Employment Law

Ninth Circuit Holds 125,000-to-1 Ratio Maintains a “Reasonable Relationship” Between Compensatory and Punitive Damages

Why it matters: In a decision that should make employers sit up and take notice, the Ninth U.S. Circuit Court of Appeals approved an award for a Title VII plaintiff of $125,000 in punitive damages—and just $1 in nominal damages. Reviewing the boundaries of due process and existing case law on constitutional damages ratios, the court reduced a lower court’s award of $300,000 down to $125,000. While the court acknowledged that the original $300,000 punitive award was “outside of constitutional limits,” the panel decided on $125,000 because that was the highest ratio approved by a fellow federal appellate court in a survey of discrimination cases. In addition to putting employers on notice that the Ninth Circuit will uphold punitive damages ratios far beyond a single-digit limit – up to 125,000 to 1 – the holding presents an interesting question: How high is the court willing to go? If another federal court were to approve an award with a higher ratio between compensatory and punitive damages, would the Ninth Circuit match it?

Detailed Discussion
A female employee of a copper mining facility alleged that she was subjected to sexual harassment over an 11-month period and that when she complained, she was retaliated against and constructively discharged.

The harassment at ASARCO included a daily proposition by her male supervisor, who often stood close enough to make Angela Aguilar fear for her safety. Despite her repeated complaints, the harassment continued. After transferring to a different work crew, Aguilar dealt with another supervisor who used choice phrases like “your ass is mine” and often yelled at her, snapped his fingers, and threatened her with termination.

After an eight-day trial, a federal jury found ASARCO liable on the sexual harassment claims but not the constructive discharge or retaliation claims. The jury did not award any compensatory damages for Aguilar. Instead, they awarded $1 in nominal damages for the sexual harassment claim and $868,750 in punitive damages.

The trial court reduced the punitive award to $300,000, the statutory maximum under Title VII for an employer of ASARCO’s size. The employer appealed, arguing that the award remained constitutionally excessive.

A three-judge panel of the Ninth Circuit agreed, reducing the $300,000 award to $125,000.

The court reviewed recent case law from the U.S. Supreme Court addressing the constitutionality of punitive damages, beginning with the 1996 decision that changed the landscape, BMW of North America, Inc. v. Gore, where the justices held that an excessive punitive award could violate “[e]lementary notions of fairness enshrined in our constitutional jurisprudence.” The Ninth Circuit then applied the three factors laid out in the Gore decision – the reprehensibility of the defendant’s conduct, the ratio to actual harm inflicted on the plaintiff, and civil or criminal penalties that could be imposed for comparable misconduct – to ASARCO’s conduct.

Citing Gore for the proposition that “the most important indicium of the reasonableness of a punitive damages award is the degree of reprehensibility of the defendant’s conduct,” the panel determined ASARCO’s conduct was repeated and demonstrated “indifference or reckless disregard for Aguilar’s health and safety.” Further, the jury found that the employer acted “with malice…[or] with reckless indifference to the federally protected rights of [Aguilar].”

The company’s actions, therefore, supported substantial damages and the imposition of a very large punitive award, the court said. While the U.S. Supreme Court has held that few awards exceeding a single-digit ratio between compensatory and punitive damages will satisfy due process, the Ninth Circuit emphasized that no bright-line ratio exists and that a higher ratio may be “justified when ‘a particularly egregious act has resulted in only a small amount of economic damages.’ ”

After conducting a survey of discrimination cases and awards across the country, the panel said that affirming the $300,000 in punitive damages would result in the highest approved ratio in a discrimination case since Gore. The highest ratio found by the panel came from the Fifth Circuit, where an award of $125,000 in punitive damages and only $1 in compensatory damages was affirmed. The Ninth Circuit followed suit, reducing the $300,000 award to $125,000.

“Our task in reducing the award is not easy. No bright line ratio has been set by the Supreme Court for cases which are ‘particularly egregious.’ Since nothing compels a particular dollar figure, we conclude that the highest punitive award supportable under due process is $125,000, in accord with the highest ratio we could locate among discrimination cases,” the panel wrote. “We think this is the highest reward which maintains the required ‘reasonable relationship’ between compensatory and punitive damages. This award is nonetheless on the order of the damages cap in Title VII and proportional to the reprehensibility of ASARCO’s conduct.”

To read the opinion in State of Arizona v. ASARCO, click here.

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Misclassification of Independent Contractors Focus for Legislators and Regulators

Why it matters: The issue of independent contractor misclassification remains a hot topic for legislators and regulators alike. The recent introduction of federal legislation proposing penalties for such misclassification should reiterate for employers the importance of correctly classifying all employees. Scrutiny from regulators may also increase, as the Department of Labor continues to gather partners for its Misclassification Initiative, like the state of New York, which became the fifteenth state to agree to share information with the federal agency. And employers can be sure that the continuing governmental attention will certainly not be ignored by plaintiff’s attorneys.

Detailed Discussion
Battling the misclassification of independent contractors remains a priority for both legislators and regulators.

A group of senators – Robert P. Casey, Jr. (D-Penn.), Tom Harkin (D-Iowa), Sherrod Brown (D-Ohio), and Al Franken (D-Minn.) – recently introduced the Payroll Fraud Protection Act, S. 1687, a bill that would “hold employers accountable” for misclassification by establishing it as a violation of the Fair Labor Standards Act (FLSA).

The lawmakers noted the value of independent contractors to the United States workforce and bemoaned misclassification that leaves such workers without overtime benefits, minimum wage pay, and other benefits. In addition, misclassification can offer businesses an unfair leg up on competitors and costs the government millions in lost income, unemployment, and other payroll taxes, they said.

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 Department of Labor (DOL) site for more information about their rights, and provide contact information for the DOL 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.

The proposed law also includes an anti-retaliation provision prohibiting employers from discharging or discriminating against workers based on their opposition to a practice regarding their own classification.

Other changes would authorize information sharing between the DOL and the Internal Revenue Service (IRS) and require the DOL to measure performance by each state with regard to misclassification.

In regulatory news, the DOL announced a joint enforcement effort with the state of New York to ensure appropriate employee classification, making it the fifteenth state to agree to share information with the agency. Pursuant to the memoranda of understanding, the DOL, the New York State Labor Department, and the New York State Attorney General’s Office will now be working together.

Similar agreements are in place with California, Colorado, Connecticut, Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah, and Washington.

The information sharing with states has helped the Wage and Hour Division recover more than $18.2 million in back pay for almost 20,000 employees who had been incorrectly classified as independent contractors, the DOL said.

To read S. 1687, click here

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Breaking Up Can Be Hard to Do: Case Illustrates the Need for Clear Termination Date

Why it matters: A recent decision from a New Jersey appellate court demonstrates the importance of establishing a clear termination date to trigger the start of the statute of limitations on a former employee’s subsequent lawsuit. Although all of the employer’s records pointed to the same date of termination, the employee in the suit claimed he was not told he was fired until several days later and actually showed up for work. The appellate court reversed summary judgment for the employer, holding that a material issue of fact existed about the actual date of termination. With the employer now facing continuing legal action – and additional costs – the case provides a clear example of the importance of a termination letter to establish a termination date and avoid unnecessary litigation.

Detailed Discussion
Brian Rabb worked as a stock supervisor at the retail store Children’s Place. On August 26, 2011, Rabb filed suit alleging that he was wrongfully terminated after complaining of racial discrimination in the workplace. An African American, Rabb alleged he was subjected to racially offensive comments and jokes before he was fired on August 28 – just getting his suit in under the two-year statute of limitations of New Jersey’s discrimination law.

The retailer filed a motion for summary judgment in response, arguing that Rabb’s suit was time-barred. His actual date of termination was August 20, the employer said, and therefore the complaint was filed too late. Children’s Place pointed to Rabb’s time sheet, which showed that Rabb’s last day of work was August 20 and that his last paycheck reflected hours worked up to August 20. In addition, his job history report lists August 20 as his last day of work, and the company hired his replacement on August 25.

Rabb argued that he reported to work on August 28 and was questioned by the store manager about a prior incident on the register; he was then fired and told to leave the premises.

Based upon the employment records, a trial court judge granted summary judgment for Children’s Place, finding Rabb’s complaint untimely.

But in an unpublished opinion, the New Jersey Court of Appeals reversed.

Too many questions remained to end the suit without discovery, the court said. “Discovery would afford plaintiff the opportunity to review Children’s Place employment records and other relevant corporate documents that relate to the claim regarding his termination date, and hence, the triggering event of the statute of limitations,” the panel wrote. “Based on the early posture of this case, we conclude that summary judgment and dismissal of the complaint with prejudice was premature.”

The court also refused to accept the employer’s position that the last day the plaintiff was paid triggered the statute of limitations. “Children’s Place’s reliance on plaintiff’s last day of pay as the triggering event may be inapposite, as a matter of law, with our focus on the date that plaintiff is actually harmed by defendant’s conduct,” the court said, which could be August 29, the date Rabb claimed he was informed of his termination.

Without additional facts and a more developed record, “we cannot discern when or if plaintiff was harmed by Children’s Place, or whether the last day of pay truly represents the date plaintiff was terminated,” the panel concluded.

To read the decision in Rabb v. Children’s Place, click here.

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Study: Employers May Be Using Social Media to Discriminate

Why it matters: According to a new study from Carnegie Mellon University, employers may be using their social media research of potential applicants to discriminate. Using fake profiles on popular social networking sites, the researchers found that Muslim applicants were less likely to be called back for an interview than applicants with a profile suggesting they were Christian. The findings demonstrate the dangers for employers of consulting sources like Facebook and the potential for relying upon illegal information like religion when making a hiring decision. Even seemingly innocuous information – a quote from a specific religious text, for example – could lead employers to consider off-limit topics like religion and open themselves to liability.

Detailed Discussion
Researchers from Carnegie Mellon attempted to test employer responses to differences in applicant’s religion (Christian or Muslim) and sexuality (gay or straight) by creating fake resumes and Facebook profiles.

The study found that in regard to the 10 to 33 percent of employers that conducted research on applicants using social networks like Facebook, applicants with public Facebook profiles indicating that the applicant was Muslim were less likely to be called back for an interview than those with profiles suggesting the applicant was Christian. Overall, the Muslim applicants received 14 percent fewer callbacks. Given the low number of total callbacks, however, the researchers said the difference was not statistically significant.

The study found more dramatic differences in conservative parts of the country (based on 2012 election data) with callbacks of 2 percent for Muslims versus 17 percent for Christian applicants. The 10 states that identified most strongly as conservative were Alabama, Arkansas, Idaho, Kansas, Kentucky, Nebraska, Oklahoma, Utah, West Virginia, and Wyoming. “We [found] more evidence of bias among subjects more likely to self-report more political conservative party affiliation,” the study authors wrote.

Disclosures about sexuality had no impact on early interest from employers, the study found.

“An Experiment in Hiring Discrimination via Online Social Networks” involved more than 4,000 fake resumes that the researchers sent to private companies nationwide with more than 15 employees with a job opening listed online. Jobs ranged from technical to managerial positions requiring years of experience or a graduate degree.

To ensure that an Internet search would yield the correct (fake) candidate, the researchers used one of four unique male or female names. The four resulting Facebook profiles implied the individual was Christian, Muslim, gay, or straight. To suggest a particular religion or sexual orientation, the researchers listed different activities and interests. Falsified LinkedIn profiles were also created as well as additional fake profiles for friends and colleagues.

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Kmart’s Arbitration Policy Violates NLRA Despite Opt-Out

Why it matters: The infamous D.R. Horton decision from the National Labor Relations Board (NLRB) lives on, with an administrative law judge (ALJ) recently striking down Kmart’s arbitration agreement. Despite the inclusion of a 30-day opt-out period, the ALJ ruled that the agreement’s waiver of any class or collective actions was in violation of the National Labor Relations Act as interpreted by D.R. Horton. While some federal courts have declined to follow the D.R. Horton decision, the Kmart ruling reinforces for employers that some judges are strictly enforcing the precedent.

Detailed Discussion
A complaint was issued by the NLRB against Kmart based upon an arbitration agreement implemented in April 2012 for all employees nationwide. The agreement prohibited employees from “filing, opting into, becoming a class member in, or recovering through a class action, collective action, representation action or similar proceeding,” with a complete waiver of all class, collective, and private attorney general actions.

The company also included an opt-out, however. Employees were given 30 days to elect not to be bound by the arbitration agreement. Evidence was presented that of the more than 84,500 Kmart employees in the United States, about 8,500, or roughly 10 percent, chose to opt out.

Administrative Law Judge David I. Goldman immediately turned to the seminal 2012 decision from the National Labor Relations Board in D.R. Horton, Inc. In that case, the Board held that an employer’s arbitration agreement that included a prohibition from class or collective actions violated the National Labor Relations Act (NLRA).

According to the Board, the redress of collective grievances is “not peripheral but central to the Act’s purposes,” and struck down that policy.

Kmart’s “one-time initial window of opportunity” to opt out of the company’s policy did not save it from a similar fate, Goldman wrote. While employees may enter into individual agreements with their employers, they may not do so at the expense of their substantive rights under the NLRA, he said.

“The problem is not the feasibility of the opportunity to opt out,” the ALJ wrote. “The issue is whether an employer and an individual employee may enter into an agreement to waive irrevocably future rights protected by the Act.”

Employers cannot contract away an employee’s substantive right to engage in the collective redress of grievances, just as employers may not obtain a waiver for an employee’s future rights to join a union, go on strike, or file charges with the Board, the judge said.

Goldman found Kmart’s argument that employees who declined to opt out voluntarily accepted the terms of the agreement unavailing. “[T]he voluntariness of [Kmart’s] policy is debatable: an employee can be bound by the policy if he fails to respond to (or learn of) the arbitration policy and its opt-out provisions.”

Even assuming that the failure to opt out constituted voluntary acceptance, the “inducement to individuals to irrevocably waive future Section 7 rights is not one the employer has the right to provide. It is not a choice employers may purport to enforce. It is not an agreement that an employee may irrevocably make with his employer. In D.R. Horton, the vice was the imposition of a rule barring future collective actions. In this variant, the vice is the agreement between the individual employee and the employer to bar them,” Goldman wrote.

Because employees were required to prospectively and for all time waive their rights under Section 7, the 30-day opt-out period could not save the agreement. “[A]n irrevocable prospective lifetime waiver of certain Section 7 rights relating to all employment disputes that may arise in the future” violates the NLRA, the judge concluded.

Goldman also said the Federal Arbitration Act (FAA) and recent U.S. Supreme Court precedent like American Express Co. v. Italian Colors did not mandate approval of the policy.

“In short, the FAA and its policy preference for arbitration do not privilege enforcement of such agreements when the terms contravene substantive protections under the Act,” he wrote. As for Supreme Court precedent, the judge distinguished the rulings because the statute at issue did not contain a substantive right to collective action – unlike the rights vested in employees by Section 7 of the NLRA.

“[I]t cannot be stressed enough that the Board’s concern in this case, and in D.R. Horton, is not with the FAA or with arbitration,” Goldman explained. “The Board is not hostile to arbitration, but rather, unwilling to countenance any unilateral employer policy, arbitral or otherwise, imposed upon or agreed to with individual employees, that purports to restrict employees’ substantive Section 7 rights, in this case the prohibition on all forms of collective actions in all forums.”

The judge therefore ordered Kmart to rescind or revise its arbitration policy and notify employees accordingly.

To read the ALJ’s decision in Kmart Corp., click here.

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