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July/August 2000 - By Rebecca Walker
What We Can Learn About Compliance Programs From Recent Employment Discrimination Cases
In 1998 and 1999, the U.S. Supreme Court issued three decisions concerning the vicarious liability of employers for employment discrimination in which the Court for the first time articulated affirmative defenses to certain types of liability
based on the existence of an effective corporate compliance program. The task then fell to the lower courts to determine what is required to satisfy the elements of those defenses. They have begun to do so, and the cases that follow from that mandate contain valuable information concerning what the courts regard as important and effective elements of compliance programs.
The Supreme Court rules
In the 1998 twin cases of Burlington Industries, Inc. v. Ellerth, 524 U.S. 742, and
Faragher v. City of Boca Raton, 524 U.S. 775, the Supreme Court held that an employer may avoid liability for sexual harassment claims where no tangible adverse employment action has been taken against the plaintiff if the company can prove that (1) it exercised reasonable care to prevent and correct promptly any sexually harassing behavior, and (2) the employee unreasonably failed to take advantage of any preventive or corrective opportunities provided by the employer or otherwise to avoid
harm. In its 1999 decision in Kolstad v. American Dental Ass’n., 527 U.S. 526, the Supreme Court held that an employer will not be liable for punitive damages in a Title VII action where the employment decisions at issue are contrary to the employer’s good faith efforts to comply with Title VII. An employer may thus avoid punitive damages in a Title VII action if the employer implemented an effective compliance program prior to the misconduct at issue.
The lower court applications of
Ellerth, Faragher, and Kolstad provide much-needed (and, in many instances, surprisingly detailed) guidance to companies interested in implementing new or improving existing compliance programs. While the case law addresses sexual harassment and employment discrimination, the courts’ assessments of corporate compliance efforts can just as readily be applied to other types of legal liability risks.
Indeed, given the paucity of case law under the federal Sentencing Guidelines for
Organizations concerning what constitutes an effective compliance program, the employment discrimination cases in the wake of Ellerth, Faragher and Kolstad are the most expansive articulation of judicial views on this topic.
As might be expected, these judicial assessments dovetail with some of the Sentencing Guidelines’ seven minimum criteria for an effective compliance program. This is likely due in part to the significance placed by prosecutors, regulators, and courts on the
Guidelines’ seven elements as indicia of an effective compliance program. The topics addressed by the case law include (1) what written compliance policies should (and should not) contain; (2) appropriate training; (3) effective reporting procedures; and (4) investigations of, and discipline for, violations of policies.
Standards and procedures: What policies should contain
The first factor that most courts have considered in determining whether a company has established an
effective anti-discrimination program tracks the Sentencing Guidelines’ first element of an effective compliance program: whether a company has formulated standards and procedures that are reasonably capable of reducing the prospect of misconduct. (See, e.g., Montero v. AGCO Corp., 192 F.3d 856 [9th Cir. 1999.]) Indeed, the Court in Ellerth specifically mentioned a "stated policy suitable to the employment circumstances" as a means of proving that a company exercised reasonable care
to prevent and correct promptly sexually harassing behavior. The lower courts have also addressed what such a written policy should contain.
Specifically, courts have stated that an effective sexual harassment policy should (1) provide a definition of sexual harassment; (2) provide multiple avenues of reporting incidents of sexual harassment; (3) describe the disciplinary measures that the company may use in the event of harassment; and (4) indicate that retaliation will not be
tolerated. (See, e.g., Montero, 192 F.3d at 862.) These factors can be applied to a wide range of compliance policies: An effective written compliance policy should include: a description of the prohibited conduct; an avenue for reporting complaints; a discussion of the consequences of non-compliance; and a statement of non-retaliation.
The cases also make clear that a policy’s description of prohibited conduct must be sufficiently broad as to set forth clearly all types of covered
conduct. Thus, companies may want to ensure that their sexual harassment policies define harassment to include not only unwanted sexual advances and other sexually provocative misconduct, but also harassment that is gender-based but not sexual in nature. In Smith v. First Union Nat’l Bank, 202 F.3d 234 (4th Cir. 2000), a policy that failed to so specify was deemed deficient where the plaintiff complained of gender-based (but not sexually provocative) harassment.
At least one court has
denounced a provision in a company’s sexual harassment policy stating that false reports of sexual harassment will subject a complainant to disciplinary action. (See Williams v. Spartan Communications, 2000 WL 331605 [4th Cir. March 30, 2000—unpublished opinion.]) Such language may not only lead a court to conclude that a written policy is ineffective; it also provides a plaintiff with a basis to argue that any failure to take advantage of the compliance policy was not unreasonable (thus
negating the second prong of the Ellerth/Faragher defense) because of a legitimate fear that utilizing the complaint procedure would lead to discipline.
Companies with "false report" provisions in their sexual harassment policies may wish to revisit those policies to omit such language or at least to ensure that the phrasing and context of such a provision does not discourage reporting of complaints. Another method of dealing with the Williams court’s concern is to include
false report language in the section of a company’s code of conduct relating to discipline but to omit such language from the sexual harassment policy.
The courts have also counseled that, when disseminating written policies, companies should ask employees to sign an acknowledgment form indicating not only that they received the company’s policies, but also that they have read, understand, and agree to abide by their terms. In Elmasry v. Veith, 2000 U.S. Dist. LEXIS 340 (D.N.H. Jan. 7,
2000) (unpublished opinion), the court declined to dismiss a sexual harassment claim where the employer had a written anti-harassment policy and complaint procedure that was distributed to plaintiff, but the plaintiff alleged that no one ever specifically pointed out the policy to her or told her to read the employee handbook, and the form signed by plaintiff upon receipt of the handbook did not indicate that she had read or understood it.
In notable contrast, in Shaw v. AutoZone,
Inc., 180 F.3d 806 (7th Cir. 1999), the plaintiff contended that she had never seen her employer’s sexual harassment policy; but the court found plaintiff’s contention "irrelevant" because she had signed an acknowledgment form stating that she understood that it was her "responsibility to read and learn" her employer’s compliance policies. Those companies with acknowledgment forms that do not state clearly that an employee has read, understood and agrees to abide by the
policy may wish to revise their acknowledgment forms in light of these decisions. (This is also a good reminder of the importance of carefully maintaining acknowledgment forms as a matter of proof.)
Communication of policies
The Sentencing Guidelines’ fourth criterion for an effective compliance program is whether the organization has taken steps to communicate effectively its standards and procedures to all employees. In other words, a written compliance policy will be
considered an effective attempt to prevent misconduct only if it is distributed to the relevant employees and appropriate training takes place. Indeed, the court in Kolstad was clear that its decision was intended to encourage companies to adopt antidiscrimination policies and "to educate their personnel" about the prohibitions against workplace discrimination.
In the past, employers have traditionally focused training efforts on employees in management-level positions. While
the courts continue to recognize the importance of training managers and supervisors, Kolstad and its progeny also highlight the desirability of training lower-level employees, especially concerning avenues of reporting inappropriate conduct. The Tenth Circuit, applying Kolstad in holding an employer liable for punitive damages in a claim brought under the Americans with Disabilities Act (ADA), found the defendant guilty of "a broad failure" to educate employees about the ADA’s
requirements. (See Equal Employment Opportunity Comm’n v. Wal-Mart Stores, Inc., 187 F.3d 1241 [10th Cir. 1999.]) The court cited specific examples of employees who had "received no training" regarding disability discrimination and of a supervisor who had "never discussed the [ADA] with any of the employees under her supervision."
The Sentencing Guidelines’ fifth minimum criterion for an effective compliance program is whether a company
takes reasonable steps to achieve compliance with its standards, such as by utilizing monitoring and auditing systems reasonably designed to detect criminal conduct and by implementing and publicizing a reporting system whereby employees can report criminal conduct without fear of retribution.
In applying Ellerth, Faragher and Kolstad, the courts have made clear that a reporting system must allow employees to bypass the wrongdoer and should, if at all possible, afford several different
avenues of relief. (See, e.g., Madray v. Publix Supermarkets, Inc., 208 F.3d 1290 [11th Cir. 2000.]) The court in Madray concluded that the complaint procedures established by the employer there were sufficient because they "did not require that the employee complain to the offending supervisor or through the supervisor’s chain of command" and they "provided multiple avenues of lodging a complaint to assessable, designated representatives."
Courts have also stated
that, to be effective, compliance policies must make clear a company’s policy regarding non-retaliation for good faith reporting of violations. (See Williams v. Spartan Communications.) Indeed, in Miller v. Woodharbor Molding & Millworks, Inc., 80 F. Supp. 2d 1026 (N. Dist. Iowa 2000), the court stated that one of the "gravamen," or significant parts, of an effective compliance program is an expressly anti-retaliation provision, and went on to find that a reporting provision
that did not contain an anti-retaliation statement was "woefully inadequate."
Responding to complaints
In addition to requiring that employers exercise reasonable care to prevent harassment, the first prong of the Ellerth/Faragher defense to hostile environment sexual harassment claims requires that employers exercise reasonable care to correct promptly any sexually harassing behavior. This requirement, which dovetails with the Sentencing Guidelines’ sixth element of
an effective compliance program (that standards be consistently enforced through appropriate disciplinary measures), requires that employers make prompt investigations of allegations of improper conduct, and, if necessary, take prompt and appropriate remedial action. (See, e.g., Montero, 192 F.3d at 863.) Even if a plaintiff only notified her employer of improper conduct after the plaintiff’s employment terminated, it is nevertheless advisable to conduct an internal investigation and take
appropriate remedial action, if appropriate, against the harasser. (Elmasry, 2000 U.S. Dist. LEXIS 340, at *24-25.)
It is important, when considering this element of an effective compliance program, not to overlook the advisability of a fair investigation prior to imposing any type of remedial measure. If an investigation is not conducted, the employer may face a discrimination suit brought by the disciplined employee, alleging that he or she was the victim of discrimination by virtue
of being unfairly accused of and disciplined for sexually harassing behavior. (See Curato v. Saluti, 1999 U.S. Dist. LEXIS 19844 [E.D. Pa. Dec. 30, 1999.])
In order to ensure that the company can "correct promptly" inappropriate behavior, employers who have not already done so may wish to formulate internal policies governing their responses to allegations of misconduct, which can be distributed to supervisors, members of the human resources department, and any other
personnel designated to receive these types of complaints. Such policies are particularly appropriate for companies that have decentralized compliance systems so as to ensure consistent responses to allegations of impropriety.
In Hetreed v. Allstate Ins. Co., 1999 U.S. Dist. LEXIS 7219 (N.D. Ill. May 12, 1999), the court, in dismissing plaintiff’s hostile environment sexual harassment claim, approved the defendant’s policy guide for management, which sets forth required procedures for
management to handle complaints of sexual harassment. These procedures state simply that the manager who receives the complaint must report the information to the human resources department, which in turn must conduct an investigation with the assistance of department management, and the company must then take any necessary corrective measures, including counseling, reprimand or dismissal.
By contrast, in Miller v. Woodharbor, the court deemed a compliance program ineffective where a
supervisor testified that he had never received instruction regarding "the procedure he was expected to follow if he observed sexually harassing behavior or . . . if one of his employees reported sexually harassing behavior to him."
Policies instructing management on how to handle complaints can be extremely useful in assisting management with all types of reports of misconduct (not just sexual harassment). These policies can include information such as (1) what a supervisor
should do immediately upon receiving a report or complaint (for example, the policy could instruct the supervisor to (a) assure the complainant that the matter will be fully investigated, (b) summarize the complaint in writing, and (c) contact appropriate personnel); (2) who is responsible for investigating various types of allegations of misconduct and at what point in the process the legal department should be consulted; (3) the importance of maintaining confidentiality to the maximum
extent possible; (4) the parameters or prerequisites of any investigations; (5) how the investigation is to be memorialized; (6) appropriate remedial action if claims of misconduct are substantiated; (7) how remedial action is to be dispensed and how it is to be memorialized; and (8) who should maintain copies of documents regarding the investigation and remedial action, and for how long.
Assuring consistent, systemic responses to allegations of misconduct by informing and training
supervisors and all other responsible parties is a critical component of a credible compliance program. It creates an incentive for potential complainants to utilize the company’s reporting system instead of going directly to the courts, and it can impart a sense of fairness and due process to those employees who are accused of wrongdoing. It will also go a long way toward assuring a court (or, for that matter, a prosecutor or regulator) that a company is serious about its compliance
program—in the unfortunate event that the company is forced to render such assurances.
Rebecca S. Walker is an associate specializing in corporate compliance at the law firm of Skadden, Arps, Slate, Meagher & Flom LLP in New York.
Reprinted from the July/August 2000 issue of ethikos
© 2004 Ethikos, Inc. All rights reserved.
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