In the spirit of Labor Day, I thought both employees and business owners in Wisconsin should know about a recent decision on restrictive covenants from the Wisconsin Court of Appeals. The case is important for you or your business because it affects whether certain employer-employee agreements are actually enforceable.

Many Wisconsin employer-employee relationships are governed by restrictive covenant agreements, which typically come in three forms:

  • A non-competition agreement (an agreement not to start a competing business or work for a competitor),
  • a non-solicitation agreement (an agreement not to hire, or help an employee poach the employer’s current employees or customers), or
  • a confidentiality agreement (an agreement to maintain the secrecy of an employer’s confidential information). We wrote on Confidentiality Agreements earlier this summer.

In many other states, these types of agreements are deemed to be illegal and unenforceable. Wisconsin, however, has a different stance, and by statute, allows employers to restrict an employee from competing against its business and protect its own business provided the agreement is “reasonably necessary for the protection of the employer.” What does that mean? Well, Wisconsin Courts have the ultimate power in deciding what is “reasonable” under the law.

 

The Wisconsin Court of Appeals Ruling

Most recently, the Wisconsin Court of Appeals ruled on the reasonableness of a non-solicitation agreement, in the case of Manitowoc Company v. Lanning. Lanning, the employee, was an experienced, well-connected engineer for Manitowoc Company, a company that manufacturers construction cranes and food service equipment. After working for Manitowoc Company in its construction crane division for almost 35 years, Lanning left to work for a competitor in the area. During his time with Manitowoc, he and Manitowoc Company had executed a non-solicitation agreement stating that Lanning would not “solicit, induce, or encourage any employee to terminate their employment with Manitowoc” or to take a new job with a competitor, customer or supplier. Manitowoc believed that Lanning was breaching this agreement by allegedly poaching some of their employees through his new employer, so they sued Lanning to enforce the agreement.

The Court of Appeals ruled that the non-solicitation agreement was unenforceable because the agreement allowed Manitowoc to restrict not only its own interests in restricting competition, but also some of its non-competitive interests. The court found that the agreement applied to Lanning’s poaching of any employee of Manitowoc. This could have applied to a high level executive or key employee in the division Lanning worked (which alone, may have been an enforceable restriction) or even an entry level employee or maintenance worker for the Food Service Division, a division in which Lanning never worked. If enforceable, this would have allowed Manitowoc to restrict Lanning’s ability to encourage any employee to find new work even if the termination of that employee would have had little to no impact on Manitowoc’s ability to compete. The Court noted the agreement would have allowed Manitowoc to enforce the restriction on Lanning even if he encouraged a young family friend who worked for Manitowoc to quit his job to pursue graduate studies and take a job as a barista at Starbucks, and that that would be too broad.

Even though Manitowoc is entitled to prevent an employee from poaching employees that actually affected their competitive interests under Wis Stat. 103.465, if any potential application of the agreement is not reasonably necessary, the entire agreement is void. Essentially, if Manitowoc would have drafted their non-solicitation agreement more carefully to avoid this broad application, their agreement would have been enforceable against Lanning.

 

The Bottom Line

It’s important that these types of agreements are carefully drafted. As this case shows, even if the actions that a former employee are competitive, a poorly drafted provision will not effectively restrict competition of employees and risks making the entire agreement void. Identifying which employees will actually have an impact on an employer’s competitive interests and inserting language in the agreement that limits the restrictions to those individuals is absolutely essential to an effective and enforceable restrictive covenant.

Whether you are an employer or employee subject to a restrictive covenant agreement, or even an employer thinking about entering into these types of agreements with your employees, this case adds some additional complications to the law on restrictive covenants in Wisconsin. With an employee’s or business’ livelihood on the line with these types of agreements, it is well worth it to have your agreement reviewed or drafted by an attorney with experience in the area to ensure it is effective. One of our business attorneys at Schober Schober & Mitchell, S.C. would be happy to help.

top secretA long awaited Federal Law on trade secret misappropriation was signed into effect last month. The new law, titled the Federal Defend Trade Secrets Act, or “DTSA”, creates a Federal cause of action for businesses who own trade secrets against individuals who have misappropriated the business’ confidential information. The law creates a uniform definition of
trade secret; a definition that currently differs from state to state, and that has made litigation difficult for businesses with multi-state presences.

Many businesses’ livelihoods depend upon protection of trade secrets. Trade secrets include secret formulas, designs, ideas, and other forms of intellectual property that are the basis for the business’ competitive advantage in their particular market.  While other type of intellectual property like trademarks, patents, or copyrights require publicizing the particular information to mark it as the business’ own property, publicity of a trade secret risks hindering the business’ competitive advantage, giving the business incentive to keep that trade secret, a secret! A couple famous examples of trade secrets that are currently utilized by American companies are Coca-Cola’s formula for Coke, and Google’s search algorithm.

Of course, without protection of trade secret laws, businesses’ risk their trade secrets falling into the wrong hands. Necessarily, employees, independent contractors, and other individuals often become aware of trade secrets when becoming involved with a particular business. Because these individuals could exploit those trade secrets for their own gain, many states, including Wisconsin, have devised their own trade secret misappropriation laws to give businesses a right to recover damages from a person who gained access to the trade secret and then exploited it for his or her own benefit. However, with the increased nationalization (and indeed globalization) of the modern marketplace,  businesses should welcome a uniform definition of trade secret and a uniform forum in Federal Court for litigating trade-secret misappropriation. These changes in the DTSA ease the procedural and financial burdens that accompany state court trade secret litigation.

What this means for your business

One particularly important section in the DTSA is one affecting confidentiality agreements in business contracts, whether they be between the business and its employees, or between the business and independent contractors. The section requires that, as of May 16, 2016, in order for a business to have the full protection of the DTSA, any agreement regarding trade secrets must provide a specific notice to individuals signing those agreements of their rights and protections as whistleblowers in particular types of trade secret cases.

This recent development in trade secret law demonstrates the importance of keeping your business apprised and compliant with the latest changes to the legal landscape. Whether your business’ confidentiality agreements need review, updating, or need to be drafted in the first place, or if you have a former employee or contractor who you believe misappropriated your trade secrets, contact one of our business attorneys at Schober Schober & Mitchell, S.C. to discuss how we can help.

Many businesses, including law firms and accounting firms, employ interns over the summer. There are a number of reasons such an arrangement works for both sides.

For the business, interns provide bodies that can fill voids in the work staff, since many people center their vacations over the summer. The internship also provides the business with an opportunity to get to know a prospective employee, creating a source of qualified future applicants. For some businesses, interns perform tasks that result in a positive cash flow for the company!

From the intern’s standpoint, the internship provides the coveted “experience” factor which enhances one’s resume. It provides a look into a company to see the company’s culture and determine whether it is a place the intern may be interested in working after graduation. For paid interns, it provides needed spending money, helping loosed the belt on a typically tight student budget.

DOL Position

Balancing the above factors has resulted in a mixed bag as far as internships are concerned: some are paid and some are unpaid. The real question here though is, “how does the government look at this? The Department of Labor leans toward paid internships. The DOL has developed a 6 part test:

The following six criteria must be applied when making this determination:

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

If all of the factors listed above are met, an employment relationship does not exist under the FLSA, and the Act’s minimum wage and overtime provisions do not apply to the intern.  This exclusion from the definition of employment is necessarily quite narrow because the FLSA’s definition of “employ” is very broad.

Final Thoughts

In a second circuit court of appeals case from 2015 (Glatt et al. v. Fox Searchlight Pictures et al.), the court ignored the above 6 part test and instead looked at “which party was the primairy beneficiary of the arrangement.”

With this matter now clouded, it would definitely pay to consult with a knowledgable attorney as to how to treat the compensation issue, as far as interns are concerned. We, at Schober Schober & Mitchell, S. C. would be glad to assist with any such problems.

Employers, you may soon be required to dish out more overtime pay to your employees. On June 30, 2015, the Department of Labor released their plan to “modernize” the Fair Labor Standards Act’s overtime pay rules for salaried employees. Currently, employers are only required to pay time-and-one-half to “white-collar” salaried employees that make $23,660 or less per year (or $455 or less per week). The change in the law would more than double this salary threshold to require that all salaried “white-collar” employees making less than $50,440 per year must receive time-and-one-half  for overtime hours worked. The Department also proposed that this salary threshold would increase annually to match the consumer price index.

Not all employees making this amount are required to be paid extra for overtime hours, however. Only employees who are in executive, administrative, or professional positions and who are under the salary threshold must receive the additional overtime pay.  Under the current regulations, about 11% of salaried employees are eligible for overtime pay, but this change would increase this to about 40% of the salaried American workforce.  It’s estimated that over 5 million salaried workers currently earn more than the current threshold of $23,660 per year but also earn less than $50,440, entitling those individuals to overtime bonus pay for their overtime hours worked.

Of course, this will come at a cost to employers, forcing businesses who wish to avoid paying their employees time-and-a-half to choose between hiring additional staff to reduce overtime hours for full-time staff, or to pay qualifying employees a salary above the new threshold. It’s projected that the rule change will put an additional $1.2 to 1.3 billion in the pockets of these employees newly eligible for overtime pay. The Department of Labor has provided a site where public commentary can be made on this proposed change, where you can provide your input to the Department of Labor. You can comment online by going to the website, www.regulations.gov and posting on Regulatory Information Number (RIN) 1235-AA11.

Schober Schober & Mitchell, S.C. encourages you to contact us for advice in planning how your business will comply with this proposed rule.

This post was written by our law clerk, Jeremy Klang.