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September 1994


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

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 claim.

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 litigation.

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 litigation.

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 arbitration.

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 productivity.

[Mr. Brody and Mr. Ragovin are Senior Counsel and associate, respectively, in Gibney, Anthony & Flaherty's Labor and Employment Group.]

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 employees' conduct.

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 activities.

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 activities together.

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.

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 extension exception.

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 business purposes.

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 communication consents.

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 organizers.

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 Employment Group.]

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 employee.

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 unavailability.

[Mr. Maltby is head of Gibney, Anthony & Flaherty's Immigration Department and teaches immigration law at Pace University Law School.]

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 never anticipated.

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 U.S. citizen.

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 taxes.

[Mr. Dunworth is head of Gibney, Anthony & Flaherty's Trusts and Estates Department.]
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.

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 RUFFINO@AOL.COM Copyright 1994 by Gibney, Anthony & Flaherty.

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