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House, Senate Democrats Press Labor Board on Recent Rulings

Sen. Edward Kennedy did something Thursday, December 13, he had never done before in his 45 years in Congress. He chaired a House hearing.


Kennedy took the gavel at a joint session of the House and Senate labor committees when House members departed for a vote. His brief leadership of the hearing on recent decisions by the National Labor Relations Board was more than a Capitol oddity.


It drove home the point that Democrats are upset with NLRB rulings they believe are curtailing unionization and collective bargaining. Among the witnesses Kennedy and his colleagues grilled was NLRB chairman Robert Battista.


Battista appeared before the committees just two days before his term expires. There is no word yet from the White House whether he or two other board members whose appointments will run out when Congress breaks for the holidays will be nominated again to serve.


But when they or their replacements are selected, they should be fully scrutinized by the Senate rather than slipped onto the NLRB through a recess appointment, said Rep. Robert Andrews, D-New Jersey and chairman of the House labor subcommittee hosting the hearing.


Andrews believes several September NLRB decisions reflected an ideological bent of the quasi-judicial agency’s three-Republican majority to limit unionization.


So Andrews invited his Senate colleagues to the hearing to demonstrate that NLRB positions should go through the regular Senate confirmation process.


“This should send a message to the administration—recess appointments are off limits,” Andrews said in an interview after the hearing. “Recess appointments would subvert the role of the Congress.”


The focus of the hearing was several NLRB decisions in September, a month in which the board decided 70 cases. One that drew particularly strong Democratic ire involved Dana Corp.


The board ruled 3-2 that following union certification through a voluntary card-check process, employees have 45 days to file a petition for a vote on decertification. The vote would occur if 30 percent of workers back it.


Union advocates say the decision undermines voluntary recognition of unions and is one of many indications that the board majority is fundamentally anti-union.


“The board is notorious for its seesawing with every change of administration,” said Wilma Liebman, a Democratic member of the board. “But something different is going on—more ‘sea change’ than ‘seesaw.’ ”


She asserted that Republican appointees give more weight to business prerogatives and to the right of workers not to form a union than they do to supporting collective bargaining.


“It’s the first time the NLRB has ranked statutory priorities in that way,” she said. “In some ways, it seems, labor law has been turned inside out.”


Battista rejected the notion that the NLRB undermines unionization. He said that the agency has collected $110.3 million in back pay in the current fiscal year and has reinstated 2,456 employees. Over his five years as chairman, $604 million has been collected in back pay and 13,279 employees have been reinstated.


He also said 2,439 election petitions were filed in the last fiscal year and 1,559 elections conducted, with 93 percent being held within 56 days. Unions won 54 percent of the time.


Battista also said that during the course of his chairmanship, the NLRB backlog has been reduced from 621 to 207 cases. He denied that the September rush was unusual. In fact, the 70 cases decided this fall were the second fewest in the past five years.


He said the board does not take sides between workers and companies, but tries to ensure employees can freely choose or reject a union. If they embrace representation, the board “encourages collective bargaining,” he said.


“The law is neutral and so is this agency,” he said. “We’ve done a good job making the agency more productive and efficient. The vast bulk of our unfair labor disputes are dismissed or settled very early in the game.”


In response to criticism from a House Democrat, he said, “We may not be champions to the unions, but we’re certainly champions to the employee.”


Democrats took sharp exception. “This board has undermined collective bargaining at every turn,” Kennedy said.


He and other Democrats asserted that increasing the number of people in unions will foster higher wages and more generous benefits.


“The decline of the middle class in this country is the result of the decline of unions in this country,” said Sen. Sherrod Brown, D-Ohio. About 12 percent of U.S. workers are part of a union.


Republicans, however, criticized the Democratic majority for holding the hearing because it encroached on the judicial branch of government. They also implied that the meeting served to amplify union attacks on the board.


“Today’s hearing is little more than hollow political theater,” said Rep. John Kline, R-Minnesota.


It’s too early to tell whether Democrats will draft legislation to overturn recent NLRB decisions.


“I would want to reserve judgment on that,” Andrews said.


—Mark Schoeff Jr.

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Handed Down

Some activities in life seem ready-made for litigation. Unfortunately, work is one of them. Every day in America, a company and one of its employees (or former employees) are hard at work, not on the production line, or in the cubicle farm, but engaged in the business of duking it out in a deposition or courtroom. Sometimes the decisions tip in favor of the employee; sometimes it’s an employer win. But there are cases that go beyond the individual concerns of one company and one worker. They have an effect on all U.S. enterprises, and all employees.


    The following is Workforce Management‘s list of the top 10 employment law decisions of 2007, as compiled from interviews with attorneys around the country. While such a list is obviously subjective, it does reflect some of the most contentious legal issues currently facing employers—from wage and hour disputes and class actions to employee mental illness and health care benefits. Two cases on the list involve religious expression in the workplace. “We’re seeing more of these cases because employees are increasingly seeking to express their beliefs in the course of performing their work duties,” says attorney Jeffrey I. Pasek of Cozen O’Connor in Philadelphia.


Ledbetter v. Goodyear Tire & Rubber Co. U.S. Supreme Court 127 S.Ct. 2162 (May 29, 2007)
    In the undisputed blockbuster employment law decision of the year, a 5-4 majority of the Supreme Court held that employees claiming Title VII pay discrimination must file an EEOC complaint within 180 days of an adverse pay-setting decision even if subsequent paychecks are “infected” by discriminatory conduct. “[T]he 180-day EEOC charging deadline is short by any measure,” Justice Samuel A. Alito said, but “reflects Congress’ strong preference for the prompt resolution of employment discrimination allegations through voluntary conciliation and cooperation.”


    Pasek says the decision clarifies the scope of the “paycheck accrual rule” of Bazemore v. Friday, 478 U.S. 385 (1986), by limiting it to “a current violation, not the carrying forward of a past act of discrimination.” He also believes the 180-day deadline is “a carefully crafted legislative compromise.” But Justice Ruth Bader Ginsburg, writing for the dissenters in Ledbetter, said the majority had ignored the “realities of the workplace,” noting that a female employee “may have little reason even to suspect discrimination until a pattern develops incrementally and she ultimately becomes aware of the disparity.”


    In July, the House of Representatives passed legislation to overturn Ledbetter by restarting the 180-day deadline with each payment of a discriminatory wage. President Bush has threatened to veto the measure.


Dukes v. Wal-Mart 9th U.S. Circuit Court of Appeals 474 F.3d 1214 (February 6, 2007)
    The gender discrimination case of six female Wal-Mart employees is the largest employment class action to be certified in American legal history. The plaintiffs allege that the discriminatory practices they suffered are common to all 1.5 million women who worked for Wal-Mart in the U.S. during the relevant time period covered by the suit.


    Appealing a trial judge’s certification order, Wal-Mart argued that it has a due-process right to present a defense to each individual’s claims. But the 9th U.S. Circuit Court of Appeals in San Francisco agreed with the lower court that “it would be better to handle this case as a class action instead of clogging the federal courts with innumerable individual suits litigating the same issues repeatedly. … Although the size of this class action is large, mere size does not render a case unmanageable.”


    Commentators differed on the legal significance of the case, but Pasek says, “The bottom line is that we’re living in an age of new-found efforts to have class actions in the employment area.”


Noyes v. Kelly Services 9th U.S. Circuit Court of Appeals Case No. 04-17050 (May 26, 2007)
    A former temp agency employee alleged “reverse” religious discrimination, saying she was denied a promotion at Kelly Services because she does not belong to a small religious group, the Fellowship of Friends. A supervisor who is a fellowship member chose another member to fill the position, but Kelly alleged that the selection was based on merit.


    Reversing summary dismissal of the case, the 9th Circuit found the trial judge had put too heavy a burden on Lynn Noyes to show that the reasons Kelly proffered for not promoting her were merely a pretext. “[T]he district court required Noyes to prove the ultimate issue of unlawful discrimination—that `she was passed over for the promotion specifically because she was not a member of the Fellowship,’ ” the opinion said. “In doing so, the district court erroneously heightened the standard on summary judgment.”


    “The case suggests courts will be pretty accepting of reverse discrimination claims if the plaintiff has some evidence, if not direct evidence,” says Gregory C. Tenhoff of Cooley Godward Kronish in Palo Alto, California. “You don’t see a lot of these cases, but you do see them.”


    Another attorney, Teresa R. Tracy of Berger Kahn in Marina del Rey, California, sees Noyes as reminding employers “of the need to ensure that only nondiscriminatory factors are considered when making employment decisions.”


Webb v. City of Philadelphia U.S. District Court, Eastern Pennsylvania Case No. 05-5238 (June 12, 2007)
    The Philadelphia Police Department denied a Muslim officer’s request for permission to wear a traditional headpiece, or “khimar,” while on duty, saying it would violate the department’s uniform policy. Summarily dismissing Kimberlie Webb’s religious bias claims, U.S. District Judge Harvey Battle accepted the city’s “undue hardship” defense.


    The uniform policy “has a compelling public purpose,” he wrote. “It recognizes that the Police Department, to be most effective, must subordinate individuality to its paramount group mission of protecting the lives and property of the people living, working and visiting the City of Philadelphia.” The prohibition on officers’ wearing of religious attire “is designed to maintain religious neutrality … for the good not only of the police officers themselves but also of the public in general.”


    Pasek, who is defense co-counsel in the case, notes that employment cases involving “garb-specific religious requests” are cropping up more frequently, particularly in the public sector. “What do you do if someone shows up for work wearing a burqa?”


    The judge’s ruling in Webb, Pasek says, “has given confidence to public employers” that courts will uphold workplace clothing rules if the employee’s appearance is “an essential element of the service they provide to the public.” Webb has appealed the decision to the 3rd Circuit.


Gambini v. Total Renal Care 9th U.S. Circuit Court of Appeals 480 F.3d 950 (March 8, 2007)
    Courts around the country are disagreeing over how to treat cases of workplace misconduct involving employees with mental illnesses. In Gambini, an office worker with bipolar disorder was fired after she yelled profanities at her supervisor during a manic episode. A jury rejected her wrongful termination case, but the 9th Circuit ordered a new trial because of instructional error.


    Conduct resulting from a disability is considered part of the disability, rather than a separate basis for termination, the court ruled, and “where an employee demonstrates a causal link between the disability-produced conduct and the termination, a jury must be instructed that it may find that the employee was terminated on the impermissible basis of her disability.” Gambini’s ” `violent outbursts’ … were arguably symptomatic of her bipolar disorder.”


    Gambini conflicts, for example, with Mammone v. Harvard College, in which the Massachusetts Supreme Judicial Court last year ruled that an employer does not violate discrimination law “by terminating an employee for egregious misconduct stemming from any recognized handicap (as opposed to termination for the handicap itself).”


    “You’ve got a real split here,” Tenhoff says. “From an employer’s standpoint, what are your options?”


Prachasaisoradej v. Ralphs Grocery Co. California Supreme Court Case No. S128576 (August 23, 2007)
    A sharply divided California Supreme Court gave employers a big victory by throwing out the proposed class action of a grocery store produce manager who challenged the legality of his employer’s incentive compensation plan. Under Ralphs Grocery’s formula, a store’s profitability is calculated by subtracting expenses, including workers’ comp costs, from revenue. The profit figure is then compared with preset targets to determine what, if any, supplementary wages should be paid to employees.


    Justice Marvin Baxter, writing for a 4-3 majority, said employees did not suffer deductions from their regular wages and that the court could not “conclude that such a supplementary incentive compensation system, beneficial to both employer and employees, contravenes the wage-protection policies of the Labor Code.” But the dissent warned that the structure of the plan “creates a disincentive for injured employees to file even valid [workers’ comp] claims, as well as an incentive for fellow employees to pressure injured workers not to file claims.”


    Garry G. Mathiason, an employment law specialist at Littler Mendelson in San Francisco, said, “There has been concern [among employers] that bonus programs are inherently flawed because they allegedly encourage an underreporting of workers’ compensation claims.” The majority view in the Ralphs case “could impact thinking in many courts beyond California.”


American Association of Retired Persons v. EEOC 3rd U.S. Circuit Court of Appeals Case No. 05-4594 (June 4, 2007)
    Under a proposed EEOC regulation, the common employer practice of coordinating retiree health benefits with Medicare would be exempt from the prohibitions of the Age Discrimination in Employment Act. AARP challenged the regulation, citing an earlier 3rd Circuit precedent—Erie County Retirees Association v. County of Erie, 220 F.3d 193 (2000)—which held that Medicare coordination violates the ADEA if the result is that the employer provides lesser benefits to older Medicare-eligible retirees than to younger retirees.


    The Philadelphia-based 3rd Circuit recognized “with some dismay that the proposed exemption may allow employers to reduce health benefits to retirees over the age of sixty-five while maintaining greater benefits for younger retirees.” But without overruling Erie, it denied AARP’s challenge, finding the regulation is “a reasonable, necessary and proper exercise of [the EEOC’s] authority, as over time it will likely benefit all retirees.”


    Since Erie, some employers faced with increased health costs have chosen to reduce all retiree benefits to a lower level. Attorneys believe that the AARP case should remove that incentive. “The case impacts almost all health plans in the U.S.,” Mathiason says, “since, generally, employees are required to enroll for Medicare benefits if they are eligible.”


Arismendez v. Nightingale Home Health Care 5th U.S. Circuit Court of Appeals Case No. 06-40593 (July 23, 2007)
    In explaining to Mariluz Arismendez, a customer service rep for a medical equipment firm, why she had been fired, her immediate supervisor, Veronica Vela, told her she had a “business to run” and “could not take having a pregnant woman in the office.”


    A trial judge threw out a jury’s $1 million gender bias award to Arismendez, agreeing with her employer that because Vela “did not exercise any authority over [the regional manager’s] decision to terminate Plaintiff, Vela’s comments amount to nothing more than stray remarks.” But the New Orleans-based 5th Circuit ruled that the verdict was reasonable no matter what the “formal hierarchy” of the employer might be.


    “[T]his Court looks `to who actually made the decision or caused the decision to be made, not simply to who officially made the decision,’ ” it said, and the trial “evidence is sufficient for a jury to find that Vela exerted influence over the decision to terminate Arismendez.”


    William D. Deveney, a partner at Elarbee, Thompson, Sapp & Wilson in Atlanta, observes that a similar case was before the U.S. Supreme Court this year in BCI Coca-Cola Bottling v. EEOC, but the employer withdrew its appeal before the case was heard. “The circumstances under which an employer may be held liable for the discriminatory animus of a subordinate manager or supervisor who was not the final decision-maker remains an open question,” he said.


Cintas Corp. v. NLRB D.C. Circuit Court of Appeals 482 F. 3d 463 (July 23, 2007)
    Employee rights trumped an employer’s confidentiality policy in a case brought against a supplier of workforce uniforms by a labor union. According to its “partner”—or employee—manual, Cintas Corp. protects “the confidentiality of any information concerning … its partners,” and employees may be disciplined for releasing confidential information. Section 7 of the National Labor Relations Act protects the communication rights of employees, and the Union of Needletrades, Industrial and Textile Employees successfully challenged the policy before the National Labor Relations Board as an unfair labor practice.


    Affirming the NLRB, the D.C. Circuit Court of Appeals found the language of the policy was “facially overbroad” and “expansive.”


    “[B]ecause the Company has made no effort in its rule to distinguish [S]ection 7 protected behavior from violations of company policy, we find that the board’s determination is `reasonably defensible,’ and therefore entitled to our considerable deference,” it concluded, rejecting Cintas’ argument that construing the phrase “any information” literally invites absurdity.


    In light of Cintas, recommends Jill Panagos of Mc Glinchey Stafford in Houston, both union and nonunion employers should examine whether their confidentiality policies “infringe on employee rights [protected] under the NLRA. … Cintas makes it clear that such policies are unlawful if they result in employer interference with employees exercising their right to engage in activities for the purpose of collective bargaining.”


Sprint/United Management Co. v. Mendelsohn U.S. Supreme Court Case No. 06-1221 (pending)
Several attorneys pointed to the age discrimination case of a former employee of the telecom firm Sprint as the one to watch in the Supreme Court’s current 2007-08 term. A divided 10th Circuit in Denver ruled that Ellen Mendelsohn could introduce “me too” evidence from other employees who also claimed they were discriminated against during a companywide reduction in force.


    “The outcome will be important in [determining] how cases are litigated, since plaintiffs routinely try to base a significant part of their own case on the experiences and beliefs of other employees who have also been the subject of an adverse employment action,” Tracy says.

Workforce Management, December 10, 2007, p. 33-39 — Subscribe Now!

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Answering the Call for Training

Sue Morse knows that high turnover goes hand in hand with running customer service call centers. Nevertheless, as senior vice president of human resources for StarTek Inc., Morse—along with her training team—has set out to upset the status quo.

    The best training strategy, she says, is to recruit wisely. Indeed, recruitment tops the list of activities at the Denver-based company, which provides outsourced customer service to wireless telecommunications carriers. Surging consumer demand for wireless products has fueled the opening of three new StarTek call centers in recent years, swelling its roster of service agents to 8,000.


    That growth also presents a challenge: how to find and attract people with an aptitude for a job that can be grueling. Rather than hire people, train them and hope they’ll work out, StarTek is putting more emphasis on assessing people’s abilities during recruiting.


    “Our training starts at the hiring phase. We put people through a screening process that has two parts,” Morse says.


    Step one assesses an individual’s technical competency, particularly computer skills. Yet being a computer whiz means little if a person lacks the desired attributes, such as patience, flexibility and a real desire to help customers. Of greater value, Morse says, is a subsequent personality assessment in which applicants respond to a series of questions designed to elicit their fitness for the job.


    “These are people who are going to be serving people on the phone [and doing so] over and over,” Morse says. “We want to know if they have an attitude that emphasizes service to our clients’ customers.”


Practice, practice
   Unlike some call centers, StarTek goes slowly when preparing new trainees. Before taking a single actual call, agents in training are immersed in a six-week-long simulation of how an actual call center operates. They learn basic skills, such as how to access customer accounts, but also more sophisticated technical information about each wireless carrier’s calling plans, coverage areas, service expectations and equipment. Trainees answer simulated calls and receive immediate feedback from supervisors on how well—or how poorly—they did.


    Those who survive the initial month and a half of training advance to “Academy Bay,” a pre-production environment that has a higher ratio of supervisors to agents.


    “Academy Bay gives supervisors a chance to observe our agents in action and to determine if they are applying what they’ve learned,” Morse says.


    StarTek’s push to improve agents’ skills probably is driven in part by recent business challenges. During the technology boom earlier this decade, StarTek shares traded above $70, but have been tumbling ever since. Earnings growth remains flat.


    Instability in the front office hasn’t helped. The company has had three CEOs since 2001. Amid the shake-up came news that 300 agents were laid off at its Petersburg, Virginia, facility, one of its newer centers. Shareholders were told the layoffs stemmed from one client’s “reduction in volume.”


Managing to motivate
   Call centers represent one of the fastest-growing services industries in the world. More than 125,000 call centers are in operation worldwide, with roughly 75,000 of them based in North America, according to research by Troy, Michigan-based J.D. Power and Associates. Yet turnover among these organizations remains disproportionately high, mostly because of employee job dissatisfaction or burnout, experts say.


    Penny Reynolds, a senior partner with the Call Center School in Lebanon, Tennessee, says call center organizations are desperate for strong managers who can drive employee retention. Higher pay and recognition may be enough to satisfy some employees, while others clamor for more responsibilities in hopes of advancing to higher positions.


    “Getting the right people is the biggest factor for call centers, but it’s up to supervisors to learn the different factors that motivate those individuals,” Reynolds says.


    Some call center organizations are implementing “screening assessment” tools when weighing whether to promote high-performing agents to positions of greater responsibility or leadership, Reynolds says.


    Promoting the right people is an area where StarTek excels, Morse says. All but three of the company’s 19 site directors advanced from other positions within the company. To help them succeed, StarTek provides these supervisors with access to coaching resources to help them build rapport with their employees.


    In addition, company trainers are required to obtain a certification that shows proficiency in adult-learning principals. They also are measured each month on factors such as class attrition, attendance rates and 360 feedback assessments by trainees.

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DOL Proposes Retirement Plan Fee Disclosure Rule

With cries in Congress growing louder for increased transparency on retirement plan fees, the Department of Labor proposed a new disclosure rule on Wednesday, December 12, that would give more insight into fees charged by certain service providers and any potential conflicts of interest that could influence the providers.


The proposed rule is the second of three fee-related regulations the DOL plans to issue. It requires service providers to disclose, in writing, to plan fiduciaries of 401(k) plans and other employee benefit plans all services to be furnished; all direct and indirect compensation to be received; and any potential conflict of interest, such as material third-party relationships, that could affect their objectivity under a service contract or arrangement.


“One of the department’s top priorities is improved disclosure in order to ensure that participants and fiduciaries have the information they need to make informed decisions,” U.S. Secretary of Labor Elaine L. Chao said in a statement. “We are moving quickly to implement regulations that foster fair, competitive and transparent prices for services as well as combat excessive or hidden plan fees.”


Under the Employee Retirement Income Security Act, plan fiduciaries are required to act solely in the interest of participants and beneficiaries and to pay only reasonable plan expenses that are necessary, said Bradford P. Campbell, assistant secretary for the Labor Department’s Employee Benefits Security Administration, in a press call. But because of the increased complexities within the financial services industry, it has become more difficult for plan fiduciaries to understand how service providers are compensated and whether conflicts exist, he said.


“We’re helping define what ‘reasonable’ means so it’s clear when that duty has been met,” he said.


The proposed regulation affects only certain providers: fiduciary service providers; providers of banking, consulting, custodial, insurance, investment advisory or management, record keeping, securities brokerage or third-party administration services; or providers that receive indirect compensation for accounting, actuarial, appraisal, auditing, legal or valuation services.


The Labor Department estimates that the cost of the proposed regulation, which falls on the service providers, will be about $52 million in the first year of implementation and about $36 million the second year. The benefits—which may include lower fees, increased efficiencies and some reduced costs—will outweigh the costs of compliance, the Department of Labor said.


Under the proposed rule, which will be published in the Federal Register on Thursday, December 13, plan fiduciaries are provided an exemption if they enter into contracts that are not “reasonable” because, unbeknownst to them, the service provider failed to comply with its disclosure obligations.


The new rule is the second of three fee-related regulations the Department of Labor will issue, Campbell said. The first regulation governs disclosure by plans to the public and government, while the last regulation, which will be issued “in the next couple of months,” will govern disclosure by plans to plan participants.


Filed by Sally Roberts of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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Incentives Help State Departmet Fill Postings in Baghdad

Diplomats recently demonstrated that the Iraq war is no more popular with them than it is among the general U.S. population.


    Members of the Foreign Service resisted when the State Department indicated in late October that it would use mandatory assignments at the U.S. Embassy in Baghdad, a policy that hasn’t been instituted since the Vietnam War.


    If a diplomat declines to go to Iraq, it could result in disciplinary action—including being fired.


    But since the original announcement, nearly half of the 48 vacant positions have been filled voluntarily. That means that about 90 percent of the 252 Iraq openings for next summer have been staffed, with seven months remaining to find more volunteers, according to John Naland, president of the American Foreign Service Association.


    By Thanksgiving, it should be clear how the State Department will fill its slots in Baghdad. One obstacle is getting people to serve in a country where duty can be perceived as a “death sentence,” in the words of a diplomat who spoke in an internal State Department meeting and was quoted by the Associated Press.


    Dangerous postings also can be common in the private sector—and companies use some of the same incentives that the State Department has in its repertoire to entice workers to take jobs in unstable regions.


    Depending on career level, a Foreign Service professional who takes a one-year Baghdad assignment could receive a 70 percent boost in base salary, premium pay for overtime, support for family members left behind, 10 weeks off and preference on the next assignment, says Nicole Thompson, a State Department spokesperson.


    Oil and industrial companies offer rich incentive packages for employees they send to volatile African countries like Angola and Nigeria, according to Fran Luisi, a principal with Charles¬ton Partners, an HR executive placement firm in Rumson, New Jersey.


    “They really are trying to recruit people to exotic locations,” Luisi says.


    The draw is more than money. Just as important is the opportunity to develop skills that will enhance careers.


    International experience on the ground “really adds value to your marketability in the corporate environment,” Luisi says. “There will be promotional opportunities. That tends to play well.”


    But much of the time, expatriate assignments in the private sector are not so exciting. They’re to more traditional—and safer—places like Europe and Asia.


    “Most companies aren’t going to be putting employees in harm’s way,” says Steve Kueffner, an international consultant at Watson Wyatt.


    When they are sent away, it’s usually for one or two years. That keeps costs down but provides enough time for cultural enrichment, Kueffner says.


    “The length of assignment is shorter than it was five or 10 years ago,” he says.


    At the State Department, the time frame for postings may vary, but the need to send senior officers with the right language and skill sets to threatening regions will remain constant.


    “Going into countries that are in transition is nothing new to the department,” Thompson says. “It has been done many times in the past, and we’ll continue to do it in the future.”


Workforce Management, November 19, 2007, p. 1, 3 — Subscribe Now!

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Pay Pals Face Fresh Fire Concerning Conflicts; Congress May Seek SEC Action

A scathing congressional report alleging widespread conflicts of interest among executive compensation consultants may lead to regulatory action that would force companies to disclose all the fees paid to such consultants for pay-package advice and other services.


    What’s more, some consultants say expanded disclosure could force multi-service firms to split or sell off their compensation businesses—or at least inspire partners to leave and launch their own boutique consultancies for corporate boards that want independent executive compensation advice.


    The report, commissioned for California Rep. Henry Waxman, the Democratic chairman of the House Committee on Oversight and Government Reform, found that roughly half of Fortune 250 companies used compensation consultants that were also providing much more lucrative services—such as employee benefits administration, human resources management and actuarial services—to these major clients at the same time.


    While current Securities and Exchange Commission rules don’t require companies to reveal the fees paid for these various services, many panelists at a congressional hearing on the issue in Washington last week—including both shareholder advocates and compensation consultants—agreed that more disclosure is needed. A staffer on the oversight committee confirmed that an e-mail has been sent to the SEC to suggest a follow-up meeting on the issue, but the staffer says nothing has been scheduled yet. An SEC spokesman declined to comment.


    Such added disclosure could lead to a full-blown restructuring of the industry, not unlike what happened to the auditing industry after conflicts of interest were exposed in the late 1990s. At that time, leading auditing firms like KPMG and PricewaterhouseCoopers sold off their consulting practices, notes Joseph Rich, chairman of Pearl Meyer & Partners, a compensation consultant working only for board clients.


    “The full-service firms must be having conversations about possibly selling off their executive compensation businesses,” he says.


    The impetus for any upheaval is Waxman’s report, based on a seven-month investigation by his staff of the 250 largest publicly traded companies.


    The consulting firms asked to supply data were Frederic W. Cook & Co., Hewitt Associates, Mercer, the human resources consulting unit of Marsh & McLennan, Pearl Meyer, Towers Perrin and Watson Wyatt. Hewitt, Mercer, Towers Perrin and Watson Wyatt are full-service firms that can be hired by both boards and management; Cook, like Pearl Meyer, specializes in board-only work.


    The report’s findings included:


  • At 113 companies that use consultants with what the Waxman committee called conflicts of interest, the consultants on average received $200,000 to advise the company about CEO pay, and more than $2.3 million to provide other services.


  • More than two-thirds of Fortune 250 companies don’t disclose their compensation consultants’ conflicts of interest. In 30 cases, the report claimed, companies say their compensation consultants were “independent” when they were actually being paid for other services. For example, in its SEC filing, MetLife said its compensation consultant was independent even though it paid the consultant more than $7 million to provide other services.


  • There appears to be a link between the level of CEO compensation and the level of a consultant’s conflicts of interest. For example, the median CEO salary of the Fortune 250 companies that hired the consultants with what congressional researchers deemed the most conflicts of interest was 67 percent higher than the median salary of companies that did not use “conflicted consultants.”


    Some hearing participants took issue with that apparent link. Rep. Tom Davis, R-Virginia, the ranking Republican member, said the theory that “pliant and corrupt consultants, working both sides of the fiduciary street, take huge fees from management, then recommend unreasonably high compensation for those same managers” is an “interesting theory, one steeped in anti-corporate populism. … But there’s little proof it’s true.”


    Indeed not all members of Waxman’s committee agreed with the findings, or that there was any need for the special hearing in the first place. Rep. Lynn Westmoreland, R-Georgia, complained it was another step “on our march to socialism,” while Rep. Mark Souder, R-Indiana, said the hearing was “one of the most appalling and embarrassing hearings we’ve ever had.”


    James Reda, an independent consultant in New York who spoke at the hearing, told Financial Week that he recommends the SEC require companies to disclose all fees paid to consulting firms on their annual proxy statements. “If that happens, I could see Hewitt or Towers Perrin spinning off their executive compensation practices,” he said, “or consultants from those firms leaving to start their own businesses.”


    But Donald Lowman, managing director of Towers Perrin, called such speculation “wishful thinking,” and pointed out that any analogy to the audit industry was flawed. “We’re not the auditing profession, we don’t have ‘standards,’ companies are not required to use us, and they’re certainly not required to follow our advice,” he said. “We’re certainly not having those conversations.”


    Lowman says his firm will continue with business as usual, which includes “understanding and managing and mitigating conflicts. And where there are conflicts that would in any way influence our judgment, we won’t accept the work. That’s something that’s not understood [out there]. We do walk away.”


    He also discounted congressional charges of cross-selling at the full-service firm. The Waxman report included as an example of egregiousness a job posting by Towers Perrin that called for “minimum revenue generation from all sources (i.e., not just executive compensation services) of $750,000.” Lowman says that based on the sales figure, the ad was for a junior-level position.


    Such a position, he explained, would not interact directly with a compensation committee or CEO, but would work with middle management. (A similar Mercer ad cited by the committee was also for a non-CEO compensation position, explained company spokesman Charles Salmans.)


    At Watson Wyatt, compensation practice director Ira Kay also downplayed any need to spin off his unit.


    “We have sufficient safeguards to prevent conflicts of interest,” he said. “I don’t know anything about other work we may be doing at a company for which I provide executive compensation services.”


    Kay also said his firm could handle more disclosure: “We have a flexible business model and are prepared to do our business whatever comes our way.”


    Shareholder groups and governance watchdogs have targeted compensation consultants in recent years for what they believe to be their contribution to the dramatic increase in executive pay, too often without a coincident rise in shareholder value. In 1980, chief executives in the U.S. were paid 40 times the average worker’s pay; last year, the average Fortune 250 CEO earned more than 600 times the average worker’s pay, according to a report by the Institute for Policy Studies and United for a Fair Economy that was cited by the Waxman committee.


    Companies may already be moving toward using only independent pay consultants, regardless of any future regulation. Wachovia, Procter & Gamble, Pfizer, Cisco, Lockheed Martin and Verizon, for instance, have written policies prohibiting compensation companies from performing work for the management side of the company.


    “It’s one of those things directors never thought to ask about [before],” says Suzanne Hopgood, a director at DHB Industries and Acadia Realty Trust and owner of her own management consultancy. “But now it’s another question to add to our list that might keep us or the company out of trouble.”

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Avoiding Truth-in-Hiring Lawsuits

Under heavy pressure to pull in a top candidate, a recruiter exaggerates the pay and promotional opportunities for a position or conceals financial difficulties at the firm.


    The candidate leaves a secure, lucrative job to accept the position, only to discover that the recruiter overstated the opportunities. After a few months, the whole deal goes sour, and the employee sues.


    “These lawsuits are tort claims, and damages may include economic damages that may be almost unlimited,” says Peter Golden, partner in the Atlanta office of Hunton & Williams.


    Damages may cover lost job opportunities and lost salary. In addition, there may be compensatory awards for damage to reputation and emotional distress. In the most extreme cases, where a jury finds the statements made in the hiring process were clearly made in bad faith, there may be punitive damages intended to send a message to other employers.


    “We’ve definitely seen a rise in the number of truth-in-hiring lawsuits,” Golden says.


    Two trends are driving the increase. First, because top-notch candidates are in high demand, employers are competing aggressively for the best applicants and recruiters feel pressured to “sell” the company when they talk to candidates. “Misrepresentation claims arise out of these situations,” Golden notes.


    Second, the employment-at-will doctrine has become so strong in many states that employees who have been terminated often have no recourse stemming from the termination itself, so they reach for other vehicles that do not fall within the bounds of employment-at-will.


    “They go back and look at the employment situation from the very beginning and turn to tort claims,” Golden says. Many truth-in-hiring lawsuits arise after employment has been terminated.


    “Representations that originate with the recruiter or the hiring manager can come back to bite them,” Golden warns. “These lawsuits can sully a recruiter’s good name.”


    Golden reports that the most common scenario for these lawsuits arises when an employee is induced to leave a lucrative position for a new job, often because the recruiter or hiring manager told the candidate that a promotion to a higher position would occur within a short time frame.


    A candidate accepts a job in sales, for example, because during the interview the hiring manager stated that sales manager positions would open up within a few months. The new hire begins employment only to discover that none of the sales managers has any intention of leaving in the near future and no managerial positions will open up.


    These suits may also arise when a candidate leaves a job with a company that is financially stable for a new position at a company that the recruiter claims is also financially stable. In short order, the new hire learns the company is in trouble and layoffs may be imminent. “Typically in these situations, the employment relationship goes sour, and the employee quits or is terminated,” Golden says.


Trouble spots
    To avoid these lawsuits, employers should focus on two trouble spots, Golden advises. The first occurs during the interview process when a recruiter or hiring manager oversells the company.


    “At best, the end result is that the exaggerations get the candidate in the door, but they don’t stay in the job,” Golden says. The employer bears the cost of having to replace the employee and there is also a cost to the employer’s reputation. The worst-case scenario is that the employee leaves and files a lawsuit.


    The second trouble spot commonly occurs after the company has made an offer. The company learns the candidate is weighing multiple offers and the recruiter or hiring manager steps back in to try to sell the company again.


    “When recruiters and hiring managers are in the middle of a conversation with a candidate who is weighing multiple offers, these exaggerations may not seem like a big deal,” Golden says. “But they can bring trouble down the road.”


    Recruiters and hiring managers can avoid the risk of a truth-in-hiring lawsuit by following a few simple rules.


    “Tell the truth about the job and the company,” Golden advises. “Don’t make false promises. If you can’t bring the candidate in with the truth, then he or she is not the right fit.”


    Recruiters must avoid the temptation to tell candidates what they think candidates want to hear. “Recruiters should talk with the candidate about the good and the bad of the company,” Golden advises.


    Golden notes that the offer letter should contain details on the salary and job duties, but it should also contain disclaimer language and make it clear that the conditions outlined in the letter constitute only the expectations of the company.


    “Of course, if the disclaimer goes too far and the language is too strong, it can drive away top candidates,” he cautions. “So employers have to be careful on both ends. It’s a sticky situation.”


Covering contingencies
   Stephen Fox, principal in the Dallas office of Fish & Richardson, describes other situations that may trigger a truth-in-hiring lawsuit. Some employers choose not to run a background check until they know the candidate will accept the offer. The employer makes the offer, the candidate accepts, the employer runs the background check, the check reveals a problem, and the employer withdraws the offer.


    “The employee may assume that the information revealed by the check was incorrect or that the employer is using the background check as a pretext for withdrawing the offer,” Fox says. The employee may sue for breach of contract or discrimination.


    “Employers can easily avoid these cases by including in the offer a statement that the offer is contingent on a clean background check,” he advises.


    In another situation, the employer makes an offer, the candidate accepts, and the employer then withdraws the offer because the business that required new hires does not materialize or a contract is not awarded and additional employees are no longer needed.


    “In many cases, senior leadership may be aware that the business or the contract may not materialize, but recruiters have received instructions to hire new employees and senior leaders have not communicated the contingency to the recruiters,” Fox reports.


    Employers can address this situation by including employment-at-will language in the offer letter.


    “The employee may attempt to get around the employment-at-will defense by arguing that the employer made a representation and the employee accepted the offer, but the employer had some doubt about the work,” Fox says. “However, this is difficult to prove.”


    In many states, the employment-at-will doctrine is so strong that the courts will simply not allow this challenge, but courts in some states, including California, Massachusetts and Minnesota, welcome the chance to challenge the employment-at-will doctrine, Fox notes.


    Employees may sue for breach of contract, with damages equal to the pay not received during the time until the employee finds a new job, or the net difference in pay between the job offered and the new position.


    “Courts vary in how long they allow the net difference to continue, but one year is common,” Fox says. “There may also be exposure to attorney’s fees.”


    Fox advises employers to use a written offer for every position and include statements on any contingencies in the offer. He also notes that any statement on compensation and benefits provided should state the amount on a pay-period basis, such as the biweekly or monthly pay, not the annual salary. “Some Texas courts have held that a salary offered on an annual basis implies guaranteed employment for one year,” he says.


    Also, if the employer asks the employee to sign a confidentiality or non-compete agreement, the employer should reference the agreement in the offer letter as a necessary condition for beginning employment.


    “Otherwise, the employee may begin the job and then refuse to sign the agreement because it is more onerous than the employee expected,” Fox says. “The employer may then withdraw the offer, and the employee may sue based on lost opportunity.”


Pay and promotion promises
   Truth-in-hiring or fraudulent inducement lawsuits are common in the securities industry and other sectors that use commissions and high amounts of variable pay, according to Todd Hale, partner and co-chair of the labor and employment group in the Tucson, Arizona, office of Lewis and Rosa.


    “A recruiter or hiring manager tells a candidate that they will make a certain amount of money and the candidate leaves a good job under that promise,” Hale says. “Competition for brokers leads firms to dangle promises, and then it turns into a swearing contest about whether the promises were made.”


    A recruiter persuades a stockbroker to leave one large firm for another with promises that the broker will be provided with certain marketing tools that will allow the broker to earn much higher commissions. The employer does not provide the tools, the broker is not successful, and the broker sues for misrepresentation and asks for the difference in the compensation earned and the compensation that would have been earned if the tools had been provided.


    The key for employers is to ensure that recruiters are not allowed to make statements about how much the candidate will earn in commissions or variable pay.


    “Also, the employer should use written documents or offer letters that specifically disallow any promises or statements made during the recruiting process,” Hale advises. “The offer letter should explicitly state the terms of employment and stipulate that no variable pay is guaranteed.”


    “Employers must ensure that recruiters maintain a clear delineation between the potential in a particular job and the actual job,” Hale says. The best protection is a document that includes a disclaimer that all terms are spelled out in the document and no other terms are in effect.


    These documents are helpful but not a guarantee that a lawsuit will not occur; oral promises may still apply. Most important, employers need to educate recruiters and hiring managers to never make a promise that the company may not be able to keep.

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Lawmakers Urge Ending 401(k) Waiting Periods

Congress should seriously consider changing retirement savings plan law to eliminate waiting periods so employees can enroll immediately in 401(k) and other defined-contribution plans, two lawmakers said Tuesday, December 11.


“Long waiting periods don’t make any sense,” Rep. Rob Andrews, D-New Jersey, said during a briefing.


Rep. Andrews and Rep. George Miller, D-California, who chairs the House Education and Labor Committee, said other changes legislators should consider include requiring employers to offer automatic enrollment programs. Currently, about one-third of large employers offer such programs in which employees are automatically enrolled, with a stipulated percentage of their salaries contributed to the 401(k) plan unless they specifically opt out.


“We have to get people into the system,” Andrews said in referring to the need for both immediate and automatic enrollment.


Additionally, the lawmakers said consideration should be given to the federal government matching lower-income employees’ 401(k) contributions. They also said plan participants should have access to independent and unbiased investment advice, and that 401(k) plan investment fees be reasonable and clearly disclosed.


Andrews also said that tighter rules may be needed to make it more difficult for employees to withdraw 401(k) plan account balances prior to retirement, such as requiring that a pre-retirement distribution automatically be rolled over into a savings plan sponsored by an employee’s new employer.


Such distributions are costly to participants, Andrews says. Taxes and penalties are assessed when such funds are withdrawn.


The legislators’ suggestions, which they may turn into legislation, coincided with the release of a Government Accountability Office report which found that many employees eligible for 401(k) plans don’t enroll; of those that do enroll, many don’t put in enough to ensure that they will have adequate savings when they retire.


Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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Alaska Attorney General Sues Mercer Over Pension Plan Losses

Alaska’s attorney general has filed suit against Mercer seeking to recover the more than $1.8 billion the state says was lost because of Mercer’s misconduct as an actuary for its Public Employees’ Retirement System and Teachers’ Retirement System pension plans.


The suit, which was filed in state court in Juneau on Thursday, December 6, by Alaska Attorney General Talis Colberg, charges that the work of Mercer as an actuary for the plans was “riddled with significant errors.”


The suit says Mercer, which was the plans’ actuary from the 1970s until 2006, “made fundamental errors in methodology and even in basic calculations, and failed to assign competent, experienced personnel to work for the plans.”


The pension plans, which cover more than 80,000 retired and active participants, have unfunded liability of about $8.4 billion as of June 30, 2006, according to a statement issued by the office of Alaska Gov. Sarah Palin.


Responding to the suit, Mercer said in a statement: “To the extent the state has funding issues, they are caused by a number of economic factors, including skyrocketing medical costs, a downturn in the capital markets and the fact that retirees are retiring earlier and living longer than anticipated. Accordingly, beginning in 2002, Mercer advised the state to significantly increase its contributions to the retirement system. The state is now attempting to hold Mercer accountable for these economic trends, over which our firm has no control.”


Mark Iwry, senior fellow at the Washington-based Brookings Institution and a former Treasury official in charge of pension policy, says lawsuits by pension plans against actuarial consulting firms or consulting firms are uncommon, but not unprecedented.


Comparable lawsuits include a lawsuit filed by Paris-based investment bank Credit Lyonnais against a London-based unit of Watson Wyatt Worldwide over work that the pension consultant conducted for its group pension plan.


The bank claimed that Watson Wyatt overstated the funding position of the plan and, as a result, the bank granted richer benefits to employees than it otherwise would have. The claim was dismissed in 2005, with Watson Wyatt stating the two parties had agreed to the dismissal subject to certain confidential terms.


In 2006, the city of San Diego announced a $4.5 million settlement against San Francisco-based pension consulting firm Callan Associates Inc. that charged the firm had engaged in professional negligence, breach of fiduciary duty and breach of contract in connection with its work for the San Diego City Employees’ Retirements System.


A Callan spokeswoman said the suit had originally sought $50 million and that the retirement system remains a Callan client.


Filed by Judy Greenwald of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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Number of Massachusetts Uninsured Keeps Falling

The number of Massachusetts residents who lack health insurance continues to fall as the deadline set by the state’s landmark 2006 health reform law for obtaining coverage nears.


Massachusetts officials said Wednesday, December 5, that they expect more than 300,000 people—nearly all who were previously uninsured—to have coverage by January 1, 2008, the date penalties kick in for those who lack coverage.


Since programs created by the reform law began, 293,000 state residents have obtained coverage. Of that number, 160,000 have enrolled in Commonwealth Care, in which the state subsidizes—many times completely—health insurance premiums of low-income state residents.


An additional 70,000 residents have obtained coverage through an expansion of the state’s Medicaid program, while 63,000 residents have obtained coverage through Commonwealth Choice, a program that provides non-state subsidized coverage, or coverage through private insurers.


Those figures show that the state has made a huge dent in reducing the number of uninsured over the past year. Prior to the enactment of the law, state officials estimated that roughly 400,000 people lacked coverage.


“We are making remarkable progress in an effort that no other state was bold enough to tackle. Health care reform is working in Massachusetts,” said Lt. Gov. Tim Murray in a statement.


The latest enrollment figures come as a deadline to obtain coverage draws closer. State residents who cannot show they have health insurance by December 31, 2007, will lose their personal exemption on their 2007 taxes, worth $219, and a much greater penalty in future years.


However, state officials estimate that about 60,000 uninsured residents will receive waivers from the health coverage mandate, principally because they can prove affordable coverage is not available.


Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.