients left Brian’s and joined Woodward at his new competing facility. Brian’s sued Woodward and sought a preliminary injunction enforcing the non-compete. The court refused to grant Brian’s motion to enjoin Woodward from competing. The court initially noted that few jurisdictions have analyzed the effect of independent contractor status on the enforceability of covenants not to compete, but that most jurisdictions allow restrictive covenants with an independent con-tractor, ‘‘subject to limitations similar to those on employees.’’20In considering the enforceability of the
restrictive covenant at issue, the court applied New Hampshire’s common law test for the reasonableness of a covenant, which requires that a reviewing court understand the nature of the transaction before it,’’ which ‘‘may be significantly affected by whether or not a party to it is an employee or an independent contractor.’’21 Quoting an earlier Delaware Chancery Court opinion, the court explained:
The traditional employee/employer relation-ship usually involves a much more intimate relationship than that of an independent contractor. Independent contractors maintain a greater degree of control over how they ac-complish tasks; remain engaged to a much greater extent in a distinct occupation or busi-ness (as opposed to an employee, who may be asked to perform other reasonable tasks as required); and traditionally work with a lesser degree of supervision.22
The court further opined that that independent con-tractors are also more likely to bring their own strengths and abilities to the joint enterprise.23 For these reasons, the court concluded, ‘‘the legitimate protectable interests of an employer seeking to en-force a restrictive covenant against an independent contractor may be considerably limited as compared to enforcement against an employee.’’24
The court also noted that as contrasted with employees, independent contractors are generally granted less access to the confidential information of their employers: ‘‘ ‘[f]irms will, in general, invest a greater amount of firm-specific know-how in employees than in contractors engaged in a ‘distinct occupation.’’ ’’25 The Woodward court also found that Woodward had
20 No. 2012-CV-00838, slip op. at 9 (citing Edix Media
Group, Inc. v. Mahani, No. 2186-N, slip op., at 22 n. 31 (Del.
Ch. Dec. 12, 2006) (internal citations omitted);see also
Eich-mann v. Nat’l Hosp. and Health Care Servs., Inc., 719 N.E.2d 1141, 1146 (Ill. App. 1999) (judicial scrutiny of non-compete with independent contractor would be as strict where relation-ship was similar to employment); Jenkins v. Jenkins Irrigation, Inc., 259 S.E.2d 47, 49-50 (Ga. 1979) (finding that independent contractor’s non-compete should be analyzed the same as one between employee and employer); Hope Found, Inc. v. Edwards, No. 1:06-cv-0439-DFH-TAB, 2006 U.S. Dist. LEXIS 84244, at *24, *26 (S.D. Ind. Apr. 12, 2006) (finding an absence of Indiana cases addressing noncompetes with independent contractors and noting that ‘‘[i]f a person is an independent contractor, that fact may signal a greater likelihood that he has brought his own strengths and abilities to the joint enterprise, such that the party seeking to enforce a covenant not to compete may have a more limited protectable interest.’’); Starkings Court Reporting Servs., Inc. v. Collins, 313 S.E.2d 614 (N.C. App. 1984) (finding that noncompete exceeded legitimate interests
of employer in independent contractor context); Bristol Window and Door, Inc. v. Hoogenstyn, 650 N.W.2d 670, 678-80, 250 Mich. App. 479 (Mi. Ct. App. 2001) (applying common law rule of reasonableness to noncompetes with independent contractors); Quaker City Engine Rebuilders, Inc. v. Toscano, 535 A.2d 1083, 1087-89 (Pa. Super. 1987).
21
Woodward, No. 2012-CV-00838, slip op. at 10.
22 No. 2012-CV-00838, slip op. at 10 (quotingEdix, No.
2186-N, slip op., at 22-23, citing Restatement (Second) of Agency § 220(c)).
23
No. 2012-CV-00838, slip op. at 10.
24 No. 2012-CV-00838, slip op. at 10 (citingHope Found,
2006 U.S. Dist. LEXIS 84244, at *26;Edix, No. 2186-N, slip
op., at 23).
25
No. 2012-CV-00838, slip op. at 10 (citing Edix, No.
no ‘‘special influence’’ over Brian’s customers because the Independent Contractor Agreement provided that ‘‘Brian’s had no control over the manner in which [Woodward] worked with his clients.’’26 In reaching this conclusion, the court distinguished a New Hamp-shire Supreme Court opinion finding protectable interests in the principal’s existing customers and goodwill, as the independent contractor agreement in Woodward stated in pertinent part: ‘‘nothing herein shall be interpreted as preventing [Woodward] from entering into similar agreements with others.’’27 Thus, the Woodward court found that the noncompete at issue ‘‘is simply a restraint of trade, which is not in the public interest.’’28
Conclusion
Restrictive covenants in independent contractor agree-ments, including noncompetes, may be void and un-enforceable under California law for two independent reasons. First, an independent contractor agreement
with the putative employer may be void and unenforce-able ab initio as an illegal contract because it im-properly misclassifies an employee as an independent contractor in violation of fundamental California employment law. Second, even assuming, arguendo, that the putative employer’s independent contractor agreement with the worker represents a valid and lawful independent contractor relationship, a non-compete is unenforceable because it violates the categorical prohibition against such broad restraints on competition under California Business and Pro-fessions Code section 16600, in light of the nature of the independent contractor relationship itself.
Tyler M. Paetkau is a partner at Hartnett, Smith & Associates in Redwood City, California, where he regu-larly represents and counsels employers regarding trade secrets and restrictive covenants, as well as all aspects of labor and employment law. Mr. Paetkau can be reached at [email protected].
26
No. 2012-CV-00838, slip op. at 11.
27
No. 2012-CV-00838, slip op. at 11 (citing Concord Orthopedics Prof. Ass’n v. Forbes, 142 N.H. 440, 443, 702 A.2d 1273 (1997)).
28
