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Labor and Employment Update - Summer 2012

07.01.12

SUPREME COURT TO REVIEW DEFINITION OF WHO IS A “SUPERVISOR” UNDER TITLE VII

In order to resolve the current circuit split on the issue, the United States Supreme Court has agreed to review the definition of a “supervisor” in harassment cases under Title VII of the Civil Rights Act of 1964.

The Court will review the Seventh Circuit’s decision in Vance v. Ball State University. In that case, Maetta Vance, an African-American woman, was employed in the catering department of the defendant university. Vance claimed she had been harassed by three supervisors because of her race, including being slapped on her hand, subjected to racial epithets and derogatory terms, such as “Sambo” and “Buckwheat,” and demoted to a less desirable food preparation position. Vance claimed that one of the alleged harassers, Saundra Davis, was Vance’s supervisor because Davis sometimes told Vance “what to do” and did not clock-in like other employees. 

The Seventh Circuit rejected these contentions. Applying the Seventh Circuit’s established definition of a “supervisor,” the court found that Davis was not Vance’s supervisor because Davis did not “have the power to directly affect the terms and conditions of” Vance’s employment, such as “power to hire, fire, demote, promote, transfer, or discipline” Vance. Relying on the Supreme Court’s Faragher/Ellerth test for employer liability, the court ruled that the university was not liable for Davis’ harassment because Vance had not established that the university “had been negligent in discovering or remedying the harassment” and even conceded that she had not complained to a supervisor about Davis’ offending remarks.

The question now before the Supreme Court is whether a supervisor for purposes of employer liability under Title VII is one with any authority to oversee and direct the plaintiff’s work, or does it need to be one who has the “power to hire, fire, demote, promote, transfer, or discipline” the plaintiff. The more flexible first definition is the one used by the EEOC, Second Circuit, Fourth Circuit, and Ninth Circuit. The more limited second definition, used by the Seventh Circuit, is substantially similar to the one used by courts in the First Circuit, Third Circuit, and Eighth Circuit. 

The Supreme Court’s decision will have a significant impact on employers nationwide because of the different standards for employer liability in cases of non-supervisor and supervisor harassment. Under the Faragher/Ellerth framework for employer liability, the employer is not liable for harassment by a non-supervisory employee unless the plaintiff can prove 1) the employer knew or should have known about the harassment, and 2) failed to take prompt corrective action. By contrast, if the harasser is a supervisor, the employer faces automatic liability if the plaintiff proves unlawful harassment. To escape liability, the employer must then prove that 1) the employer used reasonable care to prevent and quickly correct any harassing behavior, and 2) the employee unreasonably failed to use reporting procedures created by the employer.

Consequently, if the definition of a supervisor is broadened, employers will face a more onerous task in defending harassment cases because of the greater burden placed on the employer to rebut the automatic liability imposed for supervisor harassment. Furthermore, if the Supreme Court adopts the broader definition urged by the EEOC, an employer’s internal processes for reporting, investigating, and correcting unlawful harassment will be more important than ever because these mechanisms will become an even more integral part of the employer’s defense in a Title VII suit.   

Diana E. Lipschutz
dlipschutz@klehr.com

BAD ECONOMY MAY RELIEVE EMPLOYER OF WARN ACT OBLIGATIONS

A federal appeals court recently held than an unanticipated economic downturn was an “unforeseeable business circumstance” that relieved an employer of its obligation to provide sixty days notice of a mass layoff as required by the Federal Worker Adjustment and Retraining Notification (“WARN”) Act. In United Steelworkers of America Local 2660 v. U.S. Steel Corp., the 8th Circuit Court of Appeals held that the economic crisis of late 2008, combined with a drastic reduction in customers’ orders at U.S. Steel, was sufficient to invoke the WARN Act’s unforeseeable business circumstances defense.

Under the WARN Act, employers with more than 100 employees who shut down operations or engage in a mass layoff (as defined by the Act) must provide sixty days advance notice to their employees, as well as state and local officials, or as much notice as is practicable under the circumstances. One of the defenses/exceptions for reducing the 60-day notification period is “unforeseeable business circumstances.” The Department of Labor regulations interpreting the WARN Act indicate an “unanticipated and dramatic economic downturn” is an example of such a business circumstance. The standard for whether such notice should be given is whether an employer using commercially reasonable business judgment in a similar situation would make such a decision. In the U.S. Steel case, the court held that, although the employer was aware of an impending economic downturn, a sharp drop in steel orders did not occur before the date that the employer provided WARN Act notices. Therefore, the court held that the employer’s WARN notices were provided “as soon as practicable” as required by the Act. 

Historically, the unforeseen business circumstances defense -- as well as the faltering company defense -- have been interpreted narrowly by the courts. Similarly, we anticipate that other courts will not liberally apply bad economic conditions as a valid defense for failing to provide 60-days notice. Regardless, employers should consult with counsel to insure that they are complying with the federal WARN Act, as well as various state plant closings/layoff laws that provide even greater penalties and have fewer defenses than the federal WARN Act.

Charles A. Ercole
cercole@klehr.com

OBAMACARE’S IMPACT ON SMALL BUSINESSES

The U.S. Supreme Court recently upheld the constitutionality of the Patient Protection and Affordable Care Act (“ObamaCare”). This ruling has left many wondering how the law and its employer mandates will impact small businesses specifically and the U.S. economy in general. 

ObamaCare requires employers with at least 50 full-time workers to offer government designed or approved health care plans, or pay penalties ranging from $2,000 to $3,000 per worker per year. This 50 full-time employee threshold will directly affect many of our nation’s small businesses, and as a result, may have a disastrous impact on our already struggling economy.

Dr. Chad Moutray, the Chief Economist for the Office of Advocacy of the U.S. Small Business Administration (SBA), has stated that "small business drives the American economy.” According to the SBA, small businesses represent 99.7% of all firms in the U.S., more than half of the private non-farm Gross Domestic Product, and create 60-80% the nation’s net new jobs. Thus, it is clear that the strength of small businesses is vital to our nation’s economy.

Based on ObamaCare’s regulations affecting employers with 50 or more workers, small businesses may be inclined to lay off workers to get below that number, or to refuse to hire new workers to avoid reaching that number. Many economists and analysts warn that the law may result in years of high unemployment rates, as the increased insurance costs may discourage businesses from hiring well into the next decade. In addition, since employers do not have to provide coverage for employees who work less than 30 hours per week, the law may drive businesses to reduce full-time workers to part-time status. While the law contains a provision for a small business tax credit, most small firms have found the credit is not very helpful; contrary to the White House’s estimates that between 1.4 and 4 million companies would be eligible for the credit, only 170,300 companies were actually able to claim the credit in 2010. 

Small business owners have been voicing their concerns over the impact ObamaCare will have on an already struggling economy. David Greenspan, CEO of a small business in Des Moines, Iowa, stated “the government is rewarding and encouraging businesses to remain 50 people or less to avoid the payment of high health insurance premiums.” (“Small Business on ObamaCare: No Reason to Hire or Invest,” US Business News – CNBC, June 28, 2012). Jim Cheng, a small businessman and the Virginia Secretary of Commerce and Trade, has stated that the law will “drive up the costs of hiring new employees at a moment when we simply cannot afford it.” (The Washington Times, June 19, 2012). Jim Garland, President and CEO of a small business with 60 employees, has stated that “when health care becomes more expensive, new hires become more expensive – making it more difficult for employers to taken on the cost of new employees.” (Forbes, June 18, 2012). Tim Wulf, the owner of two Jimmy John’s Gourmet Sandwich Shops said ObamaCare “was the straw that broke the camel’s back,” stating that he sold a third franchise, cut employment at his stores, and scrapped plans to expand in the market in part because of the potential increased costs and uncertainty related to the health care law. (Las Vegas Sun, June 17, 2012).

On July 10, 2012, the U.S. House of Representatives Oversight & Government Reform Committee heard from small business owners about the impact ObamaCare is having on their ability to grow and create jobs. The business men and women who attended the hearing confirmed that the law’s mandates, regulations and costs create a disincentive to hiring. They argued that the law seems to penalize businesses for hiring full-time employees and warned that it will likely result in less growth, fewer jobs and economic stagnation. 

The U.S. House of Representatives voted to repeal President Obama’s health care law on July 11, 2012. Five Democrats joined the 239 Republicans in voting to overturn the Act. However, the Democrat-controlled Senate has made it clear that any similar repeal effort there will not succeed. Furthermore, President Obama has vowed to veto any bill to repeal the Act. Nevertheless, the National Federation of Independent Business (NFIB) has vowed to continue to push for the repeal of the law. 

Carianne P. Torrissi
ctorrissi@klehr.com

WAGE AND HOUR ISSUES CONTINUE TO TRIP UP EMPLOYERS

Since the federal Department of Labor (“DOL”) has begun cracking down on employers for improperly classifying employees as exempt, more and more employers are being caught in the web of Fair Labor Standards Act (“FLSA”) violations. When the FLSA was enacted in 1938, it was based on a simple and straight-forward principle – if an employee works more than 40 hours in a week, they are entitled to 1½ times their hourly rate, unless they fall into one of the fairly obvious exempt categories. However, as the world and the workplace have evolved, the determination of who is entitled to overtime pay has become a complicated one. In addition, plaintiffs often have attempted to impose liability on parent companies for a subsidiaries’ FLSA violations by arguing that the two companies acted as joint employers. Because of the potential liability and confusion, cases involving the FLSA have been reaching the circuit courts and the highest court in the land. 

Outside Sales Exemption

In a recent 5-4 decision, the Supreme Court in Christopher v. Smith Kline Beecham Corp. ruled that pharmaceutical sales representatives qualified for the “outside sales” exemption under the FLSA and were not entitled to overtime. This holding resolves an uncertainty created after the Second Circuit in July 2010 in In re Novartis Wage and Hour Litigation and the Ninth Circuit in February 2011 in Christopher came to completely opposite conclusions on this issue. 

By way of brief background, under the DOL regulations, an employee qualifies for the outside sales exemption if his or her primary duty is, among other things, making sales (as that term is defined by the FLSA), and he or she is customarily and regularly engaged away from the employer’s place of business. The regulations provide that making sales includes the transfer of title to tangible property. 

In Christopher, the employees were pharmaceutical sales representatives who worked approximately 40 hours per week visiting physicians and another 10 to 20 hours performing other job related activities like attending marketing events and completing paperwork. The sales reps argued that they did not fall under the outside sales exemption because they were not truly engaged in “sales” under the DOL regulations. Given the nature of the prescription drug industry, their jobs did not entail transferring title to tangible property. Specifically, because the prescription drug industry is heavily regulated and the products can only be received pursuant to a physician’s prescription, pharmaceutical companies ask their sales representatives to focus their marketing efforts on the physicians who prescribe the drugs as opposed to the patients who actually purchase the drugs at retail establishments such as pharmacies. This requires the sales representatives to visit the physicians regularly at their offices, educate them about their particular drug, and attempt to obtain “non-binding commitments” from the physician that he or she would prescribe the particular drug for their patients when the diagnosis indicates that it is medically appropriate. Recently, the DOL has argued that work, like that performed by pharmaceutical sales reps, does not qualify under the regulations as outside sales work because it does not involve a “consummated transaction directly involving the employee for whom the exemption is sought.” After the Court granted certiorari in Christopher, the DOL “changed course” and expressed that its regulations require that title to the property at issue actually be transferred for the activity to be considered a “sale” under the FLSA.

The Supreme Court expressly declined to defer to the DOL’s interpretation of the regulations because: (1) the pharmaceutical industry had been classifying its sales reps as exempt for decades before the DOL issued its new interpretation, so to apply that interpretation to the industry retroactively would result in “unfair surprise” to employers; and (2) despite the decades-long practice, until 2009, the DOL never had initiated any enforcement actions on this issue or otherwise expressed its belief that employers in the pharmaceutical industry were acting unlawfully. Also, the Supreme Court ruled that the DOL interpretation was “flatly inconsistent with the FLSA.” Given the FLSA’s definition of the term “sales” to include the “other disposition” of a company’s product, the sales representatives’ activity in Christopher - ie., obtaining the non-binding commitment from physicians - was sufficient to be considered sales. The Supreme Court further found that this holding comports with the purpose of the FLSA exemption. 

The Supreme Court’s interpretation in Christopher demonstrates that when confronted with antiquated language that potentially will provide absurd applications of the FLSA and “unfair surprise” to employers – and with it, costly litigation and damages – the Court is inclined to take a common sense approach and attempt to make a more practical application of an antiquated statute against modern circumstances.

Joint Employer

With more and more complex corporate structuring (as well the constant outsourcing and subcontracting of certain services), companies are continually confronted with situations where they may be found liable for claims brought by employees of another entity. The question is whether there is a sufficient connection between entities or control of the employees such that the court will impose “joint employer” liability upon the entities. Until the Third Circuit’s decision in In re: Enterprise Rent-A-Car Wage & Hour Employment Practices Litigation, employers in this circuit did not have a definitive test to assess whether they could be considered a “joint employer” with another company in the context of an FLSA action. In the Enterprise case, the Third Circuit Court of Appeals clarified the test that should be applied to determine joint employer liability. 

Employees in Enterprise sued Enterprise Holdings. The employees claimed that Enterprise Holdings was a joint employer because Enterprise Holdings was the sole shareholder of Enterprise and the Board for Enterprise (as well as for 38 other subsidiaries bearing the name “Enterprise”) consisted of the same people as those who were on the Board for Enterprise Holdings. In finding that Enterprise Holdings was not a joint employer, the Third Circuit applied examined the following factors:

1.         The alleged employer’s authority to hire and fire the relevant employees;

2.         The alleged employer’s authority to promulgate work rules and assignments and set the employees’ conditions of employees [such as] compensation, benefits and work schedules, including rate and method of payment;

3.         The alleged employer’s involvement in day-to-day employee supervision, including employee discipline; and

4.         The alleged employer’s actual control over employee records such as payroll, insurance or taxes.

Importantly, the Third Circuit also stated that this list is not exhaustive. In addition to these factors, the Circuit Court made clear that courts should consider the “total employment situation” and the “economic realities of the work relationship.” Thus, while employers now have some clarity concerning factors that will be considered in the Third Circuit to determine joint employer liability, employers must realize that, even under the Enterprise decision, courts can still consider “all relevant evidence,” even if it does not fit neatly within the four factor test.  

Given the Enterprise decision, employers in the Third Circuit (which includes Pennsylvania, Delaware and New Jersey) should, at the least, examine their operations to ensure that their parent/subsidiary corporate relationships are conducted in such a way as to avoid the potential for joint employer liability under the four factors above. It is also fair to assume that the courts will apply this test in other joint employer analyses including leased employees, affiliated entities, and the like.

Charles A. Ercole
cercole@klehr.com

Lee D. Moylan
lmoylan@klehr.com