Taxes Due on Settlement Amounts – Part Three of Three

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Settlement amounts received under a settlement agreement that relate to a physical injury or physical sickness are excluded from income and not taxable, while amounts, other than medical expenses, arising from any other non-physical injury or non-physical sickness, such as mental anguish or other emotional damages stemming from the loss of a job, are included in income and are taxable.

But what exactly does this mean?

First of all, there is no dispute that emotional distress is not a physical injury or sickness in and of itself, because § 104(a) of the Internal Revenue Code (IRC) now says exactly that. It states that for purposes of the exclusions from taxable income under IRC § 104(a)(2), “emotional distress shall not be treated as a physical injury or physical sickness.” Not only that, the term emotional distress includes any physical symptoms such as insomnia, headaches and stomach problems that result from emotional distress.

So the key issue for federal income tax purposes becomes whether any damages for which an award is given arose on account of a physical injury of physical sickness. If it can be shown that pain, suffering and emotional distress arose out of a physical injury or sickness, such as an auto accident or cancer caused by radiation exposure, then damages to compensate for those problems are excludable from taxable income. But if those same disorders arose from a non-physical injury, such as employment discrimination or libel, then they cannot be excluded from taxable income, even though the medical expenses incurred for treating these problems can be excluded.

This may seem unfair, but that is the federal tax law as it currently stands. As we said in the previous posts, if you have made a claim under which you will receive a settlement award, determining and documenting exactly what different portions of the award were meant to cover, and how they arose, can have important financial implications for you.

On a more positive note, it’s also important to understand that all damages that flow from a physical injury or sickness are treated as payments received on account of that physical injury or physical sickness. This means, for example, that lost wages can be excluded from taxable income as long as the lost wages resulted from time in which the injured person was out of work as a result of his or her physical injuries.

To pull all of this together, let’s look at an example:

Assume you suffered an on the job personal injury in which you hurt your leg and were required to take time off as a result, then during the time you are not working you are laid off as a result of discrimination. You file a claim against your company asking for payment for your work injury claim and the pain and suffering the disability caused you, as well as for all of the medical expenses related to that injury and back pay for the time you were out of work. You also file a claim for employment discrimination, and ask for lost wages and damages for emotional distress due to the discrimination.

In this case, the damages you were asking for under the first claim could be excluded from taxable income, because they happened on account of your work-related injury. But with respect to the second claim, the award would not be excluded from taxable income, unless, of course, you could make a successful argument that the employment discrimination itself arose out of the physical injury. Now that would be an interesting case.

Taxes Due on Settlement Amounts – Part Two of Three

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As we noted in Part One last week, all money you receive from any source is subject to federal income tax unless a specific exclusion applies. IRC § 104 of the U.S. Internal Revenue Code (IRC) covers exclusions from taxable income with respect to lawsuits, settlement amounts, and awards.

To give you a further sense of how complicated this seemingly straightforward tax issue can get, here are some of the rules governing taxable income under IRC § 104 and other provisions:

  • Punitive damages are almost always included in income and are taxable. The only exception being in certain wrongful death cases.
  • Compensatory damages on account of a personal physical injury or physical sickness are excluded from income and not taxable.
  • Compensatory damages for a personal non-physical injury or non-physical sickness that is on account of a physical injury or sickness are excluded from income and not taxable.
  • Compensatory damages for any other non-physical injury or non-physical sickness, including emotional distress, are included in income and taxable.
  • Payments for medical compensation claims to treat non-physical injuries or non-physical sicknesses are excluded and not taxable.
  • Compensation for lost back pay is a wage that is subject to federal income tax, and compensation for lost front (future) pay wages may also be subject to employment tax.
  • As a general rule, dismissal pay, severance pay, or other payments for involuntary termination of employment are wages for federal employment tax purposes.
  • If you are self-employed, compensation for amounts arising from income-producing activity related to your trade or business is subject to self-employment taxes.
  • Amounts compensating for attorney fees are generally included in income and taxable, although you may be allowed a tax deduction in the same amount. These rules are particularly tricky.

As we said in the last post, it’s best to specify your own allocation of award money in your Settlement Agreement and justify that allocation through the best documentation possible. But keep in mind that the IRS is not required to respect your allocation, and may investigate it closely if you get audited. They will look at all of the facts and circumstances surrounding the case, as well as interview those involved and review documentation, and then make their own determination of how the award should be allocated. For example, if the underlying claim in the lawsuit included a request for lost wages, then the IRS may look closely at whether part of the settlement award should have been allocated to taxable lost wages. If they disagree with your assessment as stated on your income tax return, then you could be subject to penalties for failure to properly report taxable income.

In Part Three of this post, to be published next week, we’ll look at one of the most controversial issues in this area — how the IRS differentiates between physical and non-physical injuries and sicknesses for tax purposes.

Taxes Due on Settlement Amounts – Part One of Three

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If you thought that all the money you receive from the settlement of your lawsuit would be treated the same by federal tax law, you thought wrong. Some types of settlement amounts are considered income and subject to tax, while others are not. Proper planning of your settlement could potentially save you a lot of money. Failure to properly allocate and report settlement proceeds could result in the IRS knocking on your door.

The United States Internal Revenue Code (IRC) considers all money you receive, from whatever source, as taxable unless a specific exclusion applies. IRC § 104 covers exclusions from taxable income with respect to lawsuits, settlements, and awards.

Lawsuit claims, and their corresponding settlement awards, can generally be broken down into compensatory damages and punitive damages. The purpose of punitive damages is to penalize, or make an example of, the wrongdoer. The purpose of compensatory damages is to compensate a person for a loss. Compensatory damages can be further broken down into damages due to physical injuries or sicknesses, emotional distress, and economic harm such as lost wages.

Whether a settlement amount is classified as for punitive or compensatory damages, or relating to a physical injury or sickness versus a non-physical, economic loss, will determine whether that portion of the settlement award is subject to federal income tax. If the settlement award is to compensate you for lost wages, the money is probably subject to federal income tax, social security tax, and Medicare tax.

It is important to allocate every dollar you receive in a settlement award in the most tax-effective manner possible. Tax planning should be an important part of both your lawsuit and settlement strategy.

You may want to specify in the settlement agreement exactly what each part of the award is for—compensatory versus punitive damages, physical versus non-physical injury, and the like. In addition, from the beginning preparations for a lawsuit or other claim, you should collect adequate documentation to back up that allocation; for examples, medical proof of personal injury or sickness, documentation for out-of-pocket expenses, or calculations of lost wages and benefits. That way, if you are subject to an IRS tax audit, you will be able to support whatever allocation you made.

We’ll get into more detail on specific exclusions under IRC § 104, and what to be aware of with respect to the IRS, in Part II of this post.

Elder Financial Abuse – A Growing Problem

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In last week’s blog, we presented examples of legal difficulties that can occur as a result of the aging process in the hope this it becomes apparent that any attempt to deal with problems, after they occur, is difficult and generally unsatisfactory. The keys are awareness, prevention and planning to avoid the kinds of circumstances where elder financial abuse occurs. In this follow up article, we offer suggestions for prevention following by an overview of the legal rights of adults over the age of 60. . If you know an older adult, share this blog post with him or her. Do what you can to help neighbors, friends and relatives become aware.

Avoid Becoming Isolated

A common element in all of the cases we see is that the older person became isolated. Being disconnected from neighbors, friends and family members is often by choice, and may be unavoidable. As people grow old their natural inclination is for independence. Many avoid discussing their futures, hoping all will turn out okay. No one wants to place his or her affairs under the control of others, even well- meaning family members or trusted advisors. But without some significant prior planning, this can be a formula for disaster, particularly with the rise in elder financial abuse in the U.S. No matter how self-sufficient one feels, it should be realized that isolation can lead to depression, loss of interest, or irrational fears and behavior. Loss of energy, declining health, debilitating illness, injury or dementia can put anyone in a vulnerable position, regardless of financial condition. The best protection is through staying connected to relatives and friend and being involved in an active social life. Loved ones, friends and neighbors should not older adults to become isolated and alone, and easy prey for elder abuse.

Be Prepared and Proactive

Wills, powers of attorney and advanced directives should be put in place before the need arises. Family members, counselors and legal advisors should be made aware of one’s wishes concerning care, treatment and the disposition of personal assets before there is reason to question someone’s judgment or competence.

Become Informed and Seek Help from Available Resources

There are numerous agencies nationwide that were put in place to deal with elder abuse, neglect and fraud. Use the internet. There are plenty of websites established by government and private agencies for the care and protection of the older adult. For example, The U.S. Administration on Aging has a website which provides information concerning how older Americans can protect themselves from consumer fraud and scams directed toward older adults. Its Eldercare Locator website provides hotlines where suspected elder abuse may be reported, with directions and easy access to places where help may be found in the local community.

Texas Adult Protective Services (APS) has as its mission, “to protect older adults and persons with disabilities from abuse, neglect and exploitation by investigating and providing or arranging for services, if needed, to stop or prevent further harm.” Its website provides abuse hotlines where suspected mistreatment of any kind can be reported. Acting on tips and complaints, APS reportedly completed 87,744 investigations in homes and care facilities in Texas during 2011. The Texas Department of Family and Protective Services, of which APS is a part, provides resource rooms which provide basic necessities and emergency supplies to older persons who are victims of abuse or neglect. It also provides educational programs and resources to broaden public awareness of the problems facing older Americans, new solutions being proposed and links to other helpful resources and agencies.

In case of emergency or life threatening situations help can be obtained from emergency responders by dialing 911. Local law enforcement agencies also investigate and prosecute cases of elder abuse, particularly when sexual abuse or assault is involved.

Texas has a Long Term Care Ombudsman Program which investigates complaints concerning nursing homes, care facilities and professional home care providers. This program operates through the Texas Department of Aging and Disability Services and has its own website. Abuse of a patient in a nursing home or care facility or committed by a home health provider may also be reported to the Texas Department of State Health Services. The list of potential sources of help goes on and on.

Prevent Elder Financial Abuse – Know Your Rights

Presented here is a brief overview of the extensive regulatory scheme for dealing with elder abuse and other problems of aging in Texas. This is not a comprehensive discussion, merely a summary. Fortunately, information and assistance is readily available through numerous state agencies that can be found on the internet or in the phone books.

Texas State Law

Texas citizens 60 or older are provided special protections by law. In the Texas Human Resources Code, there is a statute which protects an elderly individual’s right to make his own choices with respect to his personal affairs, care, benefits and services; the right to be free from abuse, neglect and exploitation; and if protective measures are required, has the right to designate a guardian or representative to insure the right to quality stewardship of his affairs.

The list of specific rights provided by this legislation is extensive, and includes the right to complain about one’s care and treatment without incurring discrimination or punitive responses; the right to privacy while attending to personal needs or receiving visitors; the right to manage one’s own personal financial affairs or to authorize another to do so; and the right to refuse medical treatment. The statute also provides certain protections against transfer or discharge of an elderly patient.

Elder Rights in Licensed Assisted Living Facilities

Another section of this same Texas Human Resources Code provides a comprehensive regulatory scheme covering licensed assisted living facilities in Texas, to assure that they provide the highest level of care. Included are the following rights: resident independence and self-determination, humane treatment, conservative intervention, access to care, continuity of care, coordination of services, safe surroundings, professionalism of service providers, participation in useful studies and quality of life.

This regulatory scheme provides for both a Resident’s Bill of Rights and a Provider’s Bill of Rights. Much like the protections provided by the aforementioned section, the provisions of this Resident’s Bill of Rights provide for protection of the rights of a resident in an assisted living facility to manage his own financial affairs, to send and receive unopened mail, to reasonable access to a telephone, to privacy, to unrestricted communication, to present grievances, to temporarily or permanently leave the facility, to a safe and decent living environment, to considerate and respectful care, and in general, not to be deprived of any constitutional or civil rights.

Allegations of Abuse and Exploitation are Investigated

Another section of the Human Resources Code provides for the investigation of allegations of abuse, neglect or exploitation of elderly persons by the state Department of Protective and Regulatory Services, and for the provision of protective services to those elderly victims, where appropriate. Protective services means services furnished by the department or by a protective services agency to an elderly or disabled person who has been determined to be in a state of abuse, neglect or exploitation, or to a relative or caretaker of an elderly or disabled person, if the department determines the services are necessary to prevent the elderly or disabled person from returning to a state of abuse, neglect or exploitation. Exploitation is defined to mean the illegal or improper act or process of a caretaker, family member or other individual who has an ongoing relationship with an elderly or disabled person that involves using, or attempting to use, the resources of the elderly or disabled person such as the person’s social security number or other identifying information, for monetary or personal benefit, profit or gain without informed consent.

Guidelines for Reporting Mistreatment

Another section of the Human Resources Code requires any person having cause to believe that an elderly person is in a state of abuse, neglect or exploitation should make a report to the Department of Protective and Regulatory Services, and in some cases, to the state agency as well. This duty applies even if such knowledge is obtained through confidential communications. It is a crime to knowingly fail to report elder abuse, neglect or exploitation. In certain cases, failure to report becomes a state jail felony. However, the code provides immunity from civil or criminal liability to any person filing a report, testifying or participating in any judicial proceeding arising from a report, unless the person acted in bad faith or with a malicious purpose.

Summary

It is important to recognize that the abuse of older adults is on the rise. The keys to deterrence are awareness, prevention and planning to avoid the kinds of circumstances where elder financial abuse occurs. In this article, we offered suggestions for prevention including the avoidance of becoming isolated, being prepared instead of ignoring the future, becoming informed, seeking help from the numerous agencies and organizations ready to help, and knowing one’s rights. If you know an older adult, share this blog post with him or her. Do what you can to help neighbors, friends and relatives become aware.

Kilgore & Kilgore’s Commercial Litigation Caseload Rises to Address Elder Financial Abuse in Texas

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The number of reports involving elder financial abuse has grown significantly over the past decade, according to the National Adult Protective Services Association (NAPSA). One in 20 older adults has indicated some form of perceived financial mistreatment. Perpetrators include relatives, friends and strangers. Below are just a few cases at Kilgore & Kilgore.

Kilgore & Kilgore Represents Relatives Against Caretaker Who Misappropriated Inheritance Monies

Kilgore & Kilgore is working to recover assets taken by a caretaker of the family’s two elderly cousins. The caretaker used the assets to retain legal counsel to draft estate planning documents used to transfer assets to the caretaker. The caretaker moved one of the cousins, without informing the family, to various nursing home locations in Texas. The family’s attempt to obtain guardianships over the cousins was hindered by the caretaker who had access to, and used, the accounts of the cousins to pay attorneys and expert witnesses. Both cousins had wills there were probated. The statute of limitations to contest probate matters had expired. However, Kilgore & Kilgore found that the cousins had claims for breach of fiduciary duties against the caretaker that could be prosecuted by the heirs. The litigation proceedings occurred in 2012 and 2013 and were hotly contested, as was an unsuccessful emergency appeal by the caretaker to the Court of Appeals to attempt to set aside trial court rulings. The case was settled by mediation. However, adispute arose as to the interpretation of the settlement agreement, and the caretaker filed bankruptcy in order to obtain a change of venue. After extensive litigation in Bankruptcy Court the family’s claims were finally settled by a conveyance of assets.

Elder Flees Institution and Works to Recover His Assets

Kilgore & Kilgore also represents a wealthy man whose children took over his estate and placed him in an institution. The man escaped the institution and contacted Kilgore & Kilgore.

Texas Mother Kidnapped and Hidden From Other Siblings

Kilgore & Kilgore represents the other children in a dispute over assets swiped from them by their sister who kidnapped her mother, induced the mother to assign to her all of the substantial family assets, and then hid the mother from the family until the mother’s death. The kidnapper then filed for bankruptcy. The other children sued to recover the family’s land from the sister’s creditors that was taken from the family.

Commercial Litigation Cases Increase as Reports of Elder Abuse Become Widespread

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Kilgore & Kilgore has recently experienced a rise in elder financial abuse cases, which mirrors a national trend. According to the National Adult Protective Services Association (NAPSA), the number and complexity of reports involving financial abuse of older adults in the U.S. has spiked during the past decade. One in 20 older adults indicated some form of perceived financial mistreatment. Reports of financial abuse to NAPSA identified the perpetrators as relatives, trusted friends and strangers.

censusIn Dallas County, there were just under 338,000 people age 60 years or older, according to the U.S. Census of 2012, of which just over 32,000 older adults were below the poverty line and just fewer than 132,000 were minorities. In our next blog post, we will discuss our advice for older adults who wish to avoid becoming susceptible to others hoping to take advantage of them. This starts with knowing their rights, which we will summarize next week. If you know an older adult, share this blog post with him or her. Do what you can to help neighbors, friends and relatives become aware.

Elderly Man Struggles to Maintain His Independence as His Abilities Decline

By way of example, consider the following scenarios. A 79- year-old man holds a substantial sum of money in trust, for the benefit of the children of his deceased son by his first marriage. There is no court supervision of the trust. He remarried but is now divorced and living alone. Since his remarriage, he has had very little contact the wife and children of his deceased son. He now suffers from the onset of dementia, and is hospitalized with what may be his final illness. He is very independent, refuses to recognize his diminishing condition, and often sends visiting relatives away from his hospital bed. He has placed the daughter of his second wife in charge of his affairs, under a power of attorney. Family members are respectful of his wishes, but are concerned about his ability to manage his affairs. In this case, it is not only the interest of the elderly person that needs protection. In what way can the children’s interest in the trust funds be protected?

Older Couple Becomes Isolated and Dependent on a Stranger

Another example involves an elderly couple lives together on a rural homestead. Neither has any children, and they have no close relatives. Over time, the husband’s health fails, and he becomes physically unable to manage the farm or their personal affairs. His wife has no business experience and is not capable of properly managing their affairs. A care giver is hired to manage the household, provide meals and otherwise look after the couple. However, over a period of time the caregiver gains their confidence, and ultimately takes control of all their affairs, including the expenditure of their funds. The caregiver gradually alienates this couple from long-term employees, friends, attorneys and advisors and discourages visitors. Slowly but surely the care giver isolates them completely. They become totally dependent on the caregiver, who ultimately acquires the entire estate. How can infirm elderly people be protected from undue influence by a caregiver in these kinds of circumstances?

Lonely Widower Gets Involved in Internet Relationship

Yet another example involves a retired, somewhat reclusive investor is left alone late in life following the death of his second wife. With no active social life and no children or close relatives, this gentleman becomes lonely and searches the internet for companionship. His inquiries are rewarded when he finds an attractive and sympathetic middle-aged woman, with similar interests and a pleasing personality. As they start seeing each other regularly, the woman shares the details of her personal life, her family background and her business interests. He, of course, reciprocates. Ultimately, they make plans to marry. He makes her a bridge loan so she can move her business closer to him. He explains to his in-laws that he probably won’t attend family functions, as in the past. It then turns out that the marriage has to be postponed due to severe medical problems the woman suddenly developed. The gentleman was more than willing to help out with additional loans to meet these unexpected medical expenses. It was not until most of his savings was depleted that this gentleman is informed by an assistant District Attorney that his companion is under investigation for criminal fraud. Eventually, it is revealed that the companion is already married and believed to be a member of a criminal group suspected of various scams to defraud people. Although the companion was indicted for fraudulently obtaining money under false pretenses, none of this gentleman’s money was recovered. In this case, the elderly man was not infirm or mentally impaired, only emotionally vulnerable. What could have been done to protect his interests?

Awareness, Knowledge and Planning – Best Strategies for Prevention

This small sampling of legal problems that can occur as a result of the aging process is presented in the hope it becomes apparent that older adults are vulnerable emotionally and financially. Attempts to deal with problems of this nature after they occur are difficult and generally unsatisfactory. The keys to prevention are awareness, knowledge and planning so as to avoid the kinds of circumstances where elder financial abuse may occur.

Get Legal Details in Order Before Need Arises

No matter how self-sufficient an older adult feels, the natural loss of energy, declining health, debilitating illness, injury, or dementia can put anyone in a vulnerable position, regardless of financial condition. The best protection is through staying connected to family members, friends and neighbors. Wills, powers of attorney and advanced directives should be put in place before the need arises. Family members, counselors and legal advisors should be made aware of the elder person’s wishes concerning care, treatment and disposition of personal assets before there is reason to question judgment or competence.

Consult a Kilgore & Kilgore Attorney

Many of these unfortunate situations can be resolved through the efforts of an attorney. Kilgore & Kilgore attorneys are experienced, compassionate and skilled at these types of matters. Stay tuned to next week’s blog post. We will briefly discuss our advice for older adults who wish to avoid becoming susceptible to others hoping to take advantage of them. This starts with knowing their rights, which we will summarize next week.

Your Rights as an Employee: Wiping the NLRB Slate Clean?

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Your Rights as an Employee: Wiping the NLRB Slate Clean?
The Impact of NLRB v. Noel Canning – Part 2

On June 26, 2014, in the case of National Labor Relations Board v. Noel Canning, the U.S. Supreme Court declared the recess appointments to the NLRB made by President Obama to be invalid. This means that for the period between August 5, 2013, and January 4, 2013, the NLRB was acting without a quorum. Its decisions during that period are arguably invalid as well. It is safe to describe the Noel Canning aftermath as an uncertain mess.

There are the more than 1,000 decisions that were issued by the NLRB during the relevant 19-month time period. Approximately 98 are still on appeal, and almost all of those decisions will have to be vacated and reheard by the NLRB. It is unclear what will happen to the rest of the decisions, depending in large part on how many employers and employees who were adversely affected want to have their cases reopened one or two years after the fact, especially given that most of what the NLRB ordered them to do at the time will have long ago been put into effect.

There is now a fully constituted five-member NLRB, three of whom are Democrats, so reopening a case would mean betting that the new Democratic members would reach a different conclusion than the invalidated recess appointees. For this reason, most believe that if the cases were sent back to be reheard, the original decisions would simply be affirmed in most cases.

During the 19-month period in question, the NLRB’s regional directors also made many decisions. The status of those decisions is also unclear The NLRB has yet to take a public stance on this topic, but if actions at the regional level are also subject to challenge, then a real Pandora’s Box of prior cases will be opened.

Each NLRB decision sets a precedent that employers and employees look to in making workplace decisions. During the relevant 19-month period, several very important NLRB precedents were set. It appears now that those decisions have now been set aside. This leaves employers in an unenviable position; should they now follow the state of the law before January 4, 2012, or should they instead take into account the subsequent invalid decisions on the assumption that the NLRB will eventually revalidate those decisions?

Politics and practicality play into this question as well. Given the workload of the NLRB, it is uncertain when and how— not to mention whether—they will be able to reestablish the lost precedents. In any event, it is bound to take a considerable amount of time to do so. And if that is the case, there is no telling what the future makeup of the NLRB will be. The term of one NLRB member is set to expire in December 2014, meaning the board will be left in a potential Two Democrat/Two Republican deadlock. If a third member cannot be confirmed during the term of the current administration, it could be a long time before new decisions and rules are handed down, and the political composition of the NLRB may have changed dramatically in the interim.

The rocky road of the NLRB does not appear to be getting any smoother. This will mean employers and employees alike will need to carefully navigate their journey under the NLRA.

Wiping the NLRB Slate Clean?

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The Impact of National Labor Relations Board v. Noel Canning

The National Labor Relations Board (NLRB) is an incredibly busy agency of the U.S. government. It administers the National Labor Relations Act (NLRA) and makes hundreds of decisions every year. The rulings in these decisions then set a precedent for future decisions, effectively contributing to the law of the employer-employee landscape. So what would happen if 19 months of rule-issuing, decision-making, precedent-setting and other administrative actions by the NLRB suddenly became invalidated? How would this impact employers and employees who were either positively or adversely affected by those decisions, or had been following those rules and precedents? What would be the current state of the law? We’re in the process of finding out.

The NLRB is appointed by the president of the United States and confirmed by the Senate. It is intended to have five members, but needs at least three for a quorum. A quorum isthe minimum number of members needed to conduct the business of the agency.In January 2012, there were only two members of the NLRB. As a result, President Obama made recess appointments to the board, so that the agency could reach a quorum and conduct its normal activities. These appointments were never confirmed by the Senate. Nonetheless, the NLRB conducted business as usual for over two years. But on June 26, 2014, in the case of National Labor Relations Board v. Noel Canning, the U.S. Supreme Court declared the recess appointments to be invalid. This means that for the period between January 4, 2012 and August 5, 2013, the NLRB was acting without a quorum. Its decisions during that period are arguably invalid as well. It is safe to describe the Noel Canning aftermath as an uncertain mess.

There are the more than 1,000 decisions that were issued by the NLRB during the relevant 19-month time period. Approximately 98 are still on appeal, and almost all of those decisions will have to be vacated and reheard by the NLRB. It is unclear what will happen to the rest of the decisions, depending in large part on how many employers and employees who were adversely affected want to have their cases reopened one or two years after the fact (especially given that most of what the NLRB ordered them to do at the time will have long ago been put into effect). There is now a fully constituted five-member NLRB, three of whom are Democrats, so reopening a case would mean betting that the new Democratic members would reach a different conclusion than the invalidated recess appointees. For this reason, most believe that if the cases were sent back to be reheard, the original decisions would simply be affirmed in most cases.

Your Rights as an Employee – The Concerted Activity Rule – Part 2

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Note: This is a continuation of our blog post dated July 16, 2014.
Legal rights of employees regarding what an employee can or cannot say, or can or cannot do, with respect to the terms and conditions of her or his employment is a judicial minefield. While an employee has considerable latitude under section 7 of the National Labor Relations Act, this discretion is not without limits. The advice of an employment attorney like those at Kilgore & Kilgore should be sought before attempting to navigate the treacherous waters of employee and employer rights.

While employees have broad latitude in what they can say or do with respect to the terms and conditions of their employment, employers can draw the line when the communications or conduct impacts the employers’ customers. For example, employees of a New York grocery store chain became upset when the chain, which had marketed its fresh cut meats, began to sell prepackaged meats in addition to those that had been freshly cut by its meat and deli employees. Employees began wearing hats and t-shirts that proclaimed: “Don’t Cheat About the Meat!” The grocery store chain suspended these employees.

Neither the grocery store chain nor the National Labor Relations Board (NLRB) were troubled by the employees’ earlier slogans, which included, “Ask Me Which Meats Were Cut Fresh Today!” However, with its “don’t cheat about the meat” campaign, the NLRB found that the employees had gone too far. The message, the NLRB noted, went beyond the prepackaging issue and could have customers believing that the grocery store was “cheating” about its meat in more nefarious ways. he chain properly disciplined the employees who proclaimed this message.

The NLRB also sided with an employer in a case involving a New York bakery that specialized in Kosher foods. The business’ customers relied on the bakery’s assurance that all of its food products satisfied all Kosher requirements. Thus, when the employees began wearing t-shirts proclaiming that “If it’s not Union, it’s not Kosher,” the bakery demanded that the employees remove the shirts or face discipline. The NLRB supported the employer, finding that the message incorrectly sent the message to customers that some of the employer’s food may not be Kosher, compromising the very core of the employer’s business.

The Medco case (mentioned in our July 16th blog) from Las Vegas further illustrates this principle. While the federal court of appeals was unconcerned about Stephen’s t-shirt and its message, it did find merit in Medco’s concerns that Medco’s customers might be troubled by the shirt. “Especially for a firm selling a service, concern for customer’s appraisal of its employees’ attitudes seems natural. Obviously we don’t mean to suggest that employers are free to suppress employee speech in the interest of presenting a Potemkin village of intra-firm harmony, but that is quite different from trying to exclude the display of slogans that an outsider might read as sullen resentment (especially when the object of discontent is something so seemingly inoffensive as the WOW program),” stated the finding. Thus, the federal appellate court concluded that the employee, Michael, could challenge the WOW program, doing so in the presence of corporate customers was a step too far.

Moreover, an employer can reasonably expect some degree of civility in an employee’s conduct or communications regarding workplace conditions and issues. Godwin’s Maxim – a humorous (but apropos) rule of arguments – posits that the longer a discussion occurs, the probability of an analogy to Hitler or Nazis approaches one. Judicial decisions suggest that employee speech or conduct has crossed the line should Godwin’s Maxim come into play. In a noteworthy case from the late 1960s, when tensions between the United States and Cuba ran very high, an employee interrupted a plant manager’s meeting and encouraged employees not to vote to unionize. In his interruption, the employee shouted at the plant manager: “I want you to know that you are no different than Castro; Castro told the people in his country if they did not like the way he was running it to pack up and leave, and you tell people at Boaz Spinning Company if they do not like the way you are running the plant to punch out and go home.” The employee was immediately fired.

The federal appellate court was not unduly concerned about the employee’s interruptions, but comparing the plant manager to Castro went too far. It stated in its finding: “[The manager] had no difficulty in understanding that he was being likened to a Communist, and [the employee]’s fellow-employees, in describing [employee]’s remark to [the manager], remembered the remark as being ‘You are just like Castro.’ That [the manager] was ‘unwilling to hear both sides of the question’ hardly deserves casting him as an ‘industrial dictator.’”

An employee has substantial freedom concerning speech in the workplace, but this discretion is has limits, particularly when customers or others with influence over the buying decision are concerned. What an employee can or cannot say, or can or cannot do, with respect to the terms and conditions of her or his employment is a judicial minefield. Seek the advice of an employment law attorney if you find yourself the victim of wrongful discharge.

Your Rights as an Employee – The Concerted Activity Rule Part 1

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Employers must use considerable caution to ensure employee rights at work when disciplining or terminating an employee for employment-related speech. A recent survey commissioned by CBS News found that only forty-five percent of Americans were satisfied with their working conditions, a modern-day low. Employers have little legal obligation to improve working conditions. And, employers can do little to stop employees from complaining about, or talking about, the working conditions at their jobs.

The genesis of this rule is the “concerted activity” clause in the National Labor Relations Act, signed into law by President Franklin Roosevelt over 78 years ago. Initially intended to protect employees who were working together to establish unions in their workplaces, this clause has been expanded to encompass a broad array of employee communications regarding working conditions, including those not involving union activity and conversations made by just one employee to a boss.

Section 7 of the National Labor Relations Act guarantees an employee the right to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection.” An employer may not discipline or terminate an employee who engages in conduct that falls within this provision. Not surprisingly, these relatively simple terms have generated decades of litigation. What constitutes “concerted” activity? What does “mutual aid or protection” mean? Courts have given employees considerable latitude in defining these terms. Among other things, Courts have held that a communication made by a single employee may constitute “concerted action,” so long as it was intended to address the “mutual aid or protection” of other employees. Moreover, what constitutes a working condition is also construed broadly.

A recent case out of Las Vegas illustrates these principles. The employer, Medco Health Solutions of Las Vegas, instituted an employee incentive program called “WOW,” under which the company selected one employee each week for recognition of his or her achievements. The recognized employee would then be memorialized on the company’s “Wall of WOW,” including a photo and brief description. This “Wall of WOW” was featured in company promotional materials, as well as in customer tours of the company’s facilities.

Not all employees were enamored with the program, however. One employee, Michael, wore a t-shirt to work one day, featuring a union logo on the front and proclaiming on the back that “I don’t need a WOW to do my job!” The employee picked a bad day to wear the t-shirt. Clients were touring the facility that day. Accordingly, Medco management told Michael to remove his shirt or be terminated. He filed a grievance, through the union, with the National Labor Relations Board.

The case wound its way through the federal administrative agency and ultimately to the District of Columbia Court of Appeals. There, the federal appellate court rejected many of the employer’s arguments that Michael’s conduct was not protected under section 7. First, Medco argued that he acted “alone,” not in “concert” with other employees. The Court disagreed, noting that protected conduct includes communications “where individual employees seek to initiate or to induce or to prepare for group action.” Medco then argued that the WOW program was not really a “term or condition of employment,” as there were no monetary incentives attached to the program, nor was any discipline imposed on anyone who did not receive a “WOW” award. Again, the Court disagreed, noting that any program intended to increase productivity fell within a term or condition of employment.

Another example of protected activity under Section 7 comes from Blue Circle Cement in Tulsa, Oklahoma. Stephen worked there and was also an ardent environmentalist. In fact, he was the local union’s “environmental” officer and a founder of a non-profit organization, Earth Concerns of Oklahoma (“ECO”). Blue Circle applied for a license to burn hazardous waste to fuel its operations, potentially releasing heavy metals into the atmosphere. Stephen opposed this. He found a Greenpeace pamphlet discussing the environmental issues relating to releasing heavy metals into the environment and photocopied the pamphlet on the company’s copy machine for distribution “to provide to persons who had no direct connection with Blue Circle.” After a plant manager discovered Stephen using the company’s copy machine for this purpose, the company terminated Stephen.

Blue Circle claimed that Stephen’s actions were not “concerted activity” on behalf of other employees, but “personal activity” in support of ECO, his non-profit environmental action committee. The United States Court of Appeal for the Fifth Circuit, however, upheld that National Labor Relations Board’s finding that Stephen was, in fact, engaging in “concerted activity” in using the company machine to copy the fliers and, therefore, that he was wrongfully terminated. The Union, the Court observed, opposed the company’s plan to burn hazardous waste. As part of its opposition, the union enlisted support from the local community beyond its membership. Stephen’s efforts, even on behalf of his personal non-profit, “were intimately connected to, and derived from, the Union’s broad-based strategic efforts.” The company should not have fired Stephen.

Employers must use extreme caution when disciplining or terminating employees who do or say anything that could be construed as addressing terms or conditions of employment. Stay tuned to our next blog, Your Rights as an Employee – The Concerted Activity Rule Part 2, in which we will discuss where employers can draw the line when the communications or conduct of employees impacts the employer’s customers.