Privately Held Corporations, Quirky Question # 140
Quirky Question # 140:
We have a small closely held company. Our owners are family members and a few close friends. Happily, our company has been increasingly successful. Unhappily, one of our executives does not seem capable of growing with the company. We have made a difficult decision to get rid of this at will employee. When we advised him of this decision, he said that because he felt he had been treated unfairly for some time, he had spoken with a lawyer. He also told us that he is not truly an “at will” employee and that we owe him higher duties. He claims we have breached the covenant of good faith and fair dealing. What is he talking about?
Roy’s Analysis:
There are a number of additional pieces of information I would need from you to be able to provide you a comprehensive response to your question. But, even without this data, I hope that I can point you in the right direction. There are some aspects about the fact pattern you described that cause me concern, and that likely will cause you some concern, as you will see from the observations below.
Before turning to the critical questions, let me make some general observations that nevertheless could be outcome determinative. First, as you likely know, there is not a federal law concerning the management of closely held corporations. Closely held companies are creatures of state law, and state laws on these issues are not uniform. Your first order of business, therefore, is to review (or have your attorney review) your state’s laws regarding closely held corporations. The degree of protection afforded your employee and the substantive and procedural rights he enjoys may be influenced significantly by these statutes and the judicial decisions interpreting these statutes. Second, even though there may be a relevant state statutory scheme, you also should explore your state’s common law to ascertain what rights are afforded your employee. As you likely know, some state statutory schemes supplant completely (or “preempt”) common law. But, in the area of closely held corporations, the preemption analysis may not apply at all or may apply only in part. Third, you did not mention in your question whether, at the time of its inception, your company established By-Laws, a Shareholder Agreement, or other fundamental corporate documents regarding the structure and governance of your company. If so, these documents could bear significantly on the rights of your majority and minority shareholders, including minority shareholders who are employees. Fourth, it is not clear from the information you provided whether your employee has a contract and whether that contract included any representations regarding duration of employment, or circumstances under which a discharge might be warranted. Fifth, your question does not really explain why you and others within your company have reached the conclusion that he is not capable of “growing with the company.” Has he engaged in misfeasance or some other wrongful conduct? Has he engaged in any conduct that clearly would justify a discharge “for cause”? Sixth, what types of feedback have you provided this employee regarding the performance deficiencies that you now have concluded warrant his termination? Keep in mind that procedural failings (e.g., no notice of his performance problems, no opportunity to rectify those problems, tolerance of the same type of problems in others, etc.) often can affect the analysis of the substantive correctness of your decision.
To recap these preliminary points: a) examine your state law on closely held corporations and the decisions interpreting your state’s statutory scheme; b) examine your state’s common law decisions that bear upon the rights of majority and minority shareholders, particularly those minority shareholders who also are employees; c) review your company’s origination documents, particularly those regarding the structure and governance of the company and any agreement describing shareholders’ rights; d) evaluate whether your executive has any contract (whether in writing or oral, including quasi-contractual arrangements) that would affect his employment rights; e) consider carefully the individual circumstances relating to this employee, focusing on why you have concluded that his performance no longer is adequate for your company; and f) assess whether you have provided adequate procedural (and substantive) guarantees for this employee.
With those preliminary observations in mind, let’s evaluate a few of the general principles that may affect your situation. In general, your employee is correct – by virtue of the fact that he is an executive in a closely held corporation, courts will hold your company to a higher standard than they would for an executive in a publicly traded company. In New York, for example, the Court of Appeals noted that the Legislature “has shown a special solicitude towards the rights of minority shareholders . . ..” In re Kemp & Beatley, Inc., 473 N.E.2d 1173, 1177 (N.Y. 1984). The courts in New York and elsewhere have emphasized the differences between shareholders in publicly traded companies and closely held companies. Owners of closely held corporations are held to the highest standards of fiduciary duty – honesty, loyalty, candor, and trust. Owners of closely held companies, and the duties they owe each other, have been compared to the relationships and duties owed among partners. Indeed, some courts have characterized closely held companies as “chartered partnerships.”
Courts also have noted that employees in closely held companies have different expectations than those in publicly traded companies. For example, in the Kemp & Beatley case cited above, the court observed, “”It is widely understood that, in addition to supplying capital to a contemplated or ongoing enterprise and expecting a fair and equal return, parties comprising the ownership of close corporation may expect to be actively involved in its management and operation.” Id. at 1178.
Quoting O’Neal, a leading commentator on closely held companies, the Court of Appeals, stated further,
“‘Unlike the typical shareholder in a publicly held corporation, who may be simply an investor or a speculator and cares nothing for the responsibilities of management, the shareholder in a close corporation is a co-owner of the business and wants the privileges and powers that go with ownership. His participation in that particular corporation is often his principal source of income. As a matter of fact, providing employment for himself may have been the principal reason why he participated in organizing the corporation. He may or may not anticipate an ultimate profit from the sale of his interest, but he normally draws very little from the corporation as dividends. In his capacity as an officer or employee of the corporation, he looks to his salary for the principal return on his capital investment, because earnings of a close corporation, as is well known, are distributed in major part in salaries, bonuses and retirement benefits.’” Id. (citation omitted).
As this analysis illustrates, courts and commentators view closely held companies differently than their publicly held counterparts. Moreover, employee shareholders are given special deference in terms of their treatment by the majority shareholders.
As noted above, states have their own independent statutes governing closely held companies. Many of those statutes discuss “oppression” of minority shareholders. Few of these statutes, however, define the word “oppression.” The question, therefore, is whether a minority shareholder/employee can argue that he has been “oppressed” if discharged. The NY courts have answered this question affirmatively. “A shareholder who reasonably expected that ownership in the corporation would entitle him or her to a job, a share of corporate earnings, a place in corporate management, or some other form of security, would be oppressed in a very real sense when others in the corporation seek to defeat those expectations and there exists no effective means of salvaging the investment.” 473 N.E.2d. at 1179.
The court held that assessing whether conduct was oppressive should be based on the complaining shareholders’ “reasonable expectations.” Id. The court stressed, “oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the venture.” Id.
Several key themes are evident from the many New York cases addressing these issues. First, oppression is judged in large part on the minority shareholder’s “reasonable expectations.” Second, the standard is objective, not subjective. Third, the expectations are not confined to the issue of dividends or valuation – expectations also may relate to an ongoing role in management, continued employment, and/or other facets of corporate involvement. Fourth, it is not enough for a minority shareholder merely to express “disappointment” with the majority’s decisions. (Again, as the Kemp court observed, “Majority conduct should not be deemed oppressive simply because the petitioner’s subjective hopes and desires in joining the venture are not fulfilled. Disappointment alone should not be equated with oppression.”)
As reflected in your question, you consider your employee to be employed “at will.” In general, absent a contract of employment defining the duration of employment and/or the grounds for discharge, a company’s employees are employed “at will.” This means that an employee may be discharged at any time, for any (legal) reason, or no reason at all, with or without notice. With few exceptions, this basic tenet of employment law has little to no applicability for a minority shareholder of a closely held corporation who also is an employee. As described above, both state legislatures and state courts have demonstrated “special solicitude” for the rights of the minority shareholder. This solicitude applies equally to the minority shareholder in his/her status as an employee.
This does not mean, however, that a minority shareholder/employee can never be terminated. Although the playing field is tilted decidedly in the employee’s direction, there are at least two alternative analyses that can justify a closely held company’s decision to terminate an employee shareholder. First, the courts have looked to the legitimate interests of the controlling, or majority, shareholders and their need to manage the company effectively. Second, the courts have assessed the terminations of shareholder/employees from the “good cause” perspective.
Even those courts that impose partner-like fiduciary obligations (good faith, candor, loyalty, etc.) on the majority shareholders have recognized that majority shareholders must have some flexibility to manage and run the company. These courts have concluded that the otherwise high standards of fiduciary duty cannot be used to stymie the legitimate actions sought by the majority shareholders, even if those actions have some adverse consequences for the minority shareholders. As explained by the Supreme Court of Massachusetts, “we are concerned that the untempered application of the strict good faith standard . . . will result in the imposition of limitations on the legitimate action by the controlling group in a close corporation which will unduly hamper its effectiveness in managing the corporation in the best interest of all concerned.” Wilkes v. Springside Nursing Home, Inc., 353 N.E.2d 657, 663 (Mass. 1976). The court identified several areas where the majority shareholders needed to maintain both control and flexibility: declaring or withholding dividends; deciding whether to merge or consolidate; establishing the salaries of corporate officers; dismissing directors without cause; and hiring and firing corporate employees.
The Wilkes court went on to establish a two-part analysis to evaluate actions taken by the majority shareholders that would benefit the corporation but arguably disadvantage the minority shareholders. First, the courts should examine “whether the controlling group can demonstrate a legitimate business purpose for its action.” Id. Second, the courts must “weigh the legitimate business purpose, if any, against the practicability of a less harmful alternative.” Id.
The question then becomes whether there is a less harmful alternative to discharging your executive. Perhaps you could provide him a chance to demonstrate that he too can grow with the company. Or perhaps you could provide him a “last chance” warning to demonstrate that he can meet your company’s legitimate performance expectations. Alternatively, another less harsh option would be to alter his position, possibly with a commensurate reduction of his salary. These alternatives are not risk free, especially for someone who, as he advised you, already has retained counsel.
The alternative analytical model that some courts have utilized is to require that the discharges of minority shareholder/employees meet a “good cause” standard. The notion simply is that there must be some circumstances under which a non-performing minority shareholder/employee can be discharged. For example, if an employee engaged in workplace violence, the company must be free to discharge him even if he is a minority shareholder. Conversely, however, if the employee merely engaged in periodic absenteeism or demonstrated performance deficiencies in some other non-material way, it is doubtful that good cause could be established.
The bottom line is that your employee does have rights that do not exist for most employees. Your majority shareholders owe the minority shareholder/employee significant fiduciary duties. Moreover, as the discussion above illustrates, these duties take your executive out of the “at will” context.
In addition, as long as your employee remains employed, he will have additional rights that should be honored scrupulously by your company. You should assume that your company’s future conduct will be scrutinized closely by your executive employee, his lawyer, and ultimately, the court. As difficult as it is to manage a current employee who is suing or threatening suit, as long as he is employed, you owe him significant obligations. [I did not ask whether your executive falls in the category of "family" that you referenced above, or whether he merely is a "close friend." If the former, the potential tensions could be exacerbated further.]
It is beyond the scope of this discussion to delineate all of the statutory and common law rights that may be available to your company. I will revisit those issues some time in the future. But you should familiarize yourself with the statutory requirements that may be imposed on your company with regard to this employee. Your failure to do so could enhance his argument that he is being treated unfairly by the company.
Implications of Gross v. FBL, Quirky Question # 139
Quirky Question # 139:
I know you’ve written about last year’s Supreme Court decision of Gross v. FBL. Does that holding have any application beyond the Age Discrimination in Employment Act?
Roy’s Analysis:
Your question – does last year’s Supreme Court decision of Gross v. FBL have implications beyond the Age Discrimination in Employment Act (ADEA) – is still playing out in the courts. But, the early indications are that the decision, decided on a close 5-4 vote, will be given broad interpretation and will be applied to statutes other than the ADEA.
Two preliminary observations are appropriate. First, the Gross decision is somewhat complicated, involving a re-examination of the high court’s Price Waterhouse “mixed motive” plurality decision and evaluatiing the consequences of the 1991 amendments to Title VII. (For an analysis of the Gross decision, use the “View By Topic” tab to the upper right and scroll down to “Age Discrimination;” then scroll down to the article regarding Gross.) Second, by way of disclaimer, I have not made an exhaustive search of all cases citing Gross to ascertain whether there is uniformity among the federal circuits with regard to how it is being interpreted. Given this fact, the discussion below is limited in scope. (To the extent that you are confronting a mixed-motive or “but for” issue in a non-Title VII case, you should conduct that legal research promptly.)
Before turning to your question, let’s briefly review the Gross holding to ensure that we are on the same page. Gross involved an interpretation of the ADEA and examined the question of whether the ADEA should be interpreted consistently with Title VII, the anti-discrimination statute enacted in 1964 during the Civil Rights movement. The Supreme Court majority concluded that the ADEA should not be interpreted in the same way as Title VII for three primary reasons.
First, following the 1989 Price Waterhouse decision (a confusing plurality opinion in which different justices articulated various rationales for the holding), Congress amended Title VII by passing the Civil Rights Act of 1991. The Civil Rights Act of 1991 codified certain portions of Price Waterhouse and made statutory changes amending other portions of the decision. Specifically, consistent with the decision, the amended statute included a provision that expressly deemed unlawful any employment practice motivated by Title VII’s protected criteria “even though other factors also motivated the practice.” In contrast, deviating from the Court’s holding, Congress added a provision that authorized limited relief to a plaintiff (inluding injunctive relief and attorneys’ fees) even if the employer was able to demonstrate that it would have made the same decision in the absence of any illegal motive.
Second, Title VII and the ADEA used different language on the issue of mixed motive decision-making (i.e., situations where an employer acts in part on the basis of a prohibited criterion – e.g., an individual’s race, sex, etc. – and in part on a legitimate criterion – e.g., an individual’s failure to meet the employer’s performance expectations). Whereas Title VII authorized a recovery for decisions based on a mixture of illegitimate and legitimate criteria, the ADEA does not, only prohibiting discrimination “because of” an individual’s age. The Gross Court interpreted the “because of” language to mean that age must be the “reason” for the employer’s decision, i.e., “a plaintiff must prove that age was the ‘but-for’ cause of the employer’s adverse decision.” Showing that the age was a “motivating factor” but not the “determinative” factor is insufficient to establish a claim of age discrimination.
Third, the high court placed considerable emphasis on the fact that when Congress passed the Civil Rights Act of 1991, amending Title VII to, among other things, address the mixed-motive context, the Court did not amend the ADEA. One can argue about whether Congress’ failure to amend the ADEA or other anti-discrimination statutes at the time it amended Title VII reflected an intent to treat the statutes inconsistently, was grounded on the belief that the courts would treat these largely similar statutes in the same way, or was merely sloppy statutory modification. Whichever explanation may be true, however, the resulting language of the anti-discrimination statutes is somewhat different and five of the current Supreme Court justices have seized upon these differences to give the statutes different meanings.
The bottom line is that the nation’s anti-discrimination statutes now have potentially significant different interpretations, based on the differences in statutory language. I leave to you to assess whether it makes sense to have one set of standards for race or gender discrimination claims and another set of standards based on identical discriminatory conduct for age discrimination. As I pointed out previously in my analysis of the Gross decision, from a practical standpoint, this situation is further complicated because often, plaintiffs assert claims involving more than one type of discrimination (e.g., race and age, gender and age, etc.). In my view, clearly instructing a jury on the different standards which they must apply and ensuring that they interpret those instructions correctly will be a challenge.
Your question addresses whether the differences referenced above between Title VII and the ADEA, as a result of the Gross decision, have been extended to any other statutes. Recently, the Seventh Circuit applied the same analysis articulated by the Supreme Court in Gross to the Americans with Disabilities Act (ADA). See, Serwatka v. Rockwell Automation, Inc., No. 08-4010 (January 15, 2010). In Serwatka, the plaintiff alleged that she was discharged by her employer because Rockwell regarded her as being disabled. The jury found that the employer discriminated against Serwatka on the basis of her perceived disability, but also found that her employer would have discharged her even if it did not perceive her as disabled.
The District Court treated the jury’s findings as a “mixed motive” determination, concluding that Rockwell’s discharge decision was based on both legal and illegal motives. Because the trial court viewed the jury’s findings as reflective of a mixed motive determination, the Court analogized to the Title VII context and reduced the plaintiff’s damages to zero. Because Zerwatka was entitled to other types of mixed motive relief, however, again relying on the parallel Title VII analysis, the court granted Zerwatka declaratory and injuctive relief and awarded her a portion of the attorneys’ fees and costs she had incurred (of the $153,290 fees and costs that were first awarded, the court allowed $30,658).
While complimenting the lower court’s analysis, the Seventh Circuit reversed in light of the intervening Gross decision. The Seventh Circuit zeroed out the plaintiff completely. Comparing the ADA’s language to Title VII (just as the Supreme Court did with regard to the ADEA in Gross), the Seventh Circuit found that the ADA’s language was similar to the ADEA’s, not Title VII’s. As noted by the Court, the ADA states “no covered entity shall discriminate against a qualified individual with a disability because of the the disability . . .” Given that the ADA has the same “because of” language found in the ADEA, the appellate court found that the “but for” analysis set forth in Gross applied. Likewise, the ADA did not have a mixed motive provision provision that was akin to that found in Title VII as a result of the Civil Rights Act of 1991.
As the Seventh Circuit summarized, “Like the ADEA, the ADA renders employers liable for employment decisions made “because of” a person’s disability, and Gross construes “because of” to require a showing of but-for causation. Thus, in the absence of a cross-reference to Title VII’s mixed motive liability language or comparable stand-alone language in the ADA itself, a plaintiff complaining of discriminatory discharge must show that his or her employer would not have fired him but for his actual or perceived disability; proof of mixed motives will not suffice.”
Curiously, as the appellate court aknowledged, the ADA itself was amended in 2008, effective January 1, 2009, modifying the “because of” language to “on the basis of” language. The court found it unnecesary to consider whether this language change mandated a different analysis since Serwatka had been discharged in 2004, several years prior to the statutory modification.
The bottom line is that at least one federal circuit court has interpreted the pre-amendment version of the ADA to fall within the Gross analysis. In short, a plaintiff may not bring a mixed motive claim under the ADA, just as a plaintiff may not bring a mixed motive claim under the ADEA. Rather, an ADA plaintiff must show that the actual or perceived disability was a “but for” cause of the adverse employment action.
Note, however, as I discussed in my description of pending federal employment legislation (Quirky Question # 135), Congress is considering the Protecting Older Workers Against Discrimination Act, a statute that essentially would legislatively reverse the Supreme Court’s holding in Gross. Whether that legislative effort will be successful remains to be seen. Whether it will be expanded to sweep in the ADA as well also is difficult to predict. Again, however, it seems odd that identical conduct would be treated completely differently based exclusively on the protected class to which the plaintiff belongs. In my view, there should be uniformity among the major federal anti-discrimination statutes.
Supreme Court Decisions, (Non)-Quirky Question # 138
Quirky Question # 138:
I saw you recently described some legislation pending before Congress that could affect the employment relationship. I have a similar non-quirky question – what cases are before the U.S. Supreme Court that bear upon the employment relationship?
Roy’s Analysis:
In 2009, the U.S. Supreme Court rendered a number of important decisions involving employment issues (Crawford – retaliation issue; Gross – age discrimination; Ricci – affirmative action; 14 Penn Plaza – arbitration of discrimination claims in union context). While 2010 may not bring decisions of comparable significance from the nation’s high court, there are a number of cases before the Supreme Court that could be important to employers and employees alike. We are monitoring four cases in particular.
In City of Ontario vs. Quon (review granted on December 14, 2009), the Court is considering several inter-related employee privacy issues. The facts of the case are relatively straightforward. The City of Ontario police department provided pagers to certain employes, including members of its SWAT team. The City did not have an official policy regarding text messaging with the pagers but did have a policy providing that information sent via email on City communications systems was not confidential. However, at least one official in the Department allowed the employees to use the pagers for personal use. The City conducted an audit of employees who regularly exceeded monthly character limits on their pagers. During this audit, the City reviewed the transcripts of the texts sent on the pagers.
As a result of this audit, the City’s employees brought suit against the City for conducting an unreasonable search under the Fourth Amendment. The Ninth Circuit held that the search was unreasonable.
The Supreme Court is reviewing three issues:
a) Does a SWAT team member have a reasonable expectation of privacy in messages transmitted on his SWAT pager, when police department has official no-privacy policy but non-policymaking lieutenant announced informal policy of allowing some personal use of pagers?
b) Did Ninth Circuit contravene the Supreme Court’s Fourth Amendment precedents and create circuit conflict by analyzing whether the police department could have used “less intrusive methods” of reviewing text messages transmitted by SWAT team member on his SWAT pager? and,
c) Do individuals who send text messages to SWAT team member’s SWAT pager have reasonable expectation that their messages will be free from review by recipient’s government employer?
The Supreme Court’s resolution of these issues should be instructive both for public and private employers and should provide employers some guidance regarding employees’ privacy rights with respect to employer issued electronic devices and electronic media.
Another case we’re monitoring is Lewis v. Chicago (oral argument occurred on Feb. 22, 2010). Lewis is another case involving a test that had a disparate impact on minority applicants for firefighters; though the issue in Lewis focuses on the timeliness of the Charges of Discrimination. The Seventh Circuit held that the plaintiffs’ EEOC charges were untimely because the applicants were required to file their charges within 300 days after they learned that their test scores had placed them in the “qualified” category, and that the city would only be hiring “well-qualified” applicants.
Plaintiffs filed their administrative charges 420 after learning those facts, but within 300 days of the City actually beginning to hire the “well-qualified” applicants. The question presented in Lewis is: When an employer adopts an employment practice that discriminates against African Americans in violation of Title VII’s disparate impact provision, must a plaintiff file his/her EEOC charge with 300 days after the announcement of the practice, or may a plaintiff file his/her charge within 300 days after employer’s use of discriminatory practice?
Here, too, the Supreme Court’s analysis is very likely to have ramifications beyond the public employer context and should help define the appropriate statute of limitations with regard to discriminatory practices that are announced but not immediately implemented or put into practice.
A third case before the nation’s high court is Rent-A-Center West Inc. v. Jackson (review granted Jan. 15 ,2010). In Rent-A-Center West, an employee brought suit against his employer under § 1981 alleging race discrimination and retaliation. The employer had an arbitration agreement in place that governed discrimination claims. Based on this agreement, the District Court granted the employer’s motion to dismiss and compel arbitration, notwithstanding the employee’s argument that the arbitration provision was unconscionable. The Ninth Circuit reversed, holding that whether a mandatory arbitration provision within a larger contract is “unconscionable” is for a court , and not an arbitrator, to decide.
The specific question presented in the Rent-A-CenterWest case is whether a district court is required in all cases to determine claims that an arbitration agreement subject to the Federal Arbitration Act is unconscionable, when the parties to the contract have clearly and unmistakably assigned this ‘gateway’ issue to the arbitrator for decision? The decision has significance for any employer that uses mandatory arbitration agreements with its employees because it has the potential for shifting the issue of unconsionability from the arbitral to the judicial forum.
The last case currently before the U.S. Supreme Court that we’re monitoring is Granite Rock Co. v. Int’l Bhd of Teamsters (oral argument occurred on Jan. 19, 2010). This case focuses on the interaction between a local and international union, and implicates additional arbitration issues.
In Granite Rock, the employer sued the local union and international union under Section 301(a) of the Labor Management Relations Act (LMRA) claiming that (1) the international union tortiously interfered with a collective bargaining agreement (CBA) between the employer and the local union, and (2) the local union breached the CBA by going on strike. The Ninth Circuit held that the employer failed to state a claim under Section 301(a) against the international union because the tortious interference claim did not “arise under” the CBA between the employer and the local. The Court also held that the entire dispute between the employer and local union should go to arbitration because both parties consented to arbitration whether or not CBA had been ratified: the employer by suing under the contract and the union by moving to compel arbitration.
The two specific questions presented are:
a) Does a federal court have jurisdiction to determine whether a collective bargaining agreement was formed when it is disputed whether any binding contract exists, but no party makes an independent challenge to the arbitration clause apart from claiming it is inoperative before the contract is established?
b) Does Section 30l(a) of the LMRA, which generally preempts otherwise available state law causes of action, provide a cause of action against an international union that is not a direct signatory to the collective bargaining agreement, but effectively displaces its signatory local union and causes a strike, breaching a collective bargaining agreement for its own benefit?
While these issues may not be critical to non-unionized employers, for employers with employees working pursuant to a collective bargaining agreement, the decision has the potential to clarify some important issues affecting the employer/unionized employee relationship.
As we all have seen in the last 12 months, the U.S. Supreme Court is ideologically divided. We will have to see how the complex issues described above play out in the Court but if one made predictions solely on the basis of parties and ideology, one might predict the following outcomes:
Quon: Employer wins; no violation of employees’ Fourth Amendment rights against unreasonable search and seizure by public employer’s review of text messages sent on pagers;
Lewis: Employer wins; charges untimely because they were not filed within 300 days of the adoption of the policy;
Rent-A-Center West: Employer wins; the issue of the unconscionability of an arbitration agreement should be decided in the first instance by the arbitrator, not the federal courts; and,
Granite Rock: Employer wins (but likely not on all issues). It’s hard to imagine that this high court is going to do any favors for the labor movement.
We’ll see how these cases are decided within the next several months and you can assess whether my predictions, based largely on the general ideology of the majority of the Court, were accurate or misguided. As the Court renders its decisions on these four cases, we will provide you additional analyses to ensure that you understand the decisions and their practical consequences.
Pregnancy Discrimination, Quirky Question # 137
Quirky Question # 137:
Our company recently hired a woman to manage our clean room. This job is critical to our business and we spent a great deal of time finding someone who we thought would be the right person for bringing a new product to market on a critical time path. In addition to supervising the employees in the room, she is also required to work alongside them. Some of what she is required to do involves heavy lifting, and certain steps in the process involve potentially toxic chemicals. Imagine our dismay when she announced only two weeks into the job that she was three months pregnant. She didn’t say anything about this during the interview. We are worried about our legal exposure if she is injured, but also the project may be negatively impacted if she is gone for an extended period of time, and who knows if she’ll come back once the baby is born. She is an at-will employee. Can’t we just fire her now before we invest any more time in training her?
Karen’s Analysis:
[Readers: Quirky Question # 137 was posed to my colleague, Karen Wentzel, in our Palo Alto office. If you have any questions about QQ # 137, please do not hesitate to contact Karen at wentzel.karen@dorsey.com, or via phone at 650.843.2708. Additional information regarding Karen is available at: http://www.dorsey.com/wentzel_karen/. Regards, Roy]
This is a composite of questions I’ve been asked over the past few months. While you may have sympathy for the employer’s plight here, if you think the response should be – “Go ahead and fire her!” – you may soon be joining the ranks of defendants in discrimination lawsuits. The example points out the importance of not stereotyping your employees based on what you think is best for them, even if you do have the best of intentions.
First, to review the basics as we’ve done here before (use the “View By Topic” tab to the upper left and scroll down to Joint Employer Liability, Quirky Question # 70): California law, like the federal Title VII, prohibits discrimination on the basis of sex. Under California law, sex is defined to include pregnancy, childbirth, or medical conditions related to pregnancy or childbirth. What this means is that, as with other protected categories under state and federal law, it is important that an employer not take any adverse employment actions against a worker “because of” her pregnancy. An adverse employment action can include something drastic, as in this example, terminating the person’s employment, but in some circumstances also could include taking other less drastic measures. For example, the U.S. Supreme Court has pointed out that changing a woman’s schedule so she can no longer pick up her kids on time can be an adverse employment action if taken in retaliation for the woman sticking up for her rights.
In addition to prohibiting discrimination on the basis of pregnancy, California law also requires an employer to provide up to four months’ leave for a woman disabled by pregnancy. Further, under California law, the employer is required to transfer a woman to a less strenuous or hazardous position for the duration of her pregnancy if she so requests, with the advice of her physician, and if the transfer can be reasonably accommodated.
While the employer in our example might think that it is doing the employee a favor and “protecting her” while doing what it thinks is best for its business, the courts (and juries) will likely see it differently. In a case before a California appellate court just last year, Sasco Electric v. California Fair Employment & Housing Commission (2009) 176 Cal.App.4th 532, the employer appealed an award of back pay plus over $100,000 in emotional distress and punitive damages in favor of an employee who was fired after becoming pregnant. The woman, Zibute Scherl, was hired as a deckhand on a corporate yacht used to entertain clients. She had extensive experience as a deckhand and second captain on a variety of other boats, and was licensed by the U.S. Coast Guard as a Merchant Marine. Within nine months, she had been promoted to second captain. The captain of the boat described her as “the hardest working, responsible, boat savvy individual to work with me during my seventeen years on this vessel.”
Shortly after being promoted, she married. When the executive director of the company congratulated her on her marriage, he reportedly told her, “Whatever you do, don’t get pregnant.” When she became pregnant a few months later, the captain of the boat expressed his disappointment because “in his experience, mothers do not want to work in the boating business,” and he was worried about liability based on her exposure to chemicals and fumes as well as the potential that she might slip and miscarry. He demanded that she get a release from her doctor to continue working.
Scherl asked her doctor for a release, which he provided, stating that she was not incapacitated and did not have any work restrictions associated with her pregnancy at that time. Her physician noted that once her pregnancy was further along, she should not work where she could get knocked over, and should not be out to sea for several days at a time. Even before she could submit the release to her employer, however, the company conducted a sudden reduction in force and she was laid off. The captain admitted that he chose her for lay off because he was “concerned about her still being cavalier about working on the boat for too long when she was pregnant,” and he told another crew member that the boat was unsafe for a pregnant woman. Not long after this supposed reduction in force, the captain hired a new crew member with no prior experience, and brought back another employee who had been laid off. Scherl sued. The California Fair Employment and Housing Commission found she had been terminated because of her pregnancy, and awarded her damages.
The employer appealed, but the appellate court took no time upholding the award, finding there was substantial evidence that Scherl was terminated because of her pregnancy, that the supposed reduction in force was pretextual, and that her back pay damages were appropriate because she was not disabled at the time she was chosen for lay off. The appellate court also found that the company provided no evidence that she could not have been reasonably accommodated by a temporary transfer to a less strenuous or hazardous position.
The company’s short-sighted decision in this case – to conclude that they knew better than Scherl and her doctor what was best for her – not only led to an expensive lawsuit, but also the loss of “the best [worker the captain] had ever seen” in that job.
So what about our example? The employer can certainly request that the recently hired woman provide a doctor’s note about any possible restrictions on her ability to work, particularly as to heavy lifting and exposure to toxic chemicals. Once armed with this information, the employer can evaluate whether the restrictions, if any, can be reasonably accommodated for the period of time the employee is disabled by pregnancy. There may be situations in which no accommodation is possible (for example, if a woman is hired to do a specific job taking place in a certain timeframe when she will now be out on leave and there are no other jobs available), but these will likely be few and far between.
When the company hired the person in our example, they identified her as the best person for the job. That did not change when she became pregnant. Making decisions about her future employment based on stereotypes about what a woman will or won’t do during or after her pregnancy, even if done with the best intentions, is a slippery slope that very well may lead to costly litigation and the loss of a good employee. Proceed with caution.
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