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Three Clear Messages From Washington:employers Must Deal With Overtime Issues, The Suders Case And The Wal-Mart Case Now… Or Pay Later
If you are a business executive or HR professional interested in avoiding employment law liabilities, there is always too much to know and too much to do. It is difficult to prioritize. But over the last few months, our friends in Washington have sent some very clear, very high priority messages that no business can afford to ignore for very long.
We suggest you make a maximum effort to address and resolve the following items at the earliest feasible time, but certainly before the end of the year. You owe it to your bottom line.
First: Despite the Political Uncertainties,
It’s Time for An Overtime Audit
We summarized the new overtime regulations for our readers when they were first published, in our April 2004 Special Alert. The regulations officially went into effect on August 23, and we urge you to take another look at that article now – it highlights the most significant changes in the law, and provides a “what you should do now” checklist.
But as valuable as these kinds of articles (and the mountain of commentary, analysis, and seminar offerings that have recently appeared) may be, they will only take you so far. The new regulations are lengthy and subject to much interpretation, and while the plethora of published materials on the regulations – including our Special Alert -- might focus your attention on some of the potential trouble spots and solutions, they are, necessarily, written for a general audience, including all kinds of businesses involved in all kinds of employment scenarios.
To really minimize overtime violations, which can be hideously expensive, you need to get down to specifics. The only way you can do that is through a process by which the particulars of the regulations are matched up to the particulars of a specific company.
In this regard, the overtime regulations are no different than any other set of complex regulations. For example, most business executives understand that OSHA compliance requires much more than reading articles and attending seminars – they know that in order to minimize OSHA problems, someone with sufficient expertise must painstakingly review what regulations apply most directly to a specific business; they must then review actual practices to determine if there are any existing or potential compliance shortfalls; and they must then design businesslike solutions that work within the structure of the business being addressed. The same thing happens in a Sarbanes-Oxley review, or an affirmative action analysis, or in a host of other regulatory settings.
In respect to the new (and, for that matter, prior but still in effect) regulations, the task is to determine what regulations apply, where the potential trouble spots are, and what the best solutions and “work-arounds” may be. In some companies, that may mean adjusting compensation levels to take advantage of the new “floor” and “ceiling provisions.” In others, it may mean adjusting and re-defining job requirements. In others, it may require policy revisions and management training.
We refer to this process as an “overtime audit,” and we are in the process of working through these procedures with our clients.
Most of the companies engaged in this analysis are finding that if they were in compliance previously, there is usually no need for significant changes now, but at that same time, many companies find that there are substantial opportunities to re-classify certain employees from non-exempt to exempt. Sears, for instance, just announced that it reclassified 2500 entry level positions, and although analysts disagree, some predict that millions of workers throughout the country will lose the right to overtime pay.
There is another benefit to a legal audit as well: in many instances, companies find, to their surprise, that they have not been in compliance for many years, and the process presents an opportunity for a fresh start. This is especially true for companies located in states that have their own overtime laws, which layer on top of the federal regulations.
Do not underestimate the importance of the exercise – with the new regulations will come new enforcement efforts, both in the Department of Labor and among plaintiffs’ attorneys. Overtime compliance is now a hot topic.
But there is (as there always seems to be) a proviso. On September 9, the House voted to defeat a spending bill which would effectively block the new regulations. Twenty-two Republicans joined in that vote. President Bush has vowed to veto that bill if it passes the Senate, and negotiations with the Bush administration are underway. Previously, both the Senate (in May) and (unexpectedly) the House (in mid-July) passed a bill which, among other things, seeks to change the new provisions to the extent they make employees over a certain salary level automatically exempt. There are some differences between these two bills, but efforts are underway to reconcile them. A prominent Republican, Senator Specter, has parted ways with the administration on this issue. “The bill is in conference committee, and we will be fighting to ensure that it becomes law and to protect the overtime rights of the workers who need them to survive,” said Specter. “And we will win that fight.”
And if Senator Kerry is elected, the entire process may go back to the starting blocks.
Nevertheless, the current regulations are the law, and you must deal with them. Even if those regulations are changed in the future, a present overtime audit is anything but wasted effort. An overtime audit will reveal your current overtime “base line” – what your pay practices are among different types and classifications of employees – and that will give you the ability to get current, and to then quickly implement whatever future “tweaks” are required, without starting from scratch, as this political battle plays out.
One last note… Once the audit is done, always remember that there are right ways and wrong ways to implement the required changes. For instance, employers need to be concerned about how transferring employees from non-exempt to exempt status will affect morale. In addition, depending on how the changes are packaged and presented, employees might be encouraged to seek compensation for those periods during which they were wrongly classified.
Second: It’s Time to Review Your Employee Complaint and Exit Interview Procedures,
and to Train Your Managers on Their Proper Use
The recent Supreme Court case of Pennsylvania State Police v. Suders has justifiably received a great deal of attention, especially among HR professionals. It is relatively easy to explain what the case says, but what does it really mean in terms of instructing businesses on the art of avoiding employment lawsuits?
Suders involved a “constructive discharge” situation – that is, the plaintiff claimed that she had been sexually harassed to the point where her work life had been made so intolerable as to leave her with no choice but to quit. She sued for sexual harassment, and the issue the Supreme Court had to resolve was one of monumental, practical importance: what defenses can an employer assert to constructive discharge claim?
Background… In 1998, the Supreme Court decided two cases – often referred to together as Ellerth/Faragher -- that drastically changed employment law. In Ellerth/Faragher, the Court provided some bad news, and some not-as-bad news for employers.
First, the Court ruled that in proven harassment situations involving a “tangible employment action” – that is, harassment which results in termination, demotion, discipline and so on – there is no defense, and the employer will be held liable, period. Obviously, those cases heightened the need for preventive measures (and, in effect, gave birth to CCG).
Second, the Supreme Court ruled that in proven hostile work environment situations (as opposed to a tangible employment action targeted directly at an employee), an employer would be permitted to raise a defense: the employer can avoid liability if 1) it can prove that it exercised reasonable care to prevent and promptly correct any harassing behavior of which it was made aware, and 2) if it can prove that the plaintiff unreasonably failed to use the preventive or corrective policies and procedures provided by the employer.
Focus on the second component of this defense for now. It boils down to this: if the employer has a viable complaint and investigation procedure in effect, and an employee who is victimized by a hostile work environment fails to use that procedure without good reason, the employee could easily lose his or her harassment lawsuit – basically, the Supreme Court ruled that in cases which do not involve a tangible employment action, an employee has to give an employer a chance to resolve the situation so long as the employer has established a reasonable procedure for the employee to do so.
Enter the Suders case. The question in Suders was whether a constructive discharge situation would be treated as a tangible employment action (i.e., the employer loses, no defenses allowed), or whether it would be treated as a hostile work environment case (i.e., the employer could defend by showing that the complaining employee did not take advantage of the reasonable policies and procedures the employer had implemented to redress work place harassment).
The Supreme Court ruled that the constructive discharge in Suders was not to be treated as a tangible employment action, and that the employer could offer the same defenses as are available in a hostile work environment case – good news for employers. So, while the existence of viable complaint and investigation procedures is no guaranty of victory, employers who have implemented such procedures will, in similar situations, be given the opportunity to present a defense… a great alternative to the “you’re liable, no matter what” result that abides in tangible employment action cases.
It is important to note, however, that the magic only works if you do it right. This is not a simple process. The EEOC and the courts have provided lengthy guidance on what kinds of complaint and investigation procedures will pass muster, and companies are well advised to seek professional guidance in this area. For instance, see the March 2002 and June 2002 issues of Avoiding Lawsuits. It is also of great importance to establish a compliant documentation procedure that allows you to prove you did the right thing, and an exit interview procedure can also be extremely helpful.
Finally, it cannot be stressed enough that merely enacting the policies – even the right policies -- without also training the people responsible for administering the policies, is exceptionally dangerous. Consider a 2004 Circuit Court case, MacGregor v. Mallinckrodt. An employee complained of discrimination, and utilized the company’s complaint procedure. The Court found, however, that after the complaint was made, only minimal investigations were conducted, and no effective action was taken to remedy the situation – all contrary to the company’s enacted procedures. The result: an award of $1 million in punitive damages (subsequently reduced to $300,000 by statute). Ignoring your own procedures, said the Court, is tantamount to not bothering to enact them in the first place.
In effect, in Suders, the Supreme Court has handed employers a life preserver in the increasingly-common constructive discharge cases that many employers face. You can grab onto the life preserver by properly enacting and implementing the right kinds of procedures. Or you can choose to drown.
Third: Turn Your Subjective Employment Decisions
into Objective Employment Decisions
Now that it has happened to Wal-Mart and Morgan Stanley, it could happen to you.
As the media widely reported, in June, a federal district court in San Francisco allowed a class action involving 1.5 million Wal-Mart employees to proceed toward trial – by far the largest class action ever permitted in an employment discrimination case. But that is not the whole story. What is just as interesting about the case is the legal theory on which Wal-Mart was sued.
Boiled down to its essence, the Wal-Mart employees claim that Wal-Mart institutionalized a policy of subjective decision-making respecting basic employment decisions, like raises and promotions. The court found that this policy, especially when combined with evidence of a corporate culture that included gender stereotyping, could lead to widespread gender-based discrimination. Because this could adversely affect virtually all of Wal-Mart’s female employees, the court ruled that the case could proceed in a class action format.
What does that mean in practice? The Wal-Mart decision was not a ruling on the merits. Whether Wal-Mart did anything wrong has not yet been decided. But by allowing the case to proceed as a class action, the court dramatically multiplied Wal-Mart’s risk and, therefore, the plaintiffs’ settlement leverage. When an employer faces a claim by one employee, or even a few employees, it can defend and risk defeat since the worst case scenario is not life-threatening. But when that claim is, effectively converted into a claim by 50% or more of the company’s employees, can the company afford to risk a trial?
Case in point: a few weeks ago, even before the Wal-Mart case publicized and implicitly endorsed this strategy, the EEOC announced that Morgan Stanley had agreed to pay a $54 million settlement in a gender discrimination class action which, up to that point, Morgan Stanley had vowed to vigorously defend. Many analysts have observed that Morgan Stanley settled because the risk of proceeding to trial in a class action of this nature would have involved facing a potential judgment in the hundreds of millions of dollars. Perhaps the odds favored Morgan Stanley at trial, but could it afford to take the risk?
The most effective way to prevent these kinds of claims is the following:
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There is nothing new in this advice. For instance, take a look at the Avoiding Lawsuits issues from January 2004, and September 2002. But what has changed is the urgency with which companies need to implement this advice: it is no exaggeration to state that a company which has, through inaction, left itself open to a class action of this nature has acted irresponsibly towards its owners. The stakes are too high to cavalierly run these risks.
As always, let us know if we can help.
Powell Trachtman Logan Carrle & Lombardo PC. is a full service law firm with offices in suburban Philadelphia, PA, Harrisburg, PA and Cherry Hill, NJ. Powell Trachtman represents a variety of commercial enterprises, entrepreneurs and business executives in respect to their litigation, litigation avoidance planning, business formation, business transactions, estate and tax planning, and other needs. We are also approved defense counsel for numerous insurance carriers in matters pertaining to professional malpractice, products liability, employment practices, directors and officers liability, and many other fields. For more information, contact us at info@powelltrachtman.com and visit our website at www.powelltrachtman.com.
Various insurance carriers have approved Powell Trachtman as counsel for the defense of employment practices claims, directors and officers liability claims, and other claims litigated in Pennsylvania and New Jersey. If a claim is brought against you, please feel free to contact us for further information.
