PREMIUM LEGAL RESOURCES
ASK A LAWYER
IN THIS ISSUE
1. ADR: A Deadlock Revisited or A Dream Realized?
2. Employee Dating: Recreation or Insubordination?
3. Sex, Lies and Audio Tapes: Monitoring Employees' Activities
4. International Employment: The Not-So-Friendly H-1B Visa
5. Executive Compensation: Blind Spots in Tax Planning for Expats
1. ADR: A DEADLOCK REVISITED OR A DREAM REALIZED?
By Stuart H. Brody and Marc Ragovin
Like the universe, employment law is ever expanding. Federal and state
legislation enacted to redress possible abuses and increase employee
protection is often the cause of costly and time-consuming litigation.
Recent court decisions, however, have handed employers a valuable new tool
in their continuing struggle to limit the flow of legal expenses: ADR, or,
Alternative Dispute Resolution.
In the leading 1991 case, Gilmer v. Interstate/Johnson Lake Corporation,
the Supreme Court held that a securities broker's registration application
containing a promise to arbitrate all employment disputes could be enforced
by his employer to require arbitration of a statutory age discrimination
In the wake of Gilmer and subsequent decisions, it is safe to predict that
courts will enforce standard employment agreements that require arbitration
of a wide variety of statutory claims, such as sex, race and age
discrimination. There is also judicial authority supporting the use of
employment applications or employee handbooks to require arbitration.
The new hospitality shown by the courts to arbitration has promoted
employer hopes of speedy resolution of legal disputes at tremendous cost
savings. However, it does not follow that employers should rush headlong
into an arbitration program. For instance, some arbitration procedures have
become so elaborate, they have rivaled litigation for expense and delay.
Accordingly, limitations on pre-arbitration discovery, scope of hearings
and time for rendering awards should be imposed.
Also, if arbitration were offered across the board to all employees on any
issue that might arise, this would open up for review a wide range of
employer actions that an employer would not otherwise be required to defend
(such as promotion decisions, improper supervisory treatment, vindictive
performance appraisals and so forth). Accordingly, for arbitration to limit
exposure and save money, it should be targeted toward the most costly and
most frequent disputes.
It is also important to look at what arbitration cannot achieve, no matter
how carefully crafted. Arbitration, although arguably achieving a reduction
in litigation costs and imposing a damper on huge judgments, is not really
an "alternative," but rather a substitute for litigation. That is, it is
not necessarily a means to diffuse problems before they evolve into full-
fledged disputes, but just shifts the forum for their resolution. Other
forms of ADR may be more effective in addressing communication and
productivity problems, which are the breeding grounds of disputes.
The joint employer/employee ("bi-partite") board is closely related to
arbitration. Composed equally of permanent or rotating management and
employee representatives (the latter usually elected by the employees), it
is empowered to make final decisions on employment issues. Convening such
a board is a strong statement by management of commitment to employee
involvement. The bi-partite board is most effective where employees have
demonstrated an ability to work well together, such as in work teams
quality circles or other problem-solving contexts.
A significant feature of both arbitration and the bi-partite board is that
courts grant preclusive effect to the decisions reached. This means
decisions are final and binding. Yet, this is by no means the overriding
criterion in selecting a means of dispute resolution. Procedures that
diffuse a dispute before it mushrooms into a productivity or litigation
headache may be more valuable to an employer than a final and binding
resolution once the damage is done.
For instance, a joint employer/employee board (or even an advisory board
composed only of employees that is not granted final and binding power over
disputes), may offer employees a measure of involvement that never existed
before. Providing employees with this limited but meaningful role in the
world of human resource policies (discipline, work content, production
methods, advancement, leave, etc.) that so affect their lives has been
shown to increase productivity. Equally significant, decisions by such
boards, even if not binding, serve to deter subsequent litigation.
A more limited ADR option is the use of an ombudsman or investigator, who
can help diffuse identifiable trouble spots in communication and
productivity -- for instance, departments with personality conflicts,
abrasive supervision, or disaffected workforces. An investigator can probe
the real reason for persistent absences, or elicit accurate collective
employee sentiment on departmental procedures. The role is not to
adjudicate, but to persuade, mediate and create ideas for resolution that
are acceptable to both sides. The success of this approach depends on the
appointment of an investigator with the talent and prestige to succeed.
Using an ombudsman does not require the employer to relinquish power over
the result. The downside, of course, is that while effective in settling
disputes, the ombudsman's decision is not final and binding, and employees
dissatisfied with the result are free to sue. The investigative process is
familiar to many employers in the context of a sexual harassment charge.
Unfortunately, sexual harassment investigations are too often poorly
conducted, thus increasing rather than diminishing the likelihood of
A cross between arbitration and investigation is formal mediation. This is
most effective when the employees are skilled and relatively independent.
These employees tend to understand compromise as a way of doing business
and respond to it as a means of resolving disputes and getting on with
their work. It may also be effective in sexual harassment cases and job
restructuring decisions -- two areas that inevitably explode into
The key to the success of any ADR system is that the employees understand
its value. The ADR program should be communicated in a way to promote trust
in the employer, not increase distrust. For instance, there are drawbacks
to merely inserting a new arbitration procedure in a handbook. One of the
ironies of handbooks is that, although provided to demonstrate employer
fairness and promote communication, they often have the opposite effect.
Handbooks are frequently seen by employees as rigid, mechanical, and formal
-- a compendium of management edicts. Grievance procedures contained in
handbooks are viewed cynically by employees and a mandatory arbitration
procedure might be viewed the same way.
Accordingly, it may be more effective to communicate a new ADR policy in a
separate document disseminated to employees, preferably in special meetings
at which some explanation/training is provided. For new hires, too, the
program should be explained separately, even if the employment application
contains the applicant's acknowledgment that disputes will be submitted to
In contemplating an ADR system, remember that it can be implemented
gradually. The kinds of issues and the types of employee groups covered may
be limited at first, to test the success of the system. Also, no one system
can necessarily achieve all goals. Combined approaches may be effective.
For instance, an ombudsman and mediation can be effective in improving
communication and enhancing productivity, while arbitration may more
directly influence litigation costs.
ADR, like any new management technique, can quickly become a fad, where
hasty implementation replaces careful planning. Or, it can provoke creative
thinking to address the special issues of your business. When thinking
about ADR, the key is to look beyond a "quick fix" to limit litigation
expenses, and instead, to take aim on improving communication and enhancing
[Mr. Brody and Mr. Ragovin are Senior Counsel and associate, respectively,
in Gibney, Anthony & Flaherty's Labor and Employment Group.]
2. EMPLOYEE DATING: RECREATION OR INSUBORDINATION?
By Marc Ragovin
When Wal-Mart co-workers Laural Allen and Samuel Johnson began dating in
September 1992, the last thing they thought was that they would become the
protagonists in litigation that reads like a scene from a soap opera. Yet,
this is precisely what happened.
Allen and Johnson began dating shortly after Johnson was hired. At the
time, Allen was legally separated but not divorced. Wal-Mart fired both
employees for violating a company policy that prohibited a dating
relationship between a married associate and an associate other than his or
her spouse. The New York State Attorney General, exercising his authority
under New York's recently passed Legal Activities Law ("LAL"), filed a
state court action charging Wal-Mart with a violation. This case raises
important questions concerning an employer's power to regulate its
Over the last several years, many states have passed laws protecting
employees' lawful off-duty conduct. Most of these statutes have a limited
purpose, such as prohibiting employers' discrimination against employees'
off-duty use of legally purchased products (e.g. tobacco or alcohol). New
York's LAL has a broader scope. It protects a wider area of off-duty
conduct such as political, recreational and union activity.
Specifically, the LAL, which went into effect on January 1, 1993, makes it
illegal for an employer to base any employment action on an employee's
participation in any of the following four types of conduct:
1. Legal political activities (such as running for office fundraising or
other campaign activities);
2. Legal use of consumable products prior to and after the conclusion of
the employee's work hours;
3. Membership in a union, or the exercise of any federal or state right to
engage in concerted activity; and
4. Legal recreational activity, which is defined as activity for which the
employee receives no compensation and which is generally engaged in for
recreational purposes. The LAL cites sports, games, hobbies, exercise,
reading and the viewing of television and movies as examples of protected
The Wal-Mart litigation presents an interesting issue: is dating between
co-workers protected? The Attorney General argued that dating is
"recreational conduct" and specifically protected by the LAL. Wal-Mart
moved to have the Attorney General's complaint dismissed on the grounds
that the activity engaged in by Allen and Johnson -- dating -- is a social,
not a recreational activity, and therefore not covered by the LAL.
The court ruled that the case proceed, stating that Allen and Johnson may
have engaged in recreational activity within the meaning of the statute.
The court reasoned that because both Allen and Johnson were protected
individually when engaging in recreational activities, such as attending
games and movies, they were no less protected if engaged in those
By applying this interpretation, the court failed to address the central
issue in the case: whether an employer can take adverse action against
employees, not because they have engaged in recreational activities defined
by the statute, but because they are involved in a relationship that the
employer views as counterproductive, and which may lead to employer
liability. In the case of anti-dating policies, the employer seeks to
minimize the risk of sexual harassment charges when the relationship sours,
and the perceived negative impact on morale that can result from open
displays of affection.
While varying from state to state, laws such as the LAL try to balance the
right of the employer to control employee conduct that can subject the
employer to increased health costs or other liability, and the employee's
right to engage in lawful activity. For instance, New York's LAL seeks to
accommodate these competing interests by prohibiting adverse action based
on an employee's recreational activity, yet allowing the employer to impose
different insurance premium rates if the employer can prove that the
employee's recreational activity results in increased cost.
Given the fact that lawful conduct, such as dating, can have a financial
impact on the employer, should employers be barred from acting against a
potentially harmful relationship? On the other hand, is it really the
employer's business to tell employees who they can and cannot date? Isn't
this an even greater intrusion on the employee's personal life than a
policy that, for example, prohibits sky-diving or stock-car racing?
Perhaps the solution is to do what Wal-Mart did. In August 1993, Wal-Mart
adopted a new policy that prohibits:
1. Open displays of affection between employees in the workplace;
2. Workplace conduct that causes an adverse impact on other workers; and
3. Romantic involvement between supervisor and subordinate, or anyone
whose terms or conditions of employment the supervisor may control.
The Attorney General sought to have this policy invalidated as well, but
the court, in a second opinion, ruled that because the new policy focuses
on workplace conduct and can be interpreted consistently with the LAL, it
was not illegal on its face. However, the court also ruled that the policy
could be illegal if the Attorney General presented facts to indicate that
the new policy actually punished off-duty conduct.
It is likely that the final word on the legality of anti-dating policies
will be decided by a higher court. Until then, employers should consult
counsel before implementing policies forbidding intra-office dating or
other conduct that may fall within the LAL. Through careful planning and
drafting, you can develop policies that will protect your interests without
interfering in employees' rights under the LAL.
3. SEX, LIES AND AUDIO TAPES: MONITORING EMPLOYEES' ACTIVITIES
By Sharon D. Simon
A case of "sex, lies and audio tapes," is how one court described an
attempt by an employer to secretly obtain information from its employees.
The employer used recording devices to intercept and record telephone calls
to and from employees for the purpose of curtailing personal phone calls,
as well as obtaining information about a theft on company premises. The
court noted that these purposes were legitimate. However, the employer
recorded 22 hours of calls that contained several provocative conversations
between a married employee and her boyfriend. As a result, the employee and
her boyfriend were each awarded $20,000 in statutory damages under the
Electronic Communications Privacy Act (ECPA).
Most employers at one time or another have had the urge to monitor their
employees. Whether to minimize theft of inventory, to avoid abuse of
working time, or to judge employee efficiency, the employer's motivation is
typically rooted in a legitimate business interest.
However, business decisions to monitor employees must be weighed against
the intrusive nature of surveillance, its impact on morale, and, of course,
its legality. This balancing will become even more complex with the advent
of ever-more sophisticated electronic monitoring.
There is a wide variety of monitoring devices and methods to choose from.
There are the old reliables: cameras, microphones, and tape recorders.
Technology has also given us devices that can count the number of
keystrokes employees make, follow their movements in the workplace, monitor
the location of vehicles employees are using, and identify the phone
numbers of incoming telephone calls. While advancing technology facilitates
employee surveillance, it also presents complications under federal and
state statutes regulating the use of these devices.
The ECPA is a federal statute that broadly prohibits interception and
disclosure of any wire, oral or electronic communication. The statute
includes a ban on the use of electronic, mechanical, or other devices for
interception of oral communications either: (a) on the premises of a
business establishment; or (b) that contains information relating to the
operations of a business.
However, exceptions are provided in this statute. For instance, the term
"electronic, mechanical or other device" does not include telephone
equipment or any component used in the ordinary course of business. This is
often referred to as the "ordinary course of business," or telephone
While this exception has allowed some employers to intercept communications
on business telephones that are used by the employees in the ordinary
course of business, it has its limitations. For example, as noted in the
case described at the beginning of this article, the scope of the
interception must not exceed what is reasonably necessary for legitimate
Another exception to the ECPA provides that it is not unlawful for an
employer to intercept a communication when it is a party to the
communication or when one of the persons who is a party to the
Consent is often raised as a defense when individuals challenge the
interception of their conversations. So long as the individuals have been
clearly and explicitly advised in advance that monitoring is being
conducted, the courts have been willing to find implied consent. There are,
of course, areas of employee communications that should not be intercepted.
One example is that of an employee speaking on a telephone specifically set
aside for private use. Conversations engaged in by employees under
circumstances justifying an expectation of privacy (as in an employee
lounge) should also not be monitored.
These areas of employee communications are protected because the law deems
some communications so clearly intimate that they should be free from
employer intrusions, even if the employer could acquire some relevant
information about its employees or their actions at work. Although far from
clear in every instance, the law does attempt to strike a balance between
legitimate employer concerns and employees' expectations of privacy.
As a result of the danger of intrusiveness borne of ever-more sophisticated
technical capabilities, some in Congress have moved to limit employer
options. Bills have been introduced in House and Senate committees that
will require advance notice of monitoring in most circumstances. Detailed
provisions are contemplated that will limit the methods of monitoring and
the use and disclosure of data obtained. It is not clear whether action on
the bills will be taken this year.
A notice provision, which every anti-monitoring bill contains, is perhaps
sound advice to employers, even without a statutory requirement. Giving
advance notice not only buttresses the argument that employees consented,
as suggested earlier, but also apprises employees that the zone of privacy,
upon which they may have relied, is curtailed. Remember, the argument that
the employer breached an expectation of privacy is the employee's strongest
defense. While a court may ultimately say that certain areas are private,
in closer cases, notice may afford employers wider latitude in monitoring.
Without doubt, any employer considering monitoring should also consider the
impact on employee morale. In many cases, employees are not resistant to
monitoring, since they often want the employer to identify the employee
among them wasting company time or committing specific irregularities.
However, where employees feel that management is engaging in a general
surveillance effort to uncover anything and everything, employees might
respond with reduced productivity, or a willingness to listen to union
Accordingly, monitoring is best used when aimed at uncovering specific
criminal activity or identifiable productivity problems, where notice that
monitoring may take place is given, and where the monitoring is only as
extensive as is reasonably necessary to achieve the specific purpose.
[Ms. Simon is an associate in Gibney, Anthony & Flaherty's Labor and
4. INTERNATIONAL EMPLOYMENT: THE NOT-SO-FRIENDLY H-1B VISA
By Stephen J. O. Maltby
The H-1B nonimmigrant work visa for professionally qualified aliens has
been a useful friend of the business community since its inception in 1952.
However, additional procedures, detailed record-keeping requirements and
increased enforcement of the H-1B regulations by the Department of Labor
("DOL") mandate that employers no longer take its friendliness for granted.
Starting with the Immigration Act of 1990, Congress imposed on employers
the obligation to attest that wages paid to an H-1B alien will be no less
than the "required wage rate." To ascertain that wage rate, employers are
required to perform wage studies to determine the "actual wage" for the
position at the job site and the "prevailing wage" for the position within
the area of employment.The higher of the two rates constitutes the required
wage rate. Once the required wage rate has been determined, the employer
must file a Labor Condition Application ("LCA") attesting that the H-1B
nonimmigrant will be paid in excess of the required wage rate. The net
result of this new procedure for the H-1B employer is more research, more
paperwork and longer processing times to obtain H-1B visa status for the
The record-keeping requirements for the employment of an H-1B alien are of
greater concern than the increased processing times. Employers are required
to maintain certain wage records for each H-1B alien. These include: the
payroll records of similarly situated employees at the jobsite; a copy of
the prevailing wage determination; a copy of the LCA posted at the
employer's offices; and evidence of the wages paid to the H-1B worker. The
prevailing wage rate and the actual wage rates must be updated every two
years to ensure LCA compliance.
Failure to comply with the LCA requirements can lead to the imposition of a
number of penalties, including assessment of back pay for the foreign
national, a maximum $1,000 fine for each violation, and a prohibition of
the filing of immigrant or nonimmigrant visa petitions for at least one
year. During the last year, 10 completed DOL investigations have resulted
in $485,000 in back pay for H-1B aliens, $92,000 in fines and debarment for
three businesses for up to six months. Furthermore, proposed DOL
regulations would enable the DOL to initiate its own investigations of
employer compliance during routine on-site visits pertaining to other
matters under the DOL's jurisdiction. Since the DOL would no longer be
required to wait for a complaint before taking action, we expect that this
change will significantly increase DOL enforcement.
Finally, H-1B employers should be aware of the 65,000 visa-per-year limit
on the number of H-1B visas available. For fiscal year 1993, the number of
H-1B aliens admitted was 61,000. Under current projections, the demand for
H-1B visas in 1994 is likely to exceed 1993 demand. Accordingly, the
immediate availability of an
H-1B visa should no longer be taken for granted.
In sum, H.R. personnel should ensure that their records on H-1B employees
comply with DOL regulations and should advise their clients of the increase
in processing times for H-1B visas and the potential for H-1B numerical
[Mr. Maltby is head of Gibney, Anthony & Flaherty's Immigration Department
and teaches immigration law at Pace University Law School.]
5. EXECUTIVE COMPENSATION: BLIND SPOTS IN TAX PLANNING FOR EXPATS
By Gerald J. Dunworth
The Prestons -- Veronique and Richard -- were delighted when Veronique, a
French citizen, was named to head the Lyons office of a multi-national
textile manufacturer. Their excitement doubled when Richard, an American,
landed a job as head of financial services for the French office of an
American bank. The Prestons purchased a seaside home in southern France and
are now happily occupied with home renovations and holiday plans. An ideal
scenario? Maybe not. Although Richard dreamed of living this lifestyle, he
is unaware of the legal and tax complications frequently encountered by
U.S. expats. His family could be in for some unpleasant financial
surprises, and Richard's employer may become entangled in a dispute it
Richard's expat package is typical in that it includes his employer's
promise to protect against higher taxes and other expenses in his new
location. Although this provision was likely written for income tax
purposes, some companies are now dealing with the special estate tax issues
created by the untimely death of an executive while on international
assignment. Like many executives, Richard's assets include his company
pension, his home, some investments, and life insurance. If the value of
these assets is subject to the U.S. estate tax, the tax bite can
significantly reduce the funds available for Veronique and their children.
Proposed regulations have added some guideposts to the 1988 law that
dramatically changed the estate and gift tax rules for transfer of property
to non-U.S. citizen spouses. Unlimited transfers of wealth to a non-citizen
spouse are no longer free. Although up to $600,000 can be transferred
without tax, the tax rates on assets exceeding $600,000 quickly approach
50%. If the tax applies to Richard's estate, Veronique's cash and other
liquid assets can be significantly reduced.
Although many expats were upset at the 1988 law, Congress was not totally
unfair to non-citizen spouses. Richard can defer the U.S. tax by
transferring his assets to a trust for Veronique's benefit. As long as the
assets remain within reach of the IRS, the tax is deferred until the assets
go to the children or otherwise are transferred outside the marriage. The
trust that allows for this deferral is called a Qualified Domestic Trust
(QDOT). QDOTs are essentially security devices which assure the U.S.
government that estate taxes will be collectible and which name a U.S.
person who is responsible for eventually paying the U.S. tax. The tax is
triggered by certain events, such as death of the surviving spouse,
distribution of the trust assets (other than income), or the trust ceasing
to meet the technical requirements of the IRS regulations.
Richard and Veronique should also plan for foreign inheritance taxes,
foreign inheritance rules and possibly community property rules. Foreign
jurisdictions, such as France, have rules which prevent one spouse from
leaving all his or her assets to the surviving spouse. The purpose of these
rules is to prevent children from being disinherited. Community property
rules, on the other hand, are intended to protect the spouse, but also
complicate the U.S. gift and estate tax situation when the spouse is not a
Employers wishing to assist their expats should at least make them aware
that their special situation may require a review of the complex and
technical planning issues that confront expats. It is more efficient to
encourage pre-move planning than to deal with families who are confronted
with unexpected tax bills or other restrictions on the transfer of marital
assets. In addition, employers may wish to structure their compensation
packages to avoid unintended claims for reimbursement of U.S. transfer
[Mr. Dunworth is head of Gibney, Anthony & Flaherty's Trusts and Estates
The comments contained in this newsletter do not constitute legal advice
and should not be regarded as a substitute for it. Questions concerning the
applicability of material discussed herein to actual cases should be
addressed to Stephen F. Ruffino and Stuart H. Brody, editors of
EmploymentFocus is published by Gibney, Anthony & Flaherty, Attorneys at
Law, New York, New York. For a complimentary hard copy subscription to
EmploymentFocus, please email your full name and mailing address to
[email protected] Copyright 1994 by Gibney, Anthony & Flaherty.
Brought to you by - The 'Lectric Law Library
The Net's Finest Legal Resource For Legal Pros & Laypeople Alike.