Employment Law Update - Spring 2007
The Revised 2007 EEO-1 Form: New Racial Designations and Job Categories
By: Jeanne M. Phelan
In early 2006, the Office of Budget and Management approved Equal Employment Opportunity Commission (EEOC) regulations making major changes to the EEO-1 form filed by employers of 100 or more employees and certain federal contractors with 50 or more employees. New changes to job and racial categories appear on EEO-1 forms that must be filed by September 30, 2007.
New job categories
The Officials and Managers job category has been divided into two levels: Executive/Senior Level Officials and Managers, and First/Mid-Level Officials and Managers. The Executive/Senior Level includes individuals who plan, direct and formulate policies, set strategy, and provide overall direction - typically CEOs, COOs, CFOs, other top-level staff officers, and line of business heads. The lower level consists of all other managers, including mid-level and first-level supervisors, and managers. In addition, individuals in non-managerial business and financial positions should now be reported in the Professionals category.
New racial/ethnic classifications
A new mixed-race category - "Two or more races" - appears on the 2007 form. Available to employees who do not identify themselves as "Hispanic or Latino," the new mixed-race designation retains the EEOC's practice of counting employees who identify themselves as Hispanic or Latino only in that ethnic category, regardless of skin color or racial characteristics. The Asian or Pacific Islander racial classification has been divided to separately identify "Native Hawaiian or Other Pacific Islander" from other Asians. The former Black and Hispanic categories have expanded titles.
If, as an employer and government contactor, you must complete affirmative action plans, please note that these new categories apply only to the EEO-l form. The Office of Federal Contract Compliance Programs (OFCCP) has not adopted them for use in affirmative action plans. Continue to track ethnic and racial data under the old definitions for your affirmative action obligations and under the new system as well for the EEO-1 form.
Data collection
The EEOC prefer employers to collect racial and ethnic identification information by asking employees to self-identify. With the new categories, particularly the mixed race category, self-identification seems even more essential. You are urged to survey to determine your employees' racial or ethnic categories. Ask employees to state whether they consider themselves Hispanic or Latino, and, if not, which one of the following six categories best describes them:
- White
- Black or African American
- Native Hawaiian or Other Pacific Islander
- Asian
- American Indian or Alaskan Native
- Two or More Races
Include a statement on the survey to inform your employees that the information is being sought only for government reporting compliance, the completion of the form is voluntary, and the information obtained will not be used to make employment decisions.
If an employee refuses to self-identify, use observation or information contained in prior records to supply the EEO-l designation. Be sure to store survey data separately from your employees' personnel records used for employment decisions (such as hiring, promotion, and discipline).
Timing
The EEOC regulations suggest that this survey be undertaken "as soon as possible." If you are planning updates to other personnel information, you should request the new EEO-l data at the same time. The regulations specifically state, however, that you are not required to complete this process prior to submitting the 2007 EEO-1 form.
If you are unable to complete the survey in time to include the new data on the 2007 EEO-1 report, file the 2007 EEO-1 based on data available when the report is filed. If you have actual knowledge at the time the report is filed that specific employees should be given a new designation due to the change in racial and ethnic categories, make these changes to the 2007 form, even without conducting a survey. Then complete a workforce survey in time to use the new data on the 2008 EEO-1 form. In the meantime, invite your new hires to self-identify under the new classification system (as well as the old, if you are a government contractor subject to affirmative action requirements).
The EEOC's website contains information regarding the EEO-1 revisions and a sample of the new form. If you have questions about the new 2007 EEO-1 form or need assistance, please contact one of our WTP employment lawyers for advice.
Supreme Court to Review "Cat's Paw" Case
By: Melissa M. McGuire, Esq.
The Supreme Court has agreed to review Equal Employment Opportunity Commission v. BCI Coca-Cola Bottling Co. of Los Angeles, a case addressing an employer's liability under the federal anti-discrimination statutes for being the "cat's paw" of a biased subordinate employee.
Generally, "cat's paw" refers to the situation where a biased co-worker uses the formal decision-maker as a "cat's paw" to unfairly discipline the plaintiff and fulfill his or her discriminatory purpose.
The courts have grappled with the extent to which an employer may be held liable for incorporating an allegedly biased subordinate's input into disciplinary action. The Supreme Court's ruling in BCI Coca-Cola Bottling Co. of Los Angeles should provide guidance on this issue.
Background
In BCI Coca-Cola Bottling Co. of Los Angeles, Stephen Peters claimed he was terminated because he is black, in violation of Title VII of the Civil Rights Act of 1964. The human resources official who made the decision to terminate Peters worked in a separate city, had never spoken with Peters, and did not know his race. In making the decision to terminate Peters, the HR official relied exclusively on information provided by Peters' supervisor,
Grado, who Peters claimed was racially biased against black employees. While Grado did not recommend Peters' termination and actually had no authority to terminate Peters, the federal Court of Appeals for the Seventh Circuit ruled that Grado's discriminatory animus infected the decision to terminate Peters and was attributable to BCI Coca Cola Bottling under Title VII.
The court found that an employer is liable when a biased subordinate's discriminatory reports, recommendations, or other actions cause an adverse employment action. Mere "influence" or "input" in the decision-making process is insufficient for employer liability to arise. However, the court specifically rejected the theory that an employer may be liable for subordinate bias only if the decision-maker receives and approves an explicit recommendation from the biased subordinate to impose discipline.
"Cat's Paw" in the Fourth Circuit
The court in BCI Coca-Cola Bottling of Los Angeles rejected the "cat's paw" analysis adopted by the Fourth Circuit Court of Appeals, the federal appellate court that encompasses Maryland, Virginia, West Virginia, North Carolina, and South Carolina. Specifically, the Seventh Circuit examined in detail the Fourth Circuit's decision in Hill v. Lockheed Martin Logistics Management, Inc., and criticized the stringent standard applied in Hill for imposing employer liability in a "cat's paw" situation. If the Supreme Court similarly rejects the Fourth Circuit's analysis when it reviews BCI Coca-Cola Bottling of Los Angeles, the standard may be broadened in the Fourth Circuit, resulting in more employer exposure when a biased co-worker is involved in employee discipline.
In Hill, the Fourth Circuit found that even though an allegedly biased safety inspector reported the infractions that led to Hill's discharge, Lockheed Martin was not liable for any alleged bias because the safety inspector was not the ultimate decision-maker. Hill was terminated from her job as an aircraft sheet metal mechanic after she received three reprimands. She admitted to her supervisor that she had committed the infractions. Nevertheless, Hill complained that her termination was due to illegal gender discrimination and retaliation because the allegedly biased safety inspector reported two of the three infractions that led to the reprimands. The safety inspector did not have the authority to terminate Hill and he did not make the decision to do so. Hill argued that his involvement in her termination rendered it discriminatory.
The Fourth Circuit rejected Hill's argument and declined to find that the safety inspector was a "decisionmaker" who incurred liability on behalf of Lockheed Martin. The Court concluded that to impose employer liability under Title VII, it is insufficient for a biased co-worker to have had a "substantial influence" on the decision to impose discipline or to play a "significant role" in the challenged employment action. Rather, a biased co-worker must be "principally responsible" for the disciplinary decision or the "actual decision-maker." As such, the supervisor, not the safety inspector, was the actual decision-maker and principally responsible for the decision to fire Hill. The supervisor made his decision after he met with Hill and she admitted the infractions, not based on an unsubstantiated report from the safety inspector.
What this means for you
Regardless of whether the Supreme Court adopts a narrow or broad standard for imposing employer liability in "cat's paw" scenarios, take steps to reduce your company's exposure.
Have your formal decision-makers thoroughly and independently review all facts prior to imposing corrective action. If there are multiple witnesses to an alleged infraction, interview more than one witness, all if possible, and consider all relevant documents.
Your decision-maker's independent review should also include an interview of the employee who may receive the corrective action, prior to imposing the discipline. This ensures fairness, permits the employee to provide her or her side of the story, and provides the employee an opportunity to voice any concerns over perceived discrimination or bias by individuals who affect the employment decision. Investigate any allegations or articulated
concerns of discrimination to ensure that the disciplinary decision, or other aspects of the work environment, is not infected with unlawful discrimination.
Restrictive Covenants: Sometimes They're Not Worth the Paper They're Printed On!
By: Kevin C. McCormick, Esq.
A decision from the Maryland Court of Special Appeals highlights the significant challenges that employers face when they attempt to enforce a restrictive covenant against a former employee.
In the decision, the court found that although there was clear evidence that the former employee was in violation of the covenant by working for a competitor, it denied the employer's request for liquidated damages, finding that the damage clause was unenforceable. In short, the employer won the battle but lost the war.
Background
The employer, Willard Packaging Company (Willard), is a Maryland corporation that manufacturers and distributes packaging materials, including boxes, bubble wrap tape and foam packaging throughout the mid-Atlantic region, including Virginia, Maryland, District of Columbia, and Delaware.
In March 1998, Demetrio Javier was hired as an outside salesman for Willard. In this position, Javier was required to establish leads and make cold calls to generate sales and business for Willard.
Shortly after being hired, Javier was required to sign a "Duty of Confidentiality and Covenant Not to Compete." Under its terms, the agreement prohibited Javier from working for a competing business within a 75-mile radius of Willard's principal place of business for one year after leaving Willard's employ. The agreement also contained a liquidated damages' provision of $50,000 in the event Javier breached the agreement. Without objection, Javier and other employees at Willard signed the agreement and, as consideration, received $50.
On April 11, 2003, Javier voluntarily terminated his employment with Willard. During Javier's exit interview, he was reminded about his restrictive covenant. Approximately six months thereafter, Javier took a position with Atlas Alexandria Packing, LLC (Atlas).
Atlas, a manufacturer and distributor of packaging materials, was a major competitor of Willard in the DC-area market. Once Willard learned of Javier's employment with Atlas, it filed a lawsuit seeking injunctive relief and damages. The Circuit Court denied Willard's request for injunctive relief and the remaining claims for breach of contract and damages were set in for trial.
At the conclusion of the trial, Javier moved for judgment claiming that Willard had failed to prove that the $50,000 liquidated damages provision was supported by a reasonable expectation of damages. The trial court agreed and granted Javier's motion, even though Javier was in clear breach of the restrictive covenant by remaining employed with Atlas within the 75-mile restriction. According to the trial court, Willard was not entitled to any economic damages as the liquidated damage clause in the agreement was not based upon a reasonable expectation of damages, but, instead, was a penalty. Since Willard had failed to prove any other actual damages, the court awarded Willard nominal damages of $1.
Dissatisfied with this result, Willard appealed the trial court's decision. On appeal, however, Willard faired no better. According to the appellate court, although liquidated damage provisions in a contract that allow the parties
to agree in advance on a specific amount of damages in the event of a breach, are generally enforceable, where such provisions fix an unreasonably large liquidated damages amount so as to be unreasonable, they are void and unenforceable.
In this case, the testimony revealed that the $50,000 figure was not based on a reasonable assessment of the potential damages that Willard would face in the event Javier breached the restrictive covenant, but, rather, on a hodgepodge of reasons, none of which were sufficient to satisfy the requirement that the liquidated damage provision have a reasonable relationship to the potential damages.
Willard claimed that the $50,000 figure was appropriate because, in an earlier case, the cost of litigating a breached, non-compete provision, was about that sum. Willard also claimed that the figure was a reasonable estimate of the expense it incurred in hiring and training a salesman like Javier. Finally, Willard conceded that the covenant and the liquidated damaged figure, was taken from another employment contract utilized by a friendly competitor.
The court rejected all three of these proffered justifications and found that Willard had not used any reasonable
method to determine the liquidated damage amount, and it was meant merely to penalize and punish Javier for taking a job with a competitor rather than to compensate Willard for any loss Willard had suffered as a result of Javier's breach.
Indeed, the appellate court noted that Willard presented no evidence of any actual damages resulting from Javier's breach of the restrictive covenant. As a result, the appellate court affirmed the award of $1 in compensatory damages.
Practical pointers
As many employers already know, enforcing restrictive covenants can often be a difficult process. While no one questions the need for such documents to protect legitimate business interests, this case highlights the care that should be taken in drafting any such agreements that restrict any post-employment activities.
While liquidated damage provisions can be used effectively in such agreements, they should be based on a reasonable estimate of the damages that the breach would cause the non-breaching party. Simply copying a provision from someone else's agreement, according to the court, is legally insufficient to support an award of damages.
At a minimum, if you use any post-employment agreements that contain a liquidated damages provision, you should review it carefully to make sure that the damages you are claiming have a rational and reasonable relationship to the expected loss caused by the breach. If not, you may wind up spending a lot of time, effort, and money to recover a buck.
What! Me Worry?? I Have Insurance to Cover that Claim!!
By: Kevin C. McCormick, Esq.
As many of you know, there are various insurance policies available to protect against employment-related claims. Although some policies cover a variety of claims, many cover only specific claims to the exclusion of all others.
A decision from the U.S. Court of Appeals for the Fourth Circuit, which covers Maryland, highlights some of the interesting issues that can arise in resolving employment claims covered by an insurance policy.
Background facts
In December 1999, Leona Trotter and other employees of Perdue Farms, Inc., filed suit against Perdue in federal court challenging as unlawful Perdue's compensation and recordkeeping practices.
Her complaint alleged three counts under ERISA, one count under The Fair Labor Standards Act, and five counts under various state wage and hour laws. Because Perdue had a $10,000,000 insurance policy covering certain ERISA claims, it notified the carrier - Travelers Casualty and Surety Company - of Trotter's claims and to provide a defense to those claims.
Travelers determined that because the complaint alleged certain ERISA claims, there was a potential of coverage, requiring the insurance company to defend Perdue. Travelers reserved its rights to refuse any settlements or judgments, to decline to defend non-covered wage and hour claims, and to seek reimbursement for defense costs expended on those non-covered claims. During the next several years, Travelers paid over $4.4 million defending Perdue against these various claims.
In June 2002, Perdue settled with Trotter in a class of similarly situated employees for $10,000,000 and limited injunctive relief. The settlement agreement did not indicate how much of the $10,000,000 was attributable to the ERISA or FLSA claims.
Indemnification refused
Perdue requested that Travelers indemnify it for the full $10,000,000 settlement. Travelers refused, claiming that the settlement was based primarily upon noncovered wage and hour claims. Perdue thereafter filed a lawsuit seeking indemnification for the full settlement amount, minus $775,000 paid to employees asserting only wage and hour claims and $98,000 in attorneys' fees related solely to those claims.
Travelers filed a counterclaim against Perdue seeking reimbursement of that portion of the approximately $4.4 million in defense costs, attributable to noncovered wage and hour claims. Both parties moved for summary judgment.
The trial court held that Travelers could not obtain any reimbursement for its defense costs and that Perdue was entitled to indemnification for the full settlement, minus those sums clearly earmarked for employees asserting only wage and hour claims. Travelers had contended that because ERISA did not contain a remedy for back pay, much of the settlement must have been due to violations of wage and hour laws, not covered by the ERISA policy. The trial court disagreed reasoning that Travelers was required to compensate Perdue or the settlement because Perdue was "potentially liable" under ERISA.
According to the trial court, Perdue's faced potential liability for this covered claim because the Supreme Court had yet to determine whether back pay constitutes an appropriate remedy under ERISA. The trial court further held that Travelers was liable for the entire amount Perdue requested because the non-covered wage and hour claims were "reasonably related" to the covered ERISA ones. With respect to Travelers' counterclaim for defense costs, the trial court held that no such right of partial reimbursement existed.
According to the court, the case involved two separate concepts in the law of insurance - the duty to defend and the duty to indemnify. The duty to defend, according to the court, refers to an insurer's obligation to defend its insured when a third party files suit. This duty arises at the outset of litigation, whenever the underlying complaint and other appropriate extrinsic evidence reveals claims that are even "potentially" covered under the insurance policy. According to the court, in order for an insurer to be obligated to defend an insured, the underlying suit need only allege action that is potentially covered by the policy no matter how attenuated, frivolous or illogical that allegation may be.
The duty to indemnify, by contrast, refers to an insurer's responsibility to pay a monetary award when its insured has become liable for a covered claim. The duty to indemnify depends upon liability and is narrower than the duty to defend. While an insurer must frequently defend both potentially covered claims and claims that are not covered under an insurance policy, it is only required to indemnify covered claims for which liability is incurred.
In the instant matter, the court first considered Travelers' request for reimbursement of certain defense costs, which it claimed were unrelated to the ERISA-covered claims. According to the court, while jurisdictions differ on the soundness of an insurer's right to reimbursement of defense costs, the court could not find one case that extends this right to insurers. Under law, if an insurance policy potentially covers any claim in an underlying complaint, the insurer must typically defend the entire suit, including non-covered claims. To permit a carrier to seek reimbursement of defense costs incurred in defending non-covered claims would, according to the court, "serve only as a backdoor narrowing of the duty to defend and would appreciably erode a long-held view that the duty to defend is broader than the duty to indemnify."
The court rejected Travelers' attempt to recoup some of its $4.4 million spent defending the lawsuit. The court then considered Travelers' duty to indemnify Perdue for the settlement. It reversed the trial court and found that the insurance company can only be required to indemnify the insured for those claims covered by the insurance policy and not others that might also be in the litigation. The court also found that the employees, in effect, were raising two claims under ERISA and federal and state wage and hour laws, claims that provide for distinct and separate remedies. The duty to indemnify would not, according to the court, cover the wage and hour claims, even if they were "reasonably related" to the covered ERISA claims.
Thus, Travelers would have no obligation to indemnify Perdue for any amounts paid in settlement of any claims asserting age and hour violations. In order to determine how the trial court should proceed on remand, the court suggested that a rough apportionment of settlement amounts among covered and non-covered claims would be most appropriate. Some of the factors that should be considered in making this determination would include reviewing how the parties characterize the claims in the underlying complaint and settlement agreement, and the intent of the parties entering into the settlement and the relative merits of the underlying claims.
The court also acknowledged that this task could have been easily avoided if, in the settlement agreement, the parties had specified how liability was allocated between the covered and non-covered claims. According to the court, such a scenario arises with some frequency and the apportionment of settlement amounts between covered and non-covered claims is typically resolved through negotiation and private agreement. Here, however, the parties apparently could not agree, resulting in additional litigation.
Practical pointers
As this case highlights, insurance policies are as varied as the types of claims that employees can bring in litigation. It is essential that all employers be familiar with the specific types of insurance policies that are in force and exactly what types of employment claims are covered under those policies. Depending upon how the claims are described in the complaint, the insurance company may have an obligation to provide a defense to those claims, even for ones not specifically covered under the insurance policy, but your right to seek indemnification for any ultimate judgment and/or settlement will depend upon the nature of the claim involved.
To be sure, in the event any matter covered by insurance is ultimately settled, it would be prudent to come to some agreement with the carrier as to how the claims should be characterized, if at all possible. Your failure to do so, as indicated in this case, can result in more costly litigation, something most employers would like to avoid at all costs!