Ellis & Winters

Generally, N.C. Gen. Stat. § 75-1.1 does not apply to employer-employee disputes. Most courts have held that these disputes fail the “in or affecting commerce” test under the statute.

In a recent decision, however, the U.S. District Court for the Western District of North Carolina held that this rule did not apply to a lawsuit that alleged fraudulent inducement to enter an employment relationship. The decision highlights the scope problems with the so-called employment exemption under section 75-1.1.

The Origins of the Employment Exemption

The 75-1.1 employment exemption was born in Buie v. Daniel International Corp. The employer in that case fired the plaintiff after he sought workers’-compensation benefits. The North Carolina Court of Appeals affirmed the dismissal of the plaintiff’s 75-1.1 claim. The court held that employer-employee relationships fall outside the scope of section 75-1.1. It stated two reasons for this conclusion: (1) employment relationships are not like the buyer-seller relationships that were the original target of the statute, and (2) employment relationships are extensively regulated by other bodies of law.

Since Buie, however, courts have sometimes made case-specific carve-outs from the employment exemption. For example, courts have often reasoned that the employment exemption does not apply—and, thus, that section 75-1.1 can apply—when the acts in question happened before or after an employment relationship.

The Fusco Decision

In Fusco v. NorthPoint ERM, LLC, a husband and wife alleged that the defendant, NorthPoint, fraudulently induced them to work for the company. NorthPoint convinced the Fuscos to work for free, promising that they would be paid generously when revenue came in from new service contracts in the works.

After the Fuscos had been working without pay for a year, however, NorthPoint told them that the service contracts had fallen through. The Fuscos sued NorthPoint, asserting (among other claims) a deception claim under section 75-1.1.

U.S. District Judge Graham Mullen denied NorthPoint’s motion to dismiss. The court stressed that NorthPoint’s deceptive conduct occurred before the employment relationship began.

The court’s reasoning turned solely on timing. The court wrote: “When [NorthPoint’s] conduct allegedly occurred, there was no ‘employer-employee’ relationship.”

Fusco highlights several problems with a timing-based approach to the employment exemption.

First, a timing test can involve question-begging distinctions. Consider Fusco, for example. If NorthPoint was lying to the Fuscos before they began work, it no doubt continued the lies during the employment, to keep the Fuscos working for free. Whether the Fuscos alleged this common-sense point or not, it shows that the fact pattern had more of a connection with the employment relationship than the court’s analysis suggested.

Second, focusing on timing alone can lead to inconsistent outcomes. For example, decisions before Fusco have gone both ways on whether the employment exemption applies to pre-employment events.

Third, a timing-based analysis is unmoored from the policies that underlie the employment exemption. The court in Fusco did not ask whether NorthPoint and the Fuscos had anything like a buyer-seller interaction, or whether other statutes and regulations governed their relationship. These questions might not have changed the outcome of the motion to dismiss, but they would have allowed the parties and the court to compare the case more effectively with other cases on the employment exemption.

The timing aspects of the employment exemption are only one of several issues with the scope of that exemption. Most likely, it will take an opinion from the North Carolina Supreme Court to make the case law in this area more consistent and predictable.

Author: Matt Sawchak

Law student Kathleen O’Malley contributed substantially to this post.