• Expanded Protection For "Whistleblowers"
• Individual Managers Not Liable For Overtime Pay
• New Federal Rule For Consumer Report Information
• Court Protects Financial Services Industry Employers From Defamation Claims
• New I-9 Form
• New USERRA Poster Now Required For Employers

EXPANDED PROTECTION FOR "WHISTLEBLOWERS"

On August 11, 2005, in Yanowitz v. L'Oreal USA, Inc., the California Supreme Court expanded protections for employees who refuse to follow orders they reasonably believe to be discriminatory. In Yanowitz, the court ruled that such employees are protected from retaliation under California's Fair Employment and Housing Act ("FEHA") even where the employee fails to report the alleged discriminatory order to the company.

In this new case, a sales manager alleged that her employer wrongfully retaliated against her for refusing to follow an order she believed was discriminatory. The employee's general manager allegedly ordered her to fire a dark-skinned female sales associate whom the general manager did not find "sufficiently physically attractive" and to hire "somebody hot" such as a "fair-skinned blonde." In response, the employee repeatedly asked her general manager for "adequate justification" for why she should terminate the female sales associate, which he would not provide. Ultimately, the employee refused to carry out her general manager's order because she believed the order was discriminatory on the basis of sex—male sales associates were not required to be physically attractive. Significantly, Yanowitz did not complain to anyone at the company about her general manager's order nor did she explicitly tell her general manager, or anyone else at the company, that she believed his order was discriminatory.

According to the employee, she was thereafter subjected to hostile adverse treatment, including management's solicitation of negative information about her from her subordinates and increased criticism of her job performance. The employee ultimately went on disability leave due to work-related stress and never returned.

The employee argued that the company's adverse actions following her refusal to follow what she believed was a discriminatory order violated FEHA's prohibition against retaliation for engaging in protected activity. To constitute "protected activity," an employee must complain of, or oppose, a practice forbidden by the FEHA (e.g., sex, age, race, national origin, etc., discrimination). The employee argued that her refusal to follow the general manager's order was protected activity because she reasonably believed that his order was discriminatory on the basis of sex. The company, in turn, argued that the employee could not be found to have "opposed" a practice forbidden by the FEHA (i.e., sex discrimination) because she never notified anyone at the company that she was refusing to obey the order because she believed the order was discriminatory. In other words, the company argued that the employee did not "blow the whistle" and, therefore, cannot trigger the FEHA's whistleblower protection.

The court disagreed with the company's argument and held that an employee may be protected under the FEHA's anti-retaliation provisions even where the employee does not explicitly inform the employer that he/she opposes conduct believed to be discriminatory. The court explained that:

"When the circumstances surrounding an employee's conduct are sufficient to establish that an employer knew that an employee's refusal to comply with an order was based on the employee's reasonable belief that the order was discriminatory, an employer may not avoid the reach of the FEHA's antiretaliation provision by relying on the circumstance that the employee did not explicitly inform the employer that she believed the order was discriminatory."

The court emphasized that "an employee is not required to use legal terms or buzzwords when opposing discrimination;" the relevant inquiry is whether "the employee's comments, when read in their totality, oppose discrimination."

Based on this standard, the court concluded that one could properly find that the company knew that the employee's refusal to comply with the order to fire the sales associate was based on the employee's belief that the order constituted discrimination on the basis of sex. The court further held that the employee could make out a prima facie case that she suffered an adverse employment action as a result of her opposition to the order because the alleged actions taken against the employee following her refusal to follow the order, if true, would materially affect the terms, conditions or privileges of her employment. Accordingly, the court affirmed the court of appeal's decision reversing the trial court's grant of summary judgment in favor of the company.

The Yanowitz decision makes it clear that employers should review their internal complaint and "open door" procedures to ensure that adequate channels exist for employees to explicitly communicate their employment-related problems or concerns. Employers will be in a more defensible position in such litigation if they can show that they facilitated an employee's opportunity to voice such concerns to management.

INDIVIDUAL MANAGERS NOT LIABLE FOR OVERTIME PAY

On August 11, 2005, in an important victory for California corporate officers, directors, and managers, the California Supreme Court held that such individuals cannot be held personally liable for a company's failure to pay wages to employees under California Labor Code sections 1194 and 510. In Reynolds v. Bement, plaintiff filed a class action lawsuit against his former employer and eight of its officers and directors alleging that the company improperly classified its store managers as exempt from overtime.

The Labor Code provides employees with a private right of action against their employer for unpaid overtime. The Labor Code, however, does not define the term "employer." Plaintiff argued that the broad definition of "employer" contained in the Industrial Welfare Commission's (IWC) wage orders ("any person . . . who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person") should apply.

This definition arguably reaches beyond the corporate entity to include individual corporate agents (i.e., officers, directors, and managers). The court rejected this argument, emphasizing that common and statutory law prevent corporate officers from being liable for the actions of the corporation in employment cases. The court reasoned that "[h]ad the legislature meant . . . to expose to personal civil liability any corporate agent who 'exercises control' over an employee's wages, hours, or working conditions, it would have manifested its intent more clearly than by mere silence."

From a practical standpoint, although the court's holding was limited to Labor Code sections 1194 and 510, the Bement rationale is arguably applicable to any Labor Code section that is silent as to the meaning of the term "employer." Under Bement, therefore, individual corporate agents will be able to argue that they have no personal liability for alleged statutory violations when the applicable statute is silent as to the meaning of the term "employer."

Individual corporate agents still could be liable for Labor Code violations under other sections which specifically manifest an intent to impose such liability. For example, Labor Code section 558, which imposes civil penalties on "any employer or other person acting on behalf of an employer who violates, or causes to be violated, a section of this chapter or any provision regulating hours and days of work in any order of the [IWC]," could conceivably be interpreted as including individual corporate agents for purposes of liability.

On balance, however, Bement is a welcome decision for management and allows corporate officers and agents to carry out their job functions without undue fear of individual liability under these Labor Code sections.

NEW FEDERAL DISPOSAL RULE FOR CONSUMER REPORT INFORMATION

The Federal Trade Commission (“FTC”) has recently enacted new regulations requiring employers to implement measures governing the proper disposal of consumer reports (the “Disposal Rule”). The Disposal Rule was issued under the Fair and Accurate Credit Transaction Act (“FACTA”) which amends the Fair Credit Reporting Act (“FCRA”). The Disposal Rule is aimed at reducing the risk of consumer fraud and identity theft.

The Disposal Rule broadly applies to any person or business, regardless of size or number of employees, that maintains or acquires “any record about an individual” that is “derived from consumer reports.” A “consumer report” includes background reports that an employer receives from a credit reporting agency or similar third party vendor related to the character, general reputation, personal characteristics, insurance claims, residential or tenant history, or medical history of an applicant or employee, as well as other credit reports and documentation related to credit history and credit scores.

The Disposal Rule neither mandates disposal, nor indicates how long records are to be maintained. Rather, it only addresses proper disposal requirements should an employer decide to dispose of the material. The Disposal Rule requires employers to prevent unauthorized access to discarded consumer reports using “reasonable measures” such as establishing and complying with polices to: burn, shred, or pulverize papers so that the information cannot practicably be read or reconstructed; destroy or erase electronic files or media containing consumer information so that the information cannot be read or reconstructed; or conduct due diligence and hire a document destruction company to dispose of consumer information consistent with the Disposal Rule.

Violations of the Disposal Rule can result in a range of civil liabilities and penalties, including: actual damages, statutory damages up to $1,000 per violation, punitive damages, civil penalties up to $2,500 per violation, costs and attorneys’ fees. Moreover, if the FTC files an enforcement suit, an employer could be subject to additional civil penalties of up to $10,000 for each violation.

The Disposal Rule makes it even more important for employers to maintain the confidentiality of personnel information they compile. It may also be prudent for employers to draft and implement appropriate document destruction policies.

COURT PROTECTS FINANCIAL SERVICES INDUSTRY EMPLOYERS FROM DEFAMATION CLAIMS

Employers in the financial services industry have long been caught between the proverbial rock and a hard place with respect to the disclosure of reasons for an employee's termination. On the one hand, industry regulations require them to complete a Form U-5 reporting the reasons for the discharge of any employee to the National Association of Securities Dealers ("NASD"). The NASD, in turn, makes the Form U-5 information publicly accessible in order to protect investors. At the same time, because no California court had ruled whether a Form U-5 was absolutely privileged (and many states had ruled that it was not), the very act of making the required report to the NASD exposed a company to potential defamation litigation from former employees.

Fortunately, the California Court of Appeal in Fontani v. Wells Fargo Investments, 2005 Cal.App. LEXIS 800, recently resolved this issue in the employers' favor. The facts of the Fontani case are typical for employers in the financial services industry. Wells Fargo, after submitting its required Form U-5 disclosure to the NASD concerning the termination of one of its financial advisors, was sued by its former employee for defamation, in addition to other defamation-related torts. Wells Fargo filed a special motion to strike these claims, arguing that: (1) the reporting of the reasons for the termination to the NASD constituted “protected activity” under California's Strategic Litigation Against Public Participation ("SLAPP") law; and (2) statements on a Form U-5 are absolutely privileged under California’s litigation privilege, Civil Code section 47(b).

The court ruled firmly in favor of Wells Fargo, holding that:

1. The contents of a Form U-5 are absolutely privileged under Civil Code section 47(b) and, therefore, cannot provide the basis for a defamation action, regardless of any alleged malice on the part of the employer;

2. Because the contents of the Form U-5 are absolutely privileged, they cannot be the basis for any other business tort, such as interference with prospective business advantage; and

3. Any such suit for defamation (or any other related business tort) would be subject to an employer’s special motion to strike under the SLAPP law which would entitle an employer to attorneys' fees for bringing the motion.

While the Fontani decision is significant for employers in the financial services industry—and arguably for any other employer who is required to report misconduct to an official agency— employers must still be cautious with respect to any termination for misconduct. In particular, employers should document that the decision to terminate employment was made in good faith following an appropriate investigation, and was based on reasonable grounds for believing the employee had engaged in the misconduct.

NEW I-9 FORM

The U.S. Citizenship and Immigration Service has released a "new" I-9 form. Employers must complete an I-9 for all newly hired employees to document their identity and authorization to work in the United States.

Aside from replacing outdated references to the former Immigration and Naturalization Service, the new form is very similar to the 1991 edition. A copy of the new form can be obtained by going to http://uscis.gov/graphics/formsfee/forms/i-9.htm. Employers may only use the old form through December 31, 2005.

NEW USERRA POSTER NOW REQUIRED FOR EMPLOYERS

With approximately 480,000 National Guard and Armed Forces Reserves mobilized since Sept. 11, 2001—and many of those returning from duty with illnesses or disabilities—employers are facing an array of challenges under the Uniformed Services Employment and Reemployment Rights Act ("USERRA"). USERRA applies to employers of any size and prohibits discrimination against persons who are members of (or applicants to) the uniformed services. USERRA also protects the rights of members of the uniformed services to reclaim their employment after being absent due to military service or training.

The Veterans Benefits Improvement Act, passed by Congress in December 2004, requires employers to provide notice of these rights to all persons entitled to such benefits. The official USERRA notice is now available for downloading at http://www.dol.gov/vets/programs/userra/poster.pdf. Employers should ensure that they are displaying a copy of the notice in a prominent place frequented by employees. (There is also a Spanish translation available from the Department of Labor.)

This is just one of many posters mandated under federal and state employment law. Employers should review these postings on a regular basis.