Federal Statute Creates New Burdens for Employers Filing Unemployment Claims

A little noticed federal statute – the Unemployment Insurance Integrity Act – has the potential to create some big problems for employers who deal with unemployment insurance claims.  The statue was passed in 2011 to little fanfare.  It was focused on trying to deal with unemployment insurance fraud, but seems to have focused on relatively minor employer fraud issues, rather than the much larger and pervasive employee fraud problem, and basic government mismanagement of the unemployment insurance programs at the state level.

The statute provides that states' unemployment compensation schemes must require employers and their agents to timely and adequately respond to a state unemployment agency's request for information.  This is true regardless of the state of the employee's claim, and includes the initial unemployment claim, something that is frequently ignored by employers who do not wish to contest unemployment claims by their terminated employees.  The statute requires that if an employer engages in a pattern of non-existent or inadequate responses, the state is to charge the employer's unemployment insurance account for all benefits claimed, even when the claimant is determined to be ineligible.  In other words, an employer can lose the right to challenge frivolous unemployment claims if it supplies bad information, or no information, in response to an initial unemployment charge.  States are also required to put civil and criminal penalties in place for these failures to respond.

So employers should pay attention to these new requirements, particularly since state unemployment insurance agencies only allow a limited period for filing responses.  The required state laws penalize an employer for willfully making a false statement or willfully failing to disclose a material fact related to termination of an employee with penalties that are imposed based on repeated instances this conduct.  Traditionally, states have not required an employer to respond to an unemployment notice under circumstances where eligibility for the unemployment insurance is not in dispute, such as in a layoff situation.  Under the new statute, a response is likely required, regardless of the circumstances.  For employers that have traditionally elected to simply not contest a claim for benefits (for whatever reason) the statute works a major change.  Simply put, employers should now never ignore a request for information from an unemployment insurance agency, even in situations where the employer is electing not to challenge the claim for benefits.  Depending on the state, the company could find that two failures to respond (or a failure to respond that is late by more than a day) could constitute a pattern of failure under the state statute, and subject the employer to the loss of its ability to challenge bogus claims in the future.

So, some quick advice: do not provide written separation agreements to terminating employers providing that an employer will not contest an unemployment insurance claim.  Regardless of whether the employer wants to, a response is now required, with accurate information.  Employers must consider that their payroll service or unemployment insurance contractor will be faced with accelerated requests for information and may lean heavily on the employer to provide this information quickly.  Accordingly, employers should review their state laws and train their staffs to recognize these claims and notices for unemployment insurance so that they can be flagged for quick follow-up action.  To facilitate processing, the employer should consider using a system similar to that for managing workplace absences (and if you don’t have such a system in place for workplace absences, you should get one) involving a single or limited point of contact for all unemployment insurance inquiries and responses.  Finally, employers should consider eliminating the offer of not contesting unemployment compensation from their severance plans.  This will require some thought with respect to severance terms and offers, given that unemployment compensation is frequently a significant economic benefit to a departing employee.

Some Thoughts on the Unionization of College Athletes

The recent decision by a Regional Director of the NLRB to find that Division I college football players at a private university are, in fact, employees for purposes of union organizing is potentially a watershed event for college athletics. If this decision is not reversed during the appeal process, then it will mean the end of college athletics, at least as we know them here in the United States.

Some of the early commentary on the decision reflects a view that the analysis is a tightly crafted piece of legal wordsmithing that is likely to stand up on review by the NLRB as a whole and the federal appellate courts.

I have no idea what those early commentators were reading, but I don't think it was the NLRB decision. The document itself contains what I consider gigantic holes in terms of its reasoning and legal support. It flat-out ignores certain key aspects of the college-student relationship that I think will prove fatal to the analysis on appeal. But mainly, it simply proves too much with respect to the employee status of the college athletes.

The NLRB decision uses a lot of ink detailing the amount of control the coaching staff has over Northwestern's scholarship football players. In fact, that's one of the key weaknesses of the decision-what is described throughout these paragraphs is not an employer-employee relationship, but a relationship between students and the people responsible for their education and welfare, who stand in an in loco parentis status rather than a boss status. No employer in the United States maintains the kind of control the Northwestern coaches have over their charges. To me, that argues more heavily in favor of their student status than anything else in the decision.

The Regional Director simply glosses over the key question of whether students at a university on scholarship are performing work subject to a contract of hire, for remuneration by their employer. There's no discussion about whether the scholarships and associated room and board payments even resemble wages. For example, scholarships are a fixed value, independent of the quality or amount of work performed by the recipient. Second or third string scholarship players at Northwestern get just as much money as the guys on first team. That doesn't resemble any wage scale that I'm aware of.

The Regional Director discounts the key aspects of a college’s academic emphasis with respect to eligibility, postseason activities, and the like. He notes that during certain times of the year participation in the football program involves a lot of hours, in some cases perhaps more hours than the players spend hitting the books. I have no idea whether that's true-there was no objective evidence cited for that proposition, just anecdotal testimony-but I do know that if you're not hitting the books to a certain degree, you can't play. So whatever the emphasis on scholarship, it is in a very real sense at least as important as athletics given that your athletic performance does not determine your scholastic eligibility, but rather, the other way around. Graduation rates also dictate postseason play, a concept totally foreign in any employment relationship.

Even something as fundamental as the burden of proof in the case is contorted in the Regional Director's analysis. I'm unconvinced that a group of people who walk into an NLRB office claiming to be employees can somehow shift the burden of proof instantly to the target employer, which then must put on evidence to show that, whatever the claims, these people are not employees.

It will be very interesting to see what happens to this case on appeal. But for a minute, imagine the impact if college players are found to be employees rather than students. The value of their "wages", i.e. their tuition, books, living expenses, etc., becomes instantly taxable. Moreover, the fact that colleges would be free to pay additional "wages" would, in a real sense, very quickly spell the end of college athletic programs at a number of universities that simply would not be able to compete with the economic prowess of the major college football and basketball schools. It might also mean the end of most nonrevenue sports, because the dollars flowing into those sports from the football/basketball programs would have to be diverted to maintain the football or basketball edge.

Unlike some other commentators, I don't think this decision has a very good chance on appeal. And if nothing else, I would expect a legislative fix to be engineered if it appears likely that colleges are going to lose a big chunk of that $11 billion of annual revenue they receive from their athletic programs. But if it does survive, I think we can say goodbye to most if not all of the practices that we recognize as integral to college athletics today.

Saving Non-Competes with Forum Selection Clauses

I have been counseling a lot of clients on the use of non-compete agreements lately, and given our firm-centric focus in California, the issue often arises as to whether non-competes can ever be enforced for California employees.

Typically, the answer is “no”; California law categorically rejects any type of post-employment restriction on an employee's ability to seek work, even with a directly competing company. In addition, California courts historically reject employer efforts to get around the California non-compete rule by using a choice of law provision designating a non-compete friendly jurisdiction to hear any disputes. But a recent Supreme Court decision might be giving some life to the ability of out of state employers to enforce their non-compete provisions on their California work force.

The Supreme Court case held that contractual forum selection clauses should be enforced unless particularly unfair or exceptional circumstances exist. The ruling follows the trend already established in some California federal court cases. In one case, a Washington-based employer was permitted to enforce its Washington forum selection clause and choice of law provisions against California sales employees who left for a competitor. When the employer filed suit in Washington, pursuant to the selection clause, the employees tried to block the action by suing in California federal court. But the California federal court determined that the forum selection clause was valid. Other California federal courts have found forum selection clauses valid, for example in the case of a Pennsylvania company seeking to transfer non-compete cases from California to Pennsylvania. In both cases those courts ruled that the possibility that Pennsylvania law might be applied to the non-compete clauses was not a sufficient basis to void the forum selection clause in the employment agreements.  And a recent state court decision applying Pennsylvania law to a California resident employee is here.

So for non-California based employers, don’t give up hope with respect to your non-compete agreements. But you should start now, drafting provisions, in your employment agreements that contain forum selections clauses as well as choice of law provisions. The tide may be turning in a way that allows you to protect your business.

Silicon Valley Job Searching Advice

Some potentially useful information for both employers and job seekers in the tech world is here.

A Bad Attitude Policy and the NLRB

Most companies will terminate an employee for a lousy attitude that has tangible effects with co-workers and customers.  Sometimes that prohibition is expressed in an employment policy, most times it is not.  A recent NLRB decision dealing with the former situation should provide some solace to employers who seek to discipline employees that would rather be working somewhere else and don’t care who knows it.

The case concerned a restaurant that had a rule in its employee manual that prohibited insubordination or lack of respect and cooperation with fellow employees or guests, including “displaying a negative attitude that is disruptive” to staff and customers.  For some reason, the general counsel of the NLRB took the position that the rule clearly encompassed an area of protected concerted activity, in that employees would assume that the rule would prohibit them from being critical of the employer, which would inhibit the employees from raising controversial topics, including terms and conditions of employment.  Fortunately, the majority of the Board (in this case, the two Republican appointees) determined in fact that the relevant policy language limits the policy to unprotected conduct that would interfere with the legitimate business concerns of the restaurant.  In this case, "unprotected conduct" meaning being a butthead, specifically using an obscenity in front of the restaurant patrons, a "fit of pique [that] wasn’t part of the service that guests reasonably would expect".

The NLRB has been on the warpath against employment policies lately, taking a position that I can best express as, “if there is any possible way that a provision could be interpreted in a way that violates federal labor law, then the policy is illegal and must be voided.”  Fortunately, there are some more rational heads on the Board, and they prevailed in this case.

New EEOC Guidance on Accommodating Religious Dress in the Workplace

The EEOC recently issued its interpretation of Title VII's requirements that employers accommodate religious practices of their employees.  The guidance is here. The only thing that I would note in this publication, which is merely a restatement of current law, is that the EEOC is using the words "undue hardship" into this guidance. However, the term "undue hardship" does not mean the same thing as the phrase does in the context of other employment statutes requiring accommodation, such as the Americans with Disabilities Act.

In fact, the law regarding religious accommodation has remained relatively stable for several decades-an employer is not required to accommodate a religious practice of an employee if doing so would create more than a "de minimis" effect in the workplace. This is a significantly lower standard of harm that an employer has to demonstrate than is found in the ADA. I'm not sure why the EEOC is using the same term, except perhaps in an attempt to get people to believe that the burden is somehow higher than it actually is.

The New Up and Coming "Money Ball"

Here's a recent article from the Journal concerning the new technology available to sports managers to assess performance. It's no surprise that this is starting out in baseball, with its discrete, individual plays, easily captured and measured by the camera systems. Presumably something similar to this will be coming shortly for sports like basketball, hockey, lacrosse, etc. (basketball already has a slightly less effective player/position measurement system in use; what's described in this article will refine it considerably).  I don't know if NFL football will ever get to the point of accurate measurement described in the article, because there are too many people moving in close proximity for precision tracking by the cameras.

This type of system poses an interesting question for employers generally. How much observation of the workforce makes sense for effective management? I've commented previously on employers using RFID tracking to follow employees around the office, in an effort to determine optimal seating arrangements, office usage, break times, etc. Some employers continually monitor computer workstation activity to measure employee performance. But at some point, doesn't this become self-defeating? A workforce that believes itself to be 100% monitored 100% of the time does not sound like a happy or productive group.  And while measurements of speed, strength, and reaction time lend themselves nicely to sabermetrics, the truth is that people are not continuously productive throughout their days at work. Some people get a lot of work done immediately and then coast through the afternoon; some people are more productive later in the day; some people are highly effective procrastinators who leave everything until the last minute. The observation systems described in this article would seem to move people in the direction of some type of continuous level of effort that would not accommodate their idiosyncratic strengths (or weaknesses).

Of course, professional athletes making a fair amount of money for playing a game usually understand that their effort level on the field is required to be a consistently high, and most of them have grown up being filmed from the time they were in middle school. Observation is probably less of an issue for these folks. But for the normal workplace, I would guess the act of generating this kind of data would create more problems than it solved.

Supreme Court Extends Sarbanes-Oxley Protections to Non-Public Company Contractors

The Supreme Court formally extended the whistleblower protections of the Sarbanes-Oxley Act of 2002, determining that whistleblowing employees of contractors performing work for public companies are covered by the Act's provisions against employment retaliation.

You may recall that Sarbanes-Oxley ("SOX") was enacted by Congress following the widespread malfeasance by executives of the Enron Corporation, as well as their accounting and legal service providers. The statute was enacted to control conduct of accountants, auditors, and attorneys who work with public companies. It contains fairly elaborate provisions to protect whistleblowers, who might face employer retaliation for reporting corporate misconduct such as mail or wire fraud, bank fraud or securities or commodities fraud or fraud affecting stock prices. The language relating to whistleblower protection specifically states that it applies to public companies, or officers, employees, contractors, subcontractors or agents of such companies. The question before the Court in this case was whether the statute shielded "only those employed by the public company itself" or employees of privately held contractors and subcontractors-such as investment advisors, law firms, or accounting enterprises-performing work for the public company.

This particular case involved contract employees who were performing services for mutual funds, which the Court noted typically have no actual employees. That was true in this case; the plaintiffs were hired by the defendant contractor under a contract between the defendant and the mutual fund and serving as portfolio managers for the various fund entities. After reporting what they believed was improper accounting or costing methods relating to management of the funds, the plaintiffs were terminated.  They filed administrative complaints under SOX, and then proceeded into federal court. A federal district judge initially denied the employer's motion to dismiss, but on appeal, the First Circuit granted the motion, finding that the SOX anti-retaliation provision was restricted to employees of public companies, and not third-party contractor employees.

The Supreme Court reversed, determining that the plain language of the statute indicated that it was to apply to the employees of contractors performing services for public companies. In its decision, the Court said that such an interpretation was consistent with the purpose of the statute, i.e., helping ferret out potential fraud in public company financial operation.

In an interesting side discussion, the Court noted the contractor's defense that the original statutory language was focused only on situations where a public company hires a contractor to effectuate terminations, something referred to as an "ax wielding specialist", and portrayed by actor George Clooney in the movie Up in the Air. The Court said that the history of SOX indicated that retaliatory axe-wielding specialists were not the real world problem that prompted Congress to add contractors to the statute.

Corporate lumberjacking aside, this decision potentially breaks a lot of new ground. Although, as noted by the majority, the Department of Labor already takes the position that contractors of public entities are covered by the whistleblower protections of SOX, the majority expands the scope of the coverage even further. Virtually all employees of private businesses that do business with a public company can now avail themselves of SOX protection.  And public company employees who hire other people to work for them (think babysitters and gardeners) theoretically extend SOX protection to those personal hires, as well.  The majority noted that these concerns were more theoretical than real, but employers should note that this decision now allows virtually anyone to trigger the highly invasive and expensive SOX charge investigative procedure.  So private employers must now put in place at least some of the mechanisms used by public companies to ensure compliance with SOX requirements.  Typically this takes the form of internal policies to identify potential retaliation issues and outside management of complaints that might trigger a SOX investigation.  Some of this should already be in place; virtually all employers must be aware that any type of retaliatory-like discharge opens up the potential for litigation, either under federal law, or under a variety state wrongful discharge claims. But the Court's decision broadens the range of employers who have to to examine carefully the bases for any termination decision, especially where the employee has raised a concern about the business activities of the employer in servicing the employer's customers.