NEWSLETTER

The Ninth Circuit recently upheld an employer's decision to disqualify from employment an applicant who failed a pre-employment drug test years earlier, despite the applicant's protected status as a recovering drug addict. See Lopez v. Pacific Maritime Association (March 2, 2011).

In 1997, Santiago Lopez ("Lopez"), a longshoreman, applied for a position with the Pacific Maritime Association ("Association"), an association of shipping lines that runs a number of ports. He was rejected when he tested positive for marijuana use. Recognizing the negative effects of his drug use, Lopez became sober in 2002, and in 2004, he reapplied for a position with the Association. The Association rejected his application because of his previous positive drug test in 1997.

The Association has a "one strike rule" and it does not consider applicants who test positive for drug use during the pre-employment screening process for future employment. Applicants who fail once are permanently disqualified from consideration. At the time it rejected his application, the Association did not know that Lopez was a recovering drug addict. He tried to appeal the decision, but the Association does not allow appeals arising out of disqualifications due to positive drug tests.

Lopez then sued, claiming that the Association violated the Americans with Disabilities Act (ADA) and the California Fair Employment Housing Act by discriminating against him on the basis of his protected status as a rehabilitated drug addict. The Court disagreed with Lopez. It concluded that Lopez was disqualified because of the failed drug test, not because of his status as a recovering addict. As the Court noted, had he first applied for a position in 2004 and not failed the drug test, he would not have been disqualified despite his status as a recovering drug addict.

The Court relied on the U.S. Supreme Court's decision in Raytheon v. Hernandez, 540 U.S. 44 (2003). In Raytheon, the Court held that a policy not to rehire workers who lost their jobs due to drug-related misconduct constituted a legitimate nondiscriminatory reason to refuse to hire the employee. The Court rejected an argument that, because the employee's misconduct related to drug addiction, the refusal to rehire him violated the ADA. While the ADA prohibits employment decisions made because of a qualifying disability, it does not prohibit decisions made because of factors that are merely related to the person's disability.

The Ninth Circuit also rejected the argument that the Association intentionally adopted the one strike rule to exclude recovering drug addicts. Instead, the Court accepted the Association's explanation that the rule was adopted to address serious accidents and injuries in the work place, some of which were attributable to drug and alcohol use.

Likewise, the Court rejected Lopez' argument that the Association actually knew of status as a recovering drug addict because he informed the association of his status after it rejected him. Since the Association did not know of Lopez' disability at the time it made the decision to disqualify him, the court reasoned, it could not have discriminated against him based on his disability.

Employers may not discriminate against applicants who are recovering drug addicts or alcoholics. This includes individuals who are participating in a supervised rehabilitation program and no longer engage in drug and alcohol use and individuals who have successfully rehabilitated from past drug or alcohol use and no longer abuse drugs or alcohol. Employers may, however, choose not to hire individuals who, because of current drug or alcohol use, are unable to perform their duties without endangering their health or safety or the health or safety of others.

The ADA does not prohibit, require or encourage drug tests; however, employers should be aware of state and other federal laws that may impose requirements or restrictions on workplace drug testing. Additionally, although drug tests are not considered medical examinations under the ADA, the DOL takes the position that alcohol tests are; thus these tests are subject to additional restrictions.

If you have any questions regarding this decision or the issues addressed in this article, please contact the author, Michelle Rapoport, mrapoport@fordharrison.com, an attorney in our Los Angeles office or the Ford & Harrison attorney with whom you usually work.

In the latest example of the push to crack down on improper classification of employees, a U.S. District Court in California has given preliminary approval to a $10 million class action settlement where the plaintiffs allege they were improperly classified as independent contractors and, as a result, denied minimum wage.

The class action was brought against Spearmint Rhino Companies Worldwide, Inc. et. al. who run nightclubs in California, Las Vegas, Texas, Idaho, Florida and Kentucky. The class is made up of more than 11,000 women, making up eight subclasses of employees, who have worked for defendants as exotic dancers. The class members alleged violations of the Fair Labor Standards Act for failure to pay minimum wage; violations of the California Labor Code for failure to pay statutory minimum wage; violations of the California Labor Code for unlawful tip splitting and acceptance of other payments from employees; and violations of California Business and Profession Code § 17200, the Unfair Competition Act. In essence, the class members alleged that because they were misclassified as independent contractors rather than employees, they were not paid minimum wage and were denied benefits they were entitled to under state and federal law. Additionally, the class members claimed they were required to engage in other illegal practices such as paying a stage fee to perform and splitting tips with managers, doormen and DJs.

Deposition testimony revealed that the dancers were required to sign a contract that designated them as independent contractors, disavowed any employment relationship and provided that any dancer who claims a status other than that of landlord/tenant with the club is in material breach of the agreement. The contract also required dancers to reimburse the club in which they worked for all net dance performance fees if a court or agency found that the relationship between the dancer and the club was something other than that of a landlord/tenant and that the dancer was entitled to monetary consideration from the club. Further, the contract required arbitration in case of a dispute and imposed a one year limitations period for any claim brought by the dancers.

The settlement approved by the court creates a common fund from which class members' claims will be paid on a claims-made basis after the deduction of attorneys' fees and costs, settlement administration costs, and penalty payments to the state of California. The settlement also called for injunctive relief requiring the defendants to stop charging dancers "stage fees" to perform and to discontinue the practice of classifying dancers as independent contractors.

This case serves as yet another reminder of the importance of evaluating the classification of workers on a case by case basis and of the costly nature of mistakenly classifying an employee as an independent contractor. Employers should also be reminded that the language in an agreement signed by a worker does not control when determining the worker's status. In most cases, the degree of control exercised over that worker largely determines whether the worker will be considered an employee. However, the tests used to determine independent contractor status may vary somewhat depending on jurisdiction, and among state and federal laws. Thus it is conceivable that a worker may be properly classified as an independent contractor under one law and not another. Employers who are unsure of whether certain workers are properly classified should consult experienced employment law counsel to evaluate the pertinent aspects of the workers' job.

If you have any questions regarding this article, please contact the author, Suheily Natal, snatal@fordharrison.com, an attorney in our Chicago office, or the Ford & Harrison attorney with whom you usually work.

On April 5, 2011 the Department of Labor issued final regulations impacting an employer's use of a "tip credit" for tipped employees, which took effect May 5, 2011.

Generally, all employers are required to pay non-exempt employees at least the federal minimum wage, currently $7.25 per hour. Under the FLSA's tip-credit provisions, an employer is allowed to pay tipped employees a cash wage of $2.13 and offset the remaining amount of the minimum wage by taking a "tip credit." In other words, an employer taking the maximum tip credit must pay a tipped employee a cash wage of $2.13, but it can use up to $5.12 of the employee's tips as a credit toward the rest of the minimum wage payment. However, an employer may only take the tip credit if (1) the employee has been informed by the employer of the provisions of the FLSA's tip credit subsection, and (2) the employee retains all tips received (except amounts paid into a valid "tip pool" to be shared among employees that regularly receive tips).

The final regulations clarify the Department of Labor's position on many issues surrounding an employer's use of the tip credit. Some of the changes include:

• New Notice Requirements. If an employer elects to take a tip credit, the final regulations require that an employer inform employees:
• Of the amount of the cash wage to be paid to the employee;
• Of the additional amount by which the wages of the employee are increased by the tip credit (the value of which may not exceed actual tips received);
• That all tips must be retained by the employee (except for a valid tip pooling arrangement); and
• That the tip credit shall not apply to any employee who has not been informed of the requirements stated above.
  
• No Maximum Percentage for Tip-Pooling Agreements. The Department of Labor previously took the position that tip-pooling agreements cannot require employees to contribute more than 15% of their tips. The final regulations acknowledge that the FLSA does not impose a maximum tip pool contribution percentage.
• Employers May Not Retain Any Employee Tips. Even for employers who do not take the tip credit, the Department of Labor has expressly taken the position in the preamble to the final regulation that tips are the property of employees. Therefore, by deleting some of the language previously used in the regulations, the Department of Labor has clarified its position that employers may not retain employee tips regardless of (1) whether they take a tip credit, or (2) whether they pay an employee cash wages in excess of the minimum wage.

Employers with tipped employees should be especially mindful of the final regulation's new "notice" requirements. Even though the Department of Labor did not mandate that employers provide notice to employees in writing, employers who apply a tip credit should strongly consider using a written acknowledgement that adheres to the final's regulations requirements.

If you have any questions about the revised regulations, please contact the authors of this article, David Prather, dprather@fordharrison.com, a partner in our Memphis office, or Dylan King, dking@fordharrison.com, an associate in our Memphis office, or the Ford & Harrison attorney with whom you usually work.

In Carder v. Continental Airlines (5th Cir. March 22, 2011), the Fifth Circuit Court of Appeals held that the Uniformed Services Employment and Reemployment Rights Act (USERRA) does not provide a cause of action for harassment claims. Accordingly, the Court affirmed the dismissal of a class action filed against the airline by a group of pilots who claimed they were subjected to a hostile work environment because of their military service and service obligations.

One of the purposes of USERRA is to prohibit discrimination and acts of reprisal against service members because of their service. Specifically, USERRA provides that members of the uniformed services "shall not be denied initial employment, reemployment, retention in employment, promotion, or any benefit of employment" on the basis of that membership. Although the text of the statute defines "benefits of employment" to include a long list of terms, it does not refer to "harassment, hostility, insults, derision, derogatory comments, or any other similar words." Thus, the court held that the express language of the statute does not provide for a hostile work environment claim.

Further, the court found that Congress did not intend to create a cause of action under USERRA for harassment of service members. First, the court noted that the language of USERRA is not similar to that of other antidiscrimination laws that have been held to prohibit harassment. The court noted that in Meritor Sav. Bank, FSB v. Vinson, the U.S. Supreme Court relied heavily on Title VII's language prohibiting discrimination with respect to the "terms, conditions or privileges of employment" in permitting a plaintiff to assert a harassment claim under Title VII. The court held that the Meritor opinion makes it clear that it is the word "conditions" in particular that the Supreme Court relied on in inferring a claim for harassment under Title VII.

Although USERRA was passed in 1994, years after the Supreme Court's decision in Meritor was announced, it does not include the phrase "terms, conditions, or privileges of employment" or similar wording. The court held that if Congress intended to create a cause of action for harassment based on military service under USERRA, it could have easily expressed that intent by using this phrase. According to the court, the fact that Congress did not do so but instead used the narrower term "benefits of employment" indicates that "Congress intended to create a somewhat more circumscribed set of actionable rights under USERRA."

Further, the court found little evidence that employers harbor a negative stereotype about military service "or that Congress believes they do." The court also found nothing in the legislative history of USERRA to indicate that Congress "believed invidious and irrational harassment of members of the military in the workplace comparable to harassment addressed by Title VII is a widespread social problem in need of a remedy." Bolstering its decision, the court noted that the Department of Labor's regulations implementing USERRA do not mention employer harassment on the basis of military service, the creation of a hostile work environment or any other type of comparable claim.

Thus, while clarifying that "nothing in this opinion alters the ability of service members to sue under USERRA for the denial of contractual benefits of their employment on the basis of military service as defined in the statute," the court concluded that "service members may not bring a freestanding cause of action for hostile work environment against their employers."

If you have any questions regarding this decision or the requirements of USERRA, please contact the Ford & Harrison attorney with whom you usually work.

This article is a continuation of Ford & Harrison LLP's focus on the use of arbitration agreements to protect employers from collective/class-action exposure under the Fair Labor Standards Act.

On April 27, 2011, the United States Supreme Court issued AT&T Mobility LLC v. Concepcion addressing the enforceability of an arbitration agreement in a consumer contract that prohibited classwide arbitration. In a 5-4 decision, the Court held that the agreement was enforceable, reversing the Ninth Circuit's determination that the agreement prohibiting class claims was unconscionable under California law. The Concepcion decision is a strong indication that an arbitration agreement prohibiting classwide arbitration in the employment context would be enforceable.

Vincent and Liza Concepcion entered into an agreement for the sale and servicing of cellular telephones with AT&T. The agreement provided for arbitration of all disputes between the parties. The agreement specified that all claims be brought in the parties' "individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding." Subsequently, the Concepcions filed suit against AT&T in federal court over a dispute regarding their cell phone contract.

AT&T moved to compel arbitration pursuant to the terms of the contract it held with the Concepcions. The arbitration agreement included favorable terms for customers – claims could be brought in the county in which the plaintiff resided or in magistrate court, and provided that AT&T would pay at a minimum a recovery of $7,500, plus twice the amount of the plaintiff's attorneys' fees, if a plaintiff obtained an award greater than AT&T's final settlement offer. The District Court denied AT&T's motion based on a California Supreme Court case, Discover Bank v. Superior Court, 113 P.3d 1100 (2005), which held that arbitration provisions in most consumer contracts are unconscionable. The Ninth Circuit affirmed, holding that the Discover Bank rule was not preempted by the Federal Arbitration Act (FAA) because that rule was applicable to contracts generally in California.

Section 2 of the FAA makes arbitration agreements "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. §2. Under California law, courts may refuse to enforce contracts based on the doctrine of unconscionability. In Discover Bank, the California Supreme Court essentially held that class-action waivers in arbitration agreements in the consumer context were unconscionable, and thus unenforceable. In Concepcion, the United States Supreme Court framed the issue before it as: "whether §2 [of the FAA] preempts California's rule classifying most collective-arbitration waivers in consumer contracts as unconscionable."

The United States Supreme Court held that requiring classwide arbitration would interfere with the fundamental attributes of arbitration, and noted that the "principle purpose of the FAA is to ensure that private arbitration agreements are enforced according to their terms." To that end, parties may agree to limit the issues subject to arbitration, arbitrate according to specific rules, and limit with whom a party will arbitrate its disputes. By applying the Discover Bank rule, the California courts interfere with the principle purpose of arbitration. The Court went on discuss how class arbitration differs from bilateral arbitration by 1) undermining the efficiency of arbitration by making arbitration slower and more expensive; 2) requiring procedural formality; and 3) increasing the risks to the defendant, because mistakes are more frequent in arbitration, and the effect of any mistake would be magnified with class arbitration.

Employers have no greater weapons to prevent collective or class-action lawsuits by employees than the Supreme Court's decisions in Concepcion and Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 130 S. Ct. 1758 (2010). In Stolt-Nielsen, the Supreme Court held that "a party may not be compelled under the [FAA] to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so." (For a link to Ford & Harrison's Legal Alert regarding the Stolt-Nielsen decision, go to http://www.fordharrison.com/shownews.aspx?show=6159). In Concepcion, the Court took an additional step in enforcing arbitration agreements that contain class-action waivers.

Class- and collective-action claims are becoming increasingly frequent and expensive for employers, with claims arising under the Fair Labor Standards Act (FLSA) and state wage-hour claims leading the way. Although Concepcion involved a consumer contract, the Court's analysis likely would apply to arbitration agreements in the employment context. If anything, consumer contracts, like those in Concepcion, are more "unconscionable" than those found in the employment context because employment claims are often brought individually and are generally for more money than consumer contracts. Usage of class-action waivers will undoubtedly face additional obstacles – i.e. the National Labor Relations Board has filed charges alleging that class-action waivers violate employees' right to engage in concerted activities – however, this opinion is another strong signal from the United States Supreme Court that it will favor the FAA and arbitration agreements entered into between parties. Arbitration agreements could be used to significantly reduce liability from class-action claims.

Employers stand to benefit tremendously from the Supreme Court's Concepcion decision, if they wish to implement arbitration agreements to avoid class actions. Employers would have a variety of options to implement arbitration agreements with class-action waivers. These arbitration agreements can be tailored to fit an employer's specific needs. For example, the agreement could apply only to wage-hour claims, leaving claims arising under Title VII to federal courts. Employers should consider whether using arbitration agreements would suit their employment needs.

If you have any questions regarding the Court's decision or the issues addressed in this article, please contact the authors, John Allgood, jallgood@fordharrison.com, Jeff Mokotoff, jmokotoff@fordharrison.com, or Henry Warnock, hwarnock@fordharrison.com, attorneys in our Atlanta office, or the Ford & Harrison attorney with whom you usually work.