Employment Law Update: Recent Developments in the Supreme Court and Congress

The U.S. Supreme Court continues to keep employers on their toes by dealing with cases involving employment issues this term. During the first week of December, the Court issued its decision in Raytheon Co. v. Hernandez, No. 02-749, ___ S. Ct. ___ (2003), an ADA case involving the legality of an employer policy prohibiting the rehire of individuals fired for violating the employer's drug use policy. Also, the Court agreed to consider two other employment cases. First, in Pennsylvania State Police v. Suders, the Court will decide whether constructive discharge is a “tangible employment action” for purposes of sexual harassment claims. Second, in Central Laborers' Pension Fund v. Heinz, the Court will tackle an issue involving ERISA's anti-cutback rule for pension benefits.

In Raytheon, the Court declined to decide the issue generating interest among employment law practitioners (and upon which it had granted certiorari): “whether the ADA confers preferential rehire rights on disabled employees lawfully terminated for violating workplace conduct rules.” Instead, the Court sent the decision back to the Ninth Circuit due to its failure to apply the proper standard for evaluating the plaintiff's claims.

This case involved an appeal from the Ninth Circuit's decision reversing a grant of summary judgment in favor of Raytheon Company in claims brought by a former employee, Joe Hernandez. Hernandez worked for Hughes Missile Systems (later acquired by Raytheon) for 25 years. In July 1991, Hernandez tested positive for cocaine use on the job, an offense that was grounds for his immediate termination. Rather than being terminated, however, Hernandez accepted the provided option to resign in lieu of termination, which he chose to do. This choice was noted on his personnel file and, pursuant to an “unwritten” policy, resulted in his ineligibility for rehire.

Two and a half years later, in January 1994, Hernandez applied to be rehired with Hughes. He was not selected for rehire based on the unwritten policy against rehire of individuals who had resigned in lieu of termination. Hernandez filed suit under the Americans with Disabilities Act (ADA), alleging that he was denied employment based on his record of drug addiction.

In reviewing the district court's grant of summary judgment, the Ninth Circuit determined that Hernandez met his prima facie burden of demonstrating that he had a record of disability (drug addiction), applied and was qualified for the position, and was not hired because of his record of disability (because there were disputed issues of fact as to whether the employer knew of the alleged disability at the time of its decision). In examining whether the employer met its burden of articulating a legitimate nondiscriminatory reason for its actions, the Ninth Circuit held that: “Hughes' unwritten policy against rehiring former employees who were terminated for any violation of its misconduct rules, although not unlawful on its face, violates the ADA as applied to former drug addicts whose only work-related offense was testing positive because of their addiction.” Thus, the Ninth Circuit held that not only had Hernandez provided sufficient evidence to proceed to a jury on his failure to hire claim, but that “a policy that serves to bar the re-employment of a drug addict despite his successful rehabilitation violates the ADA.”

The Supreme Court held that while the plaintiff articulated his claim only under the disparate treatment model, the Ninth Circuit mistakenly analyzed the issue under a disparate impact formula, rather than as a disparate treatment claim. Justice Thomas, writing for the Court explained where the court of appeals went wrong:

In other words, while ostensibly evaluating whether petitioner had proffered a legitimate, nondiscriminatory reason for failing to rehire respondent sufficient to rebut respondent's prima facie showing of disparate treatment, the Court of Appeals held that a neutral no-rehire policy could never suffice in a case where the employee was terminated for illegal drug use, because such a policy has a disparate impact on recovering drug addicts. In so holding, the Court of Appeals erred by conflating the analytical framework for disparate-impact and disparate treatment claims.

The Court confirmed that a “no-rehire policy is a quintessential legitimate, nondiscriminatory reason for refusing to rehire an employee who was terminated for violating workplace conduct rules.” The Court then sent the case back to the Ninth Circuit Court of Appeals for further proceedings.

Now that the suspense is over on the Raytheon case, employment attorneys eagerly await resolution of two additional issues. In the Pennsylvania State Police case, the Third Circuit Court of Appeals (Suders v. Easton, 325 F.3d 432 (3d Cir. 2003)) reversed the district court's grant of summary judgment to the defendant. The plaintiff had sued her former employer for sexual harassment by three supervisors. The court of appeals held that the Burlington/Faragher affirmative defense was not available because the plaintiff had sufficient evidence of constructive discharge – a tangible employment action. This decision adds to an existing split in authorities on whether constructive discharge is a tangible employment action for purposes of sexual harassment claims. The Third and Eighth Circuit Courts of Appeals have held that constructive discharge is a tangible employment action. The Second and Sixth Circuit Courts of Appeals have held the opposite.

Central Laborers' Pension Fund v. Heinz, 303 F.3d 802 (7th Cir. 2002), presents the question of whether a pension plan amendment expanding the types of post-retirement employment that trigger mandatory suspension of early retirement benefits violates ERISA's anti-cutback rule. The Seventh Circuit Court of Appeals ruled that such an amendment does constitute an ERISA violation. This position conflicts with the Fifth Circuit Court of Appeals ruling in Spacek v. Maritime Association, 134 F.3d 283 (5th Cir. 1998). Attorneys for the pension fund and the United States Department of Justice argue this split will create havoc for multiemployer plans and undermines ERISA's goal of creating uniform standards for administering benefit plans.

It will be interesting to see how the Supreme Court resolves these important issues over the coming months.

Congress in Action

Not to be outdone by the Court, the House and Senate also have determined to tackle a number of issues in labor and employment law. In December 2003, President Bush signed into law the Fair and Accurate Credit Transactions Act (FACT Act) amending the Fair Credit and Reporting Act (FCRA) to exclude from the definition of “consumer report” certain internal investigations. Specifically, the FACT Act was passed in order to make clear that communications made with employers in connection with the investigation of: 1) suspected misconduct relating to employment; and 2) compliance with federal, state or local laws or regulations, the rules of a self-regulatory organization, or any preexisting written policies of the employer are not “consumer reports” under the FCRA. Thus, employers are free to hire outside consultants, investigators, or law firms to conduct investigations and report on various workplace issues without first being required to notify the target of the investigation and obtain his or her consent.

In the upcoming term, Congress will again revisit the issue of the proposed amendments to the Fair Labor Standards Act to change the regulations on the executive, administrative, and professional and outside sales exemptions. On Sept. 10, 2003, the U.S. Senate voted in favor of an amendment to block the U.S. Department of Labor (DOL) from using any funds from the FY2004 budget to enact the proposed revisions to the regulations. The amendment is part of an appropriations bill that funds the DOL and the Departments of Health and Human Services and Education. On Nov. 21, 2003, opponents to the proposed revisions to the regulations agreed to allow the appropriations bill to go forward without the blocking amendment, but that funding is part of a continuing resolution that ended on Jan. 31, 2004. Thus, the Senate will again address this issue. President Bush had previously threatened to veto any conference report that includes the blocking amendment.

Finally, over the next year Congress will also consider a broad new visa program for foreign workers (H.R. 2899, S.1461) and a genetic discrimination bill (S. 1053). In addition, the Senate will be revisiting the issue of mental health insurance parity legislation, due to the sunset provision of the 1996 Mental Health Parity Act (which Congress just reauthorized for 1 year in December 2003). The goal of this legislation will be to reenact the requirements of the 1996 law ' which mandated that annual and lifetime mental health benefits had to equal those for other medical and surgical benefits ' as well as to bar group health plans from requiring higher co-payments, deductibles, and co-insurance payments for mental health services.

The U.S. Supreme Court continues to keep employers on their toes by dealing with cases involving employment issues this term. During the first week of December, the Court issued its decision in Raytheon Co. v. Hernandez , No. 02-749, ___ S. Ct. ___ (2003), an ADA case involving the legality of an employer policy prohibiting the rehire of individuals fired for violating the employer's drug use policy. Also, the Court agreed to consider two other employment cases. First, in Pennsylvania State Police v. Suders, the Court will decide whether constructive discharge is a “tangible employment action” for purposes of sexual harassment claims. Second, in Central Laborers' Pension Fund v. Heinz, the Court will tackle an issue involving ERISA's anti-cutback rule for pension benefits.

In Raytheon, the Court declined to decide the issue generating interest among employment law practitioners (and upon which it had granted certiorari): “whether the ADA confers preferential rehire rights on disabled employees lawfully terminated for violating workplace conduct rules.” Instead, the Court sent the decision back to the Ninth Circuit due to its failure to apply the proper standard for evaluating the plaintiff's claims.

This case involved an appeal from the Ninth Circuit's decision reversing a grant of summary judgment in favor of Raytheon Company in claims brought by a former employee, Joe Hernandez. Hernandez worked for Hughes Missile Systems (later acquired by Raytheon) for 25 years. In July 1991, Hernandez tested positive for cocaine use on the job, an offense that was grounds for his immediate termination. Rather than being terminated, however, Hernandez accepted the provided option to resign in lieu of termination, which he chose to do. This choice was noted on his personnel file and, pursuant to an “unwritten” policy, resulted in his ineligibility for rehire.

Two and a half years later, in January 1994, Hernandez applied to be rehired with Hughes. He was not selected for rehire based on the unwritten policy against rehire of individuals who had resigned in lieu of termination. Hernandez filed suit under the Americans with Disabilities Act (ADA), alleging that he was denied employment based on his record of drug addiction.

In reviewing the district court's grant of summary judgment, the Ninth Circuit determined that Hernandez met his prima facie burden of demonstrating that he had a record of disability (drug addiction), applied and was qualified for the position, and was not hired because of his record of disability (because there were disputed issues of fact as to whether the employer knew of the alleged disability at the time of its decision). In examining whether the employer met its burden of articulating a legitimate nondiscriminatory reason for its actions, the Ninth Circuit held that: “Hughes' unwritten policy against rehiring former employees who were terminated for any violation of its misconduct rules, although not unlawful on its face, violates the ADA as applied to former drug addicts whose only work-related offense was testing positive because of their addiction.” Thus, the Ninth Circuit held that not only had Hernandez provided sufficient evidence to proceed to a jury on his failure to hire claim, but that “a policy that serves to bar the re-employment of a drug addict despite his successful rehabilitation violates the ADA.”

The Supreme Court held that while the plaintiff articulated his claim only under the disparate treatment model, the Ninth Circuit mistakenly analyzed the issue under a disparate impact formula, rather than as a disparate treatment claim. Justice Thomas, writing for the Court explained where the court of appeals went wrong:

In other words, while ostensibly evaluating whether petitioner had proffered a legitimate, nondiscriminatory reason for failing to rehire respondent sufficient to rebut respondent's prima facie showing of disparate treatment, the Court of Appeals held that a neutral no-rehire policy could never suffice in a case where the employee was terminated for illegal drug use, because such a policy has a disparate impact on recovering drug addicts. In so holding, the Court of Appeals erred by conflating the analytical framework for disparate-impact and disparate treatment claims.

The Court confirmed that a “no-rehire policy is a quintessential legitimate, nondiscriminatory reason for refusing to rehire an employee who was terminated for violating workplace conduct rules.” The Court then sent the case back to the Ninth Circuit Court of Appeals for further proceedings.

Now that the suspense is over on the Raytheon case, employment attorneys eagerly await resolution of two additional issues. In the Pennsylvania State Police case, the Third Circuit Court of Appeals ( Suders v. Easton , 325 F.3d 432 (3d Cir. 2003)) reversed the district court's grant of summary judgment to the defendant. The plaintiff had sued her former employer for sexual harassment by three supervisors. The court of appeals held that the Burlington/Faragher affirmative defense was not available because the plaintiff had sufficient evidence of constructive discharge – a tangible employment action. This decision adds to an existing split in authorities on whether constructive discharge is a tangible employment action for purposes of sexual harassment claims. The Third and Eighth Circuit Courts of Appeals have held that constructive discharge is a tangible employment action. The Second and Sixth Circuit Courts of Appeals have held the opposite.

Central Laborers' Pension Fund v. Heinz , 303 F.3d 802 (7th Cir. 2002), presents the question of whether a pension plan amendment expanding the types of post-retirement employment that trigger mandatory suspension of early retirement benefits violates ERISA's anti-cutback rule. The Seventh Circuit Court of Appeals ruled that such an amendment does constitute an ERISA violation. This position conflicts with the Fifth Circuit Court of Appeals ruling in Spacek v. Maritime Association , 134 F.3d 283 (5th Cir. 1998). Attorneys for the pension fund and the United States Department of Justice argue this split will create havoc for multiemployer plans and undermines ERISA's goal of creating uniform standards for administering benefit plans.

It will be interesting to see how the Supreme Court resolves these important issues over the coming months.

Congress in Action

Not to be outdone by the Court, the House and Senate also have determined to tackle a number of issues in labor and employment law. In December 2003, President Bush signed into law the Fair and Accurate Credit Transactions Act (FACT Act) amending the Fair Credit and Reporting Act (FCRA) to exclude from the definition of “consumer report” certain internal investigations. Specifically, the FACT Act was passed in order to make clear that communications made with employers in connection with the investigation of: 1) suspected misconduct relating to employment; and 2) compliance with federal, state or local laws or regulations, the rules of a self-regulatory organization, or any preexisting written policies of the employer are not “consumer reports” under the FCRA. Thus, employers are free to hire outside consultants, investigators, or law firms to conduct investigations and report on various workplace issues without first being required to notify the target of the investigation and obtain his or her consent.

In the upcoming term, Congress will again revisit the issue of the proposed amendments to the Fair Labor Standards Act to change the regulations on the executive, administrative, and professional and outside sales exemptions. On Sept. 10, 2003, the U.S. Senate voted in favor of an amendment to block the U.S. Department of Labor (DOL) from using any funds from the FY2004 budget to enact the proposed revisions to the regulations. The amendment is part of an appropriations bill that funds the DOL and the Departments of Health and Human Services and Education. On Nov. 21, 2003, opponents to the proposed revisions to the regulations agreed to allow the appropriations bill to go forward without the blocking amendment, but that funding is part of a continuing resolution that ended on Jan. 31, 2004. Thus, the Senate will again address this issue. President Bush had previously threatened to veto any conference report that includes the blocking amendment.

Finally, over the next year Congress will also consider a broad new visa program for foreign workers (H.R. 2899, S.1461) and a genetic discrimination bill (S. 1053). In addition, the Senate will be revisiting the issue of mental health insurance parity legislation, due to the sunset provision of the 1996 Mental Health Parity Act (which Congress just reauthorized for 1 year in December 2003). The goal of this legislation will be to reenact the requirements of the 1996 law ' which mandated that annual and lifetime mental health benefits had to equal those for other medical and surgical benefits ' as well as to bar group health plans from requiring higher co-payments, deductibles, and co-insurance payments for mental health services.