Labor and Employment Law Alert

1/1/2001

What's in This Alert? This month's Labor and Employment Law Alert reports on developments from several of the jurisdictions in which our labor and employment attorneys practice. We look first to the Ninth Circuit's latest sexual harassment decision which takes a refreshingly commonsense approach to evaluating the sufficiency of an employer's response to an employee's complaint of sexual harassment. Next we look to Washington State where the court of appeals this month issued a decision that makes clear that an employer's failure to provide required paid ten minute rest periods every three hours--including during overtime hours--can expose an employer to private lawsuits by employees for lost wages, penalties and attorneys' fees. We then note an amendment to the City of Portland's discrimination ordinance which extends the prohibition on discrimination to discrimination based on "gender identity." We also examine a decision by the Idaho Court of Appeals in which the court refused to enforce a non-compete agreement. The decision contains cautionary lessons about non-compete agreements that may have relevance for employers in all of the jurisdictions in which we practice. We also note a major win that we obtained from the Ninth Circuit that fixes an anomaly in Oregon employment law that has cost employers thousands of dollars defending meritless claims. And, finally, we have included an alert from our Tax Group regarding last week's announcement by the Internal Revenue Service on the appropriate tax treatment of incentive stock options and employee stock purchase plan options.

What's Love Got To Do with It? Spaces are limited and going very fast for our Valentine's Day "Love in the Workplace" breakfast seminar in Portland. We'll be wading into the messy employment law issues that may arise out of office romances, focusing in particular on what employers can do to protect themselves from paying the price for employees' romantic escapades. You can still register by sending an e-mail to Kathy Barnett at kbarnett@stoel.com. We hope to see you there. (And watch these alerts for information on upcoming presentations in Seattle.)

Our Survey Says! As readers of our December Alert know, the Office of Federal Contract Compliance Programs (OFCCP) issued final regulations last month on affirmative action plans. Following the issuance of those regulations, the OFCCP began sending out more than 50,000 equal employment opportunity surveys to government contractors across the country. Join Stoel Rives Labor & Employment Law Group partner Harry Chandler, along with Sandy Henderson from HR Specialties, Inc., on February 22 for a joint presentation on cost-effective compliance with the new regulations at the Governor Hotel in Portland. To register call 800-354-3512.

Welcome Jim Shore. We are very pleased to welcome a highly experienced management labor lawyer to our Labor & Employment Group. Jim Shore, who was formerly the chair of Graham & Dunn's labor and employment group in Seattle, joined us this week. Before becoming a partner at Graham & Dunn, Jim was in-house counsel and director of labor relations for Associated Grocers, Inc., one of the largest privately-held corporations in the Northwest. Jim has an active labor law practice in Washington, Oregon and California, and has extensive experience representing employers in all aspects of union relations and other labor and employment law matters. He can be reached in his Seattle office at (206) 386-7578 or by e-mail at jmshore@stoel.com.

Ninth Circuit Takes Commonsense Approach to Harassment Issue. The Ninth Circuit this month continued its refreshing trend of applying a more realistic and practical approach to sexual harassment in the workplace. In Star v. West, 2001 WL 40782 (9th Cir. Jan. 18, 2001), the court evaluated the sufficiency of an employer's response to an employee's complaint of harassing conduct by a co-worker. The plaintiff was a housekeeper at a hospital run by the Veterans Affairs department of the federal government. She complained to her supervisor that one of her co-workers grabbed her shoulders and hips (at trial, however, she contradicted her earlier statements and testified to more intrusive touching). In response to the employee's complaint, the supervisor confronted the alleged harasser and told him that the allegations made about him were serious and that he was to stay away from the plaintiff. One month later, the hospital transferred the alleged harasser to another shift as a "precautionary matter" and not as a form of discipline.

The plaintiff alleged that the employer's failure to take formal disciplinary action against the alleged harasser gave rise to liability under prior Ninth Circuit precedent which has referred to an employer's obligation to "discipline the offender." The court rejected this argument, noting as an initial matter that "counseling or admonishing the offender can constitute an adequate 'disciplinary' response." The court went on to make clear that "[a]n employer's refusal to apply the label 'discipline' to [its] actions is not determinative of their adequacy as a remedy." And in a welcome display of commonsense, the Ninth Circuit concluded: "What is important is whether the employer's actions, however labeled, are adequate to remedy the situation."

What Does This Mean for You? In determining the appropriate response to harassing conduct in the workplace, the focus should always be on taking effective steps to stop the inappropriate behavior (without, of course, adversely affecting the employee who has complained). Depending on the circumstances, that may include discipline, appropriate workplace conduct training, transfer, or some combination of these. Ultimately, the employer's response will be judged (with the benefit of hindsight) based on the effectiveness of the steps that were taken--a fact that, quite reasonably, leads most employers to take strong disciplinary action, including in many situations, termination of employment, even for borderline cases of sexual harassment in the workplace.

Washington Employers May Be Sued for Lost Wages for Failure to Provide Rest Periods. In Wingert v. Yellow Freight Systems, Inc., 2001 WL 44002 (Jan. 16, 2001), the Washington Court of Appeals construed the Washington wage statute and a state regulation governing employee rest periods to require that an employer may not cause an employee to work more than three hours without a ten minute paid rest period--and held that the failure to provide such a rest period exposes the employer to liability for lost wages for the work performed during the time that should have been allowed as paid rest periods. The court also made clear that the three hour limit on hours worked without a break applies to overtime as well as regular hours.

The court specifically rejected the defendant's argument that the law governing rest periods does not provide for individuals to bring suits for lost wages for work performed during what should have been a rest period. In holding that the failure to provide required breaks may give rise to a claim under the wage statute, the court paved the way for employees to assert claims not only for lost wages for the failure to provide required breaks, but for double damages, which are provided as a penalty under the wage statute, and attorneys' fees.

What Does This Mean for You? Employers who want to avoid wage claims should take affirmative steps to ensure that breaks are being taken at proper intervals.

Portland City Ordinance Forbids Gender Identity Discrimination. Effective January 15, the City of Portland's civil rights ordinance that prohibits discrimination in employment now extends that prohibition to discrimination based on gender identity. The ordinance defines "gender identity" as a "person's actual or perceived sex, including a person's identity, appearance, expression or behavior, whether or not that identity appearance, expression or behavior is different from that traditionally associated with the person's sex at birth." The ordinance contains an exception for "valid employer dress codes or policies" so long as the employer "provides, on a case-by-case basis, for reasonable accommodation based on the health and safety needs of persons protected on the basis of gender identity."

Notably, a decision from the Oregon Court of Appeals last year in Sims v. Besaw Café, 165 Or App 180 (2000) made clear that Portland's anti-discrimination ordinance allows private individuals to bring claims for damages in state court against their employers under the ordinance.

What Does This Mean for You? Employers in Portland may want to revise their harassment and discrimination policies to reference gender identity as one of the protected characteristics covered by those policies. In addition, employers should recognize that this is just one more reason to conduct appropriate workplace conduct training for managers and employees.

Overreaching Non-Compete Agreement Held Unenforceable in Idaho. In Pinnacle Performance, Inc. v. Hessing, 2001 WL 28039 (Jan. 12, 2001), the Idaho Court of Appeals sent a clear message to employers in that state that, in some cases, an overly broad non-compete agreement may not be enforced, even in a modified form. In Pinnacle, the non-compete provision at issue was included in an independent contractor agreement between Pinnacle Performance, Inc. and an individual, Lynn Hessing. The contract, which was for only a four month term, provided that for a period of two years following completion of Hessing's service under the agreement, Hessing would not provide services to any past or present client of Pinnacle without first giving Pinnacle the opportunity to contract for the work.

The court of appeals determined that Pinnacle had a "protectable interest in its customer relationships" and that the absence of any geographical limitation on the non-compete agreement was not necessarily fatal to its enforceability. However, the court found that, in this case, the absence of any geographical limitation, coupled with the broad prohibition on Hessing doing business with any Pinnacle client regardless of whether Hessing actually had contact with the client while working for Pinnacle, rendered the agreement overly broad. The court also objected to the contract's broad prohibition on Hessing performing any "service" for Pinnacle clients, especially given that the word "service" was not defined in the agreement. The court concluded: "It appears patently unreasonable to prohibit an employee who was hired for a period of only four months to work on one project from thereafter performing any services for any past and present clients in any geographical area for a period of two years." Because the covenant was "so lacking in the essential terms which would protect the employee" the court determined that it could not simply modify the agreement to make it enforceable, rather it would have to re-write the agreement, which it declined to do.

What Does This Mean for You? Be sure your non-compete agreements are tailored to the circumstances of the individual employee, and don't push the envelope too far on the scope of the agreement or you may run the risk of rendering it unenforceable.

Stoel Rives Case Alters The Playing Field For Summary Judgment of Employment Discrimination Cases. In Snead v. Metropolitan Casualty Life Insurance (Jan. 23, 2001), we represented Metropolitan against a former employee's claim that Metropolitan discriminated against her in terminating her employment following her lengthy disability leave. The plaintiff in this hard-fought and lengthy litigation claimed that she was discriminated against based on her post-traumatic stress disorder under the state and federal disability statutes. Following discovery we successfully moved for summary judgment. The plaintiff appealed to the Ninth Circuit and, among other issues, seized on a long-standing problematic area of Oregon employment discrimination law to argue that her state law discrimination claim should survive summary judgment even if the federal claim failed. A prior Ninth Circuit decision, and some confusing Oregon appellate decisions, gave the plaintiff a basis for this argument. This confusing precedent has resulted in numerous instances in which federal discrimination claims have been dismissed by the federal court in Oregon on summary judgment but identical state claims were remanded to proceed to trial. We argued that this result is absurd and not consistent with the notion that federal rules govern issues of procedure in federal court. The Ninth Circuit agreed noting, as we had in our arguments to the court, that if the state of the law were to stand, "nearly every case of employment discrimination filed under Oregon law would go to trial, providing an increased burden on the district courts"--to say nothing of employers!

New IRS Announcement on Tax Treatment of Incentive Stock Options and Employee Stock Purchase Plan Options. Most employers do not withhold or pay employment taxes (income tax, FICA and FUTA) on the exercise of incentive stock options (ISOs) or employee stock purchase plan options (ESPP options). Most employers also do not withhold on early disposition of stock acquired upon exercise of those options. For the most part, this is due to Rev Rul 71-52 (no "wages" upon exercise of qualified options or early disposition of option stock) and Notice 87-49 (no withholding on early disposition of ISO stock until further notice).

At least since 1999, when the IRS issued Field Service Advisory 199926034 (FICA and FUTA apply to exercise of ESPP option), employers have been concerned about what direction any ultimate rules might take and whether they could continue to not withhold and pay FICA and FUTA on exercises while awaiting further official guidance. We have advised our clients to continue treating exercises of statutory options and dispositions of statutory option stock as they have in the past (no withholding) until the IRS promulgates more authoritative guidance.

IRS Delays Changes in Withholding Rules. The IRS has now declared Rev Rul 71-52 obsolete and characterized Notice 87-49 as no longer applicable, but only with respect to statutory options exercised after December 31, 2002.

Where is the IRS Headed With This? Notice 2001-14, issued last Thursday afternoon, January 18, 2001, indicates that the IRS expects future administrative guidance to reflect the view that there is not a statutory exclusion from the term "wages" for FICA and FUTA purposes for exercises of statutory options, but that there "may be authority" for future administrative guidance to treat amounts realized upon disposition of statutory option stock as not being subject to income tax withholding. This suggests that the IRS' view has not changed, although any rule making will not apply to any option exercised before January 1, 2003. In the meantime, employers can continue to treat ISO and ESPP exercises as not subject to FICA and FUTA and not withhold on dispositions of statutory option stock.

Confused? Have a Question? If you have questions about the developments described in this Alert, please feel free to call on any of the attorneys in our Labor & Employment Practice Group, including John Acosta (503-294-9419) who was the principal author of this Alert. If your questions relate to the new IRS announcement described above, please contact any of the attorneys in our Tax Group. For a complete list of attorneys by practice group in Washington, Oregon, Idaho and Utah, please click on www.stoel.com.

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This is a periodic publication of the Labor and Employment Law Department of Stoel Rives LLP for the benefit and information of its clients and friends. This Alert should not be construed as legal advice or a legal opinion on specific facts or circumstances. The contents are intended for general informational purposes only. You are urged to consult your own lawyer concerning your own circumstances and any specific legal questions you may have.

Copyright 2001, STOEL RIVES LLP

This material is provided as a service to selected clients and friends of STOEL RIVES LLP.