In a prior blog post, we used the Star Wars Universe as the backdrop for a discussion about obtaining a preliminary injunction in the context of a noncompete agreement. But we left a discussion of the inevitable disclosure doctrine for another day. Today is that day.
By way of background, the inevitable disclosure doctrine typically plays out as follows. A key employee of a company who possesses all manner of company secrets leaves for a competitor without a trail, digital or otherwise, of actually taking records with him or her to the competitor. Nonetheless, even in the absence of physical copying, the company’s secrets are still in the employee’s head. In the words of the Seventh Circuit Court of Appeals in the case of PepsiCo, Inc. v. Redmond, this leaves the company in the predicament of a "coach, one of whose players has left, playbook in hand, to join the opposing team before the big game."
Common experience tells us that, even assuming good faith, the former employee simply cannot help using confidential information to lure away his/her former employer’s customers or otherwise help the new employer gain a competitive advantage. For example, if the employee knows the confidential pricing for a specific customer, how would he/she not use that information in a sales pitch for the new employer? Indeed, that would likely be a primary reason for the competitor’s recruitment of the employee in the first instance.
As is often the case, however, gut feel of misuse or misappropriation of a trade secret is not necessarily accompanied by direct proof of it. Even when there is proof, using it may not be so easy. For example, when a loyal customer reports an improper solicitation by the former employee, do we really want to drag that customer in to testify in a hearing on a preliminary injunction?
This all begs the question: How can the company convince a judge to issue a temporary restraining order and preliminary injunction barring the employee’s use of confidential information without proof of the employee’s misconduct? Enter the inevitable disclosure doctrine.
The inevitable disclosure doctrine, at its core, is a rule of pragmatics. It recognizes the practical reality that once employees have knowledge of a company’s confidential business information, it is impossible to compartmentalize that knowledge and avoid using it when they go to work for their new employer in the same industry.
The doctrine in New York has roots going back to 1919, in the case of Eastman Kodak Co. v. Powers Film Products, Inc. In the 1990s, the doctrine hit its peak in two contexts. First, in Lumex, Inc. v. Highsmith, the U.S. District Court for the Eastern District of New York held that when the departing employee had signed a noncompete agreement, the doctrine supplied the missing element of actual proof of use of trade secrets on a motion for a preliminary injunction even when the departing employee acted with the utmost good faith. Second, in DoubleClick Inc. v. Henderson, the New York State Supreme Court in New York County held that, even in the absence of a noncompete agreement, when the departing employee left with physical or electronic files, the inevitability of use of the trade secrets in such a circumstance springs from the already proven misconduct of the employee.
The decisions in Lumex and DoubleClick seemed to usher in a more welcoming attitude towards the doctrine. But that was somewhat short-lived. The doctrine receded from its high water mark when employers attempted to broadly use it as a substitute for a noncompete agreement. In Earthweb v. Schlack, decided by the U.S. District Court for the Southern District of New York, the employer sought to enjoin its former employee from working for a competitor even though the parties’ agreement contained no such prohibition. The Court held that in absence of evidence of actual misappropriation of confidential information, it would not essentially draft a noncompete for the parties under the guise of inevitable disclosure. The Appellate Division, Third Department, reached a similar result in Marietta Corp. v. Fairhurst, where the Court refused to use the inevitable disclosure doctrine in a manner that would convert a nondisclosure agreement into a noncompete agreement.
Most recently, on December 30, 2016, the U.S. District Court for the Southern District of New York, in Free Country Ltd. v. Drennen, declined to use the inevitable disclosure doctrine to enjoin the solicitation of customers in the absence of a noncompete agreement.
The issue now is whether the inevitable disclosure doctrine has lost its teeth and, if it hasn’t, how can an employer actually use it to stop its trade secrets from being used when it can’t prove misappropriation. The short answer is that the inevitable disclosure is not dead. It still has its power when used in its proper context.
If a company truly wants to protect itself from competition from former employees who possess its confidential information, there is simply no substitute for a narrowly crafted noncompete agreement. The inevitable disclosure doctrine can be used quite effectively to enforce such a noncompete agreement on an application for a preliminary injunction.
The narrower the scope of the restriction, the more receptive a court will be to enforcing it. Before drafting a noncompete, there ought to be a careful discussion of what the employer is really worried about in terms of an employee leaving. More often than not, the concern is about the employee working for a limited group of competitors and/or soliciting a limited group of major customers. In such circumstances, to increase the likelihood of success of enjoining a former employee, a noncompete agreement should actually list the specific group of competitors where the employee would be prohibited from working in the same or similar capacity and/or a specific list of customers whose solicitation would be prohibited. The noncompete itself may also have a clause stating that if the employee were to work for one of the listed competitors or attempt to solicit a listed customer it would be inevitable that the employee would use confidential information. A high level executive, particularly one with access to legal counsel to review and negotiate the agreement, would be hard pressed to later dispute that which he/she expressly acknowledged.
Finally, for those high level executives for whom it is absolutely critical that a noncompete be enforceable, the agreement should provide for the payment of compensation during the period of noncompetition. This was done effectively in Lumex.
Employers are well served to use narrowly crafted noncompete agreements for a limited class of employees whose departure could damage the company’s legitimate business interests. The inevitable disclosure doctrine, for all of its long and winding permutations, can still be a powerful tool -- not a substitute -- for enforcing a noncompete agreement.
One of underlying themes of the now defunct “O’Reilly Factor” was that the liberal elites have brought about the “wussification” of America. In Mr. O’Reilly’s world, personal responsibility has given way to excuses and coddling, begging the question: where is good old fashioned comeuppance when it is needed? We can answer that question.
While Mr. O’Reilly was a lynchpin to Fox News’ highly rated nightly line-up, he was still an employee subject to all of the common law duties and liabilities as everyone else. As an employee, he owed his employer a duty of loyalty. Employed in New York, Mr. O’Reilly is subject to “the mother of all” employer remedies, the so-called “faithless servant doctrine.” Under this doctrine, if Fox News decided to play the very type of hard-ball championed by Mr. O’Reilly, it could -- if it proves the misconduct -- recoup from him every stitch of compensation paid to him during the period of time that he was allegedly sexually harassing Fox employees, every penny owed to him as part of any “parachute,” and punitive damages. Fox may also be able to recoup from Mr. O’Reilly the investigative costs it recently paid to its outside law firm.
In New York, the faithless servant doctrine is more than one hundred years old. This doctrine, a subspecies of the duty of loyalty and fiduciary duty, requires an employee to forfeit all of the compensation he/she was paid from his/her first disloyal act going forward. The doctrine has a deliberate harsh deterrent purpose and public policy goals. Important here, the fact that Mr. O’Reilly brought in millions of dollars of revenue to Fox is irrelevant to a salary forfeiture against him, if the disloyal acts can be proven.
The doctrine has been applied in the specific context of sexual harassment. In Astra USA Inc. v. Bildman, the Massachusetts Supreme Court interpreted and applied New York law, holding that New York’s Faithless Servant Doctrine permitted an employer to recover compensation it had paid to a high level executive who had been the subject of numerous sexual harassment complaints by other employees. Under Astra, the doctrine can reach misconduct that does not involve theft or financial damages to the employer. In upholding a $7 million complete forfeiture, the court aptly stated: “For New York . . . the harshness of the remedy is precisely the point.”
The Astra court relied on the New York Appellate Division, Second Department’s decision in William Floyd Union Free School District v. Wright (argued by the author of this article without any “spin” or “pinhead” elocution). In that case a multi-million dollar forfeiture was obtained by a public school district against two high level employees who had stolen from it. In language now cited in other cases, the Court held: “Where, as here, defendants engaged in repeated acts of disloyalty, complete and permanent forfeiture of compensation, deferred or otherwise, is warranted under the Faithless Servant Doctrine.”
Despite Astra and William Floyd, disloyal employees have tried to limit the scope of the forfeiture. On June 2, 2016, the Appellate Division, Third Department added strength and vigor to the faithless servant doctrine in a case where an employee committed repeated acts of theft. In City of Binghamton v. Whalen (also argued without spin by the author of this article), the Court reaffirmed the strict application of the faithless servant doctrine: “We decline to relax the faithless servant doctrine so as to limit plaintiff’s forfeiture of all compensation earned by the defendant during the period of time in which he was disloyal.” The Court specifically noted that the faithless servant doctrine is designed not merely to compensate the employer, but to create a harsh deterrent against disloyalty by employees.
Published reports indicate that Mr. O’Reilly is parachuting out of Fox with tens of millions of dollars. Under the earnest moral convictions and biblical brimstone that were the hallmark of Mr. O’Reilly’s long tenure with Fox, he should forfeit it all back if the allegations of sexual harassment can be proven by Fox. Mr. O’Reilly famously closed his show with a “word of the day.” We offer two such words: “Faithless Servant.”
On February 22, 2017, the New York State Workers’ Compensation Board unveiled proposed regulations concerning the state's new Paid Family Leave (PFL) law. The PFL law was passed as part of the 2016 state budget and will eventually require virtually every New York employer to provide employees with up to 12 weeks of paid leave: (1) for the birth, adoption, or placement of a new child; (2) to care for a family member with a serious health condition; or (3) for a qualifying exigency arising from a family member's military service (as defined in the federal Family and Medical Leave Act). This program will be funded through employee payroll deductions. PFL is not intended to cover an employee's own serious health condition; rather, PFL is intended to complement the already existing state disability insurance program. The basics of the PFL law can be found in our earlier blog article on this subject. The Workers' Compensation Board will be accepting comments on the proposed regulations for 45 days from the date of their release -- until April 7. Click here to review the proposed regulations and to access an online link to submit comments. The state also recently launched a website providing information about PFL for employers and employees and set up a new helpline. Notably, however, the details on this new PFL website reflect the program as it would exist under the proposed regulations, meaning the information there is not yet final (despite how it appears). The proposed regulations contain a great deal of detail to digest, but several significant points will immediately catch the attention of employers:
First, the state proposes a system where employees apply directly to the employer's insurance carrier for PFL benefits. The employer merely completes one section of a claim form before it is submitted to the carrier by the employee. The insurance carrier makes the final determination -- not the employer. The proposed regulations provide specific details on the format, contents, and timing of claims and decisions on claims. This is significant because the insurance carrier's determination will have an impact beyond just the payment of benefits to the employee: it will also require the employer to protect the employee's job, and to maintain his/her health insurance benefits for the duration of the leave. Additionally, for employers and employees covered by the Family and Medical Leave Act (FMLA), FMLA and PFL benefits will typically run concurrently (more on this below). Therefore, employers will be faced with a situation where they are making a leave decision simultaneously with an insurance carrier for the same exact leave. There could be a situation where the employer denies leave, and the carrier approves it. (Consider, for example, a situation where the employer believes the medical certification is not sufficient, but the carrier disagrees.) Additionally, the proposed regulations do not include any key employee exceptions like FMLA. Thus, no matter the size of the employer or the role played by the employee, once the carrier approves the leave, the employer must grant it and guarantee reinstatement at the conclusion of the leave.
Second, the proposed regulations set up an arbitration system for the purpose of appealing claims denials. The arbitrator is appointed by the State Workers’ Compensation Board. The proposed regulations do not appear to contemplate a situation where the employer could appeal because it believes the benefits were wrongly awarded. Moreover, it is easy to anticipate the complications that could arise if an arbitrator reverses a claims denial. If the employer denied the time off because the claim was denied and the purpose for the leave has long passed, what is the employee’s remedy? On the other hand, if the employee already took the time off but used paid time off, do they receive PFL benefits on top of the wages already received? Must the employer restore the employee’s paid time off that was used? All of this is unclear.
Third, employers cannot require employees to use accrued paid time off (such as PTO, sick, or personal time) for the requested PFL time. It can offer the option and then, if the employee elects this option, seek reimbursement from the insurance carrier. If the employee elects to use accrued paid time, the employee is still entitled to be reinstated. If an employee declines this option, he or she can effectively save PTO to be used after his or her return from PFL (which is likely inconsistent with the reason the employer offered various forms of PTO in the first instance).
Fourth, state disability and PFL will not run concurrently. This means that in the case of maternity leave, it appears that an employee could conceivably collect disability payments for the first 6-8 weeks of leave (which would not be a PFL-covered absence), and then transition to PFL for an additional 12 weeks job-protected paid leave, for a total of 18-20 weeks off with partial pay.
Fifth, the regulations do allow PFL and FMLA leave to run concurrently (as mentioned above). However, this will hinge on the employer designating the leave as FMLA leave by providing the notice required under the federal FMLA regulations. Employers need to remember to provide the FMLA designation notice. The insurance carrier's acceptance of a claim for PFL benefits does not automatically cause FMLA leave to run concurrently. Also related to the interplay with FMLA, the differing eligibility standards between PFL and FMLA sets up a situation where a new employee becomes eligible after only working 26 weeks for the employer, and can immediately take up to 12 weeks of job-protected leave. Then, once the employee returns to work and reaches the FMLA threshold of 1,250 hours in 12 months, the employee will be eligible for another 12 weeks of job-protected leave.
A few other aspects of the proposed regulations will also interest employers. Under the proposed regulations, disability insurance carriers will be required to offer PFL coverage in conjunction with their existing disability insurance policies. Employees who are covered by a disability insurance policy will automatically be covered for purposes of PFL effective January 1, 2018. Carriers who choose to get out of the disability insurance business in New York, so as to avoid administering the PFL insurance program, must notify New York State by the earlier of July 1, 2017 or within thirty days of the date the community rates for premiums are published by the state (or within 180 days of discontinuing coverage, if discontinued after 2018). Employers who are self-insured for disability purposes have the option of either self-insuring for PFL benefits or obtaining alternative coverage. The employer must make the election to self-insure by November 30, 2017. Unionized employers with leave provisions in their collective bargaining agreement that are at least as favorable to employees as the PFL program are exempt from the law. However, it is not clear who will make the determination of whether the CBA’s benefits are sufficiently favorable. Additionally, public employers are only covered if they elect to opt-in. These are just a few highlights. There is much more detail covered in the 48 pages of proposed PFL regulations. Employers should take the time to review these regulations and submit comments to the Workers' Compensation Board on how the proposed provisions will impact their workplace. It is possible that many aspects of the regulations will change between now and when they are finalized. Due to the unknown, we do not recommend that employers begin drafting and revising leave policies on the basis of these proposed regulations. However, we do recommend that employers take an inventory of current leave practices and policies and begin to anticipate how they might need to change. Once the final regulations are published, it will be critical for employers to quickly respond. Among other things, employers will be required to provide written details of how PFL benefits are administered to employees. Those written details will need to reflect the processes set forth in the final PFL regulations. We will continue to analyze these proposed regulations and provide additional updates on how they might impact your workplace. Stay tuned to our blog for further updates.
In a decision issued yesterday, the New York State Industrial Board of Appeals (IBA) revoked the regulations regarding payment of wages by debit card and direct deposit. While the full decision is available here, the upshot is that the IBA concluded that the Commissioner exceeded his “rulemaking authority and encroached upon the jurisdiction of the banking and financial services regulators.”
Accordingly, the regulations governing the payment of wages by debit card and direct deposit, which were set to go into effect on March 7th, are revoked. Employers need not act to come into compliance with those regulations.
An appeal is possible. Stay tuned.
Pursuant to new regulations that take effect on March 7, 2017, New York employers will be required to satisfy certain notice requirements and obtain employees' informed consent before paying wages by debit card or direct deposit. (Additional information concerning those regulations can be found here.) In connection with those regulations, this week the New York State Department of Labor posted model templates for written notice and consent for public comment and feedback.
The notice and consent for payroll debit cards can be found here.
The notice and consent for direct deposit can be found here.
Comments and feedback can be submitted to regulations@labor.ny.gov through February 10, 2017. The Department indicates that after making any changes from such comment and feedback, it will post updated templates prior to the March 7 effective date of the rule, along with translations into additional languages specified during the rulemaking process.
As expected, this morning, the New York State Department of Labor published its final rule increasing the salary threshold applicable to exempt executive and administrative employees in New York State. While the ultimate fate of the USDOL’s regulations remains unclear, New York employers now know that the salary threshold applicable to exempt executive and administrative employees will increase effective December 31st. As previously reported, under New York’s Labor Law, the salary threshold for executive and administrative employees (NY law does not set a salary threshold for professional employees and thus the federal salary of $455 applies) is currently $675 per week -- 75 times the current minimum wage of $9.00 per hour. With the minimum wage set to gradually increase in coming years (at different rates depending on geography), the New York State Department of Labor has implemented corresponding increases in the applicable salary threshold. The first of these increases will take effect in just three days. Specifically, the increases to New York's salary threshold for executive and administrative employees are as follows: Employers Outside of New York City, Nassau, Suffolk, and Westchester Counties
$727.50 per week on and after 12/31/16;
$780.00 per week on and after 12/31/17;
$832.50 per week on and after 12/31/18;
$885.00 per week on and after 12/31/19;
$937.50 per week on and after 12/31/20
Employers in New York City"Large" employers (11 or more employees)
$825.00 per week on and after 12/31/16;
$975.00 per week on and after 12/31/17;
$1,125.00 per week on and after 12/31/18
"Small" employers (10 or fewer employees)
$787.50 per week on and after 12/31/16;
$900.00 per week on and after 12/31/17;
$1,012.50 per week on and after 12/31/18;
$1,125.00 per week on and after 12/31/19
Employers in Nassau, Suffolk, and Westchester Counties
$750.00 per week on and after 12/31/16;
$825.00 per week on and after 12/31/17;
$900.00 per week on and after 12/31/18;
$975.00 per week on and after 12/31/19;
$1,050.00 per week on and after 12/31/20
$1,125.00 per week on and after 12/31/21
A chart summarizing these thresholds is available on the NYS DOL website. What does this mean? It means that if you have any exempt executive or administrative employees who are currently paid less than the applicable salary threshold set forth above, you must increase their salary to at or above that threshold or reclassify them as nonexempt. But fear not -- you have three days. What a perfect way to end the year -- a significant change imposed on New York employers with virtually no notice. Happy New Year everyone!
You read that right -- not to be outdone by its federal counterpart -- the New York Department of Labor recently proposed significant changes to the salary threshold applicable to exempt executive and administrative employees in New York State -- changes all New York employers should be aware of. As you know, both state and federal law regulate exempt status and, to be exempt, an employee must satisfy the requisite tests under both. While employers are preparing for changes at the federal level that will go into effect on December 1st -- raising the salary threshold for most executive, administrative and professional employees to $913.00 per week -- the New York State Department of Labor has taken the opportunity to propose significant increases to New York's salary threshold. Currently, the salary threshold for executive and administrative employees (NY law does not set a salary threshold for professional employees) is set at $675.00 per week -- 75 times the current minimum wage of $9.00 per hour. With the minimum wage set to gradually increase in coming years (at different rates depending on geography), the Department of Labor has proposed corresponding increases in the applicable salary threshold. As a result of these proposed increases, New York's salary threshold will overtake the federal threshold in coming years. (Note: because the $913.00 per week federal salary threshold will be indexed, it will be adjusted every three years with the first such adjustment occurring in 2020.) Specifically, the Department of Labor has proposed the following increases to New York's salary threshold for the executive and administrative exemptions: Employers Outside of New York City, Nassau, Suffolk, and Westchester Counties
$727.50 per week on and after 12/31/16;
$780.00 per week on and after 12/31/17;
$832.00 per week on and after 12/31/18;
$885.00 per week on and after 12/31/19;
$937.50 per week on and after 12/31/20
Employers in New York City"Large" employers (11 or more employees)
$825.00 per week on and after 12/31/16;
$975.00 per week on and after 12/31/17;
$1,125.00 per week on and after 12/31/18;
"Small" employers (10 or fewer employees)
$787.50 per week on and after 12/31/16;
$900.00 per week on and after 12/31/17;
$1,012.50 per week on and after 12/31/18;
$1,125.00 per week on and after 12/31/19;
Employers in Nassau, Suffolk, and Westchester Counties
$750.00 per week on and after 12/31/16;
$825.00 per week on and after 12/31/17;
$900.00 per week on and after 12/31/18;
$975.00 per week on and after 12/31/19;
$1,050.00 per week on and after 12/31/20;
$1,125.00 per week on and after 12/31/21;
After a 45-day public comment period, the Department of Labor will likely move toward finalizing these proposed changes. As if business owners, executives, and human resource professionals did not have enough to deal with.
New York’s Election Leave Law requires employers to post a voting leave notice at least ten (10) working days before "every election." This year, the general election will be held on November 8, 2016. Therefore, employers must, if they have not already done so, post a notice no later than today, October 25, 2016.
A sample of the notice required under the New York Election Law can be found on the New York State Board of Elections web site. This notice must be posted at least ten (10) working days before the election “conspicuously in the place of work where it can be seen as employees come or go to their place of work” and must remain in place until the polls close on Election Day. The Election Law requires the notice to be posted before “every election” – not just general elections – so employers should consider whether to keep this notice posted throughout the year.
In addition to posting the notice, employers should also make sure to afford employees voting leave when obligated to do so. Under New York Election Law § 3-110, registered voters are entitled to take up to two (2) hours of paid time off from work if they do not have “sufficient time" outside of their working hours to vote. If the registered voter has four (4) consecutive hours either between the opening of the polls and the beginning of the working shift, or between the end of the working shift and the closing of the polls, it will be assumed that the voter has sufficient time to vote. (For general elections, the polls in New York State open at 6:00 a.m. and close at 9:00 p.m.).
However, the voter is not automatically entitled to take paid time off to vote if he or she does not have four consecutive hours at the beginning or at the end of the working shift. The voter must still show that the time he or she has at the beginning or at the end of the working shift is not sufficient to vote. If the voter can make such a showing, the voter will be entitled to take only as much paid time off (up to a maximum of two (2) hours) that, when added to the voting time the voter has outside working hours, will enable the individual to vote. Furthermore, New York’s Election Leave Law requires employees to notify the employer at least two (2) working days, but not more than ten (10) working days, prior to the election of the need for voting leave. For this year’s general election, requests for time off to vote should be made between Tuesday, October 25, 2016 and Friday, November 4, 2016. The employer may designate that this paid leave be taken off at the beginning or the end of the working shift, unless there is another mutually-agreed upon time.
On September 7, 2016, the New York State Department of Labor adopted regulations governing the payment of employee wages by any method other than cash or check, including direct deposit and payroll debit cards. The purpose of the new rules, which will become effective on March 7, 2017, is to ensure that workers who are paid via payroll debit cards have access to their wages in full without being subjected to hidden fees.
At least seven business days before taking action to pay employees via payroll debit cards, employers must satisfy certain notice requirements and obtain employees’ informed consent. For example, employers must provide employees with:
a plain language description of all of the employee’s options for receiving wages;
a statement that the employer may not require the employee to accept wages by payroll debit card or direct deposit;
a statement that the employee may not be charged for any fees for services that are necessary for the employee to access his/her wages in full; and
if offering the option of payroll debit cards, a list of locations of fee-less ATMs within a reasonable travel distance from the employee’s workplace or residence (a link to a website containing such information is sufficient).
Additionally, if employees are covered by a collective bargaining agreement which provides the method(s) of payment by which employees must be compensated, the employer must obtain the union’s approval before paying employees by payroll debit card.
Under the new rules, employers will not be able to pass the costs associated with payroll debit cards onto employees, nor will they be able to accept kickbacks from card issuers, card sponsors, or third parties for delivering wages via payroll debit cards. Significantly, employees who choose to receive their wages via a payroll debit card will:
have access to at least one (1) fee-less ATM within a reasonable travel distance from where the employees work or live;
have access to unlimited withdrawals from a fee-less ATM; and
not incur fees for: checking their balance; maintenance; account inactivity; overdraft; contacting customer service; receiving written statements or transaction histories; closing an account; card replacement (at reasonable intervals); taking action necessary to receive wages or hold the payroll debit card; or point of sale transactions.
Unsurprisingly, business spokespersons predict that New York employers will shy away from using payroll debit cards once these new requirements become effective. One advocate described the new rules as “unworkable.”
It is worth noting that the new rules will not apply to employees working in a bona fide executive, administrative, or professional capacity who earn in excess of $900 per week, nor will they apply to employees working on a farm not connected with a factory.
On August 3, 2016, Governor Andrew Cuomo signed a law legalizing fantasy sports in New York. The timing is critical to the industry, as it may enable major fantasy sports providers to reopen operations in New York by the beginning of the National Football League season in September. Football is easily the most popular U.S. sport for fantasy sports.
It’s hard to anticipate the full impact of the new law on New Yorkers’ level of participation in fantasy sports. But it’s safe to predict that many thousands of them will be back in the game soon. Most of these participants are employees somewhere, and many will be tempted to research or set their lineups during work time instead of performing their regular jobs. With this in mind, here’s a fantasy sports primer for New York employers.
Overview of Fantasy Sports
Americans have participated in fantasy sports for more than 30 years. Originally, the concept was for a group of friends, perhaps co-workers, to get together at the beginning of the season for a particular professional sports league and select a team of players from among those actually playing in the league. Each fantasy team earns points based on the real-life performance of their “players.” Then, in essence, whichever team has the most points over the course of the season wins the fantasy league.
The internet facilitated the expansion of fantasy sports, making it much easier to administer leagues, including those with participants from various geographic locations.
Over the past few years, a new breed of fantasy sports has rapidly emerged. So-called “daily” fantasy sports (popularly abbreviated as “DFS”) contests have been developed to enable people to pick a new team or teams as often as each day, rather than be stuck with the same players over the course of a whole season. Technically, the name of this sub-category of fantasy sports is something of a misnomer. DFS has developed to have contests ranging from only a small subset of a particular league’s games in a single day to a number of games spread out over a whole week. But the key distinction is that the winner is determined based on a much shorter period than an entire season.
Because the results of DFS contests are based on so few games within a sport, they more closely resemble betting on particular games. As a result, this type of fantasy sports has drawn legal attack in a number of states even though the traditional season-long fantasy games have been generally tolerated with little challenge. In fact, since 2006, a federal law has seemingly carved out fantasy sports from prohibitions on internet gambling. However, the Unlawful Internet Gambling Enforcement Act does not itself make fantasy sports of any variety legal under state laws.
Scope of the New Fantasy Sports Law
Fundamentally, the New York law specifically declares that “interactive fantasy sports are not games of chance.” In other words, the Legislature has found that, based on the skill involved in these games, playing them is not gambling in New York.
The law is not technically limited to DFS. Rather, it encompasses more traditional fantasy sports games as well, even though the earlier-created season-long fantasy sports have not been subject to much scrutiny in the past.
Now, any person or entity that wishes to operate any fantasy sports contests in New York where entry fees are paid must register with the New York State Gaming Commission. The law provides for temporary permits to be issued to operators who had already been providing fantasy sports games prior to November 10, 2015 (when the New York State Attorney General had declared daily fantasy sports to be illegal).
Significantly, this law specifically prohibits the following people from playing fantasy sports where an entry fee is paid:
Any member, officer, employee or agent of a fantasy sports operator or registrant;
Certain family members living in the same household as a member, officer, employee, or agent of a fantasy sports operator or registrant;
Anyone with non-public confidential information about fantasy sports contests;
Any athlete whose performance may be used to determine the outcome of a fantasy sports contest;
Any sports agent, team employee, referee, or league official associated with any sport or athletic event on which contests are based;
Anyone located in a state where fantasy sports contests are prohibited; and
Any minor under the age of 18.
The legislation also includes various safeguards intended as consumer protection measures and imposes a 15% state tax on gross revenues earned by fantasy sports operators. The tax revenue will go into the State Lottery Fund.
Notably, this new law may not finally resolve the legal status of fantasy sports in New York. Despite the Legislative declaration that fantasy sports are not games of chance, the New York Constitution does still generally prohibit “gambling” other than state-operated lotteries, pari-mutuel betting on horse races, and casino gambling as specifically authorized by the Legislature. In addition, it also remains debated whether federal law permits or prohibits particular forms of fantasy sports.
Effect on Employee Productivity
Various estimates suggest that more than 50 million people played fantasy sports in the U.S. and Canada in 2015. Millions of those people play DFS, with exact numbers increasingly difficult to estimate due to ongoing restrictions to access from state to state. It is likely that millions of New Yorkers had played DFS before the State Attorney General shut down the major contest providers late last year. Indeed, the New York State Legislature declared in the new statute that “the internet has become an integral part of society, and interactive fantasy sports a major form of entertainment for many consumers.” Undoubtedly, the number of people playing DFS in New York State will increase exponentially (from near zero under the recent moratorium) when the major contest providers reopen in the state.
DFS is, by its nature, typically more time consuming than traditional season-long fantasy sports. Even casual players can spend hours in a day researching the best matchups for that day’s/week’s games. It is this research, and the reality that it affects DFS performance, that has enabled the New York Legislature to find that fantasy sports are games of skill. DFS players who don’t conduct some meaningful level of research are essentially throwing their money away in the long run. So the motivation to spend time selecting teams is clear.
What does this mean? DFS players have to make time to play. Some, perhaps many, will do so at work, using their employer’s equipment, or when they should be sleeping to rest up for the next day. This can lead to lost work time, lost productivity while working, and even risk to computer systems through viruses or other malware. Thus, employers may soon come to prefer that their employees avoid DFS, even to a greater degree than traditional fantasy sports.
What can employers do if DFS or other fantasy sports become a problem for their employees?
Restrictions on Employers
Section 201-d of the New York Labor Law generally prohibits employers from taking adverse employment action against applicants and employees based on their recreational activities. The Labor Law specifically defines “recreational activities” as “lawful, leisure-time activity, for which the employee receives no compensation and which is generally engaged in for recreational purposes, including but not limited to sports, games, hobbies, exercise, reading and the viewing of television, movies and similar material.”
Based on this definition, it’s not clear whether playing daily fantasy sports would qualify as a recreational activity. DFS didn’t exist when the term was defined, and season-long fantasy sports were not nearly as prevalent as they are today. Various aspects of the definition could be questioned regarding this form of entertainment.
First, to be covered by Section 201-d, the activity has to be “lawful.” As discussed above, there is still some question as to the legality of fantasy sports, especially DFS, notwithstanding the new state law purporting to legalize them.
Second, is participation a “leisure-time activity, for which the employee receives no compensation”? Many people participating in fantasy sports are compensated, some quite handsomely. However, the compensation does not come from the employer. So, does this mean that the law only applies to people who are unfortunate enough never to win?
Third, are daily fantasy sports “generally engaged in for recreational purposes”? Fantasy sports are just a hobby for many participants. But, for many others, DFS is actually a business venture. Does this mean the individual’s motivations for playing determine their protection under the law?
Even assuming an employee would be considered to be engaging lawful recreational activities when playing fantasy sports, the Labor Law does allow employers to put some restrictions on their participation. The law only protects employees for engaging in recreational activities outside work hours, off of the employer's premises, and without use of the employer's equipment or other property. So, employers can prohibit employees from playing DFS or other fantasy sports while at work and while using company computers, for example.
Finally, Section 201-d also has a general exception that eliminates employee protection for activity that “creates a material conflict of interest related to the employer's trade secrets, proprietary information or other proprietary or business interest.” This exception might create an argument, for example, that employers in the sports industry or with clients or customers in that industry could prohibit certain employees (even if they are not specifically prohibited from playing under the fantasy sports law) from participating in DFS altogether based on the risk of jeopardizing business relationships or enabling “insider trading.”
Conclusion
Employers across New York should be prepared for the impact of fantasy sports in the workplace, particularly the re-introduction of daily fantasy sports. Most employers will at least want to ensure that DFS players are still getting their work done and not compromising company electronic systems and equipment.
At a minimum, computer usage policies should be reviewed and revised if necessary. For example, generic prohibitions on using company internet access for “gambling” arguably may no longer encompass fantasy sports. Accordingly, new provisions addressing fantasy sports, including DFS, may be warranted.
Some employers in related industries should take special precautions to advise employees (and other related parties) that they are prohibited from playing fantasy sports based on their relationship to the sports or contests involved.
Ultimately, if you experience a particular problem with employees based on their participation in fantasy sports, you will need to navigate not only New York Labor Law Section 201-d as addressed above, but other standard sources of employee protections, such as employment contracts, collective bargaining agreements, and anti-discrimination laws. It is highly recommend that you consult with an experienced labor and employment attorney before taking any disciplinary action based on fantasy sports or other “off-duty” conduct.
Employers in New York are familiar with the requirement, imposed by the Wage Theft Prevention Act, that every new hire must be provided with notice of their rate of pay (including overtime rate of pay if applicable), how the employee will be paid (i.e., by the hour, shift, day, etc.), the regular payday, and information regarding the employer. Employers are obligated to provide an additional written notice anytime that information changes, unless the employee's wage rate is increased and the next pay stub reflects the increase. Each time notice is given, the employer is required to obtain a signed acknowledgment from the employee, and must keep that signed acknowledgement on record for six years. Upcoming changes to the white collar exemptions under the Fair Labor Standards Act may implicate a need to issue new notices if employees are reclassified from exempt to non-exempt. As the law currently stands, employees must earn a minimum salary of $455.00 per week ($23,660 per year) to qualify for one of the white collar exemptions (administrative, executive, or professional) under the FLSA. New York currently has a higher salary threshold of $675.00 per week ($35,100 per year) for an employee to qualify for the administrative or executive exemptions. The current threshold for employees to meet the "highly compensated employee" exemption under the FLSA is $100,000 per year. Starting on December 1, 2016, however, these thresholds will rise substantially. The increased salary threshold for the administrative, professional, and executive exemptions will be $913.00 per week ($47,476 per year). The new threshold for the highly compensated employee exception will be $134,004 per year. These thresholds are set to increase every three years after that, with the first increase taking effect on January 1, 2020. This change will force many employers to reclassify employees who are currently exempt, but do not meet the new salary threshold, as non-exempt. Any such reclassification will affect the rates those employees are paid, how they are paid, and their eligibility for overtime pay. Given this impact, what legal obligation will the reclassification trigger? You guessed it -- the WTPA’s notice requirement. Accordingly, employers should be mindful of this notice requirement when reclassifying employees in order to comply with the updated regulations, or when making any other changes to employee’s rates or method of payment. Although the "pay stub exemption" may apply in some limited instances, the best practice is to provide employees with formal written notice that complies with the WTPA when making any such changes.
After a nearly eight-month delay, the New York State Department of Labor once again published draft Regulations governing the payment of employee wages via payroll debit cards, direct deposit, and other means. As we previously reported, these proposed Regulations would impose several new requirements for New York employers, even for those who merely pay employees by direct deposit. These proposed Regulations – now NYSDOL’s third version – are currently open for public comment.The most recent version is almost identical to the version last proposed in October 2015, with NYSDOL making only two substantive changes: (1) the newly-proposed Regulations make clear that the requirement to provide employees with a “list of locations” -- where they can access and withdraw their wages -- only applies to the use of payroll debit cards; and (2) the newly-proposed Regulations remove language included in the October 2015 version, which provided that, when paid by check, employees must have at least one means of no-cost local access to the full amount of wages through check cashing or deposit of a check at a financial institution (but NYSDOL nevertheless stated that employers must still “ensure that employees are able to access their wages in order for payment to be effective in accordance with the requirements of Section 191 of the Labor Law”). Notably, NYSDOL reiterated that the proposed Regulations will not be effective until six months after they are published and adopted in final form.The reason for the eight-month delay on the part of the NYSDOL in issuing these revised draft Regulations is unclear, but it is expected that final rule-making will now proceed in a timely manner.
