Tag Archives: Fair Labor Standards Act

The Costs of Employment Litigation and the Benefits of Litigation Prevention and Employment Audits

The economic and non-economic business justifications for reviewing your company’s employment practices are plentiful. Litigation for employment and labor based claims subject the corporate treasury to the risk of paying damages, including punitive damages and substantial attorney fees for both the employee’s and the company’s counsel. The non-economic costs of employment litigation that can be independently taxing and not as measurable include current employee-witnesses spending significant time talking with the employer’s attorney(s), giving depositions or attending court proceedings in connection with the litigation instead of spending time conducting the business of the employer. In addition, the employer is required to gather and produce every document potentially relating to the plaintiff’s employment with the employer, including electronically stored documents (which can be an expensive and onerous burden for which the company may not be prepared). Finally, in some cases (particularly involving EEOC lawsuits), employment practice changes may actually be compelled through a consent decree.

With a modest investment of time and money, an employer can create and implement appropriate policies and practices concerning all facets of the employment relationship (e.g., interviewing, hiring, personal conduct of employees, social media, privacy concerns, and disciplining and terminating employees). Social media and employee privacy issues as well as workplace retaliation are areas particularly ripe for an explosion of litigation. The tangible benefits that can be achieved from reviewing and, as appropriate, implementing or modifying current policies and practices include improved employee relations, increased productivity and a reduction in litigation.

Proactive measures from the start until the end of the employment relationship are the best way to avoid these expenses. Here are some basic ideas to consider, which can be implemented with the assistance of counsel familiar with the policies and law.

Prior to interviewing potential employees, employers should have their applications reviewed to be sure they are legally compliant and avoid elicitation of inappropriate information from potential employees (e.g., the potential employee’s age, information that could lead the employer to learn about the potential employee’s age, or any other information relating to a legally protected status). For those within the organization conducting employee interviews, there should be training regarding permissible and impermissible questions to ask or avoid during interviews. For example, interviewers should be trained in avoiding questions that could elicit information relating to a potential employee’s age, national origin, religion, disabilities, or any other potentially protected status.

Employers should have job descriptions for each category of employee that include the following information:

  1. An accurate reflection of the educational and practical requirements of the position.
  2. An accurate reflection of the essential functions of the position.
  3. Supervisory authority, if any, of the position.
  4. The category of employee to which the position reports.
  5. Whether the position is exempt or non-exempt.
  6. The employee’s signature acknowledging receipt of the job description.

Review of job descriptions can be particularly important if jobs have changed in any meaningful way, which can be a relatively typical phenomenon. Moreover, if the company conducts employee performance reviews, it is important to have an accurate and objective statement of the work that is being evaluated.

On a related note, employers too often assume that job titles, job descriptions or simply categorizing an employee as “salaried” automatically enables the employer to categorize employee as exempt, thus avoiding overtime pay. This is not the case. The Fair Labor Standards Act and the Department of Labor have very specific guidelines for classifying employees as exempt or non-exempt and failure to comply with those guidelines can result in unnecessary litigation expenses, paying employees for unpaid overtime, civil penalties, and paying the attorney fees of the suing employee(s). This is a problem that can be avoided with proper analysis prior to categorizing an employee as exempt or non-exempt.

With respect to handbooks, employers should have employee handbooks that provide for proper avenues of complaint for employees concerned with discrimination, retaliation, harassment, and any other employment-related issues. Where an employer has proper avenues of complaint for employees – avenues that (1) allow employees to avoid complaining to the alleged wrongdoer, and (2) allow the employee to complain to a hierarchy of employees if the problem is not investigated and addressed — The employer can create a proper defense to discrimination and harassment lawsuits should the employee fail to use the available avenues of complaint.

Likewise, employment handbooks should have proper procedures to enable employees with disabilities to request and engage the employer about obtaining reasonable accommodations. While the Americans with Disabilities Act applies to employers with 15 or more employees, many state laws apply similar or identical standards to much smaller employers. Where an employee requests an accommodation for a disability, the employer must engage the employee and work with him/her to resolve the issue in question. Ignoring the requested accommodation or simply concluding that the requested accommodation is “unreasonable” without making honest and good faith efforts to work with the employee to find a reasonable accommodation can lead to a lawsuit.

In addition to discrimination policies and complaint mechanisms, the handbook and other separate written policies represent the employer’s best opportunity to put employees on notice of various other employment policies and rules, including progressive discipline, drug testing, leave and other benefits or terms and conditions of employment. Social media and privacy policies are becoming more and more appropriate for purposes of outlining an employee’s expectations concerning use of employer-owned electronic devices. Clear communication of these myriad topics to the employee can create a better understanding between the employer and employee during employment, aid in the administration of discipline and be an invaluable piece of evidence should litigation occur.

All employers with payrolls approaching 50 employees or more must be cognizant of the Family Medical Leave Act (“FMLA”). If an employer has 50 or more employees in 20 or more workweeks in the current or preceding calendar year, including joint employers and successors of covered employers, the employer must provide up to 12 weeks of unpaid leave to qualifying employees (and 26 weeks of unpaid leave to qualifying employees who must care for a family member injured on active duty in the military). Furthermore, employers subject to the FMLA must provide written notice of its application to employees and must have procedures in place to meet the applicable deadlines relating to the employer’s response to requests for such leave. Failure to properly honor a request for such leave, failure to comply with the deadlines relating to such requests, or retaliating against an employee for requesting or exercising his/her right to such leave can result in violations of the law and ultimately lead to unnecessary lawsuits. However, proper written policies and training for employees supervising the application of FMLA leave can prevent such lawsuits from ever arising.

Employers should be sure to keep separate personnel files and medical files relating to employees. Comingling all documents relating to an employee’s employment can result in an inference that an employer considered improper medical information when making an employment decision. All documents relating to an employee’s medical history (e.g., doctor notes, FMLA forms, requests for accommodations due to disabilities, etc.) should be kept separate and apart from personnel files and only select employees should have access to those documents to avoid their consideration when making an employment decision.

If an individual is alleged to have discriminated against, harassed, or retaliated against another employee, the alleged wrongdoer, if possible, should not have any influence over or provide information resulting in an adverse employment action against the complaining employee. A growing area of litigation has arisen over the past few years that implicates a new theory of liability commonly referred to as the “cat’s paw” theory. Where an alleged discriminator, harasser, or retaliator is permitted to provide information leading to an adverse employment action against the complaining employee, his/her wrongful conduct can be imputed to the employer even if he/she is not the ultimate decisionmaker. By allowing an alleged wrongdoer to influence an adverse employment action against the complaining employee, the employer creates unnecessary liability and business expense.

The bottom line is there are a myriad of employment laws and regulations that require the employer’s attention. Compliance with those laws and regulations and the adoption of proper procedures for hiring, disciplining, reviewing, and terminating employees can avoid litigation following whatever employment decision is made. While litigation is never totally avoidable, compliance with laws, regulations and best practices relating to employment decisions is the best and most cost-efficient defense to potential litigation or actual litigation.

U.S. Supreme Court Expands Right To Claim Retaliation

The U.S. Supreme Court recently expanded an employee’s ability to meaningfully litigate retaliation claims against employers in two (2) significant opinions.  First, on January 24, 2011, the Court unanimously held that the anti-retaliation provisions of Title VII of the Civil Rights Act of 1964 (“Title VII”) protects third parties.  Thompson v. North American Stainless, LP, 131 S.Ct. 863 (2011) (terminated employee may bring retaliation claim arising out of his fiancée’s prior complaint of gender discrimination to the Equal Employment Opportunity Commission (“EEOC”)).  This landmark decision opened the floodgates to potential retaliation claims by third–parties under Title VII by failing to provide employers with a bright-line rule regarding the types of relationships and factual scenarios which are protected under Title VII’s anti-retaliation provision.

In that case, Eric Thompson and his fiancée, Miriam Regalado, were both employed by North American Stainless (“NAS”).  Thompson and Regalado met at NAS, began dating and ultimately became engaged to marry.  Their relationship was known to the company.  In February, 2003, the EEOC provided notice to NAS that Regalado had filed a charge of gender discrimination against NAS.  Approximately three weeks later, NAS dismissed Thompson.  Thereafter, Thompson filed a charge with the EEOC alleging that he was terminated in retaliation for his fiancée’s prior charge of gender discrimination.

The district court ruled in favor of NAS on the grounds that Title VII does not permit third-party retaliation claims.  Thompson appealed.  The Sixth Circuit Court of Appeals affirmed, holding that Thompson did not engage in any activity protected by Title VII and, therefore, he was not within the class of persons who had standing to bring a retaliation claim under Title VII.  The Supreme Court unanimously disagreed, reasoning that Thompson was not an “accidental victim of the retaliation-collateral damage” and concluded that Thompson’s interests were well within the “zone of interests” that Title VII is intended to protect.  The Court did not articulate a basis for determining when a potential third-party claimant’s interests qualified for Title VII protection.  Rather, the Court declined “to identify a fixed class of relationships for which third-party reprisals are unlawful.”

The Supreme Court issued a second decision in 2011 that expanded the ability of a claimant to bring a retaliation claim.  The Fair Labor Standards Act (“FLSA”) provides that it shall be unlawful “to discharge or in any other manner discriminate against any employee because such employee has filed any complaint . . . . under or related to this chapter . . . .” (emphasis added)  In Kasten v. Saint-Gobain Performance Plastics Corp., 2011 WL 977061 (2011), the Court held that the anti-retaliation provisions of the FLSA protect both oral and written complaints pertaining to alleged violations of the FLSA.  Similar to the decision in Thompson, the Kasten holding expands legal protections to employees asserting retaliation claims and puts employers in a quandary by not defining precisely what types of oral statements constitute the filing of a complaint that later may support a retaliation claim.

Kevin Kasten, a former factory worker in a Saint-Gobain plant, filed an action against his employer alleging that he was terminated after making an oral complaint to company officials pertaining to the location of the time clocks in the factory.  The trial court granted summary judgment to Saint-Gobain, and the Seventh Circuit Court of Appeals affirmed, holding that the FLSA’s anti-retaliation provisions did not protect (or extend to) oral complaints.  The U.S. Supreme Court, however, concluded that FLSA retaliation claims could be premised upon oral complaints and dealt a significant blow to employers when it held that if a “reasonable, objective person would have understood the employee to have put the employer on notice that the employee is asserting statutory rights under the Act,” then the oral comment is deemed to be a “complaint” that is “filed” and, therefore, protected activity under the FLSA.  Significantly, and similar to its holding in Thompson v. North American Stainless,  the Supreme Court again failed to provide any definitive parameters pertaining to the manner in which oral complaints should be “filed” or with whom they must be “filed.”

The ramifications of the Thompson and Kasten decisions for employers are far reaching.  Retaliation claims already comprise a significant portion of all federal employment discrimination claims.  The Supreme Court’s 2011 expansion of retaliation claims to allow both oral complaints under the FLSA and complaints by individuals other than the uniquely affected person will undoubtedly tee up years of litigation that will test, on a case-by-case basis, the limits of the expanded protections provided by these recent Supreme Court decisions.

Accordingly, prudent employers must cautiously analyze the relationships between fellow employees in order to recognize the potential ramifications of all dismissal and disciplinary decisions to determine if the employer’s action could spawn a retaliation claim because the disciplined or terminated employee’s relative (or fiancé) previously complained about some protected workplace event that preceded the contemplated discipline or dismissal.  Additionally, in response to Kasten, employers should train supervisors to adequately document and respond to oral complaints and, perhaps more importantly, how to differentiate (assuming that is even possible) between an employee who is simply grousing without intending to make a formal complaint and an employee who is genuinely attempting to lodge a complaint with his or her employer.  Ultimately, the U.S. Supreme Court’s decisions in 2011 remind employers of the age-old advice to “document, document, document” so that employers are prepared to defend their personnel decisions should a claim arise.

Workers with Intellectual Disabilities Abused by Texas-Based Company for Years, EEOC Charges

Men Subjected to Verbal and Physical Harassment, Housed in Substandard Facilities, and Denied Lawful Wages at Iowa Plant, Federal Agency Alleges

DALLAS – Hill Country Farms, doing business as Henry’s Turkey Service (“Henry’s Turkey”) subjected a group of 31 men with intellectual disabilities to severe abuse and discrimination for more than 20 years, the U.S. Equal Employment Opportunity Commission (EEOC) alleged in a lawsuit filed today in Davenport, Iowa. The company is based in Goldthwaite, Texas, but the work and abuse occurred in West Liberty and Atalissa, Iowa.

According to the lawsuit, No. 3:11-cv-0004  CRW-TJS  , filed in U.S. District Court for the Southern District of Iowa, Henry’s Turkey exploited these workers, whose jobs involved eviscerating turkeys, because their intellectual disabilities made them particularly vulnerable and unaware of the extent to which their legal rights were being denied. The affected men lived in Muscatine County, Iowa, where they worked for 20 years as part of a contract between Henry’s Turkey and West Liberty Foods, an Iowa turkey processing plant.

“This case is a stark reminder of how important it is for the EEOC to ensure that the Americans with Disabilities Act is fully enforced,” said EEOC Chair Jacqueline A. Berrien.  “Workers with intellectual disabilities should never be subjected to the demeaning and discriminatory treatment alleged in this case.”

Specifically, the complaint alleges that that the owners and staffers of Henry’s Turkey denied the workers lawful wages, paying them only $65 a month for full-time work; subjected them to abusive verbal and physical harassment; restricted their freedom of movement; and imposed other harsh terms and conditions of employment such as requiring them to live in deplorable and sub-standard living conditions, and failing to provide adequate medical care when needed.

Verbal abuses included frequently referring to the workers as “retarded”, “dumb ass” and “stupid”.  Class members reported acts of physical abuse including hitting, kicking, at least one case of handcuffing, and forcing the disabled workers to carry heavy weights as punishment.  The Henry’s Turkey supervisors, also the workers’ purported caretakers, were often dismissive of complaints of injuries or pain.

Such alleged conduct violates the Americans with Disabilities Act (ADA), as amended by the Americans with Disabilities Amendments Act (ADAAA), which prohibit discrimination on the basis of disability, including intellectual disabilities, in terms and conditions of employment and wages; and bars disability-based harassment.  The EEOC filed suit after first attempting to resolve the matter through conciliation.

“This case illustrates the importance of continued vigorous enforcement of the law in this area.  The victims in this case were subject to a hostile work environment and discriminatory treatment because of their disability,” said P. David Lopez, EEOC General Counsel.  “The EEOC stands ready to litigate such cases, wherever in our nation such employment discrimination might take place, to make victims whole and to bring workplaces into compliance with the ADA.”

The EEOC will seek to recover lost wages for two years prior to the time that the Henry’s Turkey operations were brought to a halt in 2009.  The EEOC seeks amounts consistent with minimum wages and based on pay levels commensurate with the work performed by non-disabled workers occupying the same job positions.  The agency will also seek the award  of compensatory and punitive damages resulting from adverse employment actions and abusive treatment.  During its investigation, the EEOC worked closely with Disability Rights Iowa, an organization that works to advance and protect the rights of people with disabilities and its Executive Director, Sylvia Piper.

“The isolation and exploitation these men suffered for many years, while the fruits of their labor were cruelly consumed by their employer, cannot be explained away by good intentions, nor can the violations of the ADA be excused as antiquated social policy,” said Robert A. Canino, Regional Attorney of the EEOC’s Dallas District Office, which investigated the case and is bringing the lawsuit.  “Our society has come a long way in learning how persons with intellectual disabilities should be fully integrated into the mainstream workplace, without having to compromise their human dignity. The ADA provided us with a law enforcement tool to ensure fair treatment for persons with physical and mental disabilities. We are asking the court to apply this law to the fullest extent possible.”

The lawsuit follows an EEOC Commission meeting held March 15, 2011, that explored the issue of discrimination on the basis of mental disabilities.  On March 24, the EEOC issued its final regulations interpreting the ADAAA, which simplified the determination of who has a “disability” and made it easier for people to establish that they are protected by ADA.

In addition to the EEOC’s ADA claim of disability-based wage discrimination, the U.S. Department of Labor is pursuing a separate minimum wage and overtime suit against Henry’s Turkey under the Fair Labor Standards Act, which is set for trial later this year.  Additionally, a Final Agency Decision issued on March 8, 2011, by the Iowa Department of Workforce Development, Division  of Labor, found  Henry’s Turkey and its principals responsible for substantial fines for violations of Iowa’s wage and hour laws.

Hear No Evil: U.S. Supreme Court Protects Internal Oral Wage Complaints from Retaliation

Now more than ever, employers find themselves facing retaliation suits from their employees. 2010 marked the first year in the history of the Equal Employment Opportunity Commission (“EEOC”) that race discrimination claims were not the most prevalent category of alleged employment law violations. Instead, retaliation charges topped the EEOC’s list.

Federal law offers broad protection to employees against retaliation. Several federal statutes contain anti-retaliation provisions, including the Fair Labor Standards Act (“FLSA”), the Family and Medical Leave Act, the Labor Management Relations Act, the Age Discrimination in Employment Act, and Title VII of the Civil Rights Act of 1964. Furthermore, the U.S. Supreme Court has recently extended Title VII protection to “third-party” retaliation claims, i.e., those in which an employer allegedly retaliated against one employee because another engaged in protected activity. And in a recent decision, the U.S. Supreme Court continued to expand the borders of what constitutes protected conduct under the Fair Labor Standards Act’s anti-retaliation provision.

In Kasten v. Saint-Gobain Performance Plastics Corp., No. 09-834, the U.S. Supreme Court considered whether the FLSA’s anti-retaliation provision protected employees who made internal oral complaints to their employers regarding FLSA violations, or only those who filed written complaints. After a lengthy analysis of the term “filed”, the Court concluded that the FLSA protected employees who made internal oral complaints from retaliation by their employers.

The Court’s decisions bode ill for employers for a several reasons. First, by protecting employees who make internal oral complaints, it burdens employers with determining whether an employee comment is a complaint or just an employee blowing off steam. Second, the Court ruled that the FLSA protected internal oral complaints, not just complaints to government agencies. Third, and perhaps most importantly, it makes many more employment decisions “gray” – meaning that more cases will be litigable (and litigated) than before. This will be true whether employers are actually guilty of retaliation, or not. It is now even easier for employees to allege and prove retaliation.

As bad as this new precedent is for employers, it should not change ultimate decision making by employers in most cases. For instance, even before Kasten, few employers would have consciously decided to retaliate against an employee because the employee made internal oral complaints. Some employers might have done this, but in many cases they would face charges, guilty or not, just based on timing. For example, Joe gets fired three weeks after he files an internal oral complaint about perceived overtime violations. Regardless of whether the two events are related, or not, a charge has always been possible. Now a charge is much more likely.

What will change for employers, now, is their processes before ultimate decisions are made. There are some common sense steps employers can take to protect themselves from retaliation claims:

  • Be aware of the timing of ultimate employment decisions. Some courts say that timing alone will not prove an employee’s case, but bad timing will influence a court’s decision.
  • Document an employee’s performance reviews and disciplinary history. An employer with a legitimate, non-discriminatory reason for a decision has a powerful defense to a retaliation claim. Employers should make sure they have evidence of their reasons. This is a best management practice, anyway. These new cases just make it more important.
  • Be consistent. If an employer only disciplines an employee or criticizes his performance after he files an EEOC charge, or internally reports an FLSA violation, a retaliation claim is much more likely, whether there is a good reason for the change, or not.
  • Evaluate the decision before finalizing it. Employers should ask themselves whether they would make an employment decision even if the employee had not engaged in protected activity.

Train. Everyone knows that discrimination is illegal. Prior to making discipline decisions, almost everyone knows to vet whether the discipline subject engaged in any protected activity. If they engaged in protected activity, that doesn’t protect them from adverse action, but it should make employers double-check before pulling the trigger on any adverse action. Employers now need to be even more vigilant about making sure everyone is as alert to retaliation red-flags as they are to discrimination red-flags. After Kasten, internal oral complaints about wage and hour issues must now be considered red-flags.

Employment Practices Liability Insurance: The Benefits and Pitfalls

Many insurance companies offer what is known as employment practices liability insurance (EPLI). The purpose of an EPLI policy is to protect your business against the risk of heavy financial losses resulting from employment claims. Before purchasing such a policy, however, you should know that it is not a silver bullet. Employers often do not learn until a claim already has been made and the policy is being invoked what some of the drawbacks and shortcomings of EPLI coverage tend to be.

What Is and Isn’t Covered

Typically, EPLI provides coverage to the employer, its executives and its employees against claims for employment discrimination, retaliation and harassment; claims for defamation, invasion of privacy and negligent supervision arising in the employment context; and claims for wrongful discharge, failure to promote and failure to hire.

However, EPLI typically will not cover claims by employees to enforce rights under the Fair Labor Standards Act (wage and hour claims), ERISA (employee benefits claims), the WARN Act (requiring certain employers to provide advance notice of plant closings and mass employee layoffs), COBRA, the National Labor Relations Act, and the Occupational Health and Safety Act regulations, as well as the state statute equivalents of each of these federal statutes. Additionally, EPLI typically does not cover the costs associated with providing a “reasonable accommodation” under the Americans with Disabilities Act (ADA), and it may not cover certain types of claims for breach of employment contract or claims by independent contractors.

These exclusions can be significant for employers. In fact, claims falling under some of these statutes or theories are increasingly common and can carry considerable exposure, including potential class claims and claims for punitive damages. This is particularly true of wage and hour claims. For example, if an employee or group of employees claim they were improperly classified as exempt, they can bring a class action lawsuit for all overtime pay for work the putative class performed in excess of 40 hours in a workweek. For an employer, this can lead to significant potential liability for back pay, liquidated damages and plaintiffs’ attorneys’ fees. Yet such claims likely would not be covered under EPLI.

Similarly, affirmative claims you may want to bring against employees who sue you may not be covered. So if an employee sues you for discrimination and you want to file a counterclaim for misappropriation of trade secrets, breach of duty of loyalty or breach of restrictive covenant, your EPLI may not cover the cost of pursuing those claims.

Punitive damages also generally are not covered.

Defense Costs and Selection of Counsel

Attorneys’ fees and other defense costs are usually included within the limits of an EPLI policy. Since legal fees often represent the largest expense to an employer in dealing with covered claims, this is generally a beneficial feature. However, every dollar spent by the carrier defending a claim erodes the amount available to pay for a judgment or a settlement. Also, the existence of insurance coverage must be disclosed as part of discovery in most lawsuits. Once a plaintiff’s attorney has this information, he or she may hold out for more money in settlement.

Employers should be aware that the defense cost feature of an EPLI policy usually also allows the carrier to control selection of counsel and influence case-handling strategy. This can have significant repercussions when it comes to settling a case. From the employer’s standpoint, there is the concern that any settlement amount greater than nuisance value may encourage other employees to also sue. The insurer, however, may view an employment claim the same as other insurance claims and focus predominantly on the potential for liability and the amount of damages.

Some EPLI policies address the potential for a disagreement over settlement either by giving the insurer the right to settle without the employer’s approval or, as is perhaps more often the case, by giving the employer control over settlement while adding a “hammer clause.” Such a clause provides that if the policyholder refuses to accept an offer to settle a claim that the insurer is willing to accept, then the insurer will not be liable for a subsequent settlement or judgment in excess of the rejected settlement amount.

Policy Limits and Deductibles

Typically, EPLI policy limits and deductibles apply on a per claim and aggregate basis. For example, a policy may limit coverage to $250,000 for each separate claim with an aggregate cap of $1 million for all claims. In setting deductibles and limits, you should determine your comfort level. If you view EPLI as a type of catastrophic coverage for employment claims, you may want to negotiate higher deductibles that essentially leave you uncovered for smaller claims.

Policy Type, Insurer Notification and Other Factors to Consider

EPLI policies typically are written on a “claims made” basis, meaning the claim must be incurred during the coverage period and the insurer must be notified during a designated reporting period. Untimely notice to an insurer can provide a basis to reject coverage for an otherwise covered employment claim.

Employment disputes sometimes take a long time to develop into claims. Therefore, you should consider purchasing tail coverage if or when the primary EPLI policy is dropped.

There are other factors to consider in purchasing an EPLI policy. For example. insurers usually require you to select from an approved “panel” of attorneys for your defense. If you have an existing relationship with an attorney with whom you are comfortable, however, you should request that the insurer allow you to choose your own defense counsel.

EPLI is definitely not for everyone. Before you buy a policy, you should be aware of the many pros and cons, and understand what EPLI will and will not do for you.

Employers Beware of Conducting Self-Evaluative Assessments of Compliance with Employment Laws: HR Tip of the Month

A recent case decided by a federal court in Pennsylvania serves as a reminder that a company intent on conducting an internal assessment of its compliance with applicable laws, including wage and hour laws, should carefully consider, in advance of performing that evaluation, its strategy to protect the results from potential disclosure in future litigation. In Craig v. Rite Aid Corporation, 2010 U.S. Dist. LEXIS 137773, a magistrate judge in the Middle District of Pennsylvania considered whether Rite Aid could restrict the plaintiffs’ ability to discover potentially relevant documents on the grounds that the documents were protected by the “self-critical analysis privilege,” a privilege recognized by some courts in limited circumstances “to protect evaluative materials created in accordance with governmental requirements, or for purposes of “‘self-improvement.’”

In Rite Aid, the documents sought to be protected related to the company’s voluntary internal assessment of its compliance with the FLSA, labor laws and existing bargaining agreements, initiated as part of a restructuring program led by a Human Resources executive under the direction of the company’s in-house counsel. The analysis included information-gathering, assessments, drafts, and recommended changes to store operations, all of which was shared with the in- house counsel for the purpose of obtaining legal advice and in anticipation of future FLSA litigation. Rite Aid asserted that the self-critical analysis privilege shielded the documents from production. The Court disagreed, expressing doubt as to the privilege’s validity in the Third Circuit. Even where the privilege had been recognized, the Court found it did not have widespread application where a company voluntarily undertook an internal review of its own practices and procedures. Although ruling that the defendants could not rely on the self-critical analysis privilege to protect from disclosure the challenged documents, the Court left open the possibility that other privileges, such as the attorney work product doctrine and attorney-client privilege, could offer additional protections.

As the number of wage and hour suits alleging failure to pay overtime continues to increase, it is certainly understandable why employers would want to review their payment and classification practices with an aim towards reducing litigation risk. Prior to undertaking such a review, companies should consider how to best protect the materials generated from such an internal assessment from disclosure in future litigation. The role that various individuals (Human Resources, in-house counsel, outside counsel) should play in the evaluative process, as well as the potential application of recognized privileges to the process, are factors which should be explored.

Third Party Retaliation Claims under Title VII, the Discovery Rule under the NJLAD, and the Self-Critical Analysis Privilege under the FLSA

Employers conducting business in the New Jersey / New York markets should take note of several recent employment-related decisions. In Thompson v. North American Stainless, LP, 2011 U.S. LEXIS 913 (Jan. 24, 2011), the United States Supreme Court ruled that an employee who claimed he was fired because his fiancée filed a sex discrimination charge against their mutual employer could pursue a retaliation claim under Title VII of the Civil Rights of 1964. In Henry v. New Jersey Department of Human Services, 2010 N.J. LEXIS 1260 (Dec. 10, 2010), the New Jersey Supreme Court held that a terminated employee should have the opportunity to avail herself of the “discovery rule” and demonstrate that she acted reasonably in pursuing her discrimination claim in order to avoid a dismissal on statute of limitations grounds. In Craig v. Rite Aid Corporation, 2010 U.S. Dist. LEXIS 137773 (M.D. Pa. Dec. 29, 2010), discussed in the HR Tip of the Month, the Middle District of Pennsylvania declined to recognize the “self-critical analysis” privilege to protect a company’s voluntary internal assessment of its compliance with the Fair Labor Standards Act (FLSA), labor laws and existing bargaining agreements.

Thompson v. North American Stainless, LP

Eric Thompson and his fiancée were both employed by North American Stainless (NAS). Three weeks after being notified by the Equal Employment Opportunity Commission (EEOC) that Thompson’s fiancée had filed a charge of discrimination, NAS fired him. Thompson then filed a charge with the EEOC and later filed suit in federal court claiming that NAS fired him in order to retaliate against his fiancée.

The district court granted summary judgment to NAS, holding that Title VII did not permit third party retaliation claims. An en banc panel of the Sixth Circuit affirmed, concluding that because Thompson did not engage in any statutorily protected conduct, he was not included in the class of persons for whom Congress created a retaliation cause of action. The United States Supreme Court granted certiorari, and in an 8-0 decision, reversed the appellate panel.

The Court considered two questions: first, whether NAS’s firing of Thompson constituted unlawful retaliation; and second, did Title VII grant him a cause of action. The Court had little difficulty answering the first question in the affirmative, finding that if the facts alleged by Thompson were true, then his termination violated Title VII. Relying on past precedent, Justice Scalia, writing for the Court, observed that Title VII’s anti-retaliation provision, unlike the substantive provision, was not limited to discriminatory acts that affected the terms and conditions of employment. Rather, it prohibited any employer action that might dissuade a reasonable worker from making or supporting a charge of discrimination. The Court thought it obvious that a reasonable worker might be dissuaded from engaging in protected activity if she knew that her fiancé would be fired.

Regarding the second question, the Court addressed whether “aggrieved” under Title VII should be construed in a matter consistent with Article III standing, which requires only injury in fact caused by the defendant and remediable by the court. Justice Scalia concluded that “aggrieved” must be construed more narrowly. He also rejected the position advanced by NAS – that a “person aggrieved” refers only to the employee who engaged in protected activity. The Court adopted the “zone of interests” test, holding that “aggrieved” under Title VII enabled a suit by any plaintiff with an interest “‘arguably [sought] to be protected by the statutes.’” Applying that test, the Court concluded that Thompson fell within the zone of interests protected by Title VII, as (i) he was an employee of NAS, (ii) the purpose of Title VII was to protect employees from unlawful actions, and (iii) he was not an accidental victim of retaliation (but rather injuring him was NAS’s way of punishing his fiancée).

Henry v. New Jersey Department of Human Services

In April 2004, Lula Henry (Henry), who held a Master’s degree, was hired by Trenton State Psychiatric Hospital at an entry-level nursing position. In late Spring/early Summer 2004, Henry developed initial concerns that racial discrimination explained why she was hired at an entry level position, though her concerns were uncorroborated by any firm evidence. In late Summer 2004, Henry questioned her classification and requested reclassification; in response she remained assigned to her entry-level position. In November 2004, Henry resigned from Trenton State in order to take a position with another entity.

In the Spring of 2006, Henry was informed by a union representative that a Nigerian nurse had contested the placement of a less qualified Caucasian nurse and that there were widespread claims of racism at Trenton State. Henry also learned that a Caucasian nurse with similar credentials to hers was immediately hired into a higher job classification, contrary to what she was told about her placement. Henry claimed that prior to learning this information she had no factual basis to substantiate her earlier suspicions of race-based discrimination.

On July 24, 2007, Henry filed a complaint alleging racial discrimination in defendants’ hiring practice and retaliation in violation of the New Jersey Law Against Discrimination (NJLAD). Defendants moved for summary judgment based on the two-year statute of limitations applicable to NJLAD claims. The trial judge granted the motion, determining that Henry’s action accrued in 2004 and was not tolled by the discovery rule. The Appellate Division affirmed, and the Supreme Court granted certification. At issue was the impact of the “discovery rule” on NJLAD claims. That rule “delays the accrual of the action until the plaintiff ‘discovers, or by exercise of reasonable diligence and intelligence should have discovered, facts which form the basis of a cause of action.’”

Henry argued that her NJLAD claims did not accrue until 2006 because that is when she had some measure of corroboration of her concerns. Defendants argued that the discovery rule should not apply to NJLAD cases, but that even if it did, the rule would not be appropriate under the facts of this particular case.

The Court explained that the discovery rule is a well-established equitable doctrine that is applied when the statute of limitations would cause unnecessary harm without advancing its purpose. However, the Court did not find that there was an equitable basis on which to extend the statute of limitations on Henry’s retaliation claim, because that claim must have accrued at or before the date of her resignation in November 2004. As a result, the Court affirmed the Appellate Division’s dismissal of the retaliation claim.

The Court reached a different result on Henry’s discrimination claim. Noting its approval of the use of the discovery rule in LAD cases “when and where appropriate,” the Court held that this case might present such a circumstance. Henry had initial concerns in 2004 about her hiring and classification, but the reason she was given in response had nothing to do with racial discrimination. That, according to the Court, may have led her not to pursue the issue, thereby requiring the tolling of her cause of action. The Court held Henry was entitled to assert that she did not have reasonable suspicion of racial discrimination, even by the exercise of reasonable diligence, until 2006 when, among other things, she learned that less qualified Caucasian nurses were hired into advanced positions and she was told by her union representative about other claims of racial discrimination. Under these circumstances, the Court decided that Henry should get a hearing at which she could show that she acted reasonably in pursuing her claim of discrimination.

Misclassified Maintenance Worker Figures to Clean Up: Judge Holds He Was Not an Independent Contractor

Staffing flexibility and efficiency.  Reduced liability for federal and state employment laws.  Cost savings.  There are many reasons why companies use independent contractors.  But the bottom line is that these benefits, particularly in today’s economy, can make the difference between remaining competitive in the market place and falling behind.  As a result, many employers push the envelope, classifying individuals as independent contractors when they are truly regular employees.  Government agencies like the U.S. Department of Labor (the “DOL”) and the plaintiffs’ bar have taken notice and are challenging employers who break the rules.  A recent case in the Northern District of Illinois, Bulaj v. Wilmette Real Estate & Mgmt. Co., N.D. Ill. Oct. 21, 2010, highlights some of the mistakes employers make and the risks associated with misclassifying employees as independent contractors.

Bulaj worked for Wilmette, a property management firm, for over 12 years as a building maintenance worker.  After losing his job in 2008, Bulaj filed a lawsuit claiming that he worked 66 hours per week and that Wilmette failed to pay him overtime, in violation of the Fair Labor Standards Act (the “FLSA”) and Illinois state law.  The Court granted summary judgment to Bulaj, finding that he was improperly classified as an independent contractor.  Unable to dispute the key allegations, Wilmette essentially had no defense to the allegations.

While some of the mistakes Wilmette made suggest that the company made no real effort to comply with the law, the case is nonetheless instructive.  Following a six-factor test used by the Seventh Circuit Court of Appeals (Illinois, Indiana and Wisconsin), the Court cited the following factors in finding Bulaj to be an employee rather than an independent contractor:

  • Bulaj was engaged in the core work of Wilmette’s business.  As a maintenance worker charged with the upkeep and repair of the buildings managed by Wilmette, Bulaj was doing what the company does, as opposed to a graphic designer, for example, engaged to create a new corporate logo.  As the judge noted, Wilmette would likely lose customers if the buildings it managed fell into disrepair because Bulaj did not do his job.
  • Wilmette treated Bulaj like an employee, setting his schedule, monitoring the quality of his work, and disciplining him whenever his work fell below the company’s expectations.  And while Bulaj came to the position with prior experience in skilled trades like carpentry and plumbing, much of the work he performed was basic janitorial work that did not require any special training or abilities.
  • Bulaj had no opportunity for profit or loss as part of the engagement, as he received a regular salary every two weeks.
  • Bulaj worked in the same capacity for more than 12 years, during which Wilmette withheld federal and state taxes from his paychecks and reported his earnings on a W-2 rather than a 1099 Form.

Employers would do well to recognize that loyalty and tenure mean little when employment relationships end.  Oftentimes, contractors themselves are fine with being classified as such—until something goes wrong and the relationship ends.  Bulaj, for example, worked in this capacity for 12 years—apparently without complaint or concern—until he was fired in 2008.  Then he sued.  Employers should never assume that their classification decisions are risk free simply because nobody has objected to them or filed suit in the past.  Even a long-term, model employee may turn around and sue when the relationship sours or ends.  There are no guarantees.

What to do?  There is a series of factors that one can evaluate and assess to determine whether someone should be classified as an employee or independent contractor.  Because the potential liability can be significant, it is best to be proactive and review any questionable classification decisions before the DOL comes calling or a lawsuit is filed.  A simple audit can be conducted for far less than it would cost to respond to a lawsuit.  Short of that, there are several steps companies can take, including:

  • Put it in writing.  Make sure you enter into a written agreement with anyone who will be performing services as an independent contractor, and include in that agreement all the appropriate bells and whistles.
  • Use “real” contractors.  If the individual has his or her own business, with an office, company name, business cards and the like, the greater the likelihood that person will not be viewed solely as your employee.  By the same token, do not preclude him or her from working for other companies.  The contractor should have his or her own tools; if you are providing the tools and supplies, or reimbursing him or her, that suggests the person is an employee, not a contractor.
  • Keep your distance.  Although you can and should insist upon a certain level of service, refrain from trying to oversee the day-to-day functioning of contractors as far as the methods used to reach the end result for which you contracted with them.  Do not insist they perform the work on your premises, or work specific hours.  Do not discipline them or give them formal performance evaluations.
  • Compensate appropriately.  Structure the arrangement so the worker has an opportunity for profit or loss rather than paying an hourly rate or salary.
  • Use common sense.  Do not give them business cards for your company.  Do not invite them to your employee-only holiday party.  Issue a 1099, rather than a W-2.  Do not retain former employees as contractors and do not allow the agreement to renew automatically at the end of each term.
  • Be realistic and trust your gut.  If the contractor will be doing “the business of your business” and there really is no way around it, there simply may not be any way to use the individual as a contractor without violating the law.  The question then becomes how much risk you can tolerate.