By Associate Attorney Danielle Nodar

May is Small Business Month in Charlotte! As a small business, safeguarding the confidential information that makes you stand out from the competition is important to the long-term success of the business. Non-compete agreements are common tools used by businesses to help protect this kind of confidential and proprietary business information and allow for business to hire talented employees without worrying that the employee will take your idea and implement it elsewhere. These agreements generally restrict an employee from working for a competitor until a certain period passes and protect confidential information from being used by an ex-employee. However, with companies transitioning to a remote working environment and widespread unemployment, more businesses and lawmakers are re-evaluating the scope and legality of non-compete provisions.

Non-compete agreements are controlled by state law, meaning that each state has unique provisions for what is permissible in these agreements. In North Carolina, a non-compete agreement must meet the following requirements:

• In writing, signed by the employee agreeing not to do business.
• Made for valuable consideration. This means that the employee agreeing not to compete must get something of value for their end of the agreement. For new employees, the employment itself is the valuable consideration, and a promotion or bonus is consideration for existing employees.
• Must be made to protect a company’s legitimate business interest. These agreements cannot just restrict the employee’s ability to work elsewhere, but protecting confidential business information that you would not want to fall into a competitor’s hands, such as secret recipes or formulas, processes for production, or client information, have all been upheld as legitimate business interests.
• Must be reasonable in terms of time, territory, and the scope of activity being limited.

This last factor is oftentimes where a non-compete is deemed overly broad and overly restrictive of a former employee’s ability to find comparable work elsewhere. A court considers all these factors together when interpreting a non-compete provision and looks at the employee’s position along with the skills and knowledge obtained on the job in order to ensure that the company’s restriction is not wider than necessary to protect its legitimate business interest. Oftentimes, higher level employees with more access to trade secrets or confidential business information are more likely to be subject to a non-compete, so long as it is reasonable in time and geographic scope. If a court finds that a particular provision of a non-compete agreement is unreasonable, the court will strike that portion from the contract but enforce the rest.

With the changes in the employment landscape in the last year, there has been a growing movement to limit or even abolish the use of non-compete agreements. As more workers are forced to find new jobs, have moved to remote working environments, or move to a state outside of their employer’s home base, the question of how and when to enforce non-competes has been more present with business owners and lawmakers. As non-competes are governed by state law, it also makes it difficult for employers with employees residing in multiple states to be able to maintain enforceable agreements without careful planning. For example, some states have limited noncompete agreements to apply only to employees making over $100,000 a year, or to be valid only when a business interest is being sold.

There is also a push for the federal government to step in and put some overarching limitations on non-compete agreements that limit these agreements in cases where a narrow group of defined trade secrets are trying to be protected by a business. While it is too soon to tell if federal laws impacting non-compete provisions are on the horizon, it is important for employers to be mindful of the importance of crafting a narrowly tailored non-compete provision that works to protect their business while still allowing for fair treatment of former employees. Exploring other legal options that could be used to protect confidential business information is also crucial. If you have questions about how to best protect your business’ proprietary and confidential information, please call Jesson & Rains!

By Attorney Kelly Jesson
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On September 22, 2020, the U.S. Department of Labor (“DOL”) issued a proposed rule regarding classifying workers as employees versus independent contractors. As we’ve written before, failing to correctly classify workers may result in employers paying thousands of dollars in fines, taxes, and back wages. The Fair Labor Standards Act (“FLSA”) requires that employers pay their employees minimum wage and overtime, but these rules do not apply to independent contractors.

The DOL has proposed this rule because of conflicting court cases across the country, in order to create the “sole and authoritative interpretation of independent contractor status under the FLSA.” The proposed rule creates an “economic realities test” to determine whether a worker is an employee or an independent contractor. If the worker is economically dependent on the employer for work, he/she should be classified as an employee. If a worker is considered to be in business for him or herself, that worker should be classified as an independent contractor. In the past, several factors have been used to aid in court’s determinations as to whether or not a worker is economically dependent on the employer, but with this proposed rule, the DOL specifically notes that there are two core factors that are to be given more weight than others:

     1. The nature and degree of the worker’s control over the work: If the worker, and not the employer, exercises substantial control over key aspects of the work, such as by setting his or her own work schedule, working with little or no supervision, and being able to work for others, including a potential employer’s competitors, they may be classified as an independent contractor.

     2. The worker’s opportunity for profit or loss: If the worker has an opportunity to earn profits or incur losses based on his or her personal initiative, managerial skills, or business acumen (including investments in money and also equipment, tools, and people), the worker may be classified as an independent contractor.

The text of the proposed rule references “entrepreneurs” multiple times. In reviewing the proposed rule, it is clear that the DOL considers independent contractors to be workers who work for themselves. “[T]he ability to control one’s work and to earn profits and risk losses strikes at the core of what it means to be an entrepreneurial independent contractor, as opposed to a ‘wage earner’ employee.”

The proposed rule has been submitted for public comments and, given that an election is happening in a month, it is unlikely that the proposed rule will become law in the next few months. But we will be keeping an eye on it.

If you’re considering hiring your first worker, or have questions about your existing workers, please give Jesson & Rains a call!

By Attorney Kelly Rains Jesson

Back in July of 2016, we wrote about the Department of Labor’s dramatic new proposed overtime rule, which frightened a lot of business owners. A few months later, a judge invalidated the law, and the 2004 law has been in place ever since.

The new law is back, but a little less dramatic.

Everyone is somewhat familiar with the law that requires overtime to be paid to employees who work over 40 hours per week.  However, the law exempts any employee employed in a bona fide executive, administrative, or professional capacity.  This exemption is premised on the belief that these types of salaried employees generally earn higher salaries and enjoy other benefits.
 
The change in the 2020 law applies to the exception to this exemption – if a person is a salaried employee and employed in an executive, administrative, or professional capacity, they will still be entitled to overtime under federal law if they earn a “low” salary. Currently, an employee in this category who earns less than $455/week or $23,660 is entitled to overtime if they work more than 40 hours per week.

Starting January 1, 2020, these figures will increase.  If an employee in this category earns less than $684 per week (equivalent to $35,568 per year for a full-year worker), they will be entitled to overtime if they work over 40 hours per week.
 
If you are a business owner and employ employees who may be affected by the change in the new law, we encourage you to contact an attorney or other human resource professional to ensure you comply with the law. There are other changes in the overtime law that may affect you and your business. More information can be found here.

By Attorney Edward Jesson

​Running a business can be tricky!  Having employees can be even trickier!  We are frequently asked about minimum wage and overtime.
 
The federal law that controls employee pay is the Fair Labor Standards Act (FLSA). The FLSA sets the minimum standards that the states must comply with—but there is nothing stopping the individual states from setting standards that exceed those outlined in the FLSA. For example, while the federal minimum wage is $7.25 per hour, the minimum wage in Colorado is currently set at $11.10 per hour. If you are an employer in Colorado, you have to pay $11.10 per hour regardless of the federal law. Conversely, no state can set a minimum wage below the federal amount. In North Carolina, the minimum wage is $7.25.
 
Does FLSA apply to your business? Probably, yes. Generally, the FLSA applies to all businesses that make over $500,000.00 per year gross or are engaged in interstate commerce, which is a very broad term. Most businesses engage in interstate commerce.  The FLSA can also apply to day workers, housekeepers, cooks, full-time babysitters and other “domestic service workers” under certain circumstances. If you believe that the FLSA does not apply to your business, it would be a good idea to check with a local attorney to ensure that your analysis is correct.
 
Most people know that overtime is calculated at a rate of at least 1.5 times the regular hourly rate. That 1.5 times the hourly rate kicks in for any hours worked over 40 in a single workweek. It’s important to note that the FLSA looks at workweeks and does not allow an employer to average the amount out over a longer period. For example, if an employee works 45 hours one week and 35 the next, the employer cannot average that out to 40 hours per week over those two weeks. The employee will be entitled to 5 hours overtime for the first week, and no overtime for the second week.
 
Even if the FLSA does apply to your business, there are certain exemptions to the law. For example, executive, administrative, and professional employees who earn salaries may be exempt from both minimum wage and overtime pay requirements, so long as that salary is equal to at least $455 per week. Similarly, outside sales employees may also be exempt from FLSA requirements. Employees of movie theaters are exempt from the overtime requirement but must still make minimum wage.
 
Even commissioned employees are entitled to minimum wage (unless they are considered exempt). For example, if a commissioned employee works 30 hours, at the federal minimum wage, they would be entitled to at least $217.50. If the commissions earned for those 30 hours worked totals less than $217.50, then it is the employer’s responsibility to make up the short fall. There are a number of exceptions to this rule.  
 
Tipped employees must be paid at least $2.13 per hour in direct payment from the employer. Tipped employees are entitled to at least minimum wage, so if their direct pay and tips for a workweek do not equal what they should be entitled to at the prevailing minimum wage, it is the employer’s responsibility to make up that short fall. Similarly, tipped employees are entitled to overtime pay if they work more than 40 hours in a single workweek. The calculations for a tipped employee’s overtime rate are more complex than for a regular hourly rate employee.
 
As you can see, the exceptions to the FLSA are varied, and there is no “one size fits all” answer.  It is advisable to consult with an attorney licensed in your state or a human resource professional to ensure that your employees are being paid the correct amount based on the particular circumstances of your employees and your business.   If you have any questions regarding how you are supposed to pay your employees, please give Jesson & Rains a call.

First, congratulations!!  Below is a North Carolina-specific check list.

• Prior to interviewing, review with an attorney improper questions or topics (for example, you should not ask someone if they are married).
• Prior to hiring, conduct a background check.
  • Employers can be held responsible for the negligence or intentional acts of its employees if it should have known about the employee’s background. 
  • You will need to keep personal information like social security numbers under lock and key, in a secure network, or shredded when not used.
  • If the employee will be operating a vehicle or around children, you should consider having them submit to a drug test.
• Notify your insurer.
• Prior to the employee’s first day, get any Confidentiality or Non-Compete Agreements drafted.  Do you have any proprietary systems, recipes, customer lists, etc. you need to protect?  Are you concerned that you will spend time and money training someone only to have them open a shop a mile away as your competitor?
  • Those contracts will not be enforceable if the employee is asked to sign one after their first day of work, absent a promotion or pay increase.
• Register for an IRS EIN and with the N.C. Department of Revenue (if you haven’t already).  The business will have to pay FICA Tax (social security and medicare deduction) and submit additional tax paperwork every quarter.  As the employer, you’ll be responsible for withholding the employee’s income tax from their paycheck.
  • On the employee’s first day, have them complete a W-4 and NC-4.
• Register with the NC Division of Employment Security because the business will likely have to pay unemployment tax.  https://des.nc.gov/des.  
  • You will not have to pay workers compensation insurance until you reach three employees.
  • We recommend you hire a payroll company to handle employee paychecks.  Payroll companies will make sure that your business complies with the aforementioned requirements. They will also assist you with providing tax forms and the I-9.
• Notify the state and federal government of the new hire so that, if the employee owes any back child support, his/her wages can be garnished: https://newhire-reporting.com/NC-Newhire/default.aspx
• Complete an I-9 and save for three years.  The federal government requires employers to verify that every employee they hire is eligible to work in the United States. Form can be found at www.uscis.gov.
• Upon hiring your first employee, you now have to comply with state and federal poster requirements.  The Department of Labor has a website where you can select specific facts about your business and they will tell you the posters you need: https://webapps.dol.gov/elaws/posters.htm.    State posters are found here:  https://www.labor.nc.gov/workplace-rights/employer-responsibilities/all-state-and-federal-workplace-posters
• FLSA applies to nearly every employer.  Therefore, you will be required to comply with minimum wage ($7.25) and overtime laws (depending on the type of employment).
• While an employment contract is not required, it may be helpful to define the scope of employment and provide useful information like vacation policies, for example. 
• Discrimination and wage laws are very stringent and pro-employee -- you should consult an attorney with any questions.

 
If you’re ready to hire your first employee, give Jesson & Rains a call now to ensure you are in compliance with the myriad of laws you must consider.

We are frequently asked what is the difference between an independent contractor and an employee. Hiring independent contractors is often the cheaper choice for employers as the employer saves on taxes and other administrative costs that are involved with hiring and firing traditional W2 employees. However, mistakenly (or intentionally) classifying employees as independent contractors can cost employers thousands of dollars in fines, taxes, and back wages, as well as cost the government millions of dollars in taxes.  Several years ago, the News and Observer wrote an article about contractors in the construction industry who were intentionally misclassifying those who should have been employees as independent contractors in order to save money. The article found that the misclassification of employees cost the state of North Carolina $467 million in lost tax revenue that should have been paid by employers; and that was just from a sampling of federally funded projects in North Carolina—ignoring the vast amount of private construction in the State.
 
On August 11, 2017, Governor Cooper signed into law the Employee Fair Classification Act (S.B. 407). Many in the construction industry have supported this move, feeling that the misclassification of workers by their less scrupulous competitors was making it difficult for them to compete. Companies that misclassify employees and independent contractors can save more than 20% on their labor costs.
 
The new act provides a way for the state to receive complaints that employees are being misclassified as independent contractors by creating the Employee Classification Division within the North Carolina Industrial Commission. The Employee Classifications Section’s website states that:
 
Upon receiving the complaint for employee misclassification the Director will provide this information to the North Carolina Department of Labor, North Carolina Industrial Commission – Compliance and Fraud Investigative Division, North Carolina Department of Commerce - Division of Employment Security, and North Carolina Department of Revenue where each separate agency shall conduct independent investigations to determine whether violations of their operating statutes has occurred. If determined there has been a violation of any operating agency statute, each agency will ensure the necessary enforcement actions under the respective statutes.
 
As such, should a complaint be made, independent investigations will be made into the company being complained of by several different North Carolina governmental agencies and employers could be facing multiple fines from multiple state agencies.  Also, employers are now required to post notices including the following information:

• Workers must be treated as employees unless they are independent contractors;
• Workers who believe that they have been misclassified have the right to report the alleged misclassification to the Employee Classification Section; and,
• The physical and email addresses and telephone number where alleged misclassifications can be reported.

 
To avoid any issues with the Employee Classification Section, employers must ensure that they are correctly classifying employees as either employees or independent contractors. While the classification is determined case by case and depends a great deal on the specific facts surrounding each individual’s employment, here are some basic considerations:

• Is the worker guaranteed to get paid, no matter the outcome of the project?
• Does the worker use his or her own tools or equipment?
• Does the worker work for more than one firm or business at a time?
• Does the worker offer his or her services to the general public?
• Do you have the right to give the worker instruction about when, where, and how to work?
• Did you train the worker to do the job in a particular way?
• Must the worker do the work him or herself? Or is the worker free to hire assistants? If assistants are hired, who pays them?
• Do you set the worker’s work hours?
• Must the worker spend all of his or her time on your job?
• Must the individual work on your premises?
• Do you pay the worker hourly? Weekly? Monthly? By the job?
• Can you fire the worker and/or can the worker quit without being subject to a breach of contract lawsuit?

 
That is not an exhaustive list, and no one question will determine whether a worker should be considered an employee or an independent contractor. However, if in answering those questions, you are finding that you have a lot of control over how the worker performs his or her work, then it is likely that they should be classified as an employee and not an independent contractor.
 
If you find yourself questioning whether your worker should be classified as an employee or an independent contractor, or if you find yourself being investigated by the Employee Classification Section, please give Jesson & Rains a call to assist you in the matter.