Labor and Employment Update - Fall 2005

EMPLOYERS CAN BE LIABLE FOR MISREPRESENTATIONS MADE IN REFERENCES

In Singer v. Beach Trading Co., the New Jersey Superior Court, Appellate Division, recently ruled that an employer could be held liable for negligent misrepresentation of a former employee’s work history under certain defined circumstances. Though courts in other states have addressed this issue in the past, the ruling in Singer acts as a poignant reminder to employers all over the country that they have to be very careful when they are asked for an employee reference.

Marsha Singer claimed that because her former employer, Beach Trading Company, provided inaccurate information about her employment history, she was dismissed from her subsequent employment. Ms. Singer worked as Vice President of Daily Operations at Beach Trading. She left Beach Trading to join HRK Industries, Inc. When the owner of HRK called Beach Trading posing as a customer to inquire about Ms. Singer’s employment history, the employees at Beach Trading, including one supervisor, informed him that Ms. Singer worked as Customer Service Representative. Relying on this information, HRK believed that Ms. Singer had misrepresented her position at Beach Trading and terminated her employment with HRK.

In her complaint, Ms. Singer alleged negligent misrepresentation against Beach Trading and its supervisor. The Court held that for a claim of negligent misrepresentation to survive, the plaintiff must prove: (1) the person making a reference inquiry of a prior employer clearly identifies the nature of the inquiry; (2) the employer voluntarily decides to respond to the inquiry and, thereafter, unreasonably provides false or inaccurate information; (3) the person providing the inaccurate information is acting within the scope of his/her employment; (4) the recipient of the incorrect information relies on its inaccuracy to support an adverse employment action against the employee; and (5) the employee suffers quantifiable damages proximately caused by the negligent representation.

In determining the second and third factor mentioned above, the Court held that a former employer assumes duty the moment it volunteers information and if an individual supplying the information is acting within the scope of his duty to the ex-employer, the former employer is vicariously liable.

The Singer decision does not apply to cases where the information shared is true and correct. Additionally, a few precautionary steps could protect the employers from potential lawsuits. We suggest the following precautions:

1) All inquiries relating to employees or former employees should be directed to and addressed by one or two designated personnel.
2) When there is a telephone inquiry about an employee, suggest a written inquiry or record the telephone conversation.
3) Inquire into the purpose for which the reference is required.
4) Before giving out any information, get a written authorization from the employee or the former employee releasing the employer from any liability.
5) Lay down procedures to ensure that updated information about all the employees is collected and stored in one place.
6) Give out information about the employee only when all the information has been ascertained for accuracy.

EMPLOYER CANNOT DISCRIMINATE AGAINST EMPLOYEE FOR BANKRUPTCY FILING BUT CAN TERMINATE FOR BAD CREDIT

In October 2005, the United States District Court for the District of New Jersey ruled that an employer did not violate Section 525(b) of the Bankruptcy Act or New Jersey common law prohibiting employment termination contrary to public policy when the employer fired an employee who had a red flag on his credit report and had recently filed for bankruptcy.

Constantino Cipolla was first employed by HMS Host Corporation in September 1999 as an assistant restaurant manager. During his three years of employment, Cipolla received numerous promotions and at the time of his resignation, in August 2002, Cipolla was the manager of a busy restaurant in Times Square in New York City. One year later, Cipolla recommenced working for HMS as a store manager at the Trenton Airport under the direction of his former supervisor, with whom Cipolla had both a professional and a social relationship.

In the summer of 2002, HMS had instituted a policy of conducting background investigations and credit checks as a prerequisite to employment in a supervisory capacity. Ordinarily, an applicant was provided a job offer that was expressly contingent upon the successful completion of a background investigation and credit check and new employees were only permitted to attend orientation and training prior to the completion of the background investigation and credit check.

Because the HMS’ human resource manager was out on leave at the time of Cipolla’s hiring, Cipolla had completed training and began working for HMS at the airport prior to the completion of the required background investigation and credit check. Upon the human resource manager’s return, Cipolla was provided a backdated offer letter and informed that his employment was contingent upon a background investigation and credit check.

More than two weeks after Cipolla had started working in his new position, HMS received notice that Cipolla’s credit report generated a red flag, based upon late debt payments and a recent bankruptcy filing. Cipolla explained the circumstances related to his debts to his supervisor and produced documentation of his bankruptcy filing, which was forwarded to the human resources department and to a company vice president and a company senior vice president.

After reviewing the results of the investigation and the documents provided by Cipolla, all individuals with the authority to overturn the red flag reached independent decisions that Cipolla’s credit history exceeded the conditions necessary to overturn a red flag. Accordingly, Cipolla was terminated within one week of the return of the credit check results. Although the proffered reason for termination was Cipolla’s red flagged credit check, Cipolla brought suit alleging that he was terminated because he had filed for bankruptcy.

It is well established that the Bankruptcy Act prohibits a private employer from terminating a debtor-employee who has filed for bankruptcy, or from discriminating against him in any way with respect to his employment. In order to obtain relief, the Bankruptcy Act requires that any adverse employment action taken against the employee be “solely because” of the employee’s bankruptcy.

In this case, the Court found that, even assuming that Cipolla was an employee as defined by the Bankruptcy Act, Cipolla could not show that his bankruptcy filing provided the “sole reason” for termination. In support of this finding, the Court noted that of the 85 conditional employees whose credit checks had produced red flags, none of conditional employees had been hired by HMS. Further, 62 of the 85 applicants whose credit reports generated red flags had not filed for bankruptcy.

This decision reinforces the importance of both implementing and following comprehensive employment policies and procedures. The decision also highlights the deference a Court will pay to an employer’s consistent decision-making based on established company policy when that company is faced with discrimination claims.

REQUIRING EMPLOYEES TO GIVE NOTICE BEFORE TAKING PAID VACATION VIOLATES FMLA

A federal court in Pennsylvania ruled recently that requiring an employee to give two-weeks notice before taking paid vacation leave violated the Family and Medical Leave Act (FMLA). The FMLA provides employees with twelve weeks unpaid leave within a twelve month period (among other things) to care for a sick family member. The Act also permits employees to use accrued vacation time to obtain compensation during their FMLA leave.

The case, Solovey v. Wyoming Valley Health Care Sys.-Hosp., involved a nurse who took FMLA leave after her father’s health suddenly deteriorated. Ms. Solovey was paid for two days of her absence using available time off known as “family ill” days. However, the employer denied her request to use a portion of her paid vacation allotment to obtain compensation for the remaining days she was out. The employer argued that Ms. Solovey had not complied with the provision in the collective bargaining agreement requiring employees to provide two weeks advance notice before taking a vacation day in order to qualify for use of paid vacation time.

The FMLA provides that employees may elect (or employers may require eligible employees) to substitute any of the accrued paid vacation leave, personal leave or family leave of the employee for any part of the twelve-week period provided under the FMLA. While a collective bargaining agreement can grant more rights than those provided by the FMLA, it may not diminish FMLA rights. The Court found that the provision of the collective bargaining agreement requiring two weeks advanced notice diminished Ms. Solovey’s and other employees’ rights to use the paid vacation time when the need to use the time was not foreseeable two weeks prior to the time when the leave was needed. Therefore the provision in the collective bargaining agreement unlawfully interfered with or restrained the Employees rights guaranteed by the FMLA.

While policies requiring prior notice before utilizing paid vacation time are unlawful, the Court stated that a call-in provision in a sick leave policy does not violate the FMLA. According to the Solovey court, the purpose of the FMLA is not compromised by the call-in policy because it does not prevent nor discourage employees from taking FMLA. Those policies simply ensure that employees do not abuse their FMLA leave.

In light of the Solovey decision, employers should review their vacation leave policy – whether set forth in a collective bargaining agreement or employee handbook. Changes should be made to those policies so that any prior notice requirement will not prevent an employee from using paid vacation leave to obtain compensation during an FMLA leave.

RECENT SARBANES-OXLEY RULINGS CLARIFY AVAILABILITY OF RELIEF UNDER SECTION 304

In September and October of this year, a series of federal court opinions came down that limit the availability of relief for private litigants under Section 304 of the Sarbanes-Oxley Act of 2002.

Section 304 of the Sarbanes-Oxley Act provides that CEOs and CFOs of companies that have been required to issue a public restatement due to noncompliance with financial reporting requirements under federal securities laws, may, if the noncompliance was the result of “misconduct,” be required to personally forfeit any bonuses or similar forms of compensation (including equity-based compensation) that they received from the Company during a 12-month period. What has been unclear since the law was enacted, however, is whether the company (or, under the more likely scenario, its shareholders) had the right to file suit to seek enforcement of this provision against the Company’s senior officers once a restatement occurs. Unlike Section 306 of the Act (which provides private litigants the explicit right to file suit against Company officers to disgorge amounts earned through insider trading), Section 304 is silent on the issue of whether it affords a private cause of action.

On September 12, 2005, the United States District Court for the District of Colorado issued an opinion captioned In re Qwest Communications International, Inc., in which it held that a shareholder, bringing suit in an individual capacity, did not have standing to sue under Section 304 because it would be the Company, not the shareholder, that would be entitled to the forfeited proceeds. Several days later, on September 27, 2005, in Neer v. Pelino, the United States District Court for the Eastern District of Pennsylvania went further, rejecting a shareholder derivative action brought on behalf of the Company under Section 304 and holding that no private action existed under the Act. The Neer court ruled that the existence of an explicit private cause of action in an adjacent section of the Act (Section 306) showed that “when Congress wished to provide a private damages remedy, it knew how to do so and did so expressly.” The court also examined the language in Section 304 which gave the SEC an explicit right to “exempt” any Company officer from the forfeiture provision “as it deems necessary and appropriate.” By making enforcement of the provision subject to the SEC’s discretionary authority, the Neer court found no support for the argument that Congress intended Section 304 to be enforced by private litigants.

On October 31, 2005, just a month after the court’s opinion in Neer, the United States District Court for the Southern District of New York followed suit. In an opinion captioned In re Bisys Group Inc. Derivative Action, the court cited to Neer v. Pelino, and held that no private right of action existed under Section 304.

Prior to these rulings, no federal court had issued a definitive ruling on the issue, although more than one court had noted in passing that it was “doubtful” that Section 304 gave rise to a private cause of action. Although it is too soon to tell, these rulings may signal an inclination of the courts to narrow the availability of relief to private litigants (including relief sought via shareholder derivative lawsuits) under the provisions of Sarbanes-Oxley.

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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