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Last June a federal district judge in San Francisco certified the biggest civil rights class action in history, a gender discrimination suit brought by 1.6 million current and former female Wal-Mart Stores, Inc., employees against the Bentonville, Ark.-based company. Even miniscule per capita damages, multiplied by 1.6 million, could reach staggering totals. For Wal-Mart, the class action certification “has taken the settlement value of that case into the tens of millions,” says Linda Doyle of McDermott Will & Emery’s Chicago office. Dukes v. Wal-Mart Stores, Inc., may be a sign of things to come. Employment class actions are on the upswing, say labor and employment lawyers at four large firms. Costco Wholesale Corporation and Sav-On Drug Stores, Inc., are among the other large companies facing high-profile class actions. “The 8.0 earthquake in employment and labor law has to be the use of class actions as a tool,” says Garry Mathiason, a San Francisco-based partner at labor and employment firm Littler Mendelson — where the class action caseload has doubled in the past year. “There’s not a corporation in America that hasn’t been affected by it.” The spike in class actions alone would make 2005 challenging. But there’s more. New federal regulations will force companies to review — and often change — their overtime pay policies. Recent tax code changes will lead to restructured deferred compensation plans for executives. In the U.S. Supreme Court, the justices are considering a case that could make it easier for plaintiffs to bring age discrimination cases. And the influential U.S. Court of Appeals for the Seventh Circuit is grappling with a challenge to employers who have ended their defined-benefit plans. It’s going to be a busy year. The effects of the class certification in Dukes v. Wal-Mart may be far-reaching, says Emory University labor and employment law professor Charles Shanor. Wal-Mart argued that its 3,200 U.S. retail stores made wage and promotional decisions independently of one another, so any discrimination claims deserved to be treated store-by-store, case-by-case, rather than through a class action. But the district court disagreed, allowing the plaintiffs’ claims to proceed based on an overall statistical picture that showed female employees were disproportionately paid and promoted less than their male colleagues. “I’d tell [GCs at large companies] to watch Wal-Mart, because it will have a huge impact on your flexibility in decentralizing employment decision making,” says Shanor. Wal-Mart has appealed the certification; at press time the U.S. Court of Appeals for the Ninth Circuit had not yet ruled on the appeal. Because of the unprecedented size of the class in the Wal-Mart suit, it’s easy to forget that the content of the case itself — alleged gender discrimination in a large corporation’s employment practices — has ramifications, too. In certifying the class, the court was concerned that promotion and salary decisions were characterized by “excessive subjectivity” — a phrase that could turn out to be fraught with peril for many other companies. “At the end of the day, the evaluation of performance necessarily entails subjective judgment, unless there’s a completely formulaic description of duties and expected results,” says associate GC Reginald Govan of the Federal Home Loan Mortgage Corporation, based in Maclean, Virginia. In August Wal-Mart rival Costco was hit with a suit, also seeking class action status, that echoes the claims of the Wal-Mart action. Class actions concerning overtime pay could prove just as troublesome. Starting on August 23, 2004, changes to the Fair Labor Standards Act (FLSA) radically affected which workers are — and were — qualified to receive overtime pay, drastically altering the exemptions that have applied to white-collar workers for the past 50 years. So who, exactly, is entitled to overtime now who wasn’t entitled before? In short, that’s anyone who is not a supervisor; has little autonomy in the amount of work that they’re required to do; performs work for which an advanced degree is not required; is not an artist of some sort; or earns less than $23,660 annually. (Anyone earning over $100,000 in base salary is not eligible.) The list of workers who can now collect overtime if they work more than 40 hours per week includes assistant coaches, some reporters (but not columnists or editors), and human resources employees (but not supervisors). “This is currently the largest source of litigation in the white-collar business world,” says McDermott’s Doyle. Combine it with the newfound popularity of employment class actions, and you get a double whammy. Classes of employees have begun to sue for back pay. California — long the bane of corporate America when it comes to labor and employment law — has seen a number of such cases in the past few years, thanks to laws that guarantee overtime pay to workers who perform nonmanagerial duties more than half the time. One of the most high-profile cases is the class action filed against Sav-On Drug Stores by store managers seeking overtime pay, a suit that was certified by the California Supreme Court on August 26. Now that the FLSA revisions have brought federal rules into the same ballpark as California’s, more national suits are emerging, several attorneys say. Because the statute of limitations on FLSA cases is two or three years, depending on the violation, non-compliant employers could be responsible for all the miscalculated wages for that entire time period. “One mistake can cost you upwards of $3 million, when you multiply that one miscalculated wage over several hundred stores and several hundred employees,” notes Doyle. GCs can head off potential trouble by taking advantage of the act’s “safe harbor” provision. “If a company publishes a policy saying it intends to comply and to remedy and pay for its past violations, the company will be protected,” says Henry Goldman, of counsel in the Boston office of Kirkpatrick & Lockhart. “So a GC needs to make sure the HR people put together a new policy, and follow it.” Another key employment statute may be up for reinterpretation in 2005: On the U.S. Supreme Court’s docket is an employment case that will determine which claims are valid under the Age Discrimination in Employment Act (ADEA). In 2003 a group of older police officers sued the city of Jackson, Miss., charging that a new pay policy discriminated against older officers. In order to attract new recruits, the Jackson police department had offered larger raises to officers with less than five years of experience. After the Jackson police officers lost in the lower courts, the Supreme Court heard arguments in Smith v. City of Jackson, Mississippi on November 3 and will likely issue a decision this spring. The case is important because the ADEA, which prohibits employers from discriminating against workers over 40, does not work in the same way that race, disability, and gender discrimination laws do. Those laws permit plaintiffs to sue based on a concept called disparate impact. If statistics can show that an employer’s policy leads to disadvantages for women or minorities or the disabled, then those women or minorities or disabled people can sue, even if the employer’s policy is not intentionally discriminating. But plaintiffs currently cannot use the ADEA to make an age discrimination claim based on disparate impact. Even if the Supreme Court rules against the police officers, disparate impact claims may still find their way into ADEA litigation. Laurie McCann, senior attorney for the American Association of Retired Persons, says that if need be, the AARP “would explore the possibility of a legislative fix,” by asking Congress to amend the ADEA to allow disparate impact claims. “This would have significant ramifications for corporations,” says Charles Craver, a professor at George Washington University Law School in Washington, D.C., who specializes in labor and employment law, “because many seemingly neutral practices might adversely affect older workers, and we continue to have an aging workforce.” Among those seemingly neutral practices are layoffs. Typically, in a corporate downsizing, the more expensive employees are jettisoned. But these often tend to be the oldest employees, too. And this practice might count as legal discrimination — if the Supreme Court finds, in 2005, that the ADEA should be interpreted to include disparate impact cases. Some companies are already prepared for such a change. “I’ve always acted under the assumption that avoiding all disparate impact in age is reasonable,” says William Johnson, employment counsel for Quest Diagnostics Incorporated in Teterboro, N.J. “Let’s say I was looking at a reduction in workforce. We would do an analysis to determine the impact on various protected classes, and we’d look at that to see that our practices were unbiased and objective — and we’d do it with regard to age, too.” Age discrimination claims also lie at the heart of a case, now in the U.S. Court of Appeals for the Seventh Circuit, that could have a major impact on employer-sponsored retirement plans. The suit was brought by 130,000 current and past employees of International Business Machines Corporation. They claim that the Armonk, N.Y.-based company’s July 1999 switch from a traditional pension plan to a cash-balance plan amounted to an unfair pension pay cut. In traditional pension plans, an employer increases the annual contribution it makes for each worker as the employee grows older. In a cash-balance plan, by contrast, an employer makes the same contribution for each worker, regardless of age. In July 2003 a federal district judge ruled that IBM’s revised pension plan violated the age discrimination prohibitions of the Employee Retirement Income Security Act of 1974 (ERISA), since it would penalize senior employees whose benefits had been scheduled to accelerate in their final years of employment. IBM maintains that it has not violated ERISA because it is contributing the same percentage of pay to the plan for each employee regardless of age. In September 2004 the company partially settled the plaintiffs’ claims for $300 million, but the parties agreed that IBM could appeal the district court ruling to the Seventh Circuit. “We won’t know until the appeals have run whether it will be upheld,” says Gary Ford of the Groom Law Group, a Washington, D.C., firm specializing in employee benefits. (Ford is not involved in the IBM litigation.) But in the wake of IBM’s massive settlement, other companies with pension plans are wondering whether they, too, could pay a steep price. Bank of America Corporation, Allied Waste Industries Inc., Monsanto Company, and AT&T Corp. are among the companies that are defendants in class action suits that challenge cash-balance plans. GCs may soon be making a cost-benefit decision: Is the risk of class action litigation worth the savings from switching from a defined-benefit pension plan to a cash-balance or 401(k) plan? “It’s hard to comment on, because we’ve got clients in various spots on that issue,” admits Ford. Pension plans are not the only compensation issue that GCs should keep their eyes on. In October President Bush signed the American Jobs Creation Act of 2004, which imposes sweeping changes to tax laws overseeing deferred compensation plans. Deferred compensation plans refer to arrangements by which a portion of an employee’s salary is deferred, shielding the money from immediate taxation. Often top executives, including GCs, have some form of deferred compensation plan in place, separate from 401(k) or pension arrangements. The new rules reduce the flexibility of deferred compensation plans. They require executives to make their deferral elections — how much money they want to defer, how they want that money to be invested, and how long they want to defer it — before the calendar year in which the compensation is first earned. Executives opting to take their distributions when they leave a company will have to wait an extra six months before receiving the money. The new law also bans provisions that had allowed executives to make early withdrawals in exchange for paying a percentage of the withdrawal amount as a penalty. Many attorneys are waiting to see how large companies, in general, are responding to the legislation before giving advice. “I have clients who want to do deferred comp agreements, and we’re holding off on it until we see what the new arrangements look like,” says Kirkpatrick & Lockhart�s Goldman. At the same time, Goldman notes that the new rules pertain to all monies deferred after December 31, 2004 — which means that GCs should take some immediate steps, including freezing activity under current deferred compensation plans; making 2005 deferral elections before the end of 2004, and communicating with plan participants about the changes in the offing. Two years after it became law, the Sarbanes-Oxley Act of 2002 is still required reading for GCs — and not just because of its corporate governance provisions. SOX’s Section 806, which went into effect on August 24, 2004, will have a substantial impact on labor and employment law for 2005. Commonly referred to as the act’s whistle-blower protection provision, Section 806 bars companies from retaliating against employees who accuse superiors of accounting crimes. What may happen as a result, warn several attorneys, is a surge in suits from fired or demoted employees contending that they were being punished for whistle-blowing. “These are serious claims and they are just starting,” notes Goldman. A final issue for GCs to consider in 2005 is the status of returning military personnel or reservists who wish to resume the jobs they left to serve in the armed forces. “Both federal and state laws afford [military personnel] the right to return to their jobs as if they’d never left,” says Mark Terman, a partner at Reish Luftman Reicher & Cohen in Los Angeles. The workers should return “at the same pay rate and at the same track for raises and promotions, as if they were there the whole time.” Already there has been some litigation brought by military personnel trying to get their old jobs back. The most prominent case involves Steve Duarte, a lieutenant colonel in the U.S. Marines who was laid off by Palo Alto-based Agilent Technologies, Inc., in November 2003, shortly after returning from duty in Iraq and Kuwait. Agilent maintains Duarte’s layoff was part of an overall workforce reduction and had nothing to do with his military stint. Duarte contends that the law shields veterans from corporate layoffs. At press time his suit was scheduled to be argued in March in federal district court in Colorado. The year to come promises to be one of diverse risks and challenges for in-house counsel: class actions of all stripes, new twists in age discrimination law, compensation changes, whistle-blowers, and returning vets. Perhaps the safest generalization is the advice from McDermott’s Doyle: “You have to really be careful.”

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