Dorsey Work Watch

It is safe to say that the use of artificial intelligence (AI) went mainstream in 2023. With the widening acceptance of AI, dozens of industries have raced to adopt the technology into various operations at a staggering pace – including adopting AI in human resources (HR) processes in the workplace. But, employers and HR departments should keep pace with federal agencies seeking to mitigate risks associated with AI in the workplace. AI in the Workplace AI in the workplace is moving at a fast clip. According to the Equal Employment Opportunity Commission (EEOC), as many as 83% of employers, and as many as up to 99% among Fortune 500 companies, are using some form of AI to screen or rank candidates for hiring. The use of AI in the workplace is not new from an HR perspective. Employers have long been able to use AI to perform certain HR functions in the recruiting process, such as resume screening. But now, employers can use AI for other recruitment functions, such as administering personality and aptitude tests or analyzing video interviews. Once workers are on-boarded, employers can use AI to help with worker safety, protection, management, and productivity through real-time locating systems and other technologies. Federal Agencies’ Guidance With the introduction of AI comes great benefits, several federal agencies seek to cut in on potential consequences by issuing guidance, requesting information, and devising plans for AI in the workplace in the following ways: On January 26, 2022, the federal Occupational Safety and Health Administration (OSHA) issued a trade release announcing an update and expansion of a chapter in the OSHA Technical Manual on Industrial Robot Systems and Industrial Robot System Safety. The update notes that advances in AI boost the abilities and uses of robot systems in industrial applications. The revisions add current “technical information on the hazards associated with industrial and emergent robot applications, safety considerations for employers and workers, and risk assessments and risk reduction measures.” On May 12, 2022, the EEOC issued its guidance on AI “discuss[ing] how existing ADA requirements may apply to the use of [AI] in employment-related decision making and offers promising practices for employers to help with ADA compliance when using AI decision making tools.” The same day, on May 12, 2022, the Department of Justice reported issued guidance that “outlines issues that employers should consider to ensure that the use of software tools in employment does not disadvantage workers or applicants with disabilities in ways that violate the ADA.” On October 31, 2022, the National Labor Relations Board (NLRB) General Counsel issued a memorandum recommending that the NLRB “apply the Act to protect employees, to the greatest extent possible, from intrusive or abusive electronic monitoring and automated management practices that would have a tendency to” interfere with protected concerted activity. On January 10, 2023, the EEOC issued a draft strategic enforcement plan which announced that the agency would focus “on employment decisions, practices, or policies in which covered entities' use of technology contributes to discrimination based on a protected characteristic. These may include, for example, the use of software that incorporates algorithmic decision-making or machine learning, including artificial intelligence; use of automated recruitment, selection, or production and performance management tools; or other existing or emerging technological tools used in employment decisions.” On May 1, 2023, the White House Office of Science and Technology Policy (OSTP) announced that it will be releasing a public request for information (RFI) “to learn more about the automated tools used by employers to surveil, monitor, evaluate, and manage workers.” The OSTP states that responses to the RFI “will be used to inform new policy responses, share relevant research, data, and findings with the public, and amplify best practices among employers, worker organizations, technology vendors, developers, and others in civil society.” On May 18, 2023, the EEOC issued its guidance explaining the application of Title VII to an employer’s use of automated systems, including AI, noting that the scope of the guidance “is limited to the assessment of whether an employer’s ‘selection procedures’—the procedures it uses to make employment decisions such as hiring, promotion, and firing—have a disproportionately large negative effect on a basis that is prohibited by Title VII.” Employers should expect to see more federal guidance on AI as technologies continue to develop. What Employers Can Do to Stay in the AI Race With federal agencies’ guidance in mind and an expectation of more regulation to come, employers should take proactive steps to ensure the use of AI in the workplace keeps pace with developing law. These steps include: Understanding that AI in the workplace is governed by several different laws, including privacy laws, data security laws, and anti-discrimination laws at the state and federal levels. Considering including references to the use of AI in the recruiting, hiring, and employment process in employment policies and notices. Partnering with HR, IT, and legal counsel to ensure that AI practices remain competitive while compliant with local and federal law. For additional information on employer considerations before using AI and automated decision-making systems in the workplace, check out a previous Quirky Questions article on the topic. The idea that AI can create numerous benefits in the workplace seems to be gaining traction. Federal guidance issued in 2022 and 2023 signal that regulation of AI in the workplace will strive to keep up with the strides made in technological advances. Employers and HR can stay ahead of the curve by keeping abreast of, and following, regulations applicable to their company.

Buyers of all or parts of another business often seek to protect the value of their investments by entering into non-compete agreements with their sellers.  Courts typically favor enforcement of such sale-of-business non-compete agreements in order to protect buyers from unfair competition from sellers, and to protect the business’s goodwill for which the seller has paid as part of the purchase price.  Courts regularly enforce sale-of-business non-compete agreements, either as an exception to a general legal prohibition on agreements restraining trade or by applying a more lenient standard for enforceability.  The public policy favoring enforcement of sale-of-business non-compete agreements stands in stark contrast to non-competes between employers and their employees triggered by termination of employment.  Courts in most states generally will enforce narrowly drafted and reasonable post-employment non-competes in accordance with a patchwork of state laws.  However, courts in several states, notably California, North Dakota and Oklahoma, broadly refuse to enforce post-employment non-competes. Although California law prohibits post-employment non-compete agreements, California law allows parties to enter into non-compete agreements in the context of a sale of business in accordance with certain detailed statutory requirements. Because of the size of the California economy, and the willingness of California courts to enforce appropriate sale-of-business non-compete agreements, buyers of businesses both inside and outside of California frequently seek to maximize compliance with California law.  One of the key issues such buyers need to consider in drafting sale-of-business non-compete agreements is whether the ownership interest being sold will suffice to trigger California’s sale-of-business exception.  In this article, we discuss California law governing sale-of-business non-competes and the case law addressing the nature of the ownership interest that the seller must transfer for the sale-of-business rules to apply. We also analyze the Federal Trade Commission’s (FTC) recently published proposed rule banning post-employment non-competes.  Like the California prohibition on employment non-compete agreements, the FTC’s proposed rule also includes a sale-of-business exception which buyers should consider in structuring their transactions. California’s Sale-of-Business Exception California generally invalidates non-compete agreements by making “void” “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.” Cal. Bus. & Prof. Code § 16600. However, Section 16601 of the Business and Professions Code carves out a limited exception for buyers and sellers of businesses.[1]  Under Section 16601, any of the following persons “may agree with the buyer to refrain from carrying on a similar business within a specified geographical area in which the business is sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer carries on a like business therein”: (1) “any person who sells the goodwill of a business”; (2) “any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity”; or (3) “any owner of a business entity that sells (a) all or substantially all of its operating assets together with the goodwill of the business entity, (b) all or substantially all of the operating assets of a division or a subsidiary of the business entity together with the goodwill of that division or subsidiary, or (c) all of the ownership interest of any subsidiary.” Cal. Bus. & Prof. Code § 16601. Courts construe Section 16601 to protect the buyer’s purchase of the intangible goodwill from actions by the seller that would undermine the value of the goodwill acquired.  “Goodwill” is defined as the “expectation of continued public patronage.” Cal. Bus & Prof. Code § 14100; see also Alliant Ins. Services, Inc. v. Gaddy, 72 Cal. Rptr. 3rd 259, 277 (2008). In determining whether a party has transferred goodwill, “there must be a clear indication that in the sales transaction, the parties valued or considered goodwill as a component of the sales price.” Hill Medical Corp. v. Wycoff, 103 Cal. Rptr. 2d 779, 785 (2021). In the context of selling shares of company stock, the Court in Hill Medical Corp. recognized that “[s]imply selling shares to an individual vendee or back to the corporation does not necessarily demonstrate that goodwill is part of the agreement.” Id. All aspects of the sales arrangement must be evaluated, including the shares transferred and the fractional interest involved, the entire structure of the transaction and the sales price, such as whether fair market value is paid for the shares. Id. In Vacco Industries v. Van Den Berg, 6 Cal. Rptr. 2d 602, 609 (1992), a California court enforced a sale-of-business non-compete agreement against a shareholder who sold all of his stock in the company, which amounted to less than 3% of the company’s stock. Vacco, a machinery manufacturing company, entered into an agreement with Emerson Electric Co. in which Emerson agreed to purchase all of Vacco’s stock. In conjunction with the sale, Vacco entered into employment contracts and separate non-competition agreements with 12 major shareholders. Van Den Berg, an operations manager and officer of Vacco, was one of them. The non-compete agreement specified that he “would not carry on any business competitive with the business of Vacco for the lesser of (1) five years from the date of the agreement or (2) so long as Vacco conducts the Business within the territory.” Id. The court enforced the noncompete agreement because Van Den Berg was the 9th largest shareholder and held a substantial interest in the company. By contrast, in Bosley Medical Group v. Abramson, 207 Cal. Rptr. 477, 481 (1984), another California court refused to enforce a non-compete agreement contained in a stock purchase agreement based on a finding that the transaction was a “sham” to circumvent state policy prohibiting non-competes.  In Bosley, a medical group engaged a doctor in its practice of hair transplantation and male pattern reduction surgery.  As a condition to engaging the doctor in the practice, the medical group required the doctor to sign both an independent contractor agreement and a stock purchase agreement.  The stock purchase agreement required the doctor to purchase nine shares of the medical corporation for $10,000, which shares represented 9% of the shares of the corporation.  The agreement also allowed the medical group to repurchase the shares upon termination of the doctor’s engagement as an independent contractor by either party at an agreed upon amount equal to the purchase price plus 10% of such purchase price per year of the doctor’s ownership of the shares.  The doctor purchased the shares with the proceeds of a promissory note.  The purchase agreement contained a provision which prohibited him from engaging in a similar medical practice within certain counties for three years after leaving the medical group. The court concluded that the non-compete agreement was “a sham” because the doctor was required, not permitted, to purchase the shares and because he did not benefit from the value of the stock he purchased.  The court further observed that the doctor could not benefit from the payment of dividends or a capital gain on the value of the stock, because the interest he paid on the promissory note exceeded the dividend that was paid.  The court also referred to the small amount represented by the purchase price plus only 10% of the purchase price per year that he received under the stock purchase agreement when he left the group. The court concluded based on these facts that the real purpose of the stock purchase agreement was to prevent the doctor from leaving the medical group and opening a competitive practice.  The court also stated that Section 16601 applied “only in situations in which the transfer of ‘all’ of the owner’s shares involves a substantial interest in the corporation so that the owner, in transferring ‘all’ of his shares, can be said to transfer the goodwill of the corporation.”  Id. at 481. The FTC’s Proposed Rule The Federal Trade Commission recently proposed to ban most non-compete clauses for American workers based on its view that such clauses are an “unfair method of competition” and, therefore, prohibited under Section 5 of the Federal Trade Commission Act.  See FTC Proposed Rule, 88 Fed. Reg. 3482 (Jan. 19, 2023). The proposed rule carves out from this prohibition “a non-compete clause that is entered into by a person who is selling a business entity or otherwise disposing of all of the person's ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity's operating assets, when the person restricted by the non-compete clause is a substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause.”  Id. § 910.3.  The proposed rule defines “substantial owner, substantial member, and substantial partner” as “an owner, member, or partner holding at least a 25 percent ownership interest in a business entity.” Id. § 910.1(e). Therefore, if the person is an owner, member or a partner owning less than 25 percent of a business entity, the proposed rule would prohibit that person from entering into a non-compete agreement with a buyer. Takeaways Business buyers seeking to enter into non-compete covenants with their sellers that satisfy California’s sale-of-business exception should consider taking the following precautions: First, buyers should confirm that the purchase involves the seller’s transfer of a substantial interest in the business, and not appear to be a sham to avoid compliance with public policy prohibiting employment non-competes. Second, buyers should keep in mind that the business owner must sell “all of his or her ownership interest in the business entity.” Third, buyers should ensure that goodwill is a part of the consideration for the sale of business. Finally, buyers should be aware that the FTC is seeking to make sweeping changes to override the non-compete laws in all fifty states.  Accordingly, buyers should keep in mind the possibility that the sale-of-business non-competes previously viewed as lawful under state law may in the future be significantly restricted, and take these new realities into account in negotiating their purchase agreements. Reprinted with permission from the February 1, 2023 edition of the NEW YORK LAW JOURNAL © 2023 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 – reprints@alm.com. [1] This article does not address two other exceptions to California’s prohibition of non-compete agreements.  Section 16602 of the Business and Professions Code allows partnerships to enforce non-compete provisions against a partner upon dissolution of the partnership or the partner’s dissociation from the partnership.  Further, Section 16602.5 provides that any member in an LLC may agree in anticipation of the termination of his or her interest in the LLC that he or she will not carry on a similar business within a specified geographic area where the LLC business has been transacted, so long as any member or any person deriving title to the business or its goodwill from any other member carries on a like business.  Unlike the sale-of-business exception, there is no requirement under Sections 16602 or 16602.5 that the partnership or LLC repurchase the interest in the partnership or LLC upon termination for a price that includes a payment for goodwill.

As many states progress through different phases of reopening, companies are preparing for their employees to return to work. Employers are also noting, however, that some states are seeing COVID-19 cases surge.  This has generated some concerns from employees who do not want to return to the work place. Can employers require employees to return to work if the employees are not comfortable returning based on fear of exposure to COVID-19 in the workplace? Often, the answer is yes.  Employers generally can require a non-high risk employee to return to work where there hasn’t been any cases in the employee’s particular workplace. But as with many broad employment questions, there is no universal answer that covers all cases and employers must look to both federal and state law, and in some instances, local law, to determine whether a particular employee can be required to return to work. For example, under federal law, employees can refuse to work under certain, narrow circumstances. In these situations, employers must proceed with caution or they risk retaliation claims. It is important to note, however, that a generalized fear of infection alone is usually not enough to permit an employee to refuse to return to work. Employers must be aware of COVID-19 related protections existing for employees and understand what rights they have in the face of an employee’s refusal to return to work. This post does not cover alternative avenues such as local, state, and federal law governing protected leave, including the Families First Coronavirus Response Act. These rights and protections vary with each state, so employers should review the most recent return-to-work orders. Americans with Disabilities Act Per EEOC guidance, the Americans with Disabilities Act (“ADA”) requires an employer to work with employees at high risk of serious health complications related to COVID-19 (as determined by guidance from the Centers for Disease Control and Prevention (“CDC”)) to provide reasonable accommodations like teleworking or taking leave. To avoid the risk of discrimination claims, employers should communicate alternative options to all employees, rather than directly reaching out to employees who have not yet requested an accommodation. As a general matter, employers should work with employees and offer alternative work arrangements where possible. Occupational Safety and Health Act Employers who are following current guidelines for safe workplaces – under the CDC or state health departments – would generally be able to require non-high risk employees to return to work without running afoul of safety standards, especially where there have not been any cases of COVID-19 in the employee’s workplace. The Occupational Safety and Health Act (“OSHA”) creates a general duty for employers to maintain safe workplaces and mitigate any health or safety hazards but as of the date of this posting has not issued any regulations specifically covering COVID-19 safety requirements.  Importantly, for “medium risk” employers (such as retailers and other workplaces open to the public) OSHA’s Interim Enforcement Response Plan for Coronavirus Disease 2019 focuses on incidences of actual exposure rather than the general risk that someone might catch COVID-19 in the workplace because the disease is spreading in the community. https://www.osha.gov/memos/2020-05-19/updated-interim-enforcement-response-plan-coronavirus-disease-2019-covid-19. However, it is important for employers to understand that under certain narrow situations, OSHA also permits an employee to refuse to perform unsafe work. The employee may refuse to perform a specific task when all of the following conditions are met: (1) the employee “asked the employer to eliminate the danger, and the employer failed to do so”; (2) the employee “genuinely believe[s] that an imminent danger exists”; (3) “a reasonable person would agree that there is a real danger of death or serious injury”; and (4) the urgency of the hazard does not allow correction through “regular enforcement channels, such as requesting an OSHA inspection.” National Labor Relations Act Employers must also be on the lookout for employee conduct that constitutes protected concerted activity under the National Labor Relations Act (NLRA). Section 7 of the NLRA guarantees unionized and non-unionized employees the right to engage in concerted activities for the purpose of “mutual aid or protection.” In the context of COVID-19, protected concerted activity could occur when two or more employees (or one employee acting on behalf of others) address issues such as safe working conditions and the steps their employers are taking to prevent the spread of the virus. State Guidance and Return-to-Work Orders In Minnesota, all critical and non-critical sector employees who are able to work from home must continue to do so. (Stay Safe Minnesota). Emergency Executive Order 20-54 protects employees for raising concerns about unsafe conditions related to COVID-19. The order extends existing state law protections to COVID-19: employers cannot discriminate or retaliate against an employee for exercising any right under the Minnesota Occupational Safety and Health Act. In contrast, California workers are protected by the state’s Resilience Roadmap because the stay-at-home order is still in effect. If an employer does not provide essential services or is not in an industry allowed to reopen in Stage 2 (or the current stage of the plan), an employee would have good cause to refuse to return to the workplace. Employers should also consult local public health ordinances. Some localities, like the City of Los Angeles, require employers to provide face coverings for all employees. Some states mandate additional protections for employees at high risk for severe COVID-19 complications. Washington Governor Jay Inslee issued Proclamation 20-46.1, in effect through August 1, amending Proclamation 20-05 to require employers to offer high-risk employees alternative accommodations. If alternative options are not feasible, the employee must be allowed to use accrued leave or seek unemployment relief while the employer maintains health insurance benefits. The order also prohibits employers from permanently replacing high-risk employees and requires employers to maintain high risk employees’ health benefits. Other states mandate employer responsibility for providing protective equipment to its employees. In New York, Executive Order 202.16 requires essential employers to provide face coverings to employees in direct contact with members of the public. Empire State Development also released guidance for determining whether a particular enterprise is subject to workforce reductions under relevant executive orders. If an employee works for a non-essential New York business that is not encompassed by its region’s current phase of reopening, they cannot be forced to come into work. Employers are encouraged to work with employees who have concerns about working safely under applicable state orders and federal guidance. Although an employee may bring safety or retaliation concerns directly to their local OSHA office or to the state department of labor, proactive efforts to discuss a safe workplace can help minimize this risk. Finally, it may behoove employers to understand when an employee could secure unemployment benefits for refusing to return to work.  Generally, a refusal to work disqualifies an individual from unemployment benefits.  But in the current COVID-19 pandemic, many states have relaxed the criteria to allow for continued benefits when the refusal to work is because of a personal situation exacerbated by COVID-19. Unemployment Insurance Benefits Minnesota The Minnesota Department of Employment and Economic Development (“DEED”) says that employees offered a suitable opportunity to return to work, and who are not subject to an exemption under Executive Order 20-05 or state law, may not continue receiving unemployment benefits. If an employee refuses a suitable offer of employment, they can be held overpaid for unemployment insurance benefits received. DEED clarified that if an employer cannot provide reasonable accommodations upon an employee’s request, they might still be eligible for unemployment benefits. Additionally, Executive Order 20-54 provides that the failure of an employer to implement a COVID-19 Preparedness Plan constitutes an adverse work environment that could qualify a complaining employee to receive unemployment benefits. Washington The Employment Security Department (“ESD”) released guidance stating that individuals receiving unemployment benefits must be available for “suitable work,” including any offer to return to previous employment after a layoff caused by COVID-19. Individuals must have good cause to refuse an offer to return to work and continue receiving unemployment benefits. Good cause may apply to those considered high risk by the CDC and those living in a household with a person at high risk. School or daycare closures, providing care for a family member, employer noncompliance with worksite safety guidelines, or a substantial change to the job may also be accepted as good cause. Employees may not refuse work and retain unemployment benefits because they make more on unemployment or because of a fear of returning to work without having good cause to refuse. California The Employment Development Department (“EDD”) released guidance emphasizing that employees that refuse to accept “suitable” employment when offered are ineligible for unemployment benefits. The EDD considers factors such as the degree of risk involved to the individual’s health and safety when determining if particular work is “suitable.” If an employer has complied with state requirements and safety regulations for reopening, an employee may not have good cause to refuse to return to work. If an employee indicates on their certification for continued benefits that they refused work, the EDD will investigate accordingly. New York If an employee refuses an offer to return to their previous position, they will likely lose eligibility for unemployment benefits unless they have good cause as defined by Section 593.2 of the Unemployment Insurance Law. Employees may not turn down offers of employment based on a general fear of exposure to COVID-19 and still receive unemployment benefits. (Returning to Work). However, in some circumstances an employee could continue receiving benefits if the employee’s situation meets Pandemic Unemployment Assistance (PUA) eligibility criteria. Employers that are following CDC and state and local guidelines regarding social distancing and other precautions in the workplace will often be allowed to require non-high risk employees to return to work when there are no cases of COVID-19 in the employer’s workplace. However, like so many employment related legal issues, the devil is in the details and exceptions abound. When employees refuse to return to work and challenge their employer’s ability to compel them to do so employers should consult with knowledgeable counsel to make sure they are on solid ground.

On September 18, 2019, Governor Gavin Newsom signed into law Assembly Bill 5, which clarifies when workers should be considered “employees” under the California Labor Code and the California Unemployment Insurance Code, thereby entitling them to the protections afforded by those laws. The bill codifies the standard set out in last year’s California Supreme Court decision, Dynamex Operations West, Inc. v. Superior Court of Los Angeles, which narrowed the circumstances under which a worker can properly be classified as an independent contractor. Specifically, under the new law, in order for a worker to properly be classified an independent contractor, the employer has the burden of establishing the following three elements (commonly referred to as the “ABC” test): (A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; (B) The person performs work that is outside the usual course of the hiring entity’s business; (C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. Most of the provisions of AB 5 become effective on January 1, 2020. Below are some answers to frequently asked questions to help employers navigate this significant development. Is the law under AB 5 any different than the Dynamex ruling? Under Dynamex, the “ABC” test was limited to the resolution of the employee or independent contractor question in claims arising under California’s Wage Orders—for example, claims for failure to pay minimum wage, overtime, or failure to provide adequate meal and rest periods. AB 5 codifies the decision in the Dynamex case and expands the application of the “ABC” test not only for purposes of the Wage Orders, but also the Labor Code and Unemployment Insurance Code as well.  This means that the “ABC” test will apply to more claims, including failure to reimburse necessary business expenses, failure to provide accurate and complete wage statements, claims for waiting time penalties under Labor Code section 203, potential recovery of Private Attorney General Act (PAGA) penalties, and failure to provide workers’ compensation insurance.AB 5 also empowers the California Attorney General and specified local prosecuting agencies to pursue injunctions against putative employers suspected of misclassifying their workers. Are there any exceptions to the application of the new standard in AB 5? AB 5 provides an exemption for a number of industries and occupations, subject to licensing and other requirements, including: Insurance brokers Physicians, surgeons, dentists, podiatrists, psychologists or veterinarians Lawyers, architects, engineers, private investigators and accountants Registered securities broker-dealer or investment adviser and their agents and representatives Direct sales salespersons (if they meet certain factors) Commercial fishermen working on an American vessel (until January 1, 2023) Contracts for “professional services” such as marketing, human resources administration, travel agents, graphic designers, grant writers, fine artists (if they meet certain factors) Photographers, photojournalists, freelance writers, editors, or newspaper cartoonists (if they meet certain factors) Licensed estheticians, electrologists, manicurists (until January 1, 2022), barbers, or cosmetologists (if they meet certain factors) Real estate agents Licensed repossession agencies Bona fide business-to-business contracting relationships (under certain conditions) Construction subcontractors (for work performed after January 1, 2020, under certain conditions) Construction trucking services (until January 1, 2022) Tutors (if they meet certain factors) Motor club services For these occupations, the determination of employee or independent contractor status will be governed by the more flexible, multi-factor test outlined in the California Supreme Court’s decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations. What effect does AB 5 have on an employer’s obligation to provide workers’ compensation insurance? The California Labor Code, at sections 3200 et. seq., requires employers to have workers’ compensation insurance covering their employees. AB 5 amends section 3351 of the Labor Code so that, for the purposes of determining the obligation to provide workers’ compensation coverage, the “ABC” test governs. Accordingly, workers who fall within the “ABC” test (and are not covered by an exception), should be covered by workers’ compensation insurance. Note that the narrowed definition of employee does not become effective until July 1, 2020 (with respect to the workers’ compensation provisions specifically). Will AB 5 affect an employer’s obligation to pay payroll taxes? The Unemployment Insurance Code imposes obligations on employers to pay certain amounts of Unemployment Insurance Tax and Employment Training Tax for its employees. Because AB 5 changes the definition of “employee” in the Unemployment Insurance Code, employers will have to pay these payroll taxes for workers who meet the definition of “employee” under the new test. Does AB 5 affect how much employers will have to withhold from employee’s paychecks? The Unemployment Insurance Code also imposes obligations on employers to withhold a portion of employees’ wages for State Disability Insurance and for California personal income tax. Accordingly, employers will have to make these withholdings for workers who meet the definition of “employee” under the new test. Does AB 5 affect an employer’s obligation to provide health insurance? Prior to AB 5, neither the California Labor Code nor the Unemployment Insurance Code imposed an obligation to provide health insurance to employees.  The amendments to these statutes pursuant to AB 5 do not add a requirement to provide health insurance to employees.  The federal Affordable Care Act sets up a scheme whereby “large” employers must either provide health insurance to a certain percentage of their employees, or pay specified penalties.  We have not yet seen any developments indicating whether the change in the definition of “employee” under California law will affect the determination of whether a worker is considered an “employee” under the federal ACA.  However, we are monitoring this issue closely.Note, however, that some jurisdictions in California, such as San Francisco, require certain employers to satisfy health care spending requirements for employees. The amount of required spending is based on the number of the employer’s employees, with small employers potentially exempt from the requirement. AB 5 could have an impact on how these requirements apply to employers. Can employers continue to pay workers who were formerly classified as independent contractors on a piece rate or project basis? AB 5 does not impact an employer’s ability to pay workers on a piece rate basis.   In order to properly do so, however, the employer must satisfy all requirements for paying employees by the piece or unit produced.   Namely, among other things, the employer must pay the employee not less than the applicable minimum wage for all hours worked in the payroll period, compensate employees for rest and recovery periods and for other nonproductive time separate from any piece-rate compensation, and ensure that piece-rate workers are paid overtime for hours worked in excess of eight in a day or forty in a week. What effect does AB 5 have on employers who hire temporary workers through a staffing agency? AB 5 does not have a direct effect on employers who hire temporary workers through a staffing agency, assuming the staffing agency categorizes those workers as employees of the staffing agency, and not independent contractors. If the staffing agency categorized those workers as independent contractors, and placed the workers at the contracting company’s site, arguably working subject to the control of the contracting company, there is a risk that the workers could make a claim of misclassification based on the “ABC” test against both the staffing agency and the contracting company. We recommend companies retaining temporary workers through a staffing agency confirm that the staffing agency classifies the workers placed as employees, unless they clearly meet the definition of an independent contractor. The decision as to whether to reclassify workers, and the changes to payroll and other benefits that may come along with it, continues to be nuanced. If you have independent contractors within your workforce, contact your Dorsey employment attorney for guidance.

Many employers have offices in multiple states, but want to have one form of employee agreement prohibiting solicitation of employees and customers. Since some state laws, namely California, may be too different to reconcile with other states, what sort of non-solicitation agreements work in California? In California, non-solicitation agreements are reviewed as contracts which prevent a person from engaging in a profession, trade or occupation which, with limited exceptions, are void under Business and Professions Code section 16600. Thus, recent cases have held that an agreement between an employer and employee prohibiting the solicitation of customers is not enforceable unless tied to the employee’s use of trade secrets or some other legal duty owed by the employee. Employers have tried to draft enforceable non-solicitation clauses by characterizing customer and employee information as trade secrets. In late 2018, in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. the Court of Appeal upheld summary judgment in favor of the former employee defendants and their new employer. The former and new employer were competitors providing temporary travel nurses to medical facilities across the U.S. The employee defendants were recruiters who signed agreements that “during employee’s employment with the Company and for a period of one year after the termination employee shall not directly or indirectly solicit or induce, or cause others to solicitor or induce, any employee of the Company . . . to leave the service of the Company.” AMN claimed that the travel nurses names and contact information were trade secrets. The court concluded that the nurses had applied to AMN years before and that the information was already in AMN’s possession or could have been obtained from other sources such as a public media group network, the Gypsy Nurse Group. For this reason, and because the employee’s profession was the recruitment of other employees, the Court found the non-solicitation agreement unenforceable. Employers in California must therefore normally tailor any non-solicitation agreements and carefully consider if the employee truly possesses confidential/trade secret information that could be used to solicit customers. To the extent the information the employee would use to solicit is a trade secret, courts have considered the agreement to be valid. Other states may allow broader non-solicitation agreements, therefore you should use different forms to receive the maximum protection in those states.