by Jackson Lewis

Breathing a sigh of relief over a slight downward turn in the number of employment related lawsuits might be welcome for many employers, but it would be premature. While the number of new cases filed in federal courts in 2006 was down 4% from 2005, the litigation lottery is being wagered and won in more employment-related class actions and multiple plaintiff lawsuits. Perhaps this explains why attorneys in corporate legal departments across the U.S. still consider labor and employment issues the top litigation concern for employers.

Several recent developments in California may increase these concerns immeasurably for employers everywhere. In a closely watched case alleging gender discrimination in pay and promotional opportunities, a panel of the U. S. Court of Appeals for the Ninth Circuit has ruled that the largest class ever certified can go forward with 1.5 million women, including part-time workers, entry level employees, and managers. In another case, the California Supreme Court has ruled that class action plaintiffs' attorneys are entitled to broad access to information about other potential class members, who specifically have not opted out of the information gathering process. These rulings are a boon to plaintiffs' counsel and are likely to result in an increase in class action filings not only in California but across the country.

Anecdotal evidence suggests that class and collective actions alleging improper calculation and payment of wages, violations of fiduciary duties involving pension and welfare benefit plans, job discrimination, and other employer misconduct are flourishing. "This is a reminder that effective corporate governance demands employers adopt formal, disciplined risk management to help them anticipate risks, and that they take other preventive steps to protect their companies," counsels Jackson Lewis partner David R. Jimenez with the firm's Corporate Governance and Class Action Litigation practice areas. "Conducting an internal employment practices audit with the assistance of outside counsel will help to uncover vulnerabilities before they come to the attention of plaintiffs' attorneys, government enforcement agencies or unions. This pro-active risk management effort also will provide a framework for corrective action and preserve the confidential nature of the information in the event of litigation."

Cashing in on Collective Claims for Wage and Hour Law Violations

One of the most prolific areas for class and collective actions is the calculation of and payment for hours worked. In 2006, the ten highest settlements involving violations of federal wage laws totaled more than $500 million, including claims for unpaid overtime resulting from the misclassification of non-exempt employees, the incorrect calculation of straight time on which overtime pay is based, and the failure to pay for all compensable hours worked. Most of these actions were filed in California where the state labor laws also have given rise to mega-claims for violations of meal breaks, rest periods, and recordkeeping requirements.

In the past several years, financial services have been particularly hard hit with dozens of class actions alleging pay practice illegalities and seeking millions of dollars in back pay and damages. On the horizon are more claims that employers have misapplied leave laws and miscalculated available leave time. In 2006, an employer alleged to have misclassified 20,000 stock brokers as exempt employees not entitled to overtime under federal wage and hour law agreed to a settlement of $98 million. The plaintiffs also claimed the employer's policy of withholding partial commissions for disputed client transactions unlawfully skewed the amount of base pay upon which their overtime pay should be calculated. A subsequent opinion letter from the Department of Labor takes the position that "registered representatives" qualify for the administrative exemption from overtime under the Fair Labor Standards Act. However, opinion letters are nonbinding and did not prevent the filing of similar collective actions.

A package delivery services employer agreed to a settlement of $87 million in 2006for its alleged failure to provide 20,000 drivers with required meal breaks and rest periods under California labor law.

A group of airline employees have filed a class action charging that the employer's method of counting leave bank time resulted in a net loss of their available leave time in violation of their rights under the Family and Medical Leave Act. ERISA Class Claims for Benefit Plan Mishandling Another major source of class and multiple plaintiff litigation is retirement, pension, 401(k), and welfare benefit plans covered by the Employee Retirement Income Security Act.

Settlements in ERISA class actions in 2006 totaled hundreds of millions of dollars, and among the most costly were those involving breach of fiduciary duties owed to 401(k) plan participants. Many employers attempt to reduce ERISA liability by giving participants the right to direct their401(k) investments among an array of fund options. However, even if the plan meets the statute's specific requirements, there can be significant exposure in the areas of policy statements, fund selections, fund monitoring, and information sharing. A media company agreed to a $100million settlement of claims brought under the Employee Retirement Income Security Act for breach of fiduciary duty for 65,000 plaintiffs participating in the employer's 401(k) plan. Among the allegations were charges of improperly investing in the employer's own stock fund, failing to disclose material information about plan assets and benefits, and failing to appoint fiduciaries with the necessary knowledge and expertise.

A telecommunications company agreed to settle the claims of over 63,000 401(k) plan participants against the company, its board of directors, the plans' administrative committee, and the plans' directed trustee. The charges included allowing participants to hold shares of company stock, permitting the stock to remain as an investment option, and failing to disclose information about the plans' investment in that stock and a failed merger with another publicly traded company. The settlement requires the company to increase its 401(k) matching contributions and to provide financial planning services to its employees. The ten highest settlements involving violations of federal wage laws totaled more than $500 million.

New Phase for Discrimination Class Actions

Although reports indicate the number of employment discrimination lawsuits being filed in federal courts has fallen slightly over the past several years, to get the whole story, employers must look beyond that number and at the multiple plaintiff and class action lawsuits alleging discrimination on the basis of race, sex, age, and national origin. As noted earlier, gender discrimination is the basis for the largest class action ever filed on behalf of 1.5 million part-time, entry level, hourly employees and salaried managers. Disability discrimination continues to outpace the trend where recent rulings have favored plaintiffs in classwide claims under the Americans with Disabilities Act. As a result, employers may be more vulnerable to charges that broadly applied job requirements and uniform injury prevention, absence management, workplace safety, and wellness programs fail to meet case-by-case evaluation and interaction mandates.

The rise in disability discrimination claims is not the only indicator of increasing interest in large scale litigation. In some cases, the Equal Employment Opportunity Commission initiates or participates in these actions, and that trend likely will grow with the agency's announcement in 2006 of a new enforcement emphasis on classwide cases. The commission has restructured itself to facilitate investigating and prosecuting pattern or practice, policy and/or class cases where the alleged discrimination has a broad impact on an industry, profession, company, or geographic location. According to the EEOC, each district office must develop Systemic Plans to identify and investigate systemic discrimination in a coordinated, strategic, effective manner, and the Office of General Counsel is directed to model its prosecution of systemic cases on a national law firm model that brings in agency staff with the particular expertise needed in each case.

What Protection May Be Available to Employers?

Employers faced with defending a class action or multiple plaintiff litigation may find some relief in the provisions of the Class Action Fairness Act of 2005, enacted specifically to address concerns about the burdens on the court system. The effect has been positive for employers, since CAFA has forced more plaintiffs into federal court where, unlike in state courts, damages in some employment cases are limited. Bringing class actions under federal court rules also makes class certification a tougher hurdle for plaintiffs who must show commonality to succeed. When certification is denied, the employer is in a far better position either to defend the allegations or negotiate an acceptable settlement. While helpful, CAFA has not stemmed the tide of class and collective action lawsuits. Whether a class action is filed in federal or state court, or certification is successful, many employers ultimately will have no practical alternative but to agree to a potentially bottom-line busting settlement.