The US Supreme Court finished its term with a flurry of decisions likely to significantly impact all US employers. This client publication summarizes the Court’s recent decisions and explains their potential impact on US employers. Included in the summary below are cases affecting employment discrimination litigation, class action litigation, and arbitration proceedings, and the impact of the same-sex marriage decisions on employment law issues. This article also looks ahead to two significant labor issues that the Court has agreed to review during its next term.

University of Texas Southwestern Medical Center v. Nassar: Higher Standard for Title VII Retaliation Claims

As retaliation claims continue to multiply and become increasingly difficult to litigate due to murky causation standards, the Supreme Court provided some needed clarity in University of Texas Southwestern Medical Center v. Nassar. Nassar requires an employee alleging retaliation under Title VII to prove that an adverse employment action would not have occurred “but for” the employee’s protected activity.

Summary

The plaintiff in Nassar – a physician of Middle Eastern decent – was a faculty member and a hospital physician. He resigned his faculty position and sent a letter to various individuals explaining that he resigned due to another doctor’s discrimination. Nassar’s supervisor was upset by this public humiliation of the other doctor, and the supervisor objected to the hospital’s subsequent offer of employment to Nassar, which was against policy that all staff physicians also be faculty members. The hospital withdrew its offer, and Nassar brought a Title VII retaliation suit against his supervisor. Nassar prevailed at trial and the court of appeals upheld the verdict, concluding that a plaintiff must prove that retaliation is only a “motivating factor” of the adverse employment action.

Undertaking an examination of text, structure and history of Title VII, in a 5–4 decision, the Supreme Court rejected the lesser “motivating factor” standard and held that Title VII retaliation claims require “but-for” causation. In other words, a Title VII retaliation plaintiff is required to establish that if not for the employee's engaging in the protected activity, they would not have suffered the challenged adverse action. The Court acknowledged a particular need to properly interpret this standard because retaliation claims are “being made with ever-increasing frequency.” The Court further noted the practice of employees anticipating their termination, making an unfounded harassment charge and then claiming retaliation when the foreseen termination occurs.

Employer Takeaway

The causation standard in Nassar will make it easier to resolve Title VII retaliation claims at the summary judgment stage, and it may deter the filing of frivolous retaliation claims. This helpful development, however, should not cause employers to reduce their vigilance concerning retaliation. Employers should continue to implement concrete policies and undertake robust investigations when claims of retaliation are made. Employers also should beware that some state antidiscrimination laws may use a different, more lenient causation standard, resulting in more risk with respect to retaliation claims in those states.

The impact of Nassar may extend beyond Title VII retaliation claims in that Nassar suggests the “butfor” causation standard should be used as the default standard for other similar antidiscrimination laws. Courts therefore may follow suit in requiring a higher standard of causation with respect to other antidiscrimination laws that do not explicitly call for the “motivating factor” standard.

After a recent expansion of retaliation claims, Nassar appears to reflect a shift in Supreme Court's approach in this area. In both Nassar and Vance (discussed below), the Court relied on principles of interpretation but also considered practical, real-world implications, such as the need for clarity, the need to preserve resources from frivolous suits, and the need for early resolution of claims. Both cases also declined to defer to EEOC guidance. It remains to be seen whether this current trend continues or whether the dissents prevail in capturing Congressional attention.

Vance v. Ball State University: Some Clarity for Supervisor/Coworker Harassment Cases

In Vance v. Ball State University, the Supreme Court provided some much-needed guidance in Title VII harassment cases, creating the potential for more focused hostile environment litigation. Specifically, the Court clarified the standard for when an employee qualifies as a “supervisor” with respect to workplace harassment, which in turn determines the applicable standard of employer liability.

Summary

As background, the Court previously adopted two standards for determining employer liability for workplace harassment: a strict liability standard that applies when a supervisor harasses an employee, and a lesser negligence standard used for coworker harassment. Following these decisions (the familiar Farragher and Ellerth decisions) lower courts struggled with how to define “supervisor” and, accordingly, when these two different standards applied. In Vance, the plaintiff alleged that another employee created a hostile work environment. Although this other employee did not have the power to hire, fire, demote, promote, transfer, or discipline Vance, this other employee may have directed some of Vance’s activities. Vance therefore contended that the other employee was her supervisor and the strict liability standard for supervisory harassment should apply.

Resolving the split among the lower courts, the Supreme Court, in a 5–4 opinion, adopted the narrower, “workable” definition. Specifically, it held that an employee qualifies as a supervisor for liability purposes under Title VII only “if he or she is empowered by the employer to take tangible employment actions” against the complaining employee. These tangible employment actions include hiring, firing, failing to promote, reassignment with significantly different responsibilities, or a significant change in benefits. If an employee has not been empowered to take these actions, then that employee does not qualify as a supervisor, even if that employee directs the duties of the complaining employee. This decision specifically rejected the broader, “nebulous” definition of “supervisor” used by the EEOC, which the Court called “a study in ambiguity.”

Employer Takeaway

It has now been clarified that an employee is a supervisor for harassment liability purposes only if empowered to take tangible employment actions. Nonetheless, employers should be aware that an employee may still qualify as a supervisor:

  • even if that employee needs approval for a tangible employment action from higher management;
  • if the employee’s ability to assign significantly different responsibilities may result in economic consequences such as foreclosing eligibility for promotion; or
  • if the employee provides recommendations on which another supervisor relies in making tangible employment decisions.

Employers also should be aware that an employee’s ability to direct the duties of another employee is still an “important factor” to be considered by the jury in coworker harassment cases.

Although Vance provides clarity for which standard for employer liability applies in these types of cases, it does not change these two liability standards:

  • Supervisor Harassment Standard: If the alleged harasser qualifies as a supervisor, then the employer will be held strictly liable for his or her harassment if it results in a tangible employment action. If no tangible employment action results, the employer may avoid liability by establishing that (1) the employer exercised reasonable care to prevent and correct any harassing behavior (e.g., through a harassment policy), and (2) the complaining employee failed to take advantage of these preventive opportunities.
  • Coworker Harassment Standard: If the alleged harasser does not qualify as a supervisor, then the employer will be liable for that employee’s harassment if the employee shows that the employer was negligent, i.e., if the employer knew or reasonably should have known about the harassment but failed to take remedial action.

Finally, Vance does not impact employer best practices, and employers should continue to promulgate harassment policies; conduct appropriate harassment training; vigorously investigate harassment complaints; and appropriately respond to any such complaints. Additionally, it is even more important now for employers to ensure that job descriptions accurately reflect whether an employee has responsibility for taking tangible employment actions.

United States v. Windsor: Federal Defense of Marriage Act Unconstitutional

United States v. Windsor, which struck down a portion of the Defense of Marriage Act (DOMA), has the potential to have far-reaching impact on employers in the areas of employee benefits and immigration. However, the impact is limited only to those same-sex couples who are legally married under state law.

Summary

A New York woman left her entire estate to her wife. The two women had been married in Ontario, Canada and, under New York law, were lawfully married. However, under the federal DOMA, the surviving spouse was barred from claiming the federal estate tax exemption because DOMA provided that same-sex marriages were not recognized for purposes of federal law and related regulations including ERISA and federal income tax law. The surviving spouse brought suit for a tax refund, claiming that DOMA violates the principles of equal protection incorporated in the Fifth Amendment. The Supreme Court agreed and found that Section 3 of DOMA is unconstitutional.

Employer Takeaway

Potential Impacts on Employee Benefits: This decision may have the following impacts on employee benefits when an employee and same-sex partner are validly married under state law:

  • 401(k) and other defined contribution retirement plans will have to provide that the employee’s same-sex spouse will be the primary beneficiary, absent spousal consent.
  • A defined benefit pension plan will have to provide payment of the “qualified preretirement surviving spouse” annuity to the employee’s same-sex spouse. In addition, at retirement, payment will have to be made to the employee in the form of a “qualified joint and survivor annuity”. Spousal consent requirements will have to be satisfied in order to elect other benefits.
  • For a retirement plan that is subject to ERISA, a same-sex spouse or former same-sex spouse could be named as an alternate payee under a qualified domestic relations order.
  • While the ruling does not appear to require health care plans to provide coverage to samesex spouses, if a same-sex spouse is covered by the plan, COBRA rights would apply upon a divorce or legal separation.
  • There appears to be a variety of more favorable federal income tax results in relation to health care plans and other fringe benefit arrangements (e.g., no imputed income for the employee), health reimbursement accounts, Section 125 cafeteria plans (and related flexible spending accounts) and high deductible health care plans (and related health savings accounts).

Potential Impacts on Immigration: This decision may have the following impacts on immigration:

  • The Department of Homeland Security will necessarily treat lawfully married same-sex couples equally under immigration laws.
  • US citizens will be able to apply for green cards for their same-sex spouses, provided the couple is legally married by a state and both reside in the US.
  • Same-sex spouses of nonimmigrant workers employed by US companies will be eligible for derivative visas.

Other Potential Impacts: Because Windsor is limited to couples legally married in a state, clarification is needed to determine the decision’s impact on many state and federal laws. Further information should be forthcoming, as the federal government and states obtain a better understanding on which laws are impacted and which state law controls. Confusion could arise for same-sex married individuals who reside in one state and work in another, or who were legally married in one state but now reside and work in a state that does not recognize the marriage. For example, expect clarification on:

  • The decision’s impact in states that have laws allowing same-sex marriage that also prohibits employment discrimination on the basis of marital status, especially for employers that operate across multiple states.
  • Whether same sex spouses will now be covered under the definition of “family member” or "spouse" under the Family Medical Leave Act.

Oxford Health Plans v. Sutter: Supreme Court Upholds Arbitrator's Decision Allowing Class Arbitration

One of two recent arbitration rulings from the Supreme Court, Oxford Health – in which the Court refused to overrule an arbitrator’s determination that an arbitration agreement permitted class arbitration – places a sharp focus on the impact of arbitration agreements in defining how disputes between parties will be resolved. It also emphasizes the importance of carefully drafting arbitration agreements to appropriately reflect the nature of the arbitration proceeding anticipated by the parties.

Summary

A pediatrician brought a class action lawsuit against Oxford Health Plans for Oxford’s alleged failure to promptly reimburse physicians for services rendered. The case moved to arbitration based on a broad arbitration provision in the parties’ contract. In the arbitration forum, the parties agreed that the arbitrator should decide whether their contract authorized class arbitration. The arbitrator determined that the contract did, relying on the agreement’s broad arbitration provision, therefore allowing the plaintiff to pursue class arbitration on behalf of other allegedly aggrieved physicians. Oxford then moved to vacate the arbitrator’s decision, claiming that the arbitrator exceeded his powers under the Federal Arbitration Act (FAA).

In a unanimous opinion, the Court deferred to the arbitrator’s broad interpretation of the arbitration contract, holding that the arbitrator did not exceed his authority under the FAA by construing the contract to allow class arbitration. The provision at issue did not explicitly allow for class arbitration and stated only that “[no] civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration . . .” The Court explained, “the question for a judge is not whether the arbitrator construed the parties’ contract correctly, but whether he construed it at all.” Only if the arbitrator acts outside the scope of his or her contractually delegated authority – issuing an award that reflects his or her own notions of justice rather than drawing its essence from the contract – may a court overturn the determination.

Employer Takeaway

Arbitration clauses must be drafted unambiguously. In its 2010 decision in Stolt-Nielsen, the Court held that the FAA requires parties to submit to class arbitration only if the contract shows the parties expressly agreed to do so. Although the decision in Oxford indicates that the Court will uphold an arbitrator’s broad interpretation of these clauses, the Court has repeatedly held that it will enforce class action waivers in arbitration agreements (see AT&T Mobility v. Concepcion and American Express Co. v. Italian Colors Restaurant). If the intent is to prohibit class arbitration, employers should be sure that their arbitration contracts unambiguously state as much. Where, as in Sutter, there is ambiguity as to class arbitration and the parties submit the issue to the arbitrator for decision, parties will be bound by that decision as to whether employees can proceed with arbitrating their claims on behalf of themselves and a class, thereby dramatically increasing the cost of arbitration and potential exposure far beyond the individual plaintiff's claim.

American Express Co. v. Italian Colors Restaurant: Class Action Waiver in Arbitration Agreement is Enforceable, Regardless of Cost of Pursuing Individual Claims

On the heels of Oxford Health, the Supreme Court issued another arbitration decision further placing the enforceability of class action waivers on solid ground.

Summary

Merchants who accept American Express charge cards filed a class action against American Express for alleged antitrust violations. However, the contracts between the merchants and American Express require all disputes to be resolved by arbitration and states “there shall be no right or authority for any Claims to be arbitrated on a class action basis.” The Court held that this class action waiver is enforceable under the FAA.

The merchants argued that enforcing the class action waiver in the arbitration agreement would effectively preclude them from vindicating their rights under antitrust law due to the financial disincentive imposed by individual arbitration. Writing for the majority, Justice Scalia rejected that argument, explaining that absent a “contrary Congressional command” requiring the Court to reject the class action waiver – which the Court determined was not present in the FAA – the Court would not invalidate the parties’ contractual agreement to arbitrate claims solely on an individual basis. The Court additionally rejected the merchants’ “effective vindication” argument based on the cost of individual arbitration relative to the potential recovery – an argument frequently advanced by plaintiffs at both the state and federal level – explaining that the “effective vindication” exception to enforcement of contracts applies to situations where the contract imposes a prospective waiver of the party’s right to pursue the claim, a situation not presented by agreement challenged by the merchants in this case.

Employer Takeaway

As noted above, the American Express case arose in the commercial context. But the Court’s holding, along with its reaffirmation of the principles it explained in Concepcion, strongly suggests that a class action waiver in an arbitration agreement between an employer and an individual employee will be enforced. Employers now have an even clearer signal that deploying class action waivers as a means to manage risk associated with potential class discrimination, wage and hour, employee benefits, and other employment-related claims will be enforced and pass judicial review. This becomes more important based on the decision in Oxford, which allows arbitrators broad powers to construe the terms of a contract to allow class action arbitration.

A Look at the Year Ahead

The next term is already sparking interest on employment law issues, as the Supreme Court recently agreed to review two potentially significant cases: Noel Canning v. NLRB and Unite Here Local 355 v. Mulhall.

Noel Canning v. NLRB: Will Hundreds of NLRB Decisions be Overturned and the NLRB Left Without a Quorum?

The Supreme Court agreed to review the D.C. Circuit’s decision in Noel Canning v. NLRB, which will be closely watched and is potentially of immense significance. In that case, the D.C. Circuit held that the recess appointments made by President Obama in January 2012 to the National Labor Relations Board (NLRB) were unconstitutional and, therefore, effectively void. The ultimate decision by the Supreme Court will determine the validity of hundreds of significant NLRB decisions made since the appointments on issues ranging from social media to union rights including those discussed in our December 2012 publication, A Review of The NLRB's Holiday Gift to Unions and Employees. If the Supreme Court finds that the members making those decisions were not properly appointed, those rulings cannot stand. Until the Supreme Court makes a ruling in Noel Canning v. NLRB, employers should treat any NLRB rulings made in the last year with caution and seek legal advice on any interpretive issues.

Unite Here Local 355 v. Mulhall: Will Employer Neutrality Agreements be Allowed in Union Organizing Campaigns?

The Supreme Court also agreed to review the Eleventh Circuit's decision in Unite Here Local 355 v. Mulhall. As part of an organizing campaign, a union sometimes exerts pressure on an employer, through negative publicity or complaints to regulators, to enter into a "neutrality agreement," through which an employer agrees to stay neutral in response to, and not oppose, a union organizing campaign, in exchange for the union's agreement to stop exerting pressure on the employer. The Eleventh Circuit split from other lower courts on the question of whether these neutrality agreements are lawful or instead proscribed by labor law. Until the Supreme Court makes a ruling, the legality of any neutrality agreement during an organizing campaign is uncertain.