Labor and Employment Update - Fall 2008

NEW JERSEY COURTS ALLOW RETALIATION CLAIM TO PROCEED BASED ON POST-EMPLOYMENT NON-JOB RELATED CONDUCT

The purpose of state and federal anti-retaliation statutes is to ensure that employees are not deterred from making good faith complaints of discrimination or assisting others in making a complaint.  Over the last two years, the type of employer conduct that could be considered retaliatory has evolved towards a more liberal standard, and one that is less favorable to employers.  Specifically, in 2006, the United States Supreme Court addressed what should be the appropriate scope for determining employer liability under the anti-retaliation provision of Title VII of the Civil Rights Act of 1964, a federal statute, in the case of Burlington Northern and Santa Fe Railway Company v. White.  Prior to Burlington, the standard applied by many jurisdictions, including the Third Circuit (which covers Pennsylvania, New Jersey and Delaware), was to exclude any conduct on the part of an employer that resulted in an adverse action unrelated to an employee’s employment or the workplace.  In Burlington, the Supreme Court rejected that standard in favor of a more liberal one and chose to extend what could be interpreted as retaliatory conduct to adverse actions against an employee that were not workplace related or employment related.  In other words, an employer could now be liable for acts against a current or former employee that resulted in some adverse impact totally unrelated to the workplace.  Examples of such conduct could be a decision to contest an employee’s unemployment compensation application based on a retaliatory motive, or intentionally thwarting a former employee’s efforts to find a subsequent job.

The impact of the Burlington case now appears to be reaching into the New Jersey state courts, as can be seen in the case of Roa, et al. v. LAFE.  In Roa, the New Jersey Supreme Court was asked to consider whether a terminated employee could bring a retaliation claim under the New Jersey Law Against Discrimination (“NJLAD”) for an action taken on the part of his prior employer following his termination.  The plaintiff, Roa, alleged that LAFE had terminated him in retaliation for complaining that a supervisor was engaging in sexual harassment, and that LAFE had engaged in further retaliation by improperly canceling his health insurance.  This allegedly resulted in significant unpaid debt from hospital bills, which impacted his credit and caused him “stress and anxiety.”

In analyzing Roa’s claim, the Court cited to the Burlington decision, quoting the Supreme Court’s conclusion that “the anti-retaliation provision [of Title VII]…is not limited to discriminatory actions that affect the terms and conditions of employment.”  The Roa court then chose to adopt that same reasoning of Burlington to its interpretation of the anti-retaliation provision of the NJLAD, stating that the New Jersey courts “have traditionally looked to federal precedent governing Title VII as a ‘key source of interpretative authority’” when analyzing the NJLAD.  Having chosen to interpret the anti-retaliation provision of the NJLAD by the Burlington standard, the Roa court permitted the plaintiff’s post-termination claim of retaliatory cancellation of health benefits to proceed.

The Roa decision is one that employers in New Jersey should bear in mind when dealing with a former employee who has asserted a claim of discrimination.  There now exists significantly more opportunities for former employees who feel they were victim of discrimination or retaliation while employed to find additional facts to support a retaliation claim.  

WHEN ARE COMMISSIONS EARNED?

In June 2008, the New York Court of Appeals, the state’s highest court, faced two questions under the New York Labor Law: (1) whether executives are “employees” for purposes of the Labor Law; and (2) when a commission is “earned.”  Significantly, the second question may provide helpful information to employers with respect to the drafting of agreements for commissioned employers.

In Pachter v. Bernard Hodes Group, Inc., the plaintiff, a former vice president for the defendant company, had chosen to be compensated by commissions rather than by a fixed salary.  The defendant company calculated Pachter’s commission earnings by using a formula.  This formula included certain deductions from Pachter’s monthly commissions, such as finance charges, losses, uncollectible debts, part of her assistant’s salary, and travel and entertainment expenses.  Pachter received a commission statement every month that listed her total billings and the percentage of the billings that was her gross commission.  Advances from the commission account and expenses from her activities were then deducted to reach the net income she earned that period.  Pachter was aware of the charges subtracted from her commissions and did not complain about the method while she worked for the defendant company.

After Pachter left her employment with the defendant company, however, she brought a lawsuit claiming that the company wrongfully made deductions from her commission income.  The lower court agreed, awarding Pachter over $150,000 in damages, plus interest and attorneys’ fees.

The two questions on appeal were: (1) whether executives were “employees” under Article 6 of the Labor Law; and (2) in the absence of written agreement, when a commission is “earned” and becomes a “wage.”

The Court began by rejecting the defendant company’s argument that an executive did not classify as an employee, holding that the definition of “employee” in the Labor Law “plainly embraces executives.”  Thus, the Court held that executives are employees for purposes of the Labor Law statute limiting wage deductions, except where expressly excluded.

Commissions are considered “wages” under the Labor Law, and employers may not make deductions from an employee’s wages unless permitted by law or authorized by the employee for certain express purposes.  In Pachter’s case, the charges the company made to determine her final compensation were not permissible deductions.  Therefore, whether or not these deductions were permissible depended on when Pachter’s commission was “earned” and thus became a “wage” that would be subject to the Labor Law restrictions.  If the deductions were made before the commissions became a “wage,” the deductions were permissible; but if the deductions were made after Pachter’s commissions were earned, they were not.

Generally, a broker who produces a person ready and willing to enter into a contract upon his or her employer’s terms has earned a commission.  However, parties may enter into their own agreement regarding the earning of commissions.  Since parties may add whatever conditions they want to their agreement, they may provide that the computation of a commission includes certain deductions.  In such a scenario, the commission is not deemed “earned” or vested until computation of the agreed-upon formula.

The Court believed that the commission could have been “earned” when Pachter’s efforts resulted in a client’s commitment to buy advertising; however, this did not prevent Pachter and the defendant company from entering into their own agreement.  

Although there was no specific written contract between the parties, the Court held that because the parties had an eleven-year course of dealing, and because Pachter accepted and never disputed the monthly compensation statements, an implied contract formed between Pachter and the defendant company, and that implied contract permitted the company to make deductions from Pachter’s monthly commissions.

Thus, the Court held that, in the absence of a governing written instrument, when a commission is earned and becomes a “wage” is regulated by parties’ express or implied agreements; and if no such agreement exists, the earning of a commission occurs upon the employee’s production of a ready, willing and able purchaser of the services.  Because this case commenced in 2003, the Court did not address or apply the October 2007 amendment to the Labor Law (discussed in a previous newsletter), mandating that agreements between employers and commissioned employees be in writing, along with other certain requirements.

In sum, in addition to the confirmation that an executive of the company is considered an employee, this opinion indicates that an agreement between employee and employer, whether formal or informal, will govern the method by which the employer may take deductions from its employees’ commissions.  Alternatively, if the parties have not made any such agreement, an employee may be deemed to have earned his or her commission upon the employee securing a legitimate buyer for the services.  This opinion also indicates that the timing of the computation of an employee’s commission may be relevant: if deductions are made before the commission is determined, they may be lawful, but if they are made after the amount of the commission is determined, then they may be impermissible under the Labor Law.

A LOOK AT ELIGIBLE EMPLOYEES UNDER THE FLMA

An eligible employee may request leave under the FMLA for the birth of his/her child.  An employer who denies an employee a right granted by the FMLA can be sued for interference with the employee’s rights under the FMLA.  This type of claim is commonly referred to as an FMLA Interference claim.  To establish an FMLA Interference claim, an employee must show that he or she was eligible under the FMLA to receive a benefit and that the employer denied that benefit.  Recently, the Third Circuit Court of Appeals held that a Department of Labor regulation, which puts an affirmative duty on an employer to confirm whether an employee is eligible under the FMLA, was invalidated to the extent that it created a cause of action under the FMLA for non-eligible employees.    

In Sinacole v. iGate, a former employee appealed an order from the Western District of Pennsylvania granting summary judgment in favor of the employer and against her sexual discrimination, FMLA Interference and breach of contract claims.  The part-time employee submitted the requisite FMLA paperwork requesting leave for pregnancy and the employer never responded to her application.  She took the leave. When she subsequently submitted notice to return to work, the employer terminated her. 

She sued, claiming that she was entitled to leave under the FMLA and, because she was legitimately on FMLA leave, she had a right to return to her former position upon concluding leave.  She asserted that under the Department of Labor regulations, because the employer failed to respond to her request and never advised her of whether she was eligible, it could not assert that she was not eligible.  Accordingly, she claimed that she relied on the employer’s non-response to mean that she was entitled to the leave.    

The employer argued that she was not an FMLA eligible employee because she did not work the requisite amount of hours before she requested leave.  Quoting the Department of Labor regulation that the employee relied upon, which states “[i]f the employer fails to advise the employee whether the employee is eligible prior to the date requested leave is to commence, the employee will be deemed eligible,”  the Third Circuit held that this regulation cannot expand the scope of FMLA eligible employees by giving otherwise non-eligible employees a cause of action where no cause of action should exist.  The Court held that FMLA only provides a cause of action for “eligible employees,” and therefore the employer was entitled to summary judgment because the employee had failed to establish that she was eligible.1 

NOTE: This is an unpublished Third Circuit Court of Appeals opinion. Accordingly, an employer should not rely on this opinion as precedent to establish that the employer does not have a duty to respond to an employee’s FMLA leave application.   

1 The court also disposed of her other two claims for discrimination and breach of contract because she failed to present a sufficient pretext argument and she voluntarily terminated her contract when she reduced her hours.                           

EMPLOYERS NEED TO TAILOR EMPLOYMENT AGREEMENTS TO STATE LAW

 If Employers want to have enforceable employment agreements, they need to make sure that specific provisions will be enforced in the particular state where employees work. 

For example, many employment agreements have non-competition/non-solicitation restrictive covenants.  Laws regarding their enforceability vary from state-to-state.  In Pennsylvania, if an employee is asked to sign an agreement containing a non-competition/non-solicitation provision after they have commenced employment, they must be given additional consideration in the form of a raise, bonus, stock or other benefit.  That is true in some other states, as well.  Conversely, in New Jersey (and other states), employees can be made to sign agreements containing such restrictive covenants at anytime without being given additional consideration. 

Still other states have statutory restrictions on the enforceability of non-competition agreements.  California is one such state.  The California Supreme Court recently emphasized that even if non-competition agreements are written very narrowly and not intended to deprive employees of their right to pursue their profession, such agreements are invalid under California law unless they fall into one of the few statutory exceptions.  See, Edwards v. Arthur Anderson LLP.  One of the clauses prohibited Edwards from “performing professional services [for 18 months] of the type he provided while at Anderson, for any client on whose account he had worked during eighteen months prior to his termination.”  The court ruled that such a restriction was invalid. 

Other state employment laws also vary including, for example when employees must be paid upon termination and the penalties for failing to do so may be significant.  Employers should review their employment agreements for enforceability in the various states in which they operate.

Author:  Charles A. Ercole
cercole@klehr.com                                                                             

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The Labor and Employment Group represents and counsels employers in all aspects of the employment relationship, including EEO litigation, union avoidance, negotiations, arbitrations, executive compensation, corporate transactions, and non-competition/non-solicitation agreements, as well as compliance with federal and state laws such as the Family and Medical Leave Act, the Americans with Disabilities Act, the Health Insurance Portability and Accountability Act, the Fair Labor Standards Act and the Occupational Safety and Health Act.

This document is published for the purpose of informing clients and friends of Klehr Harrison about developments in the areas of labor, employment and benefits, and should not be construed as providing legal advice on any specific matter. For more information about this publication or Klehr Harrison, contact Charles A. Ercole, Chair of the Labor and Employment Group, at (215) 569-4282 or visit the firm’s Web site at www.klehr.com