Labor and Employment Law Blog

Another Non-Compete Thrown Out

In VL Systems v. Unisen, a Californian Court of Appeals has thrown out another type of non-compete agreement.  The general rule in California has been that an employer could not forbid an employee from working for other companies, including competitors, as long as no trade secrets were in jeopardy.  However, savvy employers have long used a loophole to get around this rule, especially in the "consulting" business. In this arrangement, an ultimate client would hire a consulting company to provide temporary labor.  The consulting company would then hire an employee and pay her a fraction of what they were getting paid by ultimate client.  The employee would work at the ultimate client site, frequently along side other employees of ultimate client.  While the consulting company might try to put a "non-compete" agreement in the contract with the employee, many employees know that these non-compete agreements are illegal.  Instead, the consulting company would put it in the contract with the ultimate client.  That is, if ultimate client hired one of consulting companies employees, they would then have to pay a significant amount of money.  Thus, not a "non-compete" because it doesn't actually prevent the employee from working wherever she wants -- or so the argument went. 

The facts of this case are a little different from the general scenario outlined above, so the holding may be a little more limited than most employees of consulting companies would hope for.  In this case, the employee (David Rohnow) worked for the consulting company, but worked on projects other that Star Trac's (ultimate client). Star Trac used the consulting company to provider workers, but never used David directly.  They did have a clause in their contract that required a significant penalty is they hired any of consulting company's employees.  Star Trac posted a job listing on the internet, David applied and was hired.  The consulting company then sued for the $60,000 penalty that they felt they were due.

The court threw out the clause in the contract that required a penalty to be paid in the event that ultimate client hired any of consulting company's employees.  It held that such a clause was simply a non-compete clause dressed up differently.  That is, it does not matter how a non-compete clause is structured. The courts will look at the end result, and if it looks like a non-compete, it will be treated as a non-compete.

Employees should be cautioned that the court did make note that it was important that (1) Employee never worked directly for ultimate client while at consulting company, (2) that Employee was only with consulting company for a short period of time, and (3) that no time or money was spent on training Employee for these particular jobs.  Thus, it is likely that non-hire clauses that are designed to prevent any of the above three issues from occurring may still be enforceable.

As a side note, it appeared that consulting company was paying employee on a salary basis in violation of California overtime laws, but that was not the subject of this lawsuit. 

Changes in Federal Overtime Law for Truck Divers

Back in August of 2005, Congress passed a law entitled  the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU).  Among the myriad of provisions, there was a the following:

(a) Definitions Relating to Motor Carriers. — Paragraphs (6), (7), (12), and (13) of section 13102 of title 49, United States Code, are each amended by striking "motor vehicle" and inserting "commercial motor vehicle as defined in section 31132."

At first, these seems like a minor changes of little consequence.  The law only sets out what types of operations the Department of Transportation can regulate, and the DOT has only ever regulated commercial motor vehicles.  That is, the DOT had never previously exercised its authority to regulate non-commercial vehicles. Thus, from the DOT's point of view, that particular section was a non-event. However, the Department of Labor has a very different point of view.

It has long been the law that truck drivers were either subject to regulation by the Department of Transportation or the Department of Labor, but not both.  This law removed the ability of the DOT to regulate vehicles of less than 10,001 lbs, and thus would subject the drivers of these vehicles to Department of Labor regulation -- and the drivers would be entitled to overtime.

Prior to the 2005 law, the idea that the motor carrier exemption could extend to any vehicle had created some unfortunate results.  For instance, in Friedrich v. U.S. Computer Services, 974 F.2d 409 (3rd Cir. 1992), the motor carrier exemption, commonly called the "truck driver exemption," was applied to field service engineers who provided computer hardware and software to customers engaged in the cable television business. Apparently, the engineers drove their personal vehicles across state lines but were carrying tools and replacement parts. This was sufficient to make them "private motor carriers," and thus exempt from overtime.  Since then, employers have been trying to apply this exemption to anyone who ever drove across state line carrying anything at all (pens, pencils, papers, etc.).

Since the enactment of the SAFETEA-LU, the DOL has taken the position that drivers of vehicles with a gross weight rating of 10,000 lbs or less are entitled to overtime pay, even if they driver interstate.  The DOL has posted its position on the Motor Carrier Exemption on the web.

In addition, courts have started to agree with the DOL.  For instance, in Musarra v. Digital Dish, Inc., 454 F.Supp.2d 692 (S.D. Ohio 2006), the court notes:

Before August 10, 2005, the FLSA's MCA exemption applied to most employees who drove any type and size of motor vehicle in interstate commerce. After the passage of SAFETEA-LU, however, vehicles that were previously exempt under the old definition of "motor vehicle" are no longer exempt because they are not "commercial motor vehicles." See Felhaber, Larson, Felon, Vogt, P.A., Big Changes in Exempt Status for Drivers and Mortgage Loan Officers, 16 No. 4 Minn. Emp. L. Letter 2, at *2 (June 2006).

Other courts have also been willing to follow this holding.

Unfortunately, these interpretations by the courts have not gone unnoticed by Congress.  In the 109th Congress, H.R. 5576 attempted to undo the amendment and revert the FLSA to its previous status. This bill failed to pass the Senate, and it does not seem that Congress has expressed an interest in picking it back up this year.  As such, a confusing and much abused loophole in the Motor Carrier Exemption seems to finally have been closed.

I have posted a good reference on the current overview of California truck driver overtime on my "got overtime" website.