Employment Law – October 2015

Sarbanes-Oxley
Sarbanes-Oxley

In This Issue:

  • FTC Offers Employers Lesson in FCRA Compliance—And Limited Exceptions
  • Second Circuit: Judicial Review of EEOC Pre-Suit Investigations Limited
  • Could the U.S. Supreme Court Settle the Debate Over Whistleblower Protections?
  • “Ban the Box” Trend Goes Federal
  • SEC Not Keeping Quiet About Employee Confidentiality Agreements
  • New DOJ Policy Alert: Here’s Looking at You, Kid—DOJ Announces Six Specific Steps to Hold Individual “Corporate Wrongdoers” Accountable

FTC Offers Employers Lesson in FCRA Compliance—And Limited Exceptions

Why it matters

A California employer recently received a lesson in Fair Credit Reporting Act (FCRA) compliance from the Federal Trade Commission (FTC). The agency investigated California Health & Wellness’s (CHW) pre-employment screening process and determined that the employer did not violate the statute. In the hope of providing guidance to other employers, the FTC published its closing letter to the employer. CHW’s procedures were “consistent with those” set forth in the FCRA, the agency explained, by notifying job applicants of its intent to use a screening report and obtaining an applicant’s authorization before running the report, for example. Applicants were given the chance to review and contest the screening report before a final employment decision was made, the FTC noted, with an adverse action notice sent when applicable. The agency also took the opportunity to discuss Section 603(y) of the statute, clarifying its position that the exceptions listed in the provision are limited in application to investigations of current employees and not job applicants. Employers should keep the FTC’s stance on the exceptions in mind when using screening programs for potential employees.

Detailed discussion

A subsidiary of Centene Corporation, CHW is a California-based health plan that offers healthcare, pharmacy, vision, and transportation services to its members. Beginning in 2013, CHW began serving Medicaid beneficiaries in 19 counties.

As required by the contract with the state’s Department of Health Care Services, CHW established a policy of conducting background checks on job applicants and obtained a screening report from a consumer reporting agency for each applicant prior to hire.

This pre-employment screening caught the attention of the FTC, which conducted an investigation into possible violations of the FCRA.

While the FTC determined that CHW’s pre-employment screening program did not violate the FCRA, the agency published its closing letter to the employer to clarify certain points about the statute.

The FCRA imposes notice, consent, and disclosure requirements on employers using background checks in making personnel decisions, Maneesha Mithal, the associate director of the FTC’s Division of Privacy and Identity Protection, wrote in the letter to CHW.

An employer must notify a job applicant of its intent to use a background screening report and obtain the applicant’s consent to get the report. If the employer decides not to hire the applicant, it must provide a “pre-adverse action” notice, allowing the individual the opportunity to review the report and explain any negative information. An “adverse action” notice must also be provided to an applicant who is ultimately denied a job because of the information in a report.

CHW’s programs and procedures with respect to background screening reports “are consistent with those set forth in the FCRA,” the FTC concluded. “Among other things, staff’s investigation showed that CHW currently notifies job applicants of its intent to use a screening report and obtains an applicant’s authorization before obtaining this report. CHW further provides applicants with an opportunity to review and contest the information in the screening report before making a final personnel decision, and if the company ultimately declines the applicant, sends the applicant an ‘adverse action’ notice.”

The FTC also used CHW’s closing letter to make a point about an exception found in Section 603(y) of the FCRA, the Exclusion of Certain Communications for Employee Investigations. That provision excludes from the definition of “consumer report” communications made to an employer in connection with an investigation of “(i) suspected misconduct relating to employment; or (ii) compliance with Federal, State, or local laws and regulations, the rules of a self-regulatory organization, or any preexisting written policies of the employer.”

FTC staff considered whether Section 603(y) applied to CHW’s background screening program but determined the procedures did not fall within the exception because “we view Section 603(y) as covering only investigations of current employees, rather than investigations of both current employees and job applicants,” Mithal wrote.

The letter listed three reasons for the agency’s position. First, “the language of Section 603(y) itself contemplates an existing employer/employee relationship,” the FTC said, noting that the title of the provision states “Employee” and not “Applicant.” In addition, two subsections of the provision make reference to “suspected misconduct relating to employment” and “preexisting written policies of the employer,” both phrases that connote an existing employment relationship.

Finally, the letter noted that “the FCRA is ‘undeniably a remedial statute that must be read in a liberal manner in order to effectuate the congressional intent underlying it.’ As such, it should be broadly construed and its exceptions be narrowly applied.”

To read the FTC’s letter to California Health & Wellness, click here.

Second Circuit: Judicial Review of EEOC Pre-Suit Investigations Limited

Why it matters

Applying the “narrow” judicial review established by the U.S. Supreme Court in EEOC v. Mach Mining,a three-judge panel of the Second Circuit Court of Appeals reversed summary judgment in favor of an employer and remanded the case for additional proceedings. The Equal Employment Opportunity Commission (EEOC) filed suit against Sterling Jewelers after the agency received 19 charges of sex discrimination from female employees in nine states over the course of two years. Sterling moved to dismiss the pattern or practice allegations, arguing that the agency did not conduct a nationwide investigation to substantiate the charges. A federal district court agreed, but the panel reversed. Although Mach Mining did not directly address the obligation of the EEOC to investigate charges, the Second Circuit said similar boundaries of judicial review existed. Therefore, the sole question for the court was whether an investigation occurred and an evaluation of the sufficiency of the investigation was inappropriate, the panel said. Because the EEOC did conduct an investigation—documented by testimony from agency investigators and the investigative file—and the court had no desire to “second-guess” the agency’s choices, the court said the suit could move forward.

Detailed discussion

Between 2005 and 2007, the EEOC received 19 individual charges of discrimination from women employed by Sterling Jewelers. The largest fine jewelry company in the United States, with operations nationwide, Sterling faced complaints from nine states: California, Colorado, Florida, Indiana, Massachusetts, Missouri, Nevada, New York, and Texas.

Initially, five investigators began looking into the charges, 16 of which alleged that the employer engaged in a continuing policy or pattern and practice of discrimination. Later, the EEOC transferred all of the charges to one investigator. The agency also requested copies of Sterling’s companywide policies and protocols, personnel files, and pay and promotion histories.

Sterling and the charging parties entered mediation and invited the EEOC to participate. The agency agreed to suspend its investigation during the process and both sides provided it with all the documents relied upon by their experts. The charging parties hired a labor economist to conduct a statistical analysis of Sterling’s pay and promotion practices, and he testified that the employer paid female employees less and promoted them at slower rates than similarly situated male employees.

The EEOC also agreed not to use any of the documents or information gleaned during the mediation in legal proceedings against Sterling. However, the parties subsequently signed an addendum to the confidentiality agreement permitting certain documents to be placed in the EEOC’s investigative file if the mediation were unsuccessful, including the statistical analysis.

In 2007 the mediation failed, and the EEOC filed suit in 2008 alleging that Sterling engaged in a nationwide pattern or practice of sex-based pay and promotion discrimination in violation of Title VII. One of the agency’s key pieces of evidence: the labor economist’s statistical analysis.

During discovery, Sterling deposed two EEOC investigators, both of whom invoked the deliberative privilege. One testified that he didn’t “really recall” much about the investigation.

Sterling then moved for summary judgment, arguing that the EEOC had not satisfied its statutory obligation to conduct a pre-suit investigation. Holding that no evidence existed that the agency investigated a nationwide class to support the pattern or practice allegations, a New York federal court judge granted the motion. The EEOC appealed.

On appeal, the Second Circuit Court of Appeals explained the EEOC must meet five requirements before it can bring an enforcement action under Title VII: (1) it must receive a formal charge of discrimination against the employer, (2) provide notice of the charge to the employer, (3) investigate the charge, (4) make and give notice of its determination that there was a reasonable cause to believe that a violation of Title VII occurred, and (5) make a good faith effort to conciliate the charges.

The statute does not define “investigation” or prescribe the steps that the EEOC must take in conducting an investigation, the three-judge panel noted, and the proper scope of judicial review is an issue of first impression in the circuit.

Looking for guidance, the court turned to the U.S. Supreme Court’s April decision in EEOC v. Mach Mining, a case about the scope of judicial review of the agency’s obligation to conciliate. The Court held that the review should be “narrow” and serve to “enforce[] the statute’s requirements … that the EEOC afford the employer a chance to discuss and rectify a specified discriminatory practice—but goes no further.” A sworn affidavit from the EEOC stating that it satisfied its conciliation efforts but failed to reach an agreement “will usually suffice to show that it has met the conciliation requirement,” the justices added.

Mach Mining did not address the EEOC’s obligation to investigate, but we conclude that judicial review of an EEOC investigation is similarly limited: The sole question for judicial review is whether the EEOC conducted an investigation,” the Second Circuit wrote. “[C]ourts may not review thesufficiency of an investigation—only whether an investigation occurred.”

As with the sworn affidavit satisfying the court’s review with regard to conciliation, the EEOC need not “describe in detail every step it took or the evidence it uncovered,” the panel said. Instead, “an affidavit from the EEOC, stating that it performed its investigative obligations and outlining the steps taken to investigate the charges, will usually suffice.”

This limited review respects the discretion given to the EEOC by Title VII, the Second Circuit said, and avoids turning the litigation into a two-step action where parties litigate the pre-suit issues before ever reaching the merits of the case.

Applying this standard to Sterling, the court said the deposition testimony from the investigators as well as the 2,600-page investigative file show that the EEOC took multiple steps to investigate the claims against Sterling, including obtaining Sterling’s company policies, the personnel documents of the charging parties, interview notes, and the statistical analysis.

“[I]t cannot be said here that the EEOC failed to conduct any pre-suit investigation at all,” the panel wrote. Although one of the investigators acknowledged that he didn’t remember very much about the investigation, his testimony was not tantamount to an admission that he failed to conduct an investigation, particularly since he was deposed seven years after the conclusion of the review, the court said.

Sterling’s “laundry list” of steps the EEOC failed to take during the investigation did not persuade the court. “For a court to second-guess the choices made by the EEOC in conducting an investigation ‘is not to enforce the law Congress wrote, but to impose extra procedural requirements. Such judicial review extends too far,'” the court said.

The EEOC investigation was nationwide, the panel added, as the charges were filed in states across the country, from California to Texas to New York. While the court recognized some tension in the various provisions and changes to the parties’ confidentiality agreement, it allowed the EEOC’s use of the statistical analysis based on companywide data.

“[W]hat other purpose could the parties have for allowing the EEOC to include [the expert’s] analysis in its investigative file if the EEOC could not review the analysis as part of its investigation?” the court asked. “Because the EEOC was permitted to rely on [the expert’s] analysis in making its reasonable-cause determination, the EEOC properly referenced that analysis as part of the proof that its investigation was nationwide.”

Reversing summary judgment in the employer’s favor, the Second Circuit remanded the case for further proceedings.

To read the decision in EEOC v. Sterling Jewelers, click here.

Could the U.S. Supreme Court Settle the Debate Over Whistleblower Protections?

Why it matters

The scope of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s whistleblower protections may be headed to the U.S. Supreme Court after a recent Second Circuit Court of Appeals decision created a circuit split. In 2013, the Fifth Circuit held that an employee was not entitled to the statute’s whistleblower protections because he reported allegedly unlawful behavior internally and not to the Securities and Exchange Commission (SEC). In September, the Second Circuit reached the opposite conclusion, ruling that an internal company complaint was sufficient to support a whistleblower claim under Dodd-Frank and that reporting to the SEC was not necessary. The split panel majority explained that the anti-retaliation provisions of the statute are ambiguous, requiring deference to the SEC’s more generous interpretation of the statute. A dissenting opinion noted that the decision not only created a split among the federal appellate courts but also placed the Second Circuit “firmly on the wrong side of it.” Given the split among the courts—and the continuing rise in the number of whistleblower suits being filed—the issue looks headed to the U.S. Supreme Court for review.

Detailed discussion

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act established legal protections for employees who blow the whistle on a company’s illegal activities. But the statute wasn’t entirely clear. Section 78u-6(a)(6) defines a whistleblower as “any individual who provides or two or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.”

Separately, Section 78u-6(h)(1)(A) provides whistleblowers with a private right of action against employers who take retaliatory actions against a whistleblower for taking certain protected actions, delineated in three subsections. Two subsections specifically reference working with the SEC, while the third provides protections more generally “in making disclosures that are required or protected” under the Sarbanes-Oxley Act, the Exchange Act, “and any other law, rule, or regulation subject to the jurisdiction of the Commission.”

Daniel Berman argued he fell under the final catch-all subsection. As the finance director at media agency Neo@Ogilvy, Berman was responsible for all of the company’s financial reporting and compliance with Generally Accepted Accounting Principles (GAAP), as well as internal accounting procedures.

According to Berman’s complaint against his former employer, he discovered various practices that he claimed amounted to accounting fraud and violated GAAP, Sarbanes-Oxley, and Dodd-Frank. Berman alleged he reported the violations internally and was terminated as a result of his whistleblower activities. Only after the limitations period on whistleblower protections under Sarbanes-Oxley had expired did he report the alleged violations to the SEC and file suit under Dodd-Frank.

Neo moved to dismiss the complaint, arguing that Berman failed to meet the definition of a whistleblower in the statute because he neglected to report his concerns to the SEC as required by Section 78u-6(a)(6). A federal court judge agreed and dismissed the suit, finding that Berman was terminated long before he reported any alleged violations to the Commission.

Berman appealed and a divided panel of the Second Circuit Court of Appeals reversed.

Reviewing the statute, the majority found “a significant tension” between the definitional subsection, where “whistleblower” means an individual who reports violations to the Commission, and the later subsection, which “does not within its own terms limit its protections to those who report wrongdoing to the SEC.”

This tension left questions unanswered, the court said, particularly with regard to whistleblowers who report wrongdoing simultaneously to their employer and the Commission, as well as regarding certain categories of whistleblowers—including auditors and attorneys—who are required to report wrongdoing to their employers before they can reach out to the SEC.

Congressional history does not shed any light on the problem, the majority said, and other courts have reached conflicting results. Led by the Fifth Circuit Court of Appeals in Asadi v. G.E. Energy, a group of federal courts from California, Colorado, Texas, and Wisconsin have ruled that the statute’s definition of “whistleblower” controls, mandating a report to the SEC to receive the protections of Dodd-Frank.

A “far larger number” of district courts have reached the opposite conclusion. Courts in California, Colorado, Connecticut, Kansas, Massachusetts, New Jersey, New York, and Tennessee have all held the catch-all subdivision permits internal reporting. “Thus, although our decision creates a circuit split, it does so against a landscape of existing disagreement among a large number of district courts,” the panel wrote.

With the text leaving the matter unclear and no hints in the legislative history, the court said the provision was “sufficiently ambiguous to oblige us to give Chevron deference to the reasonable interpretation of the agency charged with administering the statute.”

In 2011, the SEC promulgated Exchange Act Rule 21F-2, which provided a definition of a whistleblower that included those who provide specified information “in a manner described in” the retaliation protection provisions of Dodd-Frank, including the catch-all subdivision, which protects “an employee who reports internally without reporting to the Commission.” The agency’s position was recently reiterated in a rule interpretation.

“We conclude that the pertinent provisions of Dodd-Frank create a sufficient ambiguity to warrant our deference to the SEC’s interpretive rule, which supports Berman’s view of the statute,” the majority wrote, reversing and remanding for further proceedings. “Under SEC Rule 21F-2(b)(1), Berman is entitled to pursue Dodd-Frank remedies for alleged retaliation after his report of wrongdoing to his employer, despite not having reported to the Commission before his termination.”

One member of the panel filed a dissenting opinion, criticizing the majority for rewriting a federal statute. “No doubt, my colleagues in the majority, assisted by the SEC or not, could improve many federal statutes by tightening them or loosening them, or recasting or rewriting them,” Judge Dennis Jacobs wrote. “I could try my hand at it. But our obligation is to apply congressional statutes as written. In this instance, the alteration creates a circuit split, and places us firmly on the wrong side of it.”

To read the opinion in Berman v. Neo@Ogilvy LLC, click here.

“Ban the Box” Trend Goes Federal

Why it matters

The trend of enacting “ban the box” legislation has gone federal, with a new bill introduced by a bipartisan group of lawmakers. The Fair Chance Act would prohibit federal contractors or agencies from asking job applicants whether they have been convicted of a crime prior to extending a job offer. Once a conditional offer of employment has been made, the measure would allow employers to inquire about criminal history. The bill includes exceptions for “sensitive positions” such as law enforcement, national security, and those with access to classified information. Legislators cited the rising amount of convicted citizens in the country seeking work as well as the number of jurisdictions passing similar legislation—18 states and 100 local laws to date—as driving forces behind the measure. Reps. Elijah E. Cummings (D-Md.) and Darrell Issa (R-Calif.) introduced the bill in the House, while Sens. Ron Johnson (R-Wis.) and Cory Booker (D-N.J.) presented it in the Senate.

Detailed discussion

Lawmakers in both houses of Congress introduced the Fair Chance Act in September. S. 2021 and H.R. 3470 would prohibit federal agencies or contractors from asking prospective employees about whether they have a criminal record before a formal job offer has been extended.

Once a conditional offer of employment has been made, an employer would be permitted to ask about the applicant’s criminal record and revoke the offer based on the results of a criminal background check.

The proposed law includes exceptions for “sensitive positions,” including law enforcement, national security, and positions with access to classified information. Protection is provided in the bill for whistleblowers who report coworkers for not following the law, and penalties range from a warning for a first violation to suspensions of increasing length, up to a $1,000 fine for subsequent violations.

Enforcement would be provided by the Office of Personnel Management.

Colloquially referred to as “ban the box” legislation—a reference to a box that applicants check to indicate they have a criminal record—the measure reflects a wave of legislation on a state and local level over the last few years.

Lawmakers supporting the bill said 18 states and more than 100 local entities have already enactedsimilar measures, with private employers following suit by adopting internal company policies to ban the box.

Rep. Darrell Issa (R-Calif.), who cosponsored the measure in the House of Representatives, cited statistics that “about 9 percent of Americans—roughly 20 million people—have a felony conviction in the United States,” necessitating measures to help them obtain employment upon release. “What has struck me most is how challenging we make it for those who truly want to turn their lives around,” Sen. Ron Johnson (R-Wis.), who introduced the Senate version of the bill, said in a statement. “I want to help make their transition easier.”

The Fair Chance Act is currently pending in both Houses, referred to the Homeland Security and Government Affairs Committee in the Senate and five committees in the House, including Administration, Judiciary, Oversight and Government Reform, Armed Services, and Education and the Workforce.

To read the Fair Chance Act, click here.

SEC Not Keeping Quiet About Employee Confidentiality Agreements

Why it matters

Demonstrating the Security and Exchange Commission’s (SEC) stepped-up protection of whistleblowers, national retailer Barnes & Noble revealed in a quarterly filing that the agency is investigating the company’s use of employee confidentiality agreements. The Dodd-Frank Wall Street Reform and Consumer Protection Act prohibited companies from placing restrictions on the ability of employees to report alleged wrongdoing. The SEC has taken the attempt to encourage whistleblowing to heart, keeping an eye on employers that might be running afoul of the statute—such as Barnes & Noble. The company’s disclosure provides an important reminder to companies about the SEC’s vigilance in the area of whistleblowing, particularly on the heels of the agency’s recent rule interpretation that whistleblowers that report unlawful activity internally are entitled to the same legal protections as those who report to the agency. Although the agency has not commented on the Barnes & Noble investigation, it cautioned employers about the use of such agreements in a settlement earlier this year. “SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other types of agreements that may silence potential whistleblowers before they can reach out to the SEC,” Andrew J. Ceresney, director of the agency’s Division of Enforcement, said in a statement. “We will vigorously enforce this provision.”

Detailed discussion

When the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed by President Barack Obama in 2010, the statute included a provision prohibiting employers from restricting employees from blowing the whistle on alleged wrongdoing.

To enforce the provision, the SEC promulgated Rule 21F-17, which makes it a separate violation of law to “take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.”

In April, the SEC brought its first enforcement action based on an employer’s confidentiality agreement. Texas-based KBR, Inc. had a policy under which employees could be disciplined or fined if they discussed an internal investigation with a third party absent prior approval from the legal department.

While the SEC noted that it had no evidence of specific incidents where KBR tried to block whistleblowing activity, the policy had a “potential chilling effect,” the agency said. KBR neither admitted nor denied the charges but paid a $130,000 fine to settle the case and changed company policy to clarify that employees are able to report possible violations to third parties without prior approval.

Barnes & Noble could be the second company to reach a deal. In the company’s third-quarter Form 10-Q, the national retail chain disclosed the agency is investigating its use of employee confidentiality agreements. “The SEC staff has identified [a] matter, related to Rule 21F-17 of the Dodd-Frank Act, resulting from certain historical confidentiality provisions in agreements with employees,” according to the SEC filing. “The Company is in the process of discussing a potential negotiated resolution of this issue with the SEC staff in order to close the investigation.”

To read Barnes & Noble’s Form 10-Q, click here.

New DOJ Policy Alert: Here’s Looking at You, Kid—DOJ Announces Six Specific Steps to Hold Individual “Corporate Wrongdoers” Accountable

Why it matters

On September 9, 2015, Deputy Attorney General Sally Quillian Yates issued a memo to all DOJ department heads and U.S. Attorneys that detailed the government’s new policy centered on accountability for the individuals who are alleged to have perpetrated corporate misconduct. The memo, titled “Individual Accountability for Corporate Wrongdoing,” details the “six key steps” the government will now take going forward “to strengthen our pursuit of individual corporate wrongdoing.” Accountability for individuals in corporate investigations has long been a stated goal of the DOJ, and Deputy Attorney General Yates’ September 9 memo makes it official.

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