Colorado Courts Draw a Red Line When It Comes to “Blue Penciling”

When a court modifies a contract by adding language or deleting language, it is often referred to as “blue penciling.” Different states have different rules on when and if a court can blue pencil an unenforceable contract. After a recent decision from the Colorado Court of Appeals 23 LTD v. Herman, 2019COA113 (July 25, 2019), don’t count on a Colorado court to blue pencil your unenforceable contracts. 23 LTD v. Herman disabuses us of the idea that a Colorado court must blue pencil an unenforceable contract or that parties can contractually agree to have a court blue pencil an unenforceable contract.

In 23 LTD v. Herman, a recruiting company sued a former employee for violating an employment agreement with both noncompete and non-solicitation provisions. At trial, the jury found that the former employee did not violate the noncompete provision but did violate the non-solicitation provision. The trial court set aside the jury’s verdict regarding the non-solicitation provision because the non-solicitation provision was unenforceable under Colorado law.

The former employer appealed, arguing that the employment agreement required the court to blue pencil the unenforceable non-solicitation agreement to make it otherwise enforceable under Colorado law. The former employer argued alternatively that, even if the parties did not agree to require blue penciling, the court was obligated to blue pencil the non-solicitation agreement to make it enforceable.

The court held that there is no obligation for Colorado courts to blue pencil unenforceable agreements. The court also held that parties cannot contractually obligate courts to blue pencil unenforceable agreements. The court reasoned that Colorado courts are not parties to private contracts and are not agents of the parties with any contracting authority. However, if a court determines that a contract or any of its provisions are unenforceable, a court has broad discretion in determining whether to blue pencil the contract, with or without the contractual consent of the parties.

The court also appeared to enforce a contractual “severability” provision, which the parties included in the employment agreement. Generally, “severability” provisions permit otherwise enforceable provisions to still be binding on the parties even if one clause is deemed unenforceable—the unenforceable provision is “severed” from the rest of the contract. In 23 LTD v. Herman, the fact that the non-solicitation provision was unenforceable did not void the entire employment agreement.

Businesses should take care to carefully draft their contract provisions so that they are enforceable under state law to avoid the need to have a court blue pencil or sever an otherwise invalid provision. For example, states’ laws vary on the enforceability of indemnity agreements. Businesses will want to take care to not draft overly broad indemnity agreements that violate state law because a state court might not rewrite the agreement for you or the state court could sever the entire indemnity provision from the rest of the contract, leaving your business with no indemnity protection at all. Part of your careful contract-drafting process should include knowing, in the first instance, which state’s law will apply by having a well-drafted choice-of-law provision.

If you have any questions or need further guidance on contract drafting, please contact one of Woods & Aitken’s Construction Attorneys. For additional construction news, tips, and updates, we encourage you to view our Construction E-Brief archives.


Update! Changes to the One-Call Act in Nebraska

We recently updated you on proposed changes to the Nebraska One-Call Notification System Act.  Nebraska811 has posted the regulation changes to their website. 

Click here to review the rule and regulation changes.  

Changes are effective as of August 13, 2019.

 Changes include the following:

  • Ticket start time
  • Ticket life
  • Mandatory electronic positive response
  • Marking standards
  • Hand digging

Contractors that perform location services for utility operators and contractors involved in excavation work should review the regulation changes to ensure compliance with the new requirements. 

View our previous E-Brief on the proposed regulation changes here.   

If you have any questions or need assistance, please contact one of Woods & Aitken’s Construction Attorneys.  We encourage you to subscribe to our Construction Law E-Briefs to get the latest news, tips, and updates.

Changes to the One-Call Act in Nebraska

Gas pipeline flagA tragic explosion at a house in Murrieta, California on July 15, 2019, serves as an important reminder to confirm where utility lines are marked prior to excavation of any sort. According to officials, the explosion occurred when a solar contractor split the natural gas line while doing installation work. The technician was killed in the resulting explosion and at least 15 others were injured. Like most states, California law requires citizens to confirm where gas lines and other utilities are located by calling 811 before excavation. However, officials say the contractor failed to call 811 to mark and confirm the gas lines marked in advance of construction. 

The Nebraska One-Call Notifications System Act, often referred to as Nebraska811, was first established in 1994 to open the channels of communication between underground utility operators and the public during excavation projects in the state of Nebraska. Generally, the Act requires everyone who excavates or disturbs the surface of the ground in the state of Nebraska, to dial “8-1-1” two (2) business days in advance of excavation so that operators of underground facilities can locate and mark the existing facilities.

This past May, Legislative Bill 462 was signed into law by the governor. As a result, the Nebraska One-Call Notifications System Act underwent several notable changes including a provision calling for plastic or nonmetallic underground facilities to be locatable by mapping or use of tracer wire when installed. In addition, the Act now provides that locators-individuals that identify and mark underground facilities- must be trained in “locator standards and practices applicable to the industry.”  

The call center, which is responsible for providing information to operators concerning intended excavations, is governed by a board of directors. The board of directors is tasked with carrying out the One-Call Notification System Act. The recent changes to the Act refined the board of directors’ role by emphasizing its authority to propose rules and regulations to accomplish this goal. The amendments to the Act empower the board of directors to review locator training materials provided by operators, locators, and excavators and make recommendations regarding best practices for locators, when deemed appropriate. The board is also obligated to provide a report to the governor and the legislature evaluating the effectiveness of enforcement programs, enforcement actions, and damage prevention and public awareness programs surrounding excavations and the Act. An annual report from the attorney general on the number of complaints filed and prosecuted for violations relating to underground pipeline facilities is now required pursuant to the changes in the Act.

Changes to the administrative rules have been proposed as well. On May 13, 2019, the Nebraska State Fire Marshal held a public hearing to receive comments about the proposed regulatory changes. The Nebraska Chapter of the National Utility Contractors Association (“NUCA”), the leading trade association and voice for Nebraska’s utility construction and excavation industry, offered testimony in support of the proposed regulations, which change the structure and composition of the board of directors. The proposed regulations add four (4) voting members to the board from the private excavation industry. NUCA believes these “proposed changes will result in meaningful representation for private excavation companies which is imperative as the rules and regulations must reflect a balance of the often competing interests of excavators and operators.”

Contractors that perform location services for utility operators and contractors involved in excavation work should review the recent changes to the Act to ensure compliance with the new requirements.  

If you have any questions or need assistance, please contact one of Woods & Aitken’s Construction Attorneys. For additional construction news, tips, and updates, we encourage you to view our Construction E-Brief archives.

The Effective Use of Forensic Experts in Construction Litigation

The American Bar Association recently published The Effective Use of Forensic Experts in Construction Litigation. Kerry L. Kester, Joel D. Heusinger, and Allen L. Overcash, attorneys in the firm’s construction and commercial litigation practice groups, contributed to the publication. Kester is one of the book’s editors.

The Effective Use of Forensic Experts in Construction Litigation will help a litigation or arbitration team become more persuasive in telling the story about each construction issue or problem in a way that makes the complex case easier to understand, makes the truth more self-evident, and exposes the fallacies of any attempt to obfuscate the truth.

Purchase the book here.

Kester, Heusinger, Overcash, et al., The Effective Use of Forensic Experts in Construction Litigation, ABA Book Publishing, 2019.

DOL Proposes New Salary Threshold for “White-Collar” Exemptions

On March 7, 2019, the U.S. Department of Labor (“DOL”) announced a Notice of Proposed Rulemaking that plans to update the salary threshold for the “white-collar” exemptions (e.g., executive, administrative, professional employees) to the overtime compensation laws. If the proposal becomes final, the new salary level will increase from $455 per week (or $23,660 annually) to $679 per week (or $35,308 annually). The increase would reclassify more than a million American workers as non-exempt and make them eligible for overtime.

By way of background, the salary thresholds for the white-collar exemptions have not been updated since 2004. In 2016, the Obama administration proposed an increase that would have more than doubled the salary threshold to $913 per week (i.e., $47,476 annually). However, the 2016 proposed rule was judicially challenged, and a federal district court imposed an injunction to stop its implementation, in part because the proposed rule contained annual automatic increases to the salary threshold. Under the Trump administration, these court proceedings were stayed after the DOL confirmed its intent to revisit the issue through the rulemaking process. Not only does the newly proposed rule offer a more modest increase to the salary threshold, it eliminates the automatic increases and instead plans for periodic increases after public notice-and-comment.

The proposed rule also purports to increase the salary level for the highly compensated employee exemption. Under the new rule, the salary threshold for highly compensated employees would increase from $100,000 to $147,414.

The DOL expects that the proposed rule will take effect in January 2020. In the meantime, employers should take proactive steps to navigate the financial impact of this potential new rule and should work with experienced counsel on evaluating the best strategy for handling employees that would be affected by the modification, including the consideration of pay adjustments, reclassification, or reduction in force.

If you have any questions on this topic or need assistance, please contact our Labor & Employment Law Practice Group. We encourage you to subscribe to our Labor & Employment E-Briefs to get the latest HR news, tips, and updates.

Report on Reporting: OSHA Clarifies Its Position on Retaliation for Workplace Injury and Illness Reporting

The Occupational Safety and Health Administration (“OSHA”) recently published a memorandum that clarifies the agency’s position on whether certain safety incentive programs and drug testing policies violate the prohibition on retaliating against employees for reporting work-related injuries and illnesses.

Back in May 2016, OSHA issued a final rule that, in part, explicitly incorporated in the recordkeeping requirements the existing ban on discharging or discriminating against employees for reporting work-related injuries or illnesses. OSHA noted in the Preamble for the Final Rule that, in some circumstances, post-accident drug and alcohol testing and workplace safety incentive programs could deter employees from reporting work-related injuries and illnesses and would violate the rule’s anti-retaliation provisions. 

In a follow-up memorandum from October 2016, OSHA clarified that these types of policies would not be categorically prohibited and further explained how the new rule applied under each of these types of policies. Specifically, employers could not drug test employees who report work-related injuries or illnesses unless supported by an “objectively reasonable basis.” That is, drug testing could not be used by the employer as a form of discipline against employees who report an injury or illness, but it could be used as an instrument to determine the cause of a workplace incident, injury, or illness in appropriate circumstances. Under this guidance, the rule effective prohibited drug testing policies that contained blanket requirements for post-injury or post-accident drug or alcohol testing.  Similarly, employers could utilize safety incentive programs if employees were not penalized for reporting a work-related injury or illness without regard to the circumstances surrounding the injury or illness. Thus, OSHA took the position that rate-based safety incentive programs where awards were tied to the number of recordable injuries or illnesses were prohibited.

Fortunately, OSHA recently issued another memorandum clarifying the agency’s position on workplace safety incentive programs and post-accident drug testing. OSHA explained that such policies would only violate the anti-retaliation provisions if the employer took action to penalize an employee for reporting a work-related injury or illness rather than for the legitimate purpose of promoting workplace safety and health. According to the memorandum, OSHA acknowledged that “[i]ncentive programs can be an important tool to promote workplace safety and health.” OSHA provided that rate-based safety incentive programs, which focus on reducing the number of reported work-related injuries and illnesses, are permissible if there are sufficient precautions to prevent employees from being discouraged from reporting an injury or illness. However, employers must do more than circulate a statement that encourages employees to report and promises employees will not face retaliation for reporting. OSHA encourages employers to focus on creating a workplace culture that prioritizes safety, not just reporting rates, and recommended implementing the following measures to avoid any unintentional deterrent effect of rate-based incentive programs:

  • An incentive program that rewards employees for identifying unsafe conditions in the workplace;
  • A training program for all employees to reinforce reporting rights and responsibilities and emphasizes the employer’s non-retaliation policy; and
  • A mechanism for accurately evaluating employees’ willingness to report injuries and illnesses.

Incentive programs that solely focus on reported workplace injuries and illnesses may still violate the prohibition on retaliation. To ensure compliance, employers should implement comprehensive, rate-based incentive programs that incorporate OSHA’s suggestions.

With respect to drug testing, OSHA stated that “most instances of workplace drug testing are permissible” and explicitly identified the following as examples of permitted instances of drug and alcohol testing:

  • Random drug testing;
  • Drug testing unrelated to the reporting of a work-related injury or illness;
  • Drug testing under a state workers’ compensation law;
  • Drug testing under other federal law, such as the Department of Transportation regulations; or
  • Post-accident drug testing to determine the cause of a workplace incident so long as all employees whose conduct could have contributed to the incident are tested, not just employees who reported injuries.

Under this guidance, employers no longer need to analyze whether post-accident drug testing is supported by an “objective reasonable basis.”  Blanket post-accident testing is permitted if all employees whose conduct could have contributed to the accident are tested, but the rule still prohibits blanket testing that targets injured employees. Therefore, employers should focus on consistently applying their post-accident drug testing policy across similarly-situated employees to ensure compliance.

Importantly, this guidance supersedes all other OSHA interpretive documents that could be construed as contradicting the memorandum’s position.

If you have any questions on this topic or need assistance, please contact our Labor & Employment Law Practice Group. We encourage you to subscribe to our Labor & Employment E-Briefs to get the latest HR news, tips, and updates.

E-Verify Deadline Set For February 11

U.S. Citizenship and Immigration Services (“USCIS”) has fully resumed operations following the partial government shutdown, and all E-Verify features and services are now available. Now, employers that participate in E-Verify have until Monday, February 11 to create and enter cases into the system for all hires made during the 35-day government shutdown.

Normally, employers enrolled in E-Verify, the government’s electronic employment eligibility verification program, are required to use the system to run checks on new workers within three days of hire, which is defined as the first day of work for pay. During the government shutdown, however, the three-day rule for E-Verify cases was suspended. Similarly, the time period during which employees could resolve Tentative Nonconfirmations (“TNC”) was extended due to the government shutdown. USCIS stated that: “Days the federal government [was] closed will not count towards the eight federal government workdays the employee has to contact the Social Security Administration (SSA) or the Department of Homeland Security (DHS).”  However, employers were still required to satisfy the Form I-9 requirements for every person hired by completing the Form I-9 no later than the third business day after the employee starts work for wages or other remuneration.

Now, employers enrolled in E-Verify need to create and enter cases into the system for all employees hired during the government shutdown for whom a Form I-9 was completed. USCIS has instructed employers to use the hire date from the employee’s Form I-9 when creating the E-Verify case. If the case creation date is more than three days following the workers’ start date, the employer should select “Other” from the drop-down menu asking for an explanation and enter “E-Verify Not Available.”

Furthermore, any TNCs that were not able to be resolved due to the shutdown need to be addressed during this time. If an employee has received a TNC and notified the employer of his or her intention to contest it by February 11, employers must add ten federal business days to the date on the worker’s “Referral Date Confirmation” notice. Federal business days are Monday through Friday and do not include federal holidays. The employee must contact the SSA or DHS by this adjusted date to begin resolving the TNC. For TNC cases that were referred after E-Verify resumed operations, there is no need to add days to the referral date.

Again, as E-Verify was not available for federal contractor enrollment or use during the government shutdown, DHS has reiterated that any calendar day during which E-Verify was unavailable will not count towards the federal contractor deadlines found in the Employment Eligibility Verification Federal Acquisition Regulation. Federal contractors should contact their contracting officer for more information about the impact of the government shutdown on their operations related to E-Verify.

If you have any questions on this topic or need assistance, please contact our Labor & Employment Law Practice Group. We encourage you to subscribe to our Labor & Employment E-Briefs to get the latest HR news, tips, and updates.

Opportunity Zones: New Tax Incentives for Real Estate Investors and Developers

Today, the U.S. Department of the Treasury published long-awaited regulations on the Opportunity Zones tax incentive program. The Opportunity Zones program aims to promote investment and drive economic growth in low-income or economically disadvantaged communities. The current list of approved Opportunity Zones in Nebraska can be found here, and in Colorado here.

The program is an investor incentive that pertains exclusively to capital gains. If an investor sells an appreciated asset, the investor may reinvest the gains with an investment fund, known as a Qualified Opportunity Fund (“QOF”). In turn, the QOF invests in stock, partnership interests and tangible property of businesses located within an Opportunity Zone. The QOF must substantially improve any property owned by a business it invests in.

The program allows investors with capital gains tax liabilities to receive favorable tax treatment such as (1) temporary deferral, (2) step-up in basis, and (3) avoidance of additional capital gains taxes. The longer the investment in the QOF is held, the greater the capital gains tax relief for investors. More specifically, investors can defer tax on any prior gains until the date on which an investment is sold or exchanged, or December 31, 2026, whichever is earliest. If the investment is held for five or seven years, the investor receives a step-up in basis of 10% or 15% of the deferred capital gains, respectively. In addition, if the investor holds the investment for at least ten years, the investor would be eligible for an increase in basis equal to the fair market value of the investment on the date that the investment is sold or exchanged. A taxpayer must generally invest in a QOF within 180 days from the date of the sale or exchange giving rise to the gain.

As previously mentioned, the Treasury Department finally released proposed regulations to provide additional guidance regarding the Opportunity Zones tax incentive. The guidance issued thus far clarifies what gains qualify for deferral, who can invest in Opportunity Zones, and parameters for establishing a Qualified Opportunity Fund. According to the U.S. Department of the Treasury, additional guidance will be issued “in the near future,” which we hope means before the end of the year. Although this preliminary guidance is informative, without further guidance and final regulations, real estate investors and developers are left uncertain as to whether the benefit program will work as intended.

If you have any questions or want to learn more about the Opportunity Zones tax incentive, please contact one of Woods & Aitken LLP’s Real Estate Attorneys.

New Guidance on Independent Contractor Classification

Earlier this summer, the Wage and Hour Division of the Department of Labor (“DOL”) issued a Field Assistance Bulletin (“Bulletin”) on independent contractor classification in the caregiver registry industry. The Bulletin provides the first substantive guidance from the new administration on structuring independent contractor arrangements since the DOL withdrew its 2015 Administrative Interpretation last June.

While the new Bulletin focuses on factors to determine whether an employment relationship exists between a registry and a caregiver, other industries should note the significance of this Bulletin as well. Combined with the 2017 retraction of the Administrative Interpretation of the independent contractor guidance issued during the Obama administration in 2015, this Bulletin indicates a continued shift back to the traditional, multifactor balancing test previously used by the DOL and courts. The Bulletin lays out numerous factors that a DOL investigator may consider when determining whether a covered worker should be classified as an independent contractor or as an employee. For example, practices that do not suggest an employer-employee relationship include:

  1. Conducting background checks, including confirming credentials and contacting professional references;
  2. Determining what work the service provider is willing to perform, their target compensation, their availability, and other personal preferences;
  3. Interviewing the client to determine the needs of the client, the client’s budget, and the client’s personal preferences;
  4. Charging a fee for administrative services for the client, such as fees for recordkeeping, invoicing, collecting, and administering payroll;
  5. Posting available positions online for such service providers to screen and consider;
  6. Providing information to service providers and clients regarding typical pay rates in the area;
  7. Acting as a liaison between the service provider and the client in the process of the negotiating compensation; and
  8. Providing the service provider with the opportunity to purchase necessary equipment from the business or a third party.

Alternatively, activities that will suggest an employer-employee relationship, include:

  1. Suggesting or determining the rate to be paid to the service provider;
  2. Exercising control over the service provider’s schedule;
  3. Exercising any level of control over discipline;
  4. Interviewing candidates to evaluate subjective factors for the client;
  5. Exercising any control over hiring and firing decisions;
  6. Offering work assignments to select service providers based on the business’s own criteria;
  7. Assigning specific service providers to specific clients;
  8. Directing service providers on how to perform the work;
  9. Monitoring, supervising, or evaluating the service provider’s performance;
  10. Charging fees for ongoing services to be provided by the service provider; and
  11. Directing payment of its own funds to the service provider, even if later reimbursed by the client.

The DOL made clear that “the analysis does not depend on any single factor.”  Rather, it “will consider the totality of the circumstances to evaluate whether an employment relationship exists.”

While the Bulletin is limited on its face to caregiver registries, it signals a transition back to the historical approach previously employed by the DOL—focusing on the totality of the circumstances to reach the appropriate classification with a primary focus on the extent of control over the worker. Employers should consider how the DOL’s new guidance can assist them in structuring their independent contractor relationships to avoid reclassification.

If you have any questions on this topic or need assistance, please contact our Labor & Employment Law Practice Group. We encourage you to subscribe to our Labor & Employment E-Briefs to get the latest HR news, tips, and updates.

Be Aware: You Might Be Punished for Unwarranted Threats on Your Subcontractor

Don’t make unwarranted threats of liquidated damages on your subcontractors, and don’t hold them to unreasonable, unconstructible standards. This might sound obvious, but for some contractors, it’s not. After the Eighth Circuit Court of Appeals’ recent decision in Randy Kinder Excavating, Inc. v. JA Manning Construction Company, Inc., 899 F.3d 511 (8th Cir. 2018), a contractor that doesn’t heed this advice may expose itself to damages for breach of contract.

In Randy Kinder, the U.S. Army Corps of Engineers contracted with a general contractor for the construction of a pumping station to manage the water levels in the White River. The general contractor hired a subcontractor to engineer and construct a mechanically stabilized earth wall. The subcontractor couldn’t begin work until only a short number of days before the project was scheduled to be complete due to numerous weather delays and incomplete predecessor activities. Despite the subcontractor not causing any delays, the general contractor repeatedly threatened the subcontractor with liquidated damages if it didn’t meet the original schedule – all the while telling the government that the schedule needed to be changed because of recurring weather delays.

The general contractor also demanded the subcontractor place its mechanized walls with exactitude and absolutely no variance between the walls. The subcontractor objected, stating industry standards always permitted a minimum variance. The general contractor ultimately terminated the subcontractor because it failed to place the walls with exactitude. When the general contractor attempted to find a replacement subcontractor, no replacement subcontractor would agree to construct the walls without a minimum variance.

The general contractor sued the subcontractor. The Eighth Circuit, however, sided with the subcontractor, awarding it damages. The Court found that the general contractor made unjustified threats to assess liquidated damages after the evidence showed the subcontractor caused none of the project’s delays. The Court also determined that the general contractor wrongfully terminated the subcontract when the general contractor unreasonably and arbitrarily held the subcontractor to an unconstructible standard by requiring exactitude in building the walls. Ultimately, the Court held that the subcontractor was entitled to over $215,000. In the end, reasonableness and fairness won over the judge at trial.

Diplomacy and reasonableness is key when a contractor is under pressure. In Randy Kinder, the general contractor was under substantial time constraints and pressure from the owner, but it attempted to unjustifiably pass along that pressure to its subcontractors. When under fire, contractors must learn to manage both owner expectations and their subcontractors’ work to avoid unwanted consequences. A successful project is only as good as a contractor’s ability to work together with all project participants.

If you have any questions or need assistance, please contact one of Woods & Aitken’s Construction Attorneys. For additional construction news, tips, and updates, we encourage you to view our Construction E-Brief archives.