By Jennifer L. Mora and Elliot R. Fink

Seyfarth Synopsis:  Earlier this week, by denying the employer’s motion to reconsider in Cemex Construction Materials Pacific LLC, 372 NLRB No. 157 (2023), the National Labor Relations Board not only validated the applicability of its new Cemex standard, but also foreshadowed an intense appellate review process expected in the federal Circuit Courts of Appeal. This follows after the NLRB General Counsel issued guidance regarding Cemex in a memorandum earlier this month explaining key issues, such as how unions can demand recognition and bargaining, how unfair labor practices might trigger a Cemex bargaining order, and procedural considerations for labor and management handling cases under this new standard.

As noted in our previous alert, the new Cemex standard ushered in sweeping changes to union organizing at large. Under Cemex, if a union demands recognition from an employer because it claims that it has obtained majority support within a bargaining unit, the employer must pursue one of two options: (1) recognize and bargain with the union or (2) file an RM petition seeking an NLRB election. If the employer and union proceed to an NLRB election and the employer commits even one unfair labor practice (“ULP”) prior to the election, the Board may issue an order requiring the employer to recognize and bargain with the union rather than require a new election. The Board might also issue a bargaining order to an employer who neither recognizes the union nor files a petition for an election, unless the employer can demonstrate that the union did not have majority support at the time of the demand for recognition. This new standard has applied retroactively since the original decision issued on August 25, 2023.

Cemex filed a motion for reconsideration, which the NLRB denied on November 13, 2023. Eschewing the opportunity to rehash any arguments previously raised in the original proceeding in a single footnote at its outset, the opinion previews the legal defense that the Board plans to undertake on behalf of its new standard, which is certain to be challenged in the Circuit Courts of Appeal. Of note, the Board rejected arguments that the new standard violated administrative procedure under the “major questions doctrine” or by using adjudication rather than rulemaking to announce the standard, as well as the notion that retroactive application of the new standard was manifestly unjust. Additionally, as Member Kaplan noted saliently in dissent, though the Board explained why its new Cemex bargaining order standard was consistent with precedent, Cemex has potentially shaky legal underpinnings since the Board “adopted a standard that squarely conflicts with not one, but two Supreme Court Decisions: NLRB v. Gissel Packing Co., 395 U.S. 575 (1969), and Linden Lumber Division, Summer & Co. v. NLRB, 419 U.S. 301 (1974).”

Relatedly, General Counsel Jennifer Abruzzo issued recent guidance instructing the Regions on how to interpret and apply Cemex. See G.C. Memo 24-01 (Nov. 2, 2023). Mostly nestled in the footnotes of this memo, the critical takeaways encompass three main areas:

Bargaining Demands:

  • The union’s demand can be in any form—verbal or written.
  • A demand is deemed received by the employer if given to any “representative or agent,” which the GC has defined as broadly as possible: anyone acting on behalf of the employer. Therefore, for all practical purposes, any low-level supervisor who receives a valid demand will qualify.
  • Though not conveyed directly to the employer, a union’s filing of an RC petition would count as a bargaining demand if the union checks a certain box on the NLRB form and notes in the comments that the petition serves as its demand.

ULPs Setting Aside an Election:

  • Critically, the GC makes clear that even a minor 8(a)(1) or 8(a)(3) ULP during the “critical period” can trigger a bargaining order.
  • The critical period begins on the date of the demand and lasts through the date of the election. In a footnote, the GC clarified that ULPs which occur after a valid demand is made, but before any petition is filed, could result in a Region setting aside an election and issuing a bargaining order.
  • For non-hallmark charges (i.e., ULP allegations not involving discrimination against protected activity), the GC notes that the Region will examine a host of factors in deciding whether to potentially set aside the election, including the number and severity of violations, the degree to which the violation was disseminated throughout the unit, the unit’s size, the temporal proximity between the violation and an election, and the scope and number of unit employees impacted.
  • As a reminder, having certain handbook or other workplace policies could qualify as a predicate 8(a)(1) charge under Stericycle, Inc., 372 NLRB No. 113 (August 2, 2023) (related blog post can be viewed here), which could now be grounds for the NLRB setting aside the election and issuing a Cemex bargaining order.

Procedural Clarity:

  • When faced with a valid demand, an employer has two weeks to either recognize the union or file an RM petition. Once those two weeks lapse after a demand, an employer is vulnerable to the union’s filing of an 8(a)(5) ULP seeking a bargaining order.
  • In clarifying footnotes, the GC directed the Regions to consider employer’s claims of unforeseen circumstances to meet that two-week deadline on a case-by-case basis and noted that while employers may ask to view evidence of majority status (such as a card check procedure by a neutral third party), doing so would not toll the two-week deadline to file an RM petition.
  • Although an employer that files an RM petition in order to test the sufficiency of the union’s claim of majority status can object to the union’s proposed unit definition using the NLRB’s form, the Region will continue to presume that the union’s requested unit is appropriate, and the employer has its normal burden to show the inappropriateness of the union’s proposed unit.
  • In a footnote, the GC seems to suggest that an employer need not file an RM petition if a union files an RC petition. However, according to the memo, if the union withdraws its RC petition before an election but is still claiming majority status, the employer may “promptly” file an RM petition to challenge that claim.

Despite these updates, open questions linger about this controversial new Cemex standard, and perhaps the most notable of these is how the Circuit Courts of Appeal (and potentially the United States Supreme Court) will address it.

In the meantime, while we wait for some of those answers, employers should emphasize training of all supervisors, including low-level ones, about the implications of this new standard, since they may well be the ones receiving a bargaining demand. Furthermore, because any ULP can result in a bargaining order and function to set aside an election, employers must review their policies and practices to ensure compliance. Finally, given that the Board has already streamlined the procedures for elections, it may be too late to build your playbook once a demand is received, which means that appropriate, advance preparation is key.

Employers with questions or concerns navigating this new standard should reach out to Seyfarth’s team of experienced labor attorneys to help guide them through these issues.

By Darien Harris, Elizabeth L. Humphrey, and Tim Watson

Seyfarth Synopsis:  Texas has joined a number of other states in prohibiting employers, including healthcare providers, from requiring their workforces to be vaccinated against COVID-19. As a result, employers in Texas must review their vaccination policies and could be faced with tough choices in the event of another significant outbreak of the COVID-19 virus.

On November 10, 2023, Texas Governor Greg Abbott signed into law S.B. 7—legislation prohibiting private employers from requiring their employees or “contractors” to be vaccinated against COVID-19 as a condition of employment. S.B. 7 also prohibits employers from taking “adverse action” against employees / contractors who refuse to be vaccinated for COVID-19. The law is scheduled to become effective on February 7, 2024.

Employees or contractors who believe they have been discriminated against because of their refusal to be vaccinated may file a complaint with the Texas Workforce Commission (“TWC”) which must investigate such complaints. If the TWC finds that an employer violated the law, then the employer must either (1) reinstate the employee / contractor with backpay and benefits or (2) pay a fine of up to $50,000 for each violation. The TWC also may recover its reasonable costs for investigating complaints. The Texas Attorney General may sue and seek an injunction against employers who have violated the law to prevent future violations.

S.B. 7 applies to all private sector employers and does not exclude healthcare providers such as doctors’ offices, clinics, and health facilities. However, such healthcare providers may establish a “reasonable policy” requiring unvaccinated employees to use protective medical equipment if the employee presents a risk to patients.

Although 17 states require employers to grant exemptions to mandatory vaccination policies, only Texas and Florida prohibit mandatory vaccination outright.

Takeaways

Texas employers should review their vaccination policies in light of the new legislation and evaluate how best to address concerns over COVID-19. Because S.B. 7 creates a specific exception for healthcare employers—allowing them to require unvaccinated workers to use protective equipment or be tested—it arguably prohibits non-healthcare employers from requiring their workforces to undergo testing or use protective equipment in lieu of being vaccinated. That is, non-healthcare employers who impose such requirements run the risk that the requirements would be considered “adverse actions” against unvaccinated workers under the law. A non-healthcare employer should still be able to require a worker who actually has COVID-19 to stay home—since the employer in that situation is imposing this requirement not because of the worker’s failure to be vaccinated, but rather because the worker actually has COVID-19. Determining whether its workers have the virus, however, will remain a challenge for non-healthcare employers because they are prohibited from testing unvaccinated workers. It remains to be seen whether S.B. 7 would be allowed to stand if there were another significant COVID-19 outbreak similar to 2020 and the federal government took action to prohibit states from enforcing such legislation. 

For more information on this or any related topic, please contact the authors, your Seyfarth attorney, or any member of the Workplace Counseling & Solutions Team or the Workplace Policies and Handbooks Team.

By Robert S. Whitman, Daniel I. Small, and Paxton Moore  

Seyfarth Synopsis: We recently reported here that New York adopted an increased salary threshold of $1,300 per week for determining whether an employee serves in an “executive,” “administrative,” or “professional” capacity for purposes of certain provisions of Article 6 of the New York Labor Law (“NYLL”). That increase, enacted in a September 2023 amendment to the NYLL that takes effect in March 2024, did not relate to determination of exempt status with respect to the NYLL’s minimum wage and overtime provisions.

Shortly after that amendment, the New York Department of Labor issued proposed regulations to accomplish what the statutory revision did not: increase the salary threshold for minimum wage and overtime purposes. These proposed regulations are likely to be adopted, but the precise timing of their effective date is uncertain. The comment period expires on December 4, 2023, so if the DOL issues the regulations in final form, they would likely take effect right around the start of 2024. But it is also possible the effective date would be timed to match the March 2024 date of the other statutory revisions.

As before, to be an exempt “executive” or “administrative” employee for purposes of minimum wage and overtime under the proposed regulations, an employee must be paid on a salary basis in an amount that meets the required threshold. In addition, the employee must perform certain duties, which would be unchanged by the new regulations.

New York routinely sets a higher salary threshold than federal law, and the threshold is generally calculated as 75 times the current applicable minimum wage. It also has historically established different levels based on the size and location of the employer. If the proposed regulations take effect, the new salary thresholds for “executive” and “administrative” employees will be:

New York City, Westchester, and Long IslandThe Rest of New York State
2024: $1,200.00/week
($62,400.00/year)		2024: $1,124.20/week
($58,458.40/year)
2025: $1,237.50/week
($64,350.00/year)		2025: $1,161.65/week
($60,405.80/year)
2026: $1,275.00/week
($66,300.00/year)		2026: $1,199.10/week
($62,353.20/year)

New York does not have a higher salary threshold than federal law with respect to an “employee employed in a bona fide professional capacity.” As such, in New York, the professional exemption will continue to be subject to the federal professional exemption salary threshold of $684.00 per week ($35,568.00 per year).

Seyfarth will monitor the status of the proposed regulations and issue a revised alert if and when they are adopted. Please contact the authors or any Seyfarth attorney with any questions in the meantime.

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By Patrick J. Bannon, Daniel C. Whang, Kelly J. Koelker, and Michael E. Steinberg

Seyfarth Synopsis: About the Program – A lot has happened in the 10 years since our national Wage and Hour Litigation Practice Group wrote ALM’s authoritative Wage & Hour Collective and Class Litigation treatise.  We are excited to launch our informative webinar series to discuss—in bite-sized increments—the past decade’s most important changes to the state and federal employee pay litigation landscape.

During this series, the treatise’s authors, along with those who have contributed to the publication and key practice group members, will cover topics ranging from lawsuit fundamentals to arbitration to settlement strategies. 

Few topics have seen more change in the ten years since the treatise’s release than the law surrounding arbitration of wage-hour claims – both federally and in California. Our panel will discuss current law regarding class and collective action waivers in arbitration agreements, mass arbitration management, and best practices for drafting and implementing mandatory arbitration programs. 

Our Wage & Hour Collective and Class Litigation treatise, published by ALM Law Journal Press, is widely recognized as an authoritative resource on the subject and is commonly used by lawyers, judges, and academicians in researching the many complex and evolving procedural and substantive defense issues that may ultimately determine case outcomes. 

Get your copy here.

Date and Time

Tuesday, December 5, 2023
3:00 p.m. to 3:45 p.m. Eastern
2:00 p.m. to 2:45 p.m. Central
1:00 p.m. to 1:45 p.m. Mountain
12:00 p.m. to 12:45 p.m. Pacific

Register Here

If  were unable to attend our previous sessions, you can find recordings and materials available at the links below.

Time Well Spent: 10 Years of Wage & Hour Wisdom and What’s on the Way

Time Well Spent Session 2: Shifting Standards of Conditional Certification

Time Well Spent: Session 3: Certification and Decertification

By Clara L. Rademacher and Ryan McCoy

Seyfarth Synopsis: In August, the Federal Motor Carrier Safety Administration (“FMCSA”) announced that it would start accepting petitions for waivers from the recent decisions preempting California and Washington’s meal and rest break rules. While the FMCSA has not yet publicized the petitions that it received by the November 13, 2023 deadline, the California Attorney General’s Office, in partnership with the Labor Commissioner, issued a press release publicizing its waiver petition on behalf of all California commercial motor vehicle drivers, regardless of industry, in an effort to “defend” California’s state rules. It remains unclear if and when the FMCSA will address this petition, but the public should be afforded a comment period before the FMCSA decides either way. If this petition is granted, employers can expect to return to the same California meal and rest period scheme that applied to drivers before the preemption determination.

  • The FMCSA’s Invitation For Petitions For Waivers
  • In an unexpected notice published in August 2023, the FMCSA announced that it would start accepting petitions for waivers from its own preemption determinations. Although the FMCSA in 2018 had determined that federal regulations preempted California law, the agency’s announcement signaled a shift in the agency’s view of the preemption determination over more employee-friendly state rules, or at least a shift in the politics surrounding the issue after the exit of the prior administration. Nonetheless, the notice still left unclear important issues including the scope of the waivers the FMCSA may consider granting and whether the FMCSA is considering a wholesale elimination of its prior determinations in California.
  • The California Attorney General’s Petition Seeking Waiver of Preemption And “Defending” California’s Meal And Rest Period Rules
  • No doubt seeing an opportunity after California’s federal and state courts upheld federal preemption despite the State of California’s pleas, the California Attorney General and Labor Commissioner accepted the FMCSA’s invitation and filed a petition seeking a waiver on behalf of all California commercial motor vehicle drivers. The 20-page petition argues California’s meal and rest break rules align closely with the safety recommendations made by other state agencies and empirical studies regarding breaks for commercial vehicle drivers. It also argues truck parking shortages are worse in states without such stringent meal and rest break rules. Thus, the petition concludes, such meal and rest period rules have not contributed to parking shortages, and projects to expand truck parking are in place on both the state and federal level. Finally, the petition claims that trucking has remained a robust industry within the state, and there is no tangible evidence that the state’s regulations have weakened the national supply chain. Though, the petition is silent as to the burden that the state’s meal and rest period rules has on business writ large in California.  
  • The FMCSA’s original notice said the FMCSA “will publish any petitions for waiver that it receives and will provide an opportunity for public comment with respect to the petitions.” Meaning, stakeholders in California should be afforded an opportunity to respond to the Attorney General’s petition before the FMCSA takes action either way. We anticipate that the public’s comments will be boisterous, given that many employers have reasonably relied on federal preemption after the determinations came out and then upheld, one way or another, in both state and federal courts.
  • Employers Should Remain Beware Of Looming Changes
  • As we have written before, the issue of whether drivers are subject to state meal and rest break rules will remain in flux as a result of legal and political considerations. This time, the preemption determination seems to be in acute danger given the FMCSA’s invitation for petitions, and the State of California wasting no time to accept that invitation. Employers should continue to keep their eye on these developments, including any comment period and any action by the FMCSA on the Attorney General’s petition (or any other petition that was filed). This is especially important given the ramifications that preemption (or no preemption) of state meal and rest break rules would have on many employers’ policies and practices, and given the consequences of not complying with these rules, when required.

Seyfarth joined a group of dozens of Am Law 100 law firms that have sent a letter to the deans of top-ranked US law schools. The letter expressed concern over recent reports of targeted anti-Semitic harassment and threats of violence on law school campuses, and urged the deans to take an “unequivocal stance” against such activities.

Bias of any kind has no place in law firms, or in society. As the letter reads, “There is no room for anti-Semitism, Islamophobia, racism or any other form of violence, hatred or bigotry on your campuses, in our workplaces or our communities.” 

In an email to Seyfarth employees about the letter to the deans, firm Chair Lorie Almon noted: “We are proud that at Seyfarth, we truly live our core values and strive to create an environment where everyone belongs, and can feel safe and respected.”

To read the letter, click here.

REGISTER HERE

Wednesday, November 29, 2023
1:00 p.m. to 2:00 p.m. Eastern
12:00 p.m. to 1:00 p.m. Central
11:00 a.m. to 12:00 p.m. Mountain
10:00 a.m. to 11:00 a.m. Pacific

About the Program

  • You’re invited to our highly anticipated webinar, where Seyfarth Shaw LLP’s leading attorneys in non-compete law will skillfully guide you through the intricacies of non-compete agreements in the United States, focusing on the latest updates in 2023. This essential webinar will provide exclusive insights from our 2023-2024 edition of the 50-State Desktop Reference.
  • Coming soon, our 50-State Non-Compete Desktop Reference is the definitive resource for gaining comprehensive insights into non-compete agreements and understanding trade secrets laws throughout the United States. Expertly crafted by our distinguished Trade Secrets, Computer Fraud, and Non-Competes practice group, this updated tool is your gateway to staying at the forefront of the ever-evolving legal landscape.
  • Join us for a one-hour webinar as our esteemed panel provide region-specific insights that will empower legal professionals, HR specialists, and business leaders in navigating the ever-changing landscape of non-compete and trade secrets laws.

Speakers

  • If you have any questions, please contact Sadie Jay at sjay@seyfarth.com and reference this event. 
  • This program is accredited for CLE in CA, IL, and NY. Credit will be applied as requested but cannot be guaranteed for TX, NJ, GA, NC and WA. The following jurisdictions may accept reciprocal credit with our accredited states, and individuals can use the certificate they receive to gain CLE credit therein: AZ, AR, CT, HI and ME. The following jurisdictions do not require CLE, but attendees will receive general certificates of attendance: DC, MA, MD, MI, SD. For all other jurisdictions, a general certificate of attendance and the necessary materials will be issued that can be used for self-application. Please note that attendance must be submitted within 10 business days of the program taking place. CLE decisions are made by each local board and can take up to 12 weeks to process. If you have questions about jurisdictions, please email CLE@seyfarth.com.

    Please note that programming under 50 minutes of CLE content is not eligible for credit in NJ, and programming under 60 minutes of CLE content is not eligible for credit in GA. Programs that are not open to the public are not eligible for credit in NC.
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By Michael Tamvakologos

Seyfarth Synopsis: Many Australian businesses use contractual restraints of trade to protect confidential information and customer relationships. In this update we answer frequently asked questions about the future of restraints of trade in Australia, and consider options available to companies in the event that some types of restraints are no longer available.

Are restraints of trade still allowed?  

Yes – in the sense that the rules that have applied for years still apply for the moment.

Restraints of trade can form part of an employment arrangement (usually in the employment contract or a deed) and sale of business agreements and will be valid and enforceable in certain situations.

There are a fairly complicated set of both rules and principles that Courts apply in determining whether a restraint will be valid, and warranting remedy, where it has been or might be breached. The basic rule is that a restraint will be unenforceable unless there are special circumstances where a restraint protects a legitimate interest recognised by law. This interest must be recognised by the law and deemed reasonable by the Court both as between those who agreed to it, and taking into account the public interest.

Generally, Courts take a more permissive approach to sale of business restraints (which typically restrain the vendor from accepting business from former clients of the business sold for a period of time). The idea is that sale of business restraints are a public good because they benefit trade. Courts typically need much more convincing that a restraint in an employment agreement is enforceable.

When is a restraint reasonable and enforceable?

This depends on the particular circumstances. A Court will consider the scope of the restraint (the activities – such as not competing or poaching staff), how long the restraint applies, and its geographical area.

For more detail, click here to receive a copy of my article in the Australian Business Law Journal.

Are employment restraints about to be banned in Australia?

Short answer is no, not yet, but their future looks uncertain.

Businesses that use restraints of trade to protect confidential information going to competitors when employees leave, or purchasers acquiring a business who want to protect goodwill will be keen to understand the future of restraints of trade in Australia. The Australian Competition and Consumer Commission (ACCC) is presently reviewing whether restraints will be banned in Australia following a referral from the Federal Government.

We’ve set out key information about the state of play below. If you see something important and need more insight, speak to any of our partners. We have had deep involvement in many of the most contentious and high stakes cases decided in Australia and have broad advisory expertise in this area.

Are there many types of restraint and which are being reviewed?

Yes, there are many different types of restraint. They include:

  • Non-competition restraints which forbid working for a particular company or in a particular industry.
  • Non-poaching restraints which forbid soliciting or encouraging staff or clients to leave one organisation and join another.
  • Sale of business restraints which are typically a form of non-competition restraint given by a vendor to the purchaser of a business promising not to set up in competition and take clients or staff away.

We understand that all of these types of restraints are under review.

If we were to speculate, what changes will the Government make?

It depends much on what recommendations the ACCC provides the Government with, and then, of course, whether the Government has the numbers in Parliament to implement any recommendations it accepts.

Judging by what has occurred in other countries, most notably the United Kingdom and the United States of America (who Australian politicians commonly look to for ideas), consideration will be given to:

  • banning non-competition restraints contained in employment contracts;
  • limiting non-solicitation of client or staff restraints to a short period of time, say three months maximum; and
  • only permitting enforcement of a restraint where there is specific and separate payment for the period the restraint operates.

It is likely that sale of business restraints will be left alone or subject to additional criteria. We do not anticipate them being banned altogether.

Restraints of trade have been in place for hundreds of years. Why is the Government reviewing them now?

The catalyst for the review in Australia was a 2023 decision by the Federal Trade Commission (FTC) in the United States of America (similar to Australia’s ACCC which enforces competition laws) to issue a rule that all employment non-compete agreements (but not sale of business agreements) be banned, and even existing non-compete agreements be rescinded.

Although this FTC rule is not in effect whilst consultation about the proposal is occurring, the proposed change has unleashed quite the energetic backlash with more than 11,000 submissions being filed with the FTC about the proposals, with plenty of media making the case both for and against restraints. This is mostly due to US legislative activity expanding to impose restrictions on confidentiality and non-disparagement agreements following a separate decision from the National Labour Relations Board which found an increase in corporate suppression of misconduct and ill-treatment of shareholders, consumers and employees.

Interestingly, other employment restrictions including non-disclosure and non-solicitation agreements are exempt from the ban. The affected ability for employers to include confidentiality and non-disparagement clauses in separate agreements has been proposed in conjunction with the ban on non-compete clauses on the basis that these provisions provide an unfair method of competition. In the past, employees have been found to be best positioned to reveal employer misconduct as a result of their access to private, in-house information. This has in turn, attributed to a growing concern for employer abuse in the implementation of strategic confidentiality provisions and contractual clauses aimed at preventing an employee from exercising workplace rights and disclosing misconduct and wrongdoing.  

The criticisms of the FTC proposal are many and varied, including that:

  • The FTC does not take into account the many positive reasons for non-compete agreements, such as promoting innovation and giving companies a better chance to protect confidential information;
  • The FTC does not have congressional authority to make the rule banning non-competes that it proposes – this issue will be determined through litigation in 2023 and 2024; and
  • The reasons given by the FTC for banning non-competes lack substance. For example, the FTC cites the overuse of non-competes to restrict the mobility of low-earning employees, but does not explain why senior employees who have confidential and commercially sensitive information and move from a company to a direct competitor should not be subject to such restraints.

A number of States in the U.S. including California, North Dakota, Oklahoma, and Minnesota have now proposed State legislation to ban non-competes. Other States in the U.S. including Washington, Oregon, Nevada, Colorado, Illinois, Maine, Massachusetts, Rhode Island, Maryland, Virginia, and the District of Columbia have enacted legislation which is restraint friendly or unfriendly. You can find a State-by-State comparison prepared by our United States colleagues here.

The UK government appears to have followed suit shortly after the FTC’s announcement in proposing a statutory limit on the length of non-compete clauses of three months. The UK’s position aims to boost flexibility in the labour market and unleash greater competition and innovation. It is unclear from the UK’s proposal how this is to affect current in-place non-compete clauses.

In the case of Europe, no major jurisdictions have banned non-competes completely. They remain enforceable, given the commonality for employers to opt to embed non-compete clauses in employment agreements of essential employees. Many jurisdictions have a limit of 12 months on non-compete periods, requiring some non-compete periods to be paid fully or partly as is the case in France, Spain, Italy, Belgium, Denmark, Poland, Norway, Portugal, and Germany.

There is specific legislation in New South Wales that helps companies enforce restraints. Will that be changed?

We can only speculate at this point. If the Federal Government changes the law concerning restraints (for example, by placing a strict cap on the duration of employment restraints), it is likely the change in law will apply uniformly across the country, which will alter the position in New South Wales.

We are common users of restraints of trade in our business. What can we do now to put ourselves in a good position in case employment restraints are not available in the future?

Restraints are very common in some industries and professions. In the only Australian study examining the prevalence of restraints, Chia and Ramsay (2016, Australian Journal of Labour Law) found that restraints are most commonly used in financial services, professional services, technology, real estate, recruitment and in wholesale and consumer products businesses.

Although a good restraint of trade can offer important benefits to a business if it is well drafted and used for the right reasons, it is important to bear in mind that there are other means to protect confidential information. Sections 182 and 183 of the Corporations Act 2001 (Cth) prohibit directors and employees improperly misusing information obtained through their employment. Further, equitable rules regarding the misuse of confidential information, agreed contractual provisions, legislation protected trade secrets and common law protected intellectual property all ensure the security of privileged information.

The issue is that none of the means described above offer the same protection that a good restraint of trade does. For example, assuming a valid restraint has been agreed upon, a top salesperson who leaves to join a competitor can be restrained for a reasonable period to (a) enable the former employer to replace them, and (b) provide a replacement salesperson with a chance to meet clients and form customer connections. Absent a restraint, there are no strong legal protections that deal with this kind of situation.

In terms of what can be done to protect business assets, such as confidential information or critical customer connections in the face of a potential ban on restraints, we can take some guidance from what companies have done in some U.S. States, such as California, where restraints were banned years ago. Over time, a number of legal and economic instruments have been developed and deployed including:

  • Use of choice-of-forum clauses (where there are differences between States) that may enable the law of a different forum to regulate the contract;
  • Stronger drafting of confidential information protection contained in the employment contract or Non-Disclosure Agreement clauses (which can be used throughout the employment not just at the start);
  • In industries where this solution is appropriate, invention assignment agreements (typically used in technology companies and universities) where the employee agrees in advance that any inventions developed in the course of the employment belong to the employer;
  • Use of deferred compensation mechanisms to encourage employees to stay with a firm or to leave on terms which protect confidential information and customer relationships; and
  • Increased use of legislation protecting trade secrets and confidential information.

Other novel solutions also exist in particular industries and professions.

Is there merit in the criticism of restraints of trade, that they suppress wages and trap employees in jobs they don’t like?

This is a contentious topic, and there is no straightforward answer. Much depends on the stance taken on some philosophical issues such as whether employees should ever be in a situation where they cannot freely move around in a labour market and pursue their own best interests.

If it is accepted that there is a trade-off to be struck between labour mobility and the protection of company interests, such as confidential and commercially sensitive information or investment in staff and clients, the issue is where the appropriate trade-off should be.

Various overseas studies have looked closely at this issue from different perspectives include a macro whole of economy perspective, a business level perspective and an individual employee perspective. For example:

  • Ronald Gilson from Columbia Law School emphasised that the success of Silicon Valley in California is in large part attributable to the State ban on restraints. Knowledge spillovers between firms, so the argument goes, allow ideas to spread to where they are most likely to be commercialised – which accelerates innovation and is good for the economy and society.
  • By analysing a large volume of patent and other data, Agrawal, Cockburn and McHale (2006, Journal of Economic Geography) noted that it is social ties between people that results in idea and information flows. These researchers found that even after an inventor had moved companies or geographies, knowledge flow at the old location was 50% higher than when they had lived and worked there. This indicates that personal relationships endure over time, space and organisational boundaries. These researchers would not consider restraints a major variable impacting idea and information flows.
  • In a thorough and long paper, Posner, George Triantis and Alexander Triantis (2004, Olin Working Paper No. 137, University of Chicago Law & Economics) considered the issue from an economic efficiency perspective (that is, what is the correct balance point between labour mobility and employer investment in human capital), and concluded that the choice and drafting of a restraint can deal with these tensions, although there are economic incentives for both contracting parties to agree to excessively broad restraints upfront which can be a problem if they cannot be renegotiated at a later date.
  • Arup, Dent, Howe and Van Caenegem (2013, University of New South Wales Law Journal) considered the impact of legal practice (that is, how the law works in practice) upon the enforceability of restraints of trade, and found that when an employee leaves and hard bargaining occurs under circumstances of uncertainty concerning whether the restraint will be enforced, often the former employee is at a financial and expertise disadvantage unless the new employer is willing to become involved and to provide financial and legal support.

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By Michael Herbst, Suzie Saxman, Bob Bodansky, Trevor Tullius, and Stan Bloch

Seyfarth Synopsis: As you may know, the Corporate Transparency Act (“CTA”) is set to take effect on January 1, 2024 (“Effective Date”), impacting many privately held corporations, limited partnerships, statutory trusts, limited liability companies, and other similar entities. At a high level, the goal of the CTA and its associated beneficial ownership information regulations (the “BOI Regulations”) is to penetrate through layers of intermediate entities and identify to FinCEN, for law enforcement purposes, the individuals ultimately exercising control or enjoying ownership of entities doing business in the U.S.

The CTA will require certain companies (each, a “Reporting Company”) to (1) report specific beneficial ownership information (“BOI”) to the United States Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”), (2) disclose information about who created the entity or registered it to do business in the United States, and (3) report any change to previously reported information within a specified time period.

The CTA may apply to most if not all of the entities in your organization, and it adds a new material layer of regulatory compliance for your entities. This update is intended to bring the CTA to your attention and is provided for informational purposes only. This is a summary only, and you may wish to consult with us for legal advice before you report.

When Must a Report Be Filed?

For a domestic Reporting Company created before January 1, 2024 or an entity that became a foreign Reporting Company before January 1, 2024, a report must be filed with FinCEN not later than January 1, 2025. For a domestic Reporting Company created after January 1, 2024 and entities that become a foreign Reporting Company after January 1, 2024, a report must be filed within thirty (30)[1] calendar days after receipt of notice of creation (domestic Reporting Companies) or registration to do business in the U.S. (foreign Reporting Companies).

Which Entities Are a Reporting Company?

There are two types of Reporting Companies, domestic and foreign. An entity created by the filing of a document with a secretary of state or similar office under the laws of a U.S. state is a “domestic reporting company,” unless it is exempt. A “foreign reporting company” is an entity formed under the laws of a country other than the U.S., but registered to do business with a secretary of state or similar office under the laws of a U.S. state, unless it is exempt. This encompasses nearly all entities (e.g. corporations, LLCs, LLPs, etc.) unless an exemption applies.

Who Is a Beneficial Owner?

A beneficial owner is an individual who, directly or indirectly, through contract, arrangement, understanding, relationship, or otherwise, exercises substantial control over an entity or owns or controls, directly or indirectly, 25% or more of the ownership interests in an entity. Rights to convert into an ownership interest, such as options, warrants, and convertible notes are treated as if exercised when calculating ownership.

As stated in the BOI Regulations, under the “substantial control” prong of the beneficial owner definition, the following persons are beneficial owners:

  • any “senior officer,” defined as a person “exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer or any other officer, regardless of official title, who performs a similar function” 
  • any member of the board of directors
  • any individual with authority to appoint or remove a majority of board of directors
  • any individual who “directs, determines or has substantial influence over important decisions”
  • any individual who exercises “any other form of substantial control”
  • any individual exercising indirect control through: ownership or control of a majority of the voting power; control over “one or more intermediary entities that … exercise substantial control over” the company; and “arrangements or financial or business relationships, whether formal or informal”

This list is not exhaustive and additional persons may be deemed to exercise “substantial control” depending on the circumstances.

What BOI Must Be Reported?

A Reporting Company must disclose the following information with regard to each individual beneficial owner:

  1. full name;
  2. date of birth;
  3. complete current residential street address;
  4. ID number and jurisdiction of issuance for one of the following:
    • US passport,
    • state, local, or Indian tribal identification document, or
    • state-issued driver’s license; and
  5. an image of the document from which the ID number was obtained

If the individual has none of the above listed documents, a passport issued to them by a foreign government will suffice.

When BOI previously reported to FinCEN changes, an updated report must be filed within thirty (30) days. For example, if a company’s vice president changes residence, the Reporting Company must file an updated report with the new address (and new ID reflecting the new address when one is obtained) within thirty (30) days.

In addition to BOI, the Reporting Company must disclose the following information to FinCEN:

  1. Full legal name of the entity;
  2. Any trade names, doing business as (d/b/a), or trading as (t/a) names through which it conducts business;
  3. The entity’s complete current address of its principal place of business in the U.S.;
  4. State, tribal, or foreign jurisdiction of formation; and
  5. The entity’s federal employer identification number (EIN), or federal individual taxpayer identification number (ITIN), or if these are not available, the taxpayer identification number from a foreign jurisdiction and the name of such jurisdiction.

FinCEN will issue a unique identifying number to beneficial owners (individuals or entities) upon request. A Reporting Company may report the beneficial owner’s FinCEN identifier to FinCEN, rather than an individual’s or entity’s BOI. This will be useful in instances where a beneficial owner does not want to disclose its BOI to the Reporting Company. If a Reporting Company reports a beneficial owner’s FinCEN identifier rather than its BOI, this will also put the onus on the beneficial owner (rather than the Reporting Company) to report any changes to the beneficial owner’s BOI.

Which Entities Are Exempt from the Reporting Requirements of the CTA?

The BOI Regulations provide some limited exemptions. These exemptions include tax-exempt nonprofit entities, tax-exempt trusts, and certain entities already subject to regulatory oversight such as public companies, registered investment companies, and registered investment advisors. The regulations also exempt “Large Operating Companies,” which are companies with more than twenty (20) full-time employees[2] in the US, an operating presence at a physical office within the US, and more than $5 million in gross receipts or sales from sources inside the United States on its prior year federal tax return. Wholly-owned subsidiaries of exempt entities may also be exempt. If a previously exempt company becomes a Reporting Company, for example, a Large Operating Company no longer has twenty (20) full-time employees, then it is required to file a report with FinCEN within thirty (30) days.

How Can You Prepare for Compliance?

In anticipation of the implementation of the CTA, it is recommended that clients begin to prepare now for the impacts of the CTA commencing on January 1. Notably, companies should consider taking the following steps:

  1. Determine which entities that are owned and managed will be considered Reporting Companies under the CTA and whether any exemptions may apply.
  2. Determine the beneficial owners of those Reporting Companies, both at an ownership level and in terms of “substantial control.”
  3. When available, apply for a FinCEN identifier number to facilitate filings.
  4. Commence a process of requesting and collecting BOI that will need to be reported.
  5. Designate person(s) who will be responsible for compliance and making the required filings.
  6. Update internal policies and procedures to effectively collect and report BOI for new Reporting Companies, and create an internal system to capture and report changes to BOI previously reported to FinCEN.

Additionally, a variety of company documents may need to be updated to address CTA issues. For example, it could be appropriate to revise shareholder agreements, LLC agreements, and director and officer engagements to require beneficial owners to provide their BOI to the entity so it can comply with BOI reporting requirements under the CTA. Due diligence for loans, mergers, and acquisitions will likely need to include CTA compliance.

[1] FinCEN has proposed to extend the thirty (30)-day period to ninety (90) days for Reporting Companies that were created between January 1, 2024 and January 1, 2025. We expect that proposal to be implemented, but as of today it has not.

[2] Employees at subsidiary companies do not count towards the number of employees. FinCEN uses the IRS definition of full-time employee which is an employee that works thirty (30) hours or more per week and more than one hundred thirty (130) hours per month.

By Paul Whinder and Daniel P. Hart

Seyfarth Synopsis: At the State Opening of Parliament last week, the UK Government outlined its legislative agenda through the King’s Speech, an annual address where the ruling monarch, wearing the Imperial State Crown, reads a speech that has been prepared by the current Government outlining the Prime Minister’s priorities for the parliamentary year.

Yesterday’s King’s Speech was notable for several reasons. It was Charles III’s first Speech from the Throne as monarch.  It was the first King’s Speech since the late Queen’s father (and Charles III’s grandfather) George VI addressed Parliament in 1951. It set out a number of domestic and foreign policy priorities for the Government ranging from energy independence and the wars in Israel and Ukraine to regulating football clubs and banning cigarettes forever.

And notably by its absence, it included no reference to the UK Government’s previously-announced proposal to limit non-compete covenants to 3 months after employment.

Currently, non-compete agreements in England and Wales are governed by the common law rule of reason, under which such clauses are enforceable if they a) protect a legitimate business interest of the ex-employer; b) they are no wider than reasonably necessary to protect that legitimate business interest; and c) they are not contrary to the public interest.

Courts in Scotland and Northern Ireland take a similar approach. Although English law currently does not impose any per se limitation on the duration of non-compete covenants, courts throughout the constituent countries of the United Kingdom typically are more willing to enforce non-compete covenants of up to six months after termination of employment than restrictions for longer periods.

As we previously reported, earlier this year, the Government issued a policy paper in which it announced its proposal to limit non-competes. Unlike the approach taken by the U.S. Federal Trade Commission and increasingly taken by U.S. states, the UK Government does not propose banning non-competes outright. Rather, in its policy paper, the Government announced its intention to introduce legislation that will limit the length of non-compete clauses to 3 months. The Government’s policy paper indicates that the Government’s proposed legislation “will not interfere with the ability of employers to use (paid) notice periods or gardening leave, or to use non-solicitation clauses. These reforms will not cut across arrangements on confidentiality clauses, nor will they affect restrictions on (former) public sector employees under the business appointment rules.”

Although the Government’s policy paper last May announced the Government’s intention to “legislate when parliamentary time allows,” to date no bill has been introduced on this topic. The absence of any reference to this proposal in the King’s Speech suggests that limiting non-competes likely is not a major priority of the Government and that a bill to limit non-competes may not be introduced in the House of Commons any time soon, despite the fact that a limitation on non-competes likely would garner support from the Opposition benches.

That said, if the last decade has shown anything, it has shown that political developments on both sides of the Atlantic are often unpredictable. Given the current trend to restrict non-compete covenants on both sides of the Atlantic, companies with employees in either the United Kingdom or the United States should take a close look at their existing agreements to ensure that they are compliant with current law and that they are sufficiently flexible to address changes in the law in the months ahead.