HIGHLIGHTS FOR THE MONTH OF AUGUST 2009

By: Elizabeth Torphy-Donzella

RECENT DEVELOPMENTS

Court Rules CFO's Termination After Unsupported Complaints Did Not Give Rise To SOX Claim.

The U.S. Court of Appeals for the Fourth Circuit has ruled that an employee who claims he was retaliated against for complaints about accounting improprieties does not have a claim under the Sarbanes Oxley Act (“SOX”) unless he has “definitively and specifically” advised the employer how the practice violated a securities law prior to the adverse action. The Fourth Circuit covers Maryland, the Carolinas and the Virginias.

Facts of the Case: In Welch v. Chao, a Chief Financial Officer (CFO) asserted that his company’s accounting practices were seriously deficient and refused to certify SEC filings by the company as required by SOX. He documented his refusal in internal memoranda. As a result, the board of directors asked legal counsel and an outside auditor to investigate. While the investigation was pending, the CFO held what he characterized as a “Sarbanes-Oxley briefing” for senior officials in which he reiterated his concerns, generally charged company officials with fraudulent acts and suggested that he receive a generous severance package in exchange for resigning. The CFO was placed on leave pending the investigation. He refused repeated requests by the investigators to meet with them. The investigators then reported back to the board that the CFO’s concerns lacked merit and that he had breached his fiduciary duty by refusing to meet with them. The board voted to terminate him.

The Court’s Ruling: The Court of Appeals held that the CFO’s complaints did not qualify for protection under SOX. The court explained that protected complaints must concern conduct that the employee reasonably believes to constitute mail fraud, wire fraud, securities fraud, any SEC rule or any federal law relating to shareholder fraud. The employee must have a subjectively and objectively reasonable basis for the complaints. Finally, the employee’s complaints must “definitively and specifically” relate to one of the listed laws, which means that they must be communicated in a factually specific manner so that the employer has notice of the alleged violation. The court held that the CFO never explained, in his internal communications, the factual basis for his belief that the actions violated any of the listed laws. As such, his conduct was not protected.

Lessons Learned: It appears that the CFO in this case tried to use his allegations of SOX violations as a bargaining chip to obtain a severance agreement. The company did not go along and terminated him for failing to cooperate with the investigation that he had set in motion. The employee would have been protected from termination, had he supported his allegations with specific facts supporting a reasonable belief that the company violated one of the applicable laws.

Recent Decision Favors Class Action Employment Discrimination Cases.

It appears that the historically conservative U.S. Court of Appeals for the Fourth Circuit is relaxing standards for class actions in employment cases. This could signal an increase in such actions.

Facts of the Case: In Brown v. Nucor Corp., seven African-American employees filed a class action claiming that they were denied promotions based on race and subjected to a racially hostile work environment. In particular, they alleged that less experienced white employees consistently were promoted over African-Americans and given preferential opportunities to become qualified for promotion. They also alleged numerous and varied racial epithets by white supervisors and employees; the use of the plant-wide radio system to broadcast such epithets; the display of the Confederate flag throughout the plant; the sale of items with the Confederate flag in the gift shop; the circulation of e-mails with racially offensive depictions of African-Americans (e.g. with nooses around their necks); and a white employee holding up a noose while telling an African-American coworker it was for him.

The Court’s Ruling: The Fourth Circuit in a 2 to 1 decision reversed the lower court’s denial of class certification. The majority held that the district court improperly ignored evidence of discriminatory practices that affected African-American employees in common. The majority also found that the lower court erroneously ignored the plant-wide nature of the alleged misconduct. The majority rejected the lower court’s concern that competition among plaintiffs for promotions created a conflict of interest among the members of the alleged class. The Company has stated that it intends to request rehearing of this matter by the entire Fourth Circuit bench.

Lessons Learned: The Fourth Circuit is generally viewed as one of the most conservative benches in the nation. The panel majority’s ruling is a notable departure from that conservative bent, and may portend a trend that will continue as Obama appointees fill vacancies on the court. While we doubt that the routine certification of broad class actions that became common in the 1970’s will come back into vogue, even a moderately more liberal approach to class action will increase employers’ exposure. Of course, it did not help the company that the African-American employees alleged practices that are completely unacceptable in today’s workplace.

TAKE NOTE

DOL Proposes Regulations Requiring Notice To Employees Of Right To Organize. Proposed regulations were issued on August 3, 2009 by the U.S. Department of Labor to implement Executive Order 13496, which requires certain Federal contractors and subcontractors to advise employees of the right to organize and engage in other actions for mutual aid and protection. As we explained in an earlier E-Lert, Executive Order 13496 was one of three pro-labor executive orders issued in January 2009. Under the proposed regulations implementing the Order, covered contractors and subcontractors (those with government contracts of $100,000 or more) will be required to post prominently a notice containing a detailed recitation of employee rights under the NLRA including to organize; discuss terms and conditions of employment with coworkers; attend rallies, leaflet or take other actions on non-working time to improve working conditions; strike and picket; and (lastly) do none of the foregoing. The notice also identifies a number of illegal employer actions (as well as one illegal union action), and provides information on the measures employees may take if they feel that their rights have been violated (including contact information for the NLRB). The foregoing information also must, under the proposed regulations, be included in each covered government contract and subcontract. The regulations also provide for an enforcement mechanism and impose significant penalties for proven violations, including debarment. The regulations will not apply to any employer that is not covered by the NLRA. The public comment period closes on September 3, 2009.

E-Verify. On August 26, 2009, the U.S. District Court for the District of Maryland rejected legal challenges to the U.S. Department of Labor regulations requiring federal government contractors to use E-Verify to verify eligibility for employment. Although the final regulations were to have been effective as of January 16, 2009, they had been stayed pending the outcome of this lawsuit. They will now become effective September 8, 2009. E-Verify is an electronic system that employers may use to verify an individual’s eligibility to work in the U.S. For most employers, it is a voluntary system but an Executive Order mandated its use by federal contractors. Accordingly, the DOL promulgated the regulations in question. The U.S. Chamber of Commerce and other interested parties sued the DOL, claiming that the underlying statute did not authorize the President to mandate the use of E-Verify. The district court’s Opinion rejected these arguments (chief among the reasons: because companies that do not wish to use E-verify can choose not to do business with the government, E-Verify is not strictly mandatory). Absent additional delay, federal contractors will be required to use E-Verify for contracts solicited or awarded on or after September 8, 2009. Contractors will be required to use the system to verify the employment eligibility of both existing employees performing government work and all new hires. The USCIS website provides additional information on the use of E-Verify.

Workplace Fraud Audit Alert. Misclassification of employees as independent contractors is, according to the Maryland Department of Labor, Licensing and Regulation, a rampant problem that hurts the individuals who are misclassified, businesses that properly compensate (and withhold taxes for) their workers, and the public fisc by permitting tax avoidance. The issue is being addressed at the federal level, as well. Employers should prepare for an expected increase in workplace audits. The Workplace Fraud Act passed by the Maryland General Assembly in 2009 addressed the issue of misclassification in the construction and landscape industries. Governor O’Malley, however, by Executive Order, appointed a Task Force to address the issue more broadly. Draft regulations being circulated by the Task Force reflect that the Unemployment Compensation Unit of DLLR will be using random and targeted audits to identify workplaces where employees have been wrongly classified as independent contractors. DLLR has also publicized this intent on its Workplace Fraud web site. Similar efforts are underway in other states and are expected at the federal level as governments look for revenue in the face of burgeoning budget deficits. Employers should work with legal counsel to review employee classifications, ensure that any valid independent contractor relationship is reflected by a written agreement that acknowledges the contractor’s obligation to pay taxes, and ensure that payments to contractors are reported to taxing authorities. Significant penalties and back taxes may be assessed if an employer has been found to have misclassified individuals. Fiona Ong of Shawe Rosenthal has partnered with the Maryland Chamber of Commerce to monitor the activities and provide input to the Task Force. We will keep clients apprised of developments in this area.

TOP TIP

When Leave Does Not Qualify for FMLA, Think ADA.

Employers generally understand that eligible employees are entitled to 12 weeks of job protected leave under the Family and Medical Leave Act for their own serious health conditions. Too often, however, when this statutory leave right has been exhausted (or an employee is FMLA ineligible) employers think that the right to terminate is absolute. If the Americans with Disabilities Act applies, however, summary termination may result in an expensive legal claim.

Under the FMLA, an eligible employee with a serious health condition is entitled to 12 weeks of leave. Employees who are ineligible (because they have not worked for the company for a year or lack 1250 hours of service) or who have exhausted their 12 weeks lose their right to job protected leave under FMLA. Some serious health conditions may also be covered ADA-disabilities (and, indeed, this will more often be the case than before under recent amendments to the ADA). If an employee’s condition is a disability and he does not have the right to FMLA leave, the employer should consider the following:

• Can additional leave be provided as a reasonable accommodation without an undue hardship? If the doctor cannot identify any time period by which the employee can return, typically courts would not require additional leave. If the doctor identifies a time frame, consider whether additional leave will or will not be workable from a financial, operational, and logistical perspective.

• Is an alternative open position available or can an accommodation be made to the employee’s own position that will permit a return to work? Although return to work under FMLA contemplates an employee’s complete fitness for duty for his job, if he has an ADA disability, job accommodation (such as elimination or redistribution of marginal functions, modifications to the workspace, scheduling accommodations, and the like) must be considered. Creation of a new job position, however, is not required, nor is bumping another employee from his position.

• If return to work is not possible in the near term, consider retaining the individual on the employee rolls without pay or benefits. The EEOC takes the position that this may be an appropriate accommodation where holding the job for the amount of leave still needed would be an undue hardship. Whether valid or not, EEOC’s theory is that it is easier to qualify for future openings as an internal applicant rather than as a former or outside one.

• Consult with counsel when in doubt. Recent EEOC press releases touting money paid by employers in settling EEOC lawsuits show that the agency is interested in pursuing these “follow-on” ADA claims.

Consulting with employees and considering options can help companies avoid ADA claims or, at the very least, provide helpful evidence demonstrating a company’s good faith in the event of a lawsuit. Efforts to accommodate should be documented.

EFCA UPDATE

According to recent reports, top labor leaders have advised the Obama administration that they are willing to let action on the Employee Free Choice Act wait until Congress has completed its work on healthcare reform, another key component of labor’s legislative agenda. Organized labor is well advised to wait. The card check provisions proved to be a non-starter with both the general public and key Senators whose votes were needed to pass any legislation. Proponents of legislation favoring unions are working in closed door sessions to find a compromise that will garner the votes necessary for passage. With Senator Robert Byrd of West Virginia still ailing and the passing of Senator Edward Kennedy, a key cosponsor and proponent of the EFCA, the need for a legislative compromise has become even more acute. The next big issue is whether mandatory arbitration of contract terms on which the parties cannot agree in the negotiation of first contracts will be part of any proposed bill. This is a provision that organized labor views as key, and the presumed-next President of the AFL-CIO, Richard Trumka, has vowed that labor will push its agenda more aggressively than before. The U.S. Chamber of Commerce and other business groups are equally adamant that mandatory arbitration is unacceptable.

For greater clarification of any of these issues, you may contact any Shawe Rosenthal attorney.