Worthy reminders

Recent court cases reiterate the importance of treating employees appropriately

Your attorney probably has advised you of the potential pitfalls for misclassifying employees as independent contractors, failing to apply all company policies consistently and failing to exercise particular care when taking an adverse action against an employee who has engaged in protected conduct. Two recent federal court decisions reveal what dangers face roofing contractors who fail to heed that advice.


The case of Chao v. First National Lending Corp., et al. especially is important for roofing contractors who use independent contractors. If you use independent contractors, you need to ensure those workers will not be classified as employees under the test used by the U.S. Department of Labor (DOL) and the courts.

Whether a worker is properly classified as an employee or independent contractor is based on the "economic reality" of the relationship. The most common mistake made by roofing contractors is assuming compensating a worker using a Form 1099 ensures the worker will not be deemed a company employee. But job titles, labels and compensation arrangements, such as Form 1099, are not the only factors DOL and the courts consider when analyzing the relationship.

In Chao v. First National Lending Corp., et al., U.S. Secretary of Labor Elaine Chao brought suit against First National Lending Corp., Middlesburg Heights, Ohio, to recover damages for unpaid minimum wages and overtime compensation allegedly due First National Lending's employees. The key issue in the case was whether First National Lending's loan officers were employees or independent contractors. First National Lending treated its loan officers as independent contractors. The secretary of labor argued the loan officers were employees of First National Lending and entitled to minimum wages and overtime pay.

When reviewing the evidence, the court especially noted that the fact the loan officers were paid on commission did not automatically render them independent contractors and if First National Lending had gone out of business, it did not appear the loan officers could have remained in business on their own. The court also found First National Lending and the loan officers appeared to have intended an indefinite working relationship, which is consistent with general at-will principles of an employee-employer relationship.

But most important to the court's analysis was the fact that a loan officer could not work at two mortgage companies at the same time. Based on this fact, the court concluded the loan officers were economically dependent on First National Lending and, therefore, were employees and not independent contractors.

Because First National Lending improperly paid the workers as independent contractors rather than employees, it owed the loan officers about $186,000 collectively in overtime back pay and liquidated damages plus 8 percent interest and costs.

First National Lending was assessed liquidated damages in large part because it never took any affirmative steps to determine the proper classification of its employees. First National Lending also was at a severe disadvantage in challenging the amount of back pay awarded the loan officers because First National Lending could not provide the DOL auditor with time records showing the time worked by the loan officers. Had the loan officers been properly classified as employees, presumably First National Lending would have retained all documents required by law to be retained for employees.

The court's conclusion should be a warning to you if you have workers you use frequently for different roofing projects and classify as independent contractors. You should review the working relationship under the test used by DOL and the courts to determine whether the workers properly are classified.

Avoiding claims

Wallace v. DTG Operations Inc. ought to motivate you if you fail to follow and apply company policies uniformly, inconsistently review those policies and make inappropriate changes. This case also is a lesson to those who take adverse action against an employee without considering whether the employee ever engaged in any protective conduct, such as reporting a claim of harassment or discrimination.

In Wallace v. DTG Operations Inc., Terri Wallace filed suit alleging sexual harassment and retaliatory discharge. Wallace argued that while employed at DTG Operations' Dollar Rent-A-Car station at Kansas City International Airport, she was a victim of unlawful sexual harassment and was terminated in retaliation for reporting a harassment claim. At the trial court level, DTG Operations convinced the court to dismiss the lawsuit, finding Wallace's harassment claim failed because the incidents about which she complained were not sufficiently severe or pervasive to constitute actionable hostile environment harassment. The trial court also dismissed the retaliatory discharge claim because it believed Wallace failed to present evidence sufficient to raise a significant fact issue for the jury about whether DTG Operations' explanation for Wallace's termination merely was a pretext for a retaliatory decision.

On appeal to the Eighth Circuit Court of Appeals, Wallace argued her retaliatory discharge claim improperly was dismissed and the evidence showed DTG Operations' stated reason for her discharge was a pretext to hide the real reason, which was intentional retaliation for having complained about a supervisor's conduct.

Wallace alleged she was the victim of four sexual-harassment incidents and had complained to one of her supervisors about the harassment on April 9, 2002. On May 6, 2002, Wallace was summoned into a meeting with her supervisors, including the supervisor with whom she lodged her complaint. At that meeting, Wallace was told a downturn in business after Sept. 11, 2001, had reduced revenue at the location and she was being terminated because she was the manager with the least seniority at that location. The decision to terminate Wallace was made 15 days after the harassment was reported.

Wallace asked at the May 6 meeting whether she could be transferred laterally to an open manager position in another city. In response, Wallace was advised she could not be considered for a transfer request because there was a November 2001 "written warning" in her personnel file and, according to company policy, the written warning prohibited Wallace from being considered for a transfer for one year.

The court began its analysis by noting Title VII of the Civil Rights Act of 1964 prohibits employers from taking adverse actions against employees in retaliation for employee reports of harassment or discrimination. The court stated a claim for retaliation is not based on prohibited discrimination but instead on an employer's actions taken to punish an employee who makes a discrimination claim. In general, the court noted as long as a plaintiff had a reasonable, good-faith belief there were grounds for a discrimination or harassment claim, the success or failure of a retaliation claim is analytically divorced from the merits of the underlying discrimination or harassment claim.

To succeed with her claim, Wallace had to present sufficient evidence to establish a prima facie case, which has three elements. She must demonstrate the following: she took part in protected conduct, she was subjected to an adverse employment action, and a causal relationship exists between the protected conduct and adverse action.

It was undisputed Wallace took part in protected conduct and suffered an adverse employment action. In support of its conclusion that Wallace had evidence showing a causal relationship between the protected conduct and adverse action, the court relied heavily on the fact that the decision to terminate Wallace was made only 15 days after her report of harassment. The court stated an inference of a causal connection between a charge of discrimination and termination can be drawn from the timing of the two events. The timing, the court concluded, was sufficient for Wallace to make her prima facie case.

Despite the timing alone being sufficient for Wallace to make her prima facie case, the court also noted additional evidence existed to support an inference of causation. First, there was evidence the supervisor who received the complaint and made the termination decision also made comments that reflected animus. The court also found Wallace's termination was isolated when compared with the widespread effect on the company's business caused by the Sept. 11 attacks. Lastly, there was evidence the company's policy on restricting transfers was applied inconsistently.

In response to Wallace's prima facie case, the company only was obligated to set forth a legitimate, nonretaliatory reason for the adverse action. The company relied on its post-Sept. 11 downturn in revenue coupled with overstaffing. With the company having set forth a legitimate, nondiscriminatory and nonretaliatory reason for its decision, Wallace was left to demonstrate the proffered reason was not the true reason for the employment decision.

The court noted Wallace could show the reason for the employment decision "directly" by showing the reason offered by the company was unworthy of belief because it has no basis in fact or "indirectly" by showing that more likely than not, an improper reason motivated the employer's decision.

Wallace had to prove her case indirectly because the company's reason for its decision was based on fact, namely the company did experience a business downturn after Sept. 11. In concluding Wallace had enough evidence to make her case "indirectly," the court noted the timing issues. The court noted not only the absence of any documentation indicating the decision to terminate Wallace was made before she complained of harassment but also the downturn in business existed for some time before Wallace reported her complaint, yet the company did not take action until shortly after she complained. Based on that evidence, the court found a jury could infer that if business conditions were the true motivating factor for Wallace's termination, the decision to terminate Wallace would have been made sooner.

Wallace also had evidence that showed the company's transfer policy was applied inconsistently, was discretionary, was not mandatory and was not clearly applicable to Wallace.

The court found the transfer policy was applied inconsistently because despite the "written warning" in her personnel file, Wallace's supervisors previously encouraged Wallace to apply for a transfer after she received the purported written warning. The transfer policy was found discretionary and not mandatory by the court because evidence showed the company previously granted transfer requests to employees with written warnings in their personnel files. Lastly, the court found the policy was not clearly applicable to Wallace because there was an issue of fact concerning whether the "written warning" was a written warning or a written record of a verbal warning. Based on this evidence, the court concluded a reasonable jury could find the adverse and selective application of the policy to Wallace was a pretext to hide a retaliatory motive.

The case still is pending. Although a jury may rule in favor of the company, because of the company's failure to document the reasons for its decision and uniformly and consistently apply its transfer policy, the company will spend a lot of money attempting to prove its case.

To avoid a similar situation, I encourage you to carefully document all employment decisions, apply human-resources and personnel policies uniformly and consistently, and act cautiously and thoroughly when terminating employees.

Philip J. Siegel is an attorney with the Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.



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