Monthly Archives: April 2014

April 23, 2014

Nevada Medical Marijuana – Reasonable Accommodation By Employers May Be Required

By R. Calder Huntington 

Stoned employees.  Positive drug tests.  Nevada employers don’t need to accommodate employees who use medical marijuana, right?  Not exactly.  As of April 1, 2014, employers have an obligation in certain circumstances to make reasonable accommodations for the medical needs of an employee who holds a valid medical marijuana registry card.  Last year’s Senate Bill 374 amended Nevada’s existing medical marijuana law in numerous ways that significantly affect businesses with Nevada employees. 

Nevada Employers May Prohibit Marijuana Use in the Workplace 

Senate Bill 374 amended section 453A.800 of the Nevada Revised Statutes to clarify how the use of medical marijuana should be addressed in the workplace.  Before the amendment, the statute stated that the medical marijuana law does not require any employer to accommodate the medical use of marijuana in the workplace.  SB 374 revised this provision to read that the law does not require any employer to allow the medical use of marijuana in the workplace.  

This change results in a greater restriction on employers.  It essentially means that employers do not need to permit employees with valid medical marijuana cards to smoke marijuana or eat ingestible marijuana products on company premises or while working.  Without specifically saying so, this provision appears to allow employers to terminate or discipline employees who use marijuana in the workplace, even if the employee is using marijuana legally under Nevada’s medical marijuana law. 

But what about employees who legally use marijuana for medical reasons just before coming to work?  What if an employee does not use marijuana at work but tests positive for cannabis in a work-related drug test?  The parameters of how employers should address these issues has become murkier in Nevada, thanks to a new obligation on employers to make reasonable accommodations for the medical use of marijuana in certain circumstances. 

Nevada’s Marijuana Workplace Accommodation Requirement 

Senate Bill 374 also amended the medical marijuana law to state that an employer is not required to modify the job or working conditions of a person who engages in the medical use of marijuana when the job requirements or working conditions at issue “are based upon the reasonable business purposes of the employer .…”  However, the statute goes on to require that employers must attempt to make reasonable accommodations for the medical needs of an employee who holds a valid registry identification card and uses marijuana for medical purposes, provided that such reasonable accommodation would not:

            (a) Pose a threat of harm or danger to persons or property or impose an undue hardship on the employer; or

            (b) Prohibit the employee from fulfilling any and all of his or her job responsibilities. 

Employers are familiar with the concept of reasonable accommodations under the Americans with Disabilities Act (ADA).  It is possible that the undue hardship exception under Nevada’s medical marijuana law will require an analysis of the same or similar factors that are analyzed under the ADA’s undue hardship exception.  Such factors include, but are not necessarily limited to:

    • the nature and cost of the accommodation needed;
    • the overall financial resources of the facility making the reasonable accommodation; the number of persons employed at this facility; the effect on expenses and resources of the facility;
    • the overall financial resources, size, number of employees, and type and location of the employer’s facilities (if the facility involved in the reasonable accommodation is part of a larger entity);
    • the  employer’s type of operation, including the structure and functions of the workforce, the geographic separateness, and the administrative or fiscal relationship of the facility involved in making the accommodation to the employer; and
    • the accommodation’s impact on the facility’s operation.

It is unclear, however, whether the “threat of harm or danger to persons or property” is the same as the ADA’s “direct threat” defense.  In addition, Nevada’s exception to making a reasonable accommodation because it would prohibit the employee from fulfilling “any or all of his or her job responsibilities” is different from the ADA’s “essential job functions” requirement.  It remains to be seen how this reasonable accommodation requirement will play out in practice and in the courts.

Compliance Steps for Employers

To comply with the newly effective law, Nevada employers should review their policies and practices related to drug testing and medical marijuana use.  On-duty and on-site marijuana use may be prohibited but off-duty use pursuant to a valid medical marijuana registry card requires additional analysis before an employer should take an adverse employment action.  Consider whether you need to implement an interactive reasonable accommodation process to address employee use of medical marijuana outside the workplace.  Be sure to train managers, supervisors and human resource professionals on this new reasonable accommodation obligation.  Finally, stay abreast of this issue as we are likely to see some “failure to accommodate” cases being filed in the years ahead.

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April 16, 2014

EEOC Loses Kaplan Credit Check Appeal

By Brad Cave 

In 2010, the Equal Employment Opportunity Commission (EEOC) sued Kaplan Higher Education Corporation, claiming that Kaplan’s use of credit reports had a disparate impact on black applicants.   The trial court threw out the EEOC’s suit because it used an invalid method for determining the race of Kaplan’s applicants. The EEOC appealed, and lost again.  In a stinging opinion, the Sixth Circuit Court of Appeals agreed with Kaplan and rejected the methodology promoted by the EEOC’s expert witness.  The Sixth Circuit’s opinion dooms the agency’s background check disparate impact lawsuit against Kaplan and slaps the EEOC for suing a private employer “for using the same type of background check that the EEOC itself uses.”  The ruling also illustrates the EEOC’s failure to show that an employer’s use of neutral background checks results in a disparate impact on African-American applicants. EEOC v. Kaplan Higher Educ. Corp., No. 13-3408 (6th Cir. April 9, 2014). 

Credit Checks Aimed At Preventing Employee Abuses 

Kaplan is a for-profit test preparation and higher education provider.  Because some Kaplan students receive financial aid, some Kaplan employees have access to students’ financial information, including information that is subject to the U.S. Department of Education confidentiality regulations.  Years ago, Kaplan discovered that some of its financial-aid officers had stolen aid payments and some executives had engaged in self-dealing by hiring relatives as vendors for the company.  To help stop these abuses, Kaplan began conducting credit checks on applicants for senior-executive positions as well as accounting, financial aid and other positions where employees have access to company or student financial information.  Neither Kaplan nor its credit check vendor provided or linked the applicant’s race with the applicant’s credit report. 

EEOC Alleges Kaplan’s Credit Checks Screen Out More African-Americans 

Consistent with its efforts to target employers who use background check policies to screen applicants, the EEOC sued Kaplan alleging that Kaplan’s use of credit checks resulted in more African-Americans being rejected than whites, creating a disparate impact in violation of Title VII.  To support its claim, the EEOC hired industrial and organizational psychologist Kevin Murphy to analyze Kaplan’s credit check data and offer an expert opinion based on the statistics.  However, because the credit check information did not include the applicant’s race, Murphy and his team needed another method to determine race.  They created a process that the EEOC called “race rating” in which a team of five “race raters” reviewed drivers’ license photos for a portion of the applicants to visually identify their race.  Despite having credit information for 4,670 applicants, Murphy based his “expert” analysis on only 1,090 applicants, of whom 803 had been racially classified using Murphy’s “race rating” process. 

“Homemade Methodology” Rejected by Court 

The Sixth Circuit wholeheartedly rejected Murphy’s “race rating” process, stating that “[t]he EEOC brought this case on the basis of a homemade methodology, crafted by a witness with no particular expertise to craft it, administered by persons with no particular expertise to administer it, tested by no one, and accepted only by the witness himself.”  The Court upheld the exclusion of Murphy’s testimony not only due to his faulty methodology, but also because the group of 1,090 applicants in Murphy’s statistical analysis was not representative of the applicant pool as a whole.  Of Kaplan’s entire pool of 4,670 applicants, only 13.3% of the applicants were rejected on the basis of credit checks, but Murphy’s smaller pool of applicants had a fail rate of 23.8%.  The Court found that Murphy’s unrepresentative sample might not equate to the respective fail rates of black versus white applicants and therefore, was an unreliable method for the EEOC to show disparate impact. 

EEOC’s Own Background Check Policy Contradicts Its Attack on Private Employers For Use of Credit Checks 

Although not central to the exclusion of the EEOC’s expert, the Court put the EEOC’s own background check policy front and center.  Through the discovery process, Kaplan had successfully obtained information on the EEOC’s background check policies and pointed to the agency’s personnel handbook which states “[o]verdue just debts increase temptation to commit illegal or unethical acts as a means of gaining funds to meet financial obligations.”  To address those potential concerns, the EEOC runs credit checks for 84 of the 97 positions within the agency.  The Court highlighted the disconnect between the EEOC attacking Kaplan for a credit check policy that the agency used itself. 

Future EEOC Challenges to Employer Use of Credit Checks 

The Kaplan decision is the latest in a string of EEOC losses in class actions alleging disparate impact based on an employer’s use of a neutral background check process.  The EEOC seems unable to provide evidence to support a finding that African-Americans, Hispanics or other groups are being rejected for employment at higher rates than whites based on background checks.  In addition, the EEOC’s own use of credit checks in hiring will be used against it in any future similar lawsuits. Although it remains to be seen whether the EEOC will back off of its systemic enforcement efforts related to the use of background checks, the trend for employers is positive.

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April 10, 2014

Top 3 Tips for Preserving Documents When Facing Employment Litigation

By Scott E. Randolph 

If an employee or former employee has sued or threatened to sue your company alleging an employment claim, one of the first things you need to do is initiate steps to preserve all documents that potentially may be relevant to the dispute.  Your preservation obligation includes not only paper copies of documents and communications but also electronic and archived information even if it resides on mobile devices, on an employee’s off-site computer, in remote server farms, or in the cloud.  If you destroy relevant documents or electronic information while involved in litigation, courts may sanction you for “spoliation.” In particular, your judge may throw out all or part of your case and impose monetary sanctions for failing to take appropriate measures to preserve and maintain potentially relevant written and electronic communications and documents.  

To meet your document preservation obligations and help reduce the risk of adverse rulings and sanctions imposed in court, follow our top three tips for preserving relevant documents. 

Tip #1 – Identify Who May Have Relevant Data 

Identify any individuals who work with or service your company who may have data relevant to the dispute.  Consider not only your direct employees, but also any consultants, independent contractors, recruiters, agents and other persons who may have emails, texts, letters, files, evaluations or other information that may be relevant to the dispute or employment issues in question.  

Tip #2 – Instruct Identified Persons Not to Destroy, Modify or Forward Data 

After identifying who may have relevant data, you need to instruct all stakeholders in the dispute, including all persons identified above, of their obligation to preserve all potentially relevant information.  Send a “litigation hold” memo that informs these individuals to save hard copies as well as electronic versions of relevant information.  Explain that the obligation to preserve this data extends to information on remote computers and mobile devices.  Explicitly instruct folks not to change or forward information to others as that may change the data or result in inadvertent destruction.  Inform them to be careful not to use any computer programs that would sweep or erase their electronic data.  Keep this “litigation hold” in place for the duration of the dispute, including any appeal. 

Tip #3 – Stop Destruction Procedures 

Companies typically have routine document and electronic information destruction procedures.  Once you “anticipate” litigation, you need to stop all regular destruction procedures so that relevant information is not destroyed through the normal course of business.  Talk to your internal IT team to stop normal document destruction procedures and to retain all relevant data, including back up tapes, e-mail archives, etc.  If you use a third-party to manage or maintain your document retention and/or email system, you need to contact them and ensure that routine destruction practices are stopped for the duration of the litigation. 

We hope you don’t ever face or contemplate employment-related litigation, but if you do, take the time to follow our tips to help avoid intentional and inadvertent document destruction. Preserving data to be produced and used in litigation can be frustrating, time consuming and expensive, but it is worth it to avoid a judge’s wrath for spoliation. 

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April 8, 2014

Keep Good Payroll Records to Defend Wage Claim

By Jason Ritchie 

An employee can prove a wage claim based on his or her own records if the employer does not keep records of the employee’s pay and hours.  Think about that for a moment.  Your company’s liability for unpaid wages may rest solely on an employee’s notes, emails, text messages, diary, check stubs, bank statements or memory.   If that doesn’t make you quake in your boots, perhaps this will – failure to pay wages at the time specified by Montana law can result in a penalty of up to 110% of the amount of unpaid wages owed.  The significance of keeping good payroll records was driven home by the Montana Supreme Court in a recent wage case where a roofing company struggled to defend a salesman’s claim for unpaid commissions because of its poor recordkeeping practices. America’s Best Contractors, Inc. v. Singh, 2014 MT 70. 

Unpaid Commissions Under Verbal Agreement Leads to Wage Claim 

Salesman Jasvinder Singh was hired by America’s Best Contractors, Inc. (ABC) in 2003 to sell roofing, siding and gutter repairs in numerous states.  Singh typically sold jobs for ABC from March through November and then returned to his home state where he serviced the contracts for the remainder of the year.  Singh was initially paid a 10% commission, but in 2009, ABC agreed to pay Singh 12% on his sales and an additional 1% on the sales by other ABC salespersons.  ABC did not have a written employment agreement with Singh.  In 2010, Singh relocated to Billings to begin selling ABC’s repair services in Montana. 

Singh and ABC’s President Dwane Drury, were close friends.  In 2010, Singh loaned Drury $25,000 so that Drury could go on hunting trips.  

Singh kept track of the money ABC paid to him by noting on the checks which ones were to repay the loans, which checks were for commissions from contracts sold in other states and which checks were for commissions for Montana contracts.  ABC, on the other hand, failed to keep accurate payroll and commission records.  By June 2011, Singh demanded to Drury that ABC pay him outstanding commissions and when it failed to do so, he quit.  A month later, Singh filed a claim with the Montana Department of Labor and Industry (DOLI) alleging he was owed unpaid commissions of approximately $41,000 from June 2010 to June 2011. 

Check Notations 

The DOLI’s Wage and Hour Unit investigated Singh’s wage claim and determined that ABC owed Singh unpaid commissions.  ABC appealed. DOLI’s Hearings Bureau held a hearing at which the Hearings Officer heard testimony from numerous witnesses, including Singh and Drury, and considered evidence presented by the parties.  The Hearings Officer issued a Final Agency Decision concluding that ABC owed Singh $39,080.43 in unpaid commissions plus a penalty of 55% of the unpaid wages, which amounted to an additional $21,494.23.  ABC appealed to the District Court which concluded that there was substantial evidence in the record to support the findings of the Hearings Officer.  ABC then appealed to the Montana Supreme Court. 

On appeal, ABC argued, among other things, that there was insufficient evidence to find that certain payments made by ABC to Singh were for collateral obligations rather than for Singh’s commissions earned in Montana.  The problem was that ABC could not produce evidence to show that certain payments made to Singh were in fact commission payments.  

The Supreme Court reviewed the evidence presented at the DOLI hearing and found that Drury admitted that he did not keep track of records on commissions paid and the records he did offer into evidence had all been edited by Drury after Singh had filed his wage claim.  Singh, on the other hand, produced sales reports, email exchanges, text messages, checks, other memoranda and his own testimony to establish the contracts he sold in Montana, the amount of commissions owed to him on those contracts and what he was paid.  He produced checks that included notations indicating whether they were for reimbursements, commissions earned in another state, commissions earned in Montana or for providing office services when Singh was in the Billings office.  With no evidence but Drury’s testimony to counter Singh’s evidence, the Supreme Court affirmed the Hearings Officer’s findings that ABC owed commissions to Singh. 

Good Recordkeeping of Hours and Pay is Essential 

Montana employers have a duty to maintain accurate records of hours worked by employees and the amount of pay provided for those hours.  Montana law also requires that employers pay employees earned wages, including commissions, within the time frames contained in the Wage Protection Act.  Failure to do so can result in penalties up to 110% of the unpaid wages owed.  In addition to the statutory recordkeeping obligations, employers need good payroll records in order to defend against employees’ wage claims.  As ABC found out, in the absence of payroll records from the employer, DOLI Hearings Officers will consider evidence provided by the employee to substantiate the employee’s wage claim, even if that evidence is in the form of notes, emails and text messages.  Spending the time and effort to set-up and maintain good payroll records is essential in managing your workforce and minimizing risks of wage claims.  Review your recordkeeping practices now and shore up any deficiencies so that you don’t find yourself at the mercy of an employee’s notes.

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April 3, 2014

Severance Payments Are Wages Subject to FICA Tax

By Arthur Hundhausen and Mark Wiletsky 

Employers offer severance payments to separating employees for numerous reasons, including rewarding long-time employees affected by a plant closure, to maintain goodwill, to secure a release and waiver of existing or potential claims, or to comply with company policies or agreements that require such payments.  But whether the severance is dictated by policy or an individually-negotiated benefit, one sticky issue that employers may neglect to address is whether severance payments are subject to FICA taxes. The U.S. Supreme Court recently settled that issue by confirming that severance payments made to employees terminated against their will are taxable wages under FICA.  United States v. Quality Stores, Inc., No. 12-1408, 572 U.S. ___ (2014).  The Supreme Court’s ruling was consistent with the longtime IRS historical position on this issue. 

Involuntary Terminations Due to Bankruptcy Triggered Severance Payments 

Quality Stores terminated thousands of employees in connection with its involuntary Chapter 11 bankruptcy filing in 2001.  The employees received severance payments under one of two plans, ranging from six to eighteen months of severance pay.  Initially, Quality Stores reported the severance payments as wages for FICA purposes on the Forms W-2 filed with the IRS and the employees.  Consistent with such reporting, Quality Stores paid the employer’s required share of FICA taxes and withheld the employees’ share of FICA taxes as well.  Quality Stores then decided to file FICA tax refund claims with the IRS, totaling over $1 million in paid FICA taxes.  The IRS neither allowed nor denied the refund claims, so Quality Stores sought a refund as part of its bankruptcy proceeding.  Both the District Court and the Sixth Circuit Court of Appeals concluded that severance payments were not “wages” under FICA, meaning Quality Stores and its affected employees were entitled to a refund of the FICA taxes paid.  

The Sixth Circuit’s decision, however, directly contradicted rulings by other Courts of Appeals, which concluded that at least some severance payments constitute “wages” for purposes of FICA taxes. The U.S. Supreme Court agreed to review the issue to resolve the split among the courts. 

FICA’s Broad Definition of Wages Includes Severance Payments 

FICA defines wages as “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash.”  Under the plain meaning of this definition, the Court found that severance payments made to terminated employees constitutes “remuneration for employment.”  The Court noted that severance payments are made to employees only, often will vary depending on length of service, and are made in consideration for past services in the course of employment.  

Looking at statutory history, the Court noted that in 1950, Congress repealed an exception from “wages” for “[d]ismissal payments which the employer is not legally required to make” from the Social Security Act and since that time, FICA has not excepted severance payments from the definition of “wages.”  Agreeing with the government’s position in the case, the Court ruled that severance payments are taxable wages for FICA purposes. 

Implications for Employers 

The Court’s ruling confirms that employers are obligated to pay their portion of FICA taxes and withhold the employees’ portion of FICA taxes from severance payments.  Depending on the amount of the severance at issue, this FICA obligation can greatly change the total payout amount for the employer.  It also can catch unknowing employees off guard if they are expecting to receive a higher severance payment without FICA taxes being withheld.  Employers should factor the FICA tax obligation into any severance offer to ensure that both the company and the separating employee understand the total amount that is at issue and the final amount that the employee will receive.  In addition, employers offering severance payments should review their policies and practices to ensure that proper tax payments are made.  

If employers identify past severance payments where no FICA taxes were paid or withheld, such employers should consult with their tax counsel to determine whether any corrective steps are required.  In general, the applicable statute of limitations for an employer’s payroll tax liability begins on April 15 of the year following the year in which wages are paid (when prior year payroll tax returns are “deemed” to be filed), and expires after three years.  For example, the applicable statute of limitations for payroll taxes owed for 2010 began on April 15, 2011 and expires on April 15, 2014.

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