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Facing Up to Obama

Of all the perceived threats to doing business under the current administration, pay issues take top billing among lawyers on HRE's exclusive list of the nation's top employment attorneys for 2010.

Wednesday, June 16, 2010
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It's a brave new world for HR under the Obama administration.

In a sharp departure from the Bush years, employment practices are under intense scrutiny on nearly every front, from overtime issues to the classification of workers to mandatory arbitration.

At the same time, the financial risk to companies that lose in court has become significantly higher. Plaintiffs' attorneys -- encouraged by recent court decisions and by Obama-administration policies -- are increasingly filing large class-action suits, especially in the area of pay.

"From the HR perspective, the No. 1 threat a business faces today is a wage-and-hour class-action lawsuit," says Garry Mathiason, a senior partner at San Francisco-based employment law firm Littler Mendelson. "There is no question HR has a war going on."

Mathiason is one of Human Resource Executive®'s Most Powerful Employment Attorneys for 2010, a list prepared exclusively for the magazine by Lawdragon, a Los Angeles-based networking site for lawyers and clients. Mathiason and other attorneys on the list were asked to talk about the impact of the Obama administration on the workplace, and how HR should respond.

While the administration has taken a largely pro-employee stance that has a wide range of implications for HR, many attorneys agree the alarm bells should be ringing the loudest over how workers are being paid for what they're being asked to do.

"We're going to have a blizzard of these class-action lawsuits for the next two years until we get on top of it," says Mathiason. "If HR executives already have it as their first priority, [they should] make it their triple-first priority."

Mike Delikat, the global head of the employment practice group at Orrick

in New York, says employers are facing a variety of pay-related challenges at once -- not just from the administration's policies, but from its support of legislation.

Added to that is last month's $250 million punitive-damage award that a federal jury levied against Novartis Pharmaceutical Corp. -- the U.S. arm of the Swiss drug maker -- for alleged gender discrimination, and the recent U.S. Court of Appeals' decision to uphold the certification of a class-action lawsuit affecting at least 500,000 Wal-Mart employees. Both, Delikat says, will encourage plaintiffs' attorneys to pursue larger and larger class-actions.

"It's a perfect storm that indicates an expansion of employee rights and increased employer liability in the workplace," says Delikat. "HR needs to be out in front on all of this."

One of the key areas of focus by the administration, say management attorneys, is overtime -- both in who should get it and the circumstances in which it should be paid.

Theodore O. Rogers Jr., a partner at Sullivan & Cromwell in New York, says a clear sign of things to come is the Department of Labor's recent conclusion that mortgage-loan officers are not exempt from being paid overtime.

Under the Fair Labor Standards Act, employees are generally considered exempt if their work is related to the management and general business operations of the company, and their work involves the use of discretion and independent judgment.

The Labor Department's Wage and Hour Division concluded that mortgage-loan officers don't meet those criteria because their primary job is to sell loan products. That decision, says Rogers, suggests that the Wage and Hour Division will be closely examining how other types of workers are classified -- greatly expanding the risk of litigation.

Already, says Rogers, "the plaintiffs' bar is bringing many cases on this issue. Almost every day there is another class-action suit by workers who think they should be paid overtime."

Rogers recommends that human resource leaders take a close look at their organization's job categories, and make sure employees doing the same type of work are treated the same -- they're either all exempt from overtime, or all eligible. HR should look for disparities, such as cases where newer employees are eligible for overtime, but more senior ones are not.

"The important thing is to be internally consistent," he says.

At the same time, HR should make sure that the overtime policies for each category are in accordance with Department of Labor regulations (written before Obama took office), and can be adequately defended if challenged in a lawsuit.

There are other overtime powder kegs, such as calculating the "regular rate of pay" when considering overtime. Employers often fail to consider non-discretionary bonuses -- usually made available to an entire team and tied to specific goals.

"Many HR people are not factoring that in," says Mathiason, and so employers may be underpaying overtime -- which could come back to haunt them.

Another danger: The Department of Labor is cracking down on what it considers an abuse of the statute that exempts outside salespeople from overtime. The government contends that many outside salespeople should be reclassified as nonexempt inside sales representatives.

Mathiason warns that, even if employers correctly classify inside salespeople, they can still face class-action suits if they don't factor in commissions when paying overtime to certain workers -- especially those who are not in retail or service establishments, and who earn more than 50 percent of their compensation from commissions.

"This is a landmine that will explode for many employers because they often get it wrong on commissions," he says.

Even more consequential is the Obama administration's scrutiny of workers who are classified as independent contractors -- but should be considered employees.

Many employers may not be doing enough to protect themselves from lawsuits and government enforcement in this arena, say management attorneys.

Rogers suggests that employers pay close attention to their IT workers. Often, he says, a company will use IT workers who are independent contractors to build a new computer system, and then keep them on for a long time without giving them employee status. This is complicated by the fact that many of these workers prefer independent-contractor status -- but that doesn't protect the employer, he says.

Employers should look closely at all independent contractors who have worked for the company for an extended period, and who have the characteristics of employees -- two of the tests of employee status -- and find the reason for their classification, says Rogers.

Some companies, he says, have a hard policy in place that any workers who have been on-site for more than six months must be considered employees, unless special permission to be independent contractors has been granted after review.

Employment attorneys emphasize that, unlike in the past, employers cannot afford to underestimate the possible consequences of alleged employment violations. With the upsurge in class-action suits, the risk is too high.

New Sheriff in Town

This is particularly true in discrimination cases not only in pay, but in promotions, layoffs and other cases.

The danger was dramatically demonstrated by the verdict against Basel, Switzerland-based Novartis.

"Very few of these class-actions go to a full trial and a jury verdict because many are settled after class certification," says Delikat. "This is the largest punitive damage award by a jury in a discrimination case, and should demonstrate to employers that there can be significant liability in disparities in pay and promotion."

At the same time, the U.S. Equal Employment Opportunity Commission under Obama has been far more aggressive in pursuing alleged discrimination and -- in a shift from the Bush administration -- is now joining class-action suits, says Mathiason. Because it's easier for the government to get a class-action suit certified, this means that employers can face a much wider exposure in discrimination cases.

"The EEOC is joining the party," says Mathiason. "Obama has said he considers this an excellent way to enforce antidiscrimination laws."

The EEOC is also looking harder for evidence of discrimination in job categories. According to Rogers, EEOC officials are closely examining the annual EEO-1 reports that employers must file with the agency. If they find that an employer has a lower level of a particular group in a job category -- when compared with the industry as a whole -- the agency may start an investigation, without waiting for a complaint.

"They're saying they're going to act more aggressively to investigate on their own," says Rogers.

He notes that the Office of Federal Contract Compliance Programs -- which makes sure federal contractors don't discriminate -- is much more active in this area under Obama.

The administration's stance toward employment practices extends to other areas, including unions and mandatory arbitration (see sidebar).

And the impact comes not just from the administration's policies, but from its support for legislation. Again, according to employment lawyers, that can most clearly be seen in the issue of pay.

They contend the Lilly Ledbetter Fair Pay Act, signed by Obama shortly after he took office, was only the beginning. That law, which extends the statute of limitations for pay violations, has major implications for employers because it allows workers to claim damages for alleged disparities many years in the past.

Also of concern to employers, the attorneys say, is the proposed Paycheck Fairness Act. The bill, supported by the president, updates the Equal Pay Act of 1963, which prohibits discrimination in pay based on gender.

The new legislation would expand that to race and national origin, and puts far more burden on the employer to show that pay disparities are based on other factors, says Jeffrey S. Klein, a partner in the New York office of Weil, Gotshal & Manges.

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Klein cites an example of how the bill -- which was passed by the House of Representatives last year -- could complicate life for HR executives.

Say a business unit of a company takes on two new people with comparable experience -- one, a man who has been transferred laterally; the other, a woman hired from the outside. The woman was making considerably less than the man in her prior job and, even with a 15 percent increase in salary as a recruiting incentive, is still paid much less than the man. Under the Paycheck Fairness Act, says Klein, the onus would be on the employer to show that the disparity was not on account of gender.

The bill holds two other perils for employers: It would make it easier to bring class-action suits in such cases, and would make employers liable for punitive damages in addition to compensatory damages.

Possible new legislation such as this, along with the now-passed Lilly Ledbetter Fair Pay Act, means HR leaders need to be far more aggressive in how they handle pay issues, says Klein.

"They should make sure they have objective criteria around wage rates, salaries for new hires, compensation adjustments with promotions," and other pay-related matters, Klein says.

"There should also be consistency across the organization with respect to the criteria of hiring for the same type of job in different branches or business units."

Because the Ledbetter Act expanded the statute of limitations on pay violations, HR leaders may find themselves defending decisions made years earlier by people who have since left the company, says Klein. This means HR professionals should do more to document the reasons such decisions were made.

Evaluate the Evidence

HR leaders also should think about whether to save such documentation, and for how long. While they can help defend against a lawsuit, says Klein, "one of the risks of keeping them is that you may be asked for them." The key is to be consistent, so the company is not accused of selectively retaining documents to protect itself.

In the face of the increased risk of class-action lawsuits -- in wage-and-hour, discrimination and other employment issues -- management attorneys recommend that HR thoroughly review its policies and practices. But, they emphasize, any written conclusions or recommendations, or any corrective actions, should be done through lawyers, so they will have the protection of attorney-client privilege.

The danger is that if an HR leader writes a memorandum about a pay disparity, it could come back to haunt the company in a lawsuit. If the memo is written to an attorney, however, it will more likely be protected.

"HR needs to take reasonable steps to identify any disparities, but you have to make sure it will be shielded," says Delikat. "If auditing is done, the data will be discoverable, but the attorney-client privilege should cover the analysis."

Because pay issues are so risky for HR these days, some employment lawyers suggest companies provide wage-and-hour training for both managers and employees. They say such training helps employees understand why, for example, their company needs to offer lunch breaks, and helps managers to understand their duties and obligations to workers.

Live or online wage-and-hour training can go a long way in providing companies with protection -- particularly in helping prevent complaints from triggering class-action lawsuits, according to the attorneys.

They note that according to the Department of Labor and court decisions, wage-and-hour training can be a defense against an allegation that the employer willfully violated the law. If such a claim is proven, employees can receive "liquidated" or double damages for lost or unpaid wages. Willful violations also extend the statute of limitations from two years to three.

The Department of Labor has been studying whether to make wage-and-hour training mandatory, but Mathiason says employers shouldn't wait.

"It's like an insurance policy that dramatically increases the likelihood of an affirmative defense," he says.

See also:

The 2010 Most Powerful Employment Attorneys

Federal Compliance Issues

When Social Networking and the Workplace Collide

Avoiding Class-Actions and Winning in Court

Arbitrating Workplace Disputes

Other Trouble Spots

The Selection Process, Take Three

(Editor's Note: This special advertising section profiles some of those attorneys selected for inclusion in the Most Powerful Attorneys of 2010.)

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