Employment Law

DOL Grants Could Signal More Misclassification Actions

Why it matters: Employers have faced a tidal wave of litigation over the alleged misclassification of employees as independent contractors, with workers ranging from FedEx drivers to National Football League cheerleaders challenging their status. Now employers should brace themselves for similar actions from state regulators. The Department of Labor (DOL) announced the award of more than $10 million in grants to 19 states – including California and New York – to “enhance states’ ability to detect incidents of worker misclassification” while “ensuring workers receive appropriate rights and protections,” Labor Secretary Thomas E. Perez explained. Several states have existing programs designed to reduce worker misclassification, the DOL noted, but this is the first time the agency has awarded grants dedicated to the effort. Facing the threat of action from plaintiffs’ attorneys as well as federal and state authorities, employers should take the time to ensure that workers are correctly classified, remembering that the question of whether a worker is an employee or independent contractor requires a multifactor analysis of issues such as the amount of control an employer exercises over the worker and whether the worker performs work customarily performed by the employer.

Detailed Discussion

Independent contractor or employee? The question has cost some employers millions of dollars, and the scrutiny only looks to be increasing.

A total of $10.2 million was awarded by the DOL to 19 states “to implement or improve worker misclassification detection and enforcement initiatives,” the agency announced. The funds will be used “to increase the ability of state unemployment insurance tax programs to identify instances where employers improperly classify employees as independent contractors or fail to report the wages paid to workers at all.”

The states receiving money – California, Delaware, Florida, Hawaii, Idaho, Indiana, Maryland, Massachusetts, New Hampshire, New Jersey, New Mexico, New York, Oregon, South Dakota, Tennessee, Texas, Utah, Vermont, and Wisconsin – will put it to use by enhancing employer audit programs and conducting employer education initiatives, the DOL said.

Four states (Maryland, New Jersey, Texas, and Utah) will receive shares of an additional $2 million in grant funds for “high-performance bonus” programs for detecting incidents of worker misclassification.

The maximum grant available was $500,000. While many states have programs in place designed to combat worker misclassification, the grants mark the first time the DOL has awarded money earmarked for the effort, funded by the Consolidated Appropriations Act of 2014.

Misclassification has been an action item for the DOL, with the agency reaching deals with various state labor departments to share information for joint enforcement efforts. Most recently, the DOL and the state of Alabama signed a memorandum of understanding, adding it to the list of states such as California, Colorado, Connecticut, Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, New York, Utah, and Washington that have promised to work together with the feds to battle misclassification.

Legislators have also gotten into the act, with the introduction of the Payroll Fraud Protection Act, a bill that would “hold employers accountable” for misclassification by establishing it as a violation of the Fair Labor Standards Act.

Pursuant to the bill, employers would be required to provide notice to all employees of their status as either an employee or independent contractor, direct them to a DOL site for more information about their rights, and provide contact information for the agency if the employee “suspects [they] have been misclassified.”

If the employer fails to provide such notice, the legislation creates a presumption that a worker is an employee. Civil penalties are available for violations of the law, ranging from $1,100 for a first offense up to $5,000 for a second or willful violation.

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Court Should Decide Whether Class Arbitration Is Appropriate

Why it matters: When an arbitration agreement is silent, should an arbitrator or the court determine whether class arbitration is appropriate? A new decision from the California Court of Appeal found that the court should decide. A former employee alleged wage and hour violations, demanding class arbitration pursuant to his employment agreement. The employer responded with a declaratory judgment action, arguing that the agreement itself was silent as to whether class arbitration was allowed and asking for a court’s interpretation. The appellate panel agreed with the employer, writing that “[d]eciding whether the parties’ arbitration agreement authorizes class arbitration does not simply determine what arbitration procedures the parties agreed to use, but rather whose claims the parties agreed to arbitrate.” When drafting arbitration agreements, employers should keep in mind that the panel determined that absent a “clear and unmistakable” intent in the agreement to have the arbitrator answer the question of whether class arbitration is allowed, the trial court should make the decision.

Detailed Discussion

When he was hired by Network Capital Funding in October 2011, Erik Papke signed an employment agreement that included an arbitration provision requiring the parties to “utilize binding arbitration to resolve all disputes that may arise out of or be related to [his] employment in any way.”

The agreement also stated: “Both the Company and I agree that any claim, dispute, and/or controversy that either I may have against the Company . . . or the Company may have against me, shall be submitted to and determined exclusively by binding arbitration under the Federal Arbitration Act . . . Included within the scope of this Agreement are all disputes, whether based on tort, contract, statute . . . , equitable law, or otherwise. The only exception to the requirement of binding arbitration shall be for claims arising under the National Labor Relations Act which are brought before the National Labor Relations Board, claims for medical and disability benefits under the California Workers’ Compensation Act, Employment Development Department Claims, or as may otherwise be required by state or federal law.”

In June 2013, Papke served a demand on Network Capital for class arbitration based on allegations of wage and hour violations under the state’s labor code. The employer informed Papke that the agreement did not authorize class arbitration and that any disagreement about the issue must be resolved by a trial court, not an arbitrator.

When Papke disagreed, Network Capital filed a declaratory judgment action. A trial court ruled not only that a court should determine the question of whether class arbitration was permitted but also went on to hold that the agreement at issue did not permit classwide claims for arbitration.

Emphasizing that arbitration is “a matter of consent, not coercion,” the appellate panel said that in the absence of “clear and unmistakable” agreement to the contrary, “it is presumed the parties to an arbitration agreement intended the court, rather than the arbitrator, to decide whether they agreed to submit a particular dispute to arbitration.”

Alternatively, questions of a procedural nature – those that grow out of the parties’ dispute and bear on its final disposition, such as whether the claimant satisfied all prerequisites to arbitration established by the parties’ agreement, a contention that the statute of limitations has expired, or allegations of waiver or delay – are presumptively not for a judge but an arbitrator to decide.

“Here, the Arbitration Agreement’s express terms do not mention class arbitration nor do they submit arbitrability questions to the arbitrator for resolution,” the panel wrote. “Instead, the Arbitration Agreement simply requires Papke and Network Capital to arbitrate ‘any claim, dispute, and/or controversy’ they have with one another, except for a few specialized claims not applicable here. This ambiguous language is not a clear and unmistakable statement Papke and Network Capital intended the arbitrator to decide whether they agreed to class arbitration.”

The Federal Arbitration Act’s strong policy in favor of enforcing arbitration agreements “only applies to whether a particular dispute is covered by an arbitration agreement, that is, to arbitrability questions,” the court explained. “That presumption does not apply to the threshold question of who decides whether a particular dispute is covered by an arbitration agreement.”

Reviewing case law on the issue, the panel declined to follow the plurality opinion of the U.S. Supreme Court in Green Tree Financial Corp. v. Bazzle, instead electing to track decisions from the Third and Sixth U.S. Circuit Courts.

Fundamental differences exist between class and individual arbitration, the court said. A class arbitration award adjudicates not only the rights of the parties to the arbitration agreement but the rights of absent parties, class arbitration proceedings are much more formal and do not provide the time and cost savings that prompt parties to agree to arbitration, and class arbitration requires the arbitrator to resolve not a single dispute between the parties to a single agreement but rather disputes involving hundreds or thousands of parties.

“We find these fundamental differences to be highly relevant because they show the class arbitration question does not grow out of the parties’ dispute relief and does not bear on the dispute’s final resolution,” the panel said. The class arbitration question “involves the scope of the parties’ arbitration agreement because it requires the decision-maker to determine whose claims the parties agreed to arbitrate—only the named plaintiff’s claims against the defendant, or the claims of numerous other absent, but similarly-situated claimants against the defendant.”

The issue of the decision-maker is also “a question of arbitrability because contracting parties would likely and reasonably expect a court to decide the question,” the panel added. “Indeed, when the class arbitration question is properly viewed as asking whose claims the parties agreed to arbitrate, allowing the arbitrator to decide the question without clear and unmistakable evidence the parties intended the arbitrator to decide it ‘might too often force unwilling parties to arbitrate a matter they reasonably would have thought a judge, not an arbitrator, would decide.’ Allowing an arbitrator to decide this issue threatens the consensual nature of arbitration and the rule that parties may be compelled to arbitrate only those issues they agreed to arbitrate.”

Having concluded that the issue should rightfully be determined by the court, the panel turned to the agreement at issue and found it did not authorize class arbitration.

“Here, the Arbitration Agreement is silent as to class arbitration because the agreement neither expressly authorizes nor prohibits class arbitration, and therefore Papke must point to some other contractual basis for concluding the parties agreed to class arbitration,” the court said.

Although Papke pointed to the broad language of the agreement requiring the parties to submit “any claim, dispute, and/or controversy” to arbitration, the court said that was insufficient. “Without some extrinsic evidence of the parties’ intent, Papke’s argument is nothing more than an argument the parties implicitly agreed to class arbitration,” the panel wrote.

To read the opinion in Network Capital Funding Corp. v. Papke, click here.

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FEHA Not Violated by Employer’s Exam Requirement

Why it matters: An employer was not required to engage in an interactive process prior to requesting a fitness-for-duty examination where the employee failed to request an accommodation, a California appellate panel has ruled, and the employee’s termination for failing to undergo the exam did not violate state law. A mathematics professor expressed angry, threatening behavior that frightened his colleagues. After an investigation, the professor was instructed to complete a fitness-for-duty (FFD) examination or be placed on a leave of absence. When he balked, he was initially placed on leave and then terminated. Alleging violations of the Fair Employment and Housing Act (FEHA), the professor sued. A jury returned a defense verdict for the school and the appellate panel affirmed, emphasizing that employers cannot be expected to initiate the interactive process when they have no knowledge of a disability. Sufficient evidence was presented that the exam itself was necessary to determine whether the professor posed a danger to others in the workplace, the court added, as the school had a duty to maintain a safe workplace for all employees.

Detailed Discussion

Dr. John Kao began teaching mathematics at the University of San Francisco (USF) in 1991 and attained a tenured position in 1997. On multiple occasions, Kao expressed concern about the lack of diversity among the math and computer science faculty and, in 2006, submitted a 485-page complaint to the school alleging race-based discrimination and harassment.

Kao met with other members of the faculty to discuss the issue and, according to those at the meeting, was “unable to control his emotions” and began “yelling and screaming.” One of the teachers present testified that he was “terrified” by Kao’s behavior. Over the next few months, other faculty members had similar experiences where Kao engaged in disturbing behavior, clenching his fists and reacting with rage when asked innocuous questions, throwing papers at meetings, and intentionally bumping into people in the hallway.

USF launched an investigation, reviewing the incidents and meeting with a clinical and forensic psychologist as well as a forensic psychiatrist, who opined that the only way to assess Kao’s ability to do his job in a safe way was to have an independent medical exam. The university informed Kao of the choice to undergo the FFD exam or be placed on leave.

He refused to take the exam and was placed on leave before eventually being terminated. Kao filed suit and the case was presented to a jury, which sided with the employer.

On appeal, Kao told the court that USF should have been required to engage in an interactive process before it could refer him for an FFD exam and the failure to do so violated FEHA.

Not necessarily, the panel wrote. A psychological examination by an employer-chosen doctor can be job-related and consistent with business necessity, even absent the interactive process.

“The requirement for an interactive process was not implicated here because Kao never acknowledged having a disability or sought any accommodation for one,” the court said. “Unless a disability is obvious, it is the employee’s burden to initiate the interactive process. Kao cannot plausibly claim it should have been obvious to USF that he was disabled because he never admitted any disability in the workplace. When a disability is not obvious, the employee must submit ‘reasonable medical documentation confirm[ing] [its] existence.’ Kao did nothing of the sort.”

USF presented “ample evidence from which to find that an FFD was necessary to determine whether he posed a danger to others in the workplace,” the panel wrote. “Multiple people reported multiple instances of threatening behavior on his part. USF’s decision to require him to have an FFD was based on expert advice, and USF presented unrefuted expert testimony that an FFD was appropriate under the circumstances.”

The court rejected Kao’s argument that USF had no “objective” evidence that he was dangerous because he did not explicitly threaten anyone. “These are at best jury arguments, and the jury could reasonably reject Kao’s benign view of the situation,” the court noted.

The panel also recognized the balance USF was required to strike between respecting Kao’s rights, on the one hand, and the duty to maintain a campus where people could safely work, on the other. “The jury heard testimony that Kao frightened school administrators and that his behavior cast a pall of ‘fear and confusion’ over the math department,” the court wrote. “The jury could reasonably find that it was vital to the university’s business to obtain an independent assessment of his fitness for duty.”

To read the opinion in Kao v. The University of San Francisco, click here.

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Eighth Circuit: Healthcare Costs Can Be Proxy for Age, Basis for ADEA Claim

Why it matters: Evidence related to an employer’s conduct with regard to health insurance could form the basis for an Age Discrimination in Employment Act (ADEA) discrimination and retaliation lawsuit, a unanimous panel of the Eighth U.S. Circuit Court of Appeals has ruled, reversing summary judgment for an employer. “Certain considerations, such as health care costs, could be a proxy for age in the sense that if the employer supposes a correlation between the two factors and acts accordingly, it engages in age discrimination,” the court wrote. The plaintiff presented evidence that the employer sought cheaper health plans as a cost-cutting measure and negotiated with insurance companies by sending e-mails stating that, “[w]e have lost several of the older, sicker employees and should have some consideration on this.” The employer also suggested that the plaintiff and another over-65 employee use Medicare. The plaintiff claimed she was terminated not long after she declined and filed her ADEA suit in response. Although a federal district court granted summary judgment for the employer, the Eighth Circuit reversed, reinstating the case in a cautionary tale for employers. “Age and health care costs are not so analytically distinct if [the employer] presumed the rise in one necessitated a rise in the other,” the panel wrote.

Detailed Discussion

After changing hands in 2007, Associated Underwriters began operating at a loss. The new owners tried a reduction in force but still faced economic difficulties, including a significant increase in group healthcare plan premiums.

The owners began to solicit proposals from different insurance companies. One quote came back much lower than the others, and when the owner inquired, he learned that it excluded two employees over the age of 65, including Marjorie Tramp. The insurer explained that it doesn’t usually quote employees in the over-65 age group because they are Medicare-eligible. The readjusted quote including the two over-65 employees was much higher.

As the search process continued, the owners sent e-mail stating that two employees over the age of 50 had left the company and that “[w]e have lost several of the older, sick employees and should have some consideration on this.” The owner also sat down with Tramp and the other over-65 employee and suggested they utilize Medicare instead of the company’s healthcare plan. Both employees declined.

During this time, Tramp was formally reprimanded for poor performance and placed on a probationary period. The company underwent another reduction in force and both Tramp and the other employee over the age of 65 were let go.

Tramp then sued Associated Underwriters alleging violations of the ADEA. Relying on the U.S. Supreme Court’s 1993 opinion in Hazen Paper Co. v. Biggins, a federal district court granted summary judgment for the employer. In that case, an employee alleged that he was terminated just before his pension was set to vest and the Court held that it was “incorrect to say that a decision based on years of service is necessarily ‘age based’ in violation of the ADEA.”

But the Eighth Circuit reversed, finding the evidence related to healthcare costs could serve as a proxy for the employer’s age discrimination, establishing the but-for cause of the plaintiff’s termination.

Distinguishing Hazen Paper, the panel said the analysis employed by the Justices in that case was different for age and healthcare costs. “Associated Underwriters’ perception of insurance premiums is not divorced from age in the same sense that pension benefits are divorced from age,” the court explained. “Here, there remains at least a question of fact as to Associated Underwriters’ motivations for terminating Tramp. Age and health care costs are not so analytically distinct if Associated Underwriters presumed the rise in one necessitated a rise in the other.”

“Certain considerations, such as health care costs, could be a proxy for age in the sense that if the employer supposes a correlation between the two factors and acts accordingly, it engages in age discrimination,” the panel wrote. “Here, it is possible that a reasonable jury could conclude from the evidence that Associated Underwriters believed the two considerations were not analytically distinct.”

The owner’s choice of wording – that the company had lost the “oldest and sickest employees” and expected a rate decrease “from the group becoming younger and healthier” – could “be a manifestation of its discriminatory intent in the process used by Associated Underwriters to be rid of its older (and/or oldest) employees in general,” the court added.

At the very least, a question of fact remained as to the intent of the employer, the panel concluded, reversing summary judgment for Associated Underwriters and remanding the case.

To read the opinion in Tramp v. Associated Underwriters, click here.

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EEOC Targets “Perception of” Discrimination Under ADA

Why it matters: The Equal Employment Opportunity Commission (EEOC) recently provided a reminder to employers about the dangers of violating the “perception of” disability provision of the Americans with Disabilities Act (ADA). According to a new federal court complaint filed by the agency, a North Carolina restaurant refused to hire a busboy when the owner noticed that one of his arms was amputated above the elbow. In addition to injunctive relief, the lawsuit seeks back pay as well as compensatory and punitive damages for the would-be busboy, who “was not hired because of assumptions made about his abilities based on his arm amputation,” EEOC regional attorney Lynette A. Barnes said in a press release about the action. “Employers must be careful not to violate federal law by making assumptions about people with disabilities.”

Detailed Discussion

Matthew Botello applied for a position as a busboy in October 2013 at Sushi at the Lake restaurant in Cornelius, North Carolina. At the time, Botello worked as an expediter at a different restaurant, a position that included bussing duties. Botello – whose left arm was amputated above the elbow in November 2010 – could perform the essential functions of his job with or without a reasonable accommodation, the EEOC said.

Botello received a phone call instructing him to report for work at Sushi at the Lake the following day. But when he showed up – not having met or interviewed anyone at the restaurant – the owner “gestured at Botello’s left side and told Botello that he could not bus tables because he only has one arm,” according to the EEOC complaint.

Although Botello assured the owner that he could perform the job and had experience bussing tables at another restaurant, the owner remained unconvinced. And Botello’s offer to purchase a small cart at his own expense to address the owner’s concerns did not change his mind, the agency alleged. “Despite Botello’s assurance that he could do the job with or without an accommodation, [the owner] refused to hire Botello,” the EEOC claimed.

The defendant failed to hire Botello because the owner “perceived Botello as having a disability within the meaning of the ADA,” the agency said. “Specifically, [the restaurant and the owner] refused to hire Botello as a busser based on [the] erroneous belief that Botello could not perform the busser job duties because of his arm amputation.”

Such an unlawful employment practice violated the ADA, according to the EEOC’s complaint, which sought a permanent injunction from disability discrimination and a mandate for the restaurant to institute and carry out “policies, practices, and programs” which provide equal employment opportunities for qualified individuals with disabilities or persons regarded as disabled.

As for Botello, the agency requested back pay with prejudgment interest, compensation for past and future pecuniary and nonpecuniary losses (including emotional pain and suffering and humiliation) as well as punitive damages.

To read the complaint in EEOC v. Greenhouse Enterprise, Inc., click here.

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