MARCH 2004

I. LEGISLATIVE/REGULATORY UPDATE
Pending Legislation

Amendment Loosens Restrictions on Third-party Investigations

President George W. Bush signed into law the Fair and Accurate Credit Transactions Act of 2003 (“FACTA”), amending the Fair Credit Reporting Act (“FCRA”) in a number of ways. The new amendment takes effect on March 31, 2004.

This amendment is positive news for employers after the Federal Trade Commission’s (“FTC”) 1999 advisory opinion (“the Vail letter”) indicated that a workplace sexual harassment investigation conducted by an outside investigator was required to comply with all requirements of the FCRA, including obtaining a signed disclosure and consent form from the individuals being investigated before beginning the investigation, and providing a full copy of the outside investigator’s report after the investigation and before taking adverse action against an employee.

FACTA provides a practical exemption for most types of workplace misconduct investigations conducted by outside investigators. To fall within the exemption, the following requirements must be met:

• The communication is made to an employer in connection with an investigation;
  
• The investigation concerns either:
  
  • suspected misconduct relating to employment; or
    
  • compliance with federal, state, or local laws and regulations, the rules of a self-regulatory organization, or any preexisting written policies of the employer;
    
• The communication is not provided to any person except:
  
  • the employer or an agent of the employer;
    
  • any federal or state officer, agency, or department or any officer, agency, or department of a unit of general local government;
    
  • any self-regulatory organization with regulatory authority over the activities of the employer or the employee;
    
  • as is otherwise required by law; or
    
  • in accordance with an existing FCRA provision allowing a consumer reporting agency to disclose personal identification information to a government agency.
    
    As long as the communication meets those requirements, the exemption excuses an employer from adhering to the following FCRA requirements:
    
• Obtaining written authorization to conduct the workplace investigation from the individuals involved;
  
• Disclosing to the individuals under investigation that an investigation has begun;
  
• Providing to the affected person detailed information about the investigator, the investigation results, the sources of information, and the person’s rights under the FCRA before taking any adverse action based in whole or in part on the report;
  
• Waiting some period of time before making a decision about a possible adverse employment action; and
  
• Notifying the affected person of additional rights under the FCRA at the time of taking any adverse action.

Notably, FACTA does require an employer using an outside, third-party investigator to provide the affected individual a “summary report” after taking an adverse action. Unlike the prior requirement to provide a full copy of the report, including all sources of information, the new law requires only a summary, without sources, as long as the information was obtained solely for the purpose of the investigation. In addition, the employer is not required to provide the summary report until after it has taken an adverse employment action and only if that action is based in whole or in part on the information received from the investigator.

It is unsettled whether FACTA exempts from FCRA coverage any preemployment inquiries that rise to the level of an investigative consumer report (e.g., applicant reference checks conducted by an outside, third-party agency that go beyond dates of hire and employment termination and delve into areas such as job performance). Although those types of preemployment inquiries arguably are designed to explore “suspected misconduct related to [prior] employment,” FACTA’s exemption could be interpreted as applying to investigations into workplace misconduct only while employed by the employer requesting the investigative consumer report, not a prior employer.

As a result of the passage of FACTA, the unworkable FCRA restrictions suggested by the Vail letter have been substantially lifted. To preserve the ability to secure investigative consumer reports during the preemployment stage, however, employers should still consider including specific language in a disclosure and consent form authorizing the procurement and use of an investigative consumer report. Also, given the infancy of FACTA, employers should contemplate how to satisfy the “summary report” requirement, including how much and what type of information to provide.

Pending California Legislation

Proposals that may impact California employers and employees are again under consideration in the Legislature:

AB 1229 (Simitian): This bill would permit employees to sue under the Fair Employment and Housing Act (“FEHA”) whenever an employer grants an employment opportunity or benefit to an employee because he or she submits to the employer’s sexual advances or requests for sexual favors. In such case, the employer could be held liable for unlawful sexual discrimination against other persons who were qualified for, but were denied, that employment opportunity or benefit.

AB 1723 (Koretz): This bill would establish a new private right of action permitting an aggrieved party to go straight to court to enforce a new affirmative duty on all California employers to ensure that each and every employee take each and every meal and rest break required under law.

AB 1032 (Jackson): This bill would require prospective state bidders, under penalty of perjury, to provide information regarding whether current or former executives of their own company, parent companies, subsidiaries, and joint ventures have violated any California or federal tax, environmental protection, consumer protection, labor, or antitrust law in the last five years or been subject to an adverse civil judgment.

AB 1825 (Reyes): This bill mandates new posting and training requirements in regard to sexual harassment for employers with three or more employees.

ABX41 (Poochigian) and SBX43 (Maldonado): This workers’ compensation legislation attempts to reduce the cost of workers’ compensation coverage for employers. The following are key aspects of the proposed legislation:

• Would reduce misuse and fraud by requiring for the use of objective medical findings supported by medical evidence.
  
• Would amend the definition of “injury,” which the current law defines “as any injury or disease arising out of employment,” to “any injury or disease arising out of employment that is certified by a physician using medical evidence based on objective medical findings, which are defined as verifiable indications of injury or disease such as range of motion, atrophy, muscle strength, and palpable muscle spasm but not physical findings or subjective responses to physical examinations that are not reproducible, measurable, or observable.”
  
• A cumulative injury would need to be proven by a preponderance of the medical evidence that the injury was substantially caused by actual employment activities.
  
• No permanent disability compensation or death benefits would be paid unless the industrial injury is the predominant cause of the disability or death when compared to all other causes.
  
• Would eliminate compensation if the injuries are sustained while the individual is incarcerated in a county jail or state prison.
  
• Would prohibit chiropractic practitioners from determining permanent disability for purposes of receiving workers’ compensation benefits.
  
• In the event that the employer and employee do not agree with the permanent disability rating based on a treating physician’s evaluation, a physician from a Qualified Medical Evaluation Panel would be selected to prepare a medical evaluation of the employee’s permanent impairment and limitations and any need for continuing medical care resulting from the injury.
  
• Employees would be treated by physicians that are mutually agreed to by the employer and employee.
  
• Would limit chiropractic and physical therapy treatment to no more than 24 visits per industrial injury.
  
• As of July 1, 2004, would establish an Independent Medical Review system (“IMR”) for resolving issues concerning disputed medical care services and provide that any disputes regarding whether an employee is permanently disabled will be resolved by the IMR.
  
• Would stipulate that the nature of the injury is the sole factor to consider in determining the percentage of permanent disability if any of the following occur:
  
  • employee returns to regular work at the job held at time of injury.
    
  • employee is released by treating physician to regular work at the job held at the time of injury, but the employee refuses to return to that job.
    
  • employee is released by treating physician to regular work at the job held at the time of injury, but the employee is terminated by cause unrelated to the injury.
    

February 20, 2004 was the deadline for legislators to introduce bills this year.

II. JUDICIAL UPDATE

U.S. Supreme Court Issues Key Ruling in Age Bias Case

In General Dynamics Land Systems, Inc. v. Cline, a group of employees between the ages of 40 and 50 filed a case under the Age Discrimination in Employment Act (“ADEA”). The employees claimed that a benefit plan adopted by General Dynamics Land Systems (“the Employer”) favored employees 50 years of age or older. The high court rejected that reverse discrimination claim, finding that “[t]he ADEA’s text, structure, purpose, history and relationship to other federal statutes show that the statute does not mean to stop an employer from favoring an older employee over a younger one.”

The employees at two of the Employer’s facilities were governed by a collective bargaining agreement. Before 1997, full retiree health benefits were available to all employees who retired with 30 years of seniority with the company. The agreement that was renegotiated in 1997, however, stated that only employees who were at least 50 years of age on July 1 of that year would be eligible for the benefit.

Shortly thereafter, a class-action lawsuit was filed on behalf of approximately 200 employees who were between 40 and 49 years of age on July 1, 1997. The complaint alleged that the new collective bargaining agreement violated the ADEA because the employees lost the right to continued health benefits solely on the basis of their age.

A federal judge in Ohio dismissed the case after finding that the ADEA does not prohibit discrimination against younger employees. In July 2002, the Sixth Circuit Court of Appeals overturned that ruling and reinstated the employees’ suit on the basis that a “plain reading” of the statute indicated that Congress intended to bar any discrimination based on age against employees over 40 years of age -- even if an older employee was favored. The Employer appealed that ruling, and the U.S. Supreme Court agreed to hear the case.

In a 6-3 decision, the high court overturned the Sixth Circuit’s finding. The key to this case was the interpretation of one phrase in the ADEA -- which bars “discrimination . . . because of an individual’s age.” The majority, in an opinion written by Justice David Souter, concluded that the word “age” in that provision is commonly understood to refer to discrimination against older individuals. Further, according to the majority, “if Congress had been worrying about protecting the younger against the older, it would not likely have ignored everyone under 40.” Justice Souter also noted that the courts, except for this one decision from the Sixth Circuit, have uniformly found that the ADEA forbids “only discrimination preferring young to old.” As a result, the Supreme Court appears to have foreclosed a reverse age discrimination theory of liability. Cline is also instructive for cases arising under FEHA. Like the ADEA, FEHA prohibits discrimination based on age and protects employees who are at least 40 years old. Both Congress and the California Legislature expressly stated that the purpose of the ADEA and FEHA is to protect older employees from the obstacles associated with being older. When California law mirrors federal law, California courts generally will look to federal decisions for guidance. Thus, it is likely that the Cline decision will be followed by California courts addressing similar reverse age discrimination claims under California law.

Failure to Give WARN Notice Costly

In Childress v. Darby Lumber, Inc., the federal Ninth Circuit Court of Appeals recently affirmed a costly judgment against an employer that failed to comply with the federal Worker Adjustment and Retraining Notification (“WARN”) Act. The WARN Act requires employers of 100 or more full-time employees to give at least sixty days advance notice of certain plant closings or mass layoffs.

Darby Lumber Company and Bob Russell Construction (“the Employer”), a single employer for the purposes of the WARN Act, laid off approximately 90% of its employees with one day’s notice. Several weeks later the Employer laid off the remaining employees and ceased operations completely. Employees sued, alleging the Employer violated the WARN Act, seeking pay and benefits the Employer should have provided during the notice period. The Employer argued that it qualified for three exceptions to the WARN Act’s notice requirement.

The first, the “good faith” exception, requires an employer to prove that it intended to comply, and reasonably believed that it did comply, with the law’s requirements. The only evidence the Employer provided to support this exception was that it was unfamiliar with WARN’s requirements and did not want to close the business. The Ninth Circuit held that ignorance of WARN does not satisfy the “good faith” exception.

The second exception, the “business circumstances” exception, applies where the layoff or closing occurs because of a sudden, dramatic, and unexpected action outside the employer’s control. The Employer pointed to the refusal of its bank to renegotiate its credit. The court rejected this exception as well, pointing to evidence that depressed market conditions, increased raw material costs, and certain operational problems were responsible for the closing.

The third exception, the “faltering company” exception, applies when a company is seeking additional capital or business it reasonably believes will allow it to continue operating. In such cases, a WARN notice is not required because the proposed source of money or business may fear that the company’s employees are seeking other employment. The Employer argued that it was seeking new capital from its bank. The court rejected this defense because the Employer provided no evidence that its bank would have denied necessary funding because it gave its employees a WARN notice. The court awarded the employees more than $60,000 for lost wages and benefits, plus more than $123,000 in attorneys’ fees.

To prevent similar liabilities, employers should ensure familiarity with the requirements of the federal WARN Act, as well as the California WARN Act, which, in comparison to the federal, applies to smaller employers and contains somewhat different but overlapping requirements. Employers should also consider consulting with counsel when considering a layoff, plant closing, or relocation of work to assure compliance with both the federal and state notice requirements.

Court Rejects RICO Overtime Liability

In Miller v. Yokohama Tire Corporation, the Ninth Circuit Court of Appeals rejected an attempt to hold an employer and individual managers liable for unpaid overtime under the federal Racketeer Influenced and Corrupt Organizations (“RICO”) Act, the law originally passed to aid prosecution of organized crime. A successful RICO claim would have resulted in managers’ personal liability plus recovery of triple damages.

The lawsuit, filed by Christopher Miller (“the Employee”) against Yokohama Tire Corp. (“the Employer”), alleged that he and others were victims of mail and wire fraud when company managers misrepresented certain employees’ status as exempt from overtime pay. Thus, the Employee argued, each time the Employer mailed a paycheck, pay stub, or W-2 form it engaged in mail fraud, and each time the Employee direct deposited payroll funds by wire transfer it engaged in wire fraud, both violations of the RICO Act. The Employee further alleged that the Employer’s managers conspired to commit these illegal acts, an additional RICO violation.

The Employee originally filed his lawsuit in state court, where he alleged multiple violations of state wage and hour law, plus the RICO violations. After the Employer removed the case to federal court, the district court and the Ninth Circuit rejected the Employee’s claims. The Ninth Circuit ruled that the Employee had not proved that the Employer or its managers had engaged in either mail fraud or wire fraud, because such claims cannot rest solely on the employee-employer relationship. The court refused to “. . . turn the federal courts into a general venue for ordinary state wage disputes.” The Ninth Circuit returned the case to state court to resolve the overtime issues.

Decline in Stock Value Not Valid Stress Claim

In Pacific Gas & Electric Company v. Workers’ Compensation Appeals Board, a California appeals court ruled that a decline in stock value or business downturn is insufficient justification for a workers’ compensation stress claim.

A Pacific Gas and Electric (“the Employer”) employee, Clifford Bryan (“the Employee”), worked for 13 years as a meter reader and collector. The Employer eliminated the Employee’s position during a corporate reorganization, and reassigned him to a customer service position, something he found particularly stressful as the company continued to downsize and lose value in the stock market.

In addition, the Employee saw his more than $200,000 in the Employer’s stock decline significantly in value, and worried about his future employment with the Employer. The Employee left work, and filed a workers’ compensation stress claim. In evaluating the injury, the Employer’s doctor estimated 35% to 40% of his stress was caused by work, with the balance caused by outside stressors. The Employee’s doctor disagreed, finding all of his stress was due to work. When the Workers’ Compensation Appeals Board (“WCAB”) ruled that the Employee was entitled to benefits, the Employer appealed.

The appeals court reversed the WCAB decision, emphasizing that the loss of stock value was no different than that experienced by the general public. The court also said that concerns about future employment and the value of retirement funds are not discrete events of employment but rather ongoing concerns experienced by the entire workforce in tough economic times. To allow all employees to receive stress benefits due to economic conditions would subject an employer to unlimited liability. The court did conclude, however, that the Employee’s customer service reassignment was an event of employment that could, if found responsible for more than 50% of his total stress, entitle him to workers’ compensation benefits.

The court’s comments about the decline in stock value are worth noting. The court observed that the Employee voluntarily invested in the Employer’s stock, and the Employer had not required him to invest, nor had it provided any incentives to invest. The court’s comments suggest that it may have decided differently if investment in company stock had been mandatory, or if incentives for employee participation had been provided.

If you would like to discuss these or any other employment law matters, please do not hesitate to contact any member of Klinedinst's Employment Law Department.

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