Financial Services Update

This past week Merrill Lynch agreed to pay $37 million to approximately 3,250 of its California brokers to settle claims in a lawsuit seeking overtime compensation under the FLSA, the California Labor Code and the California Unfair Competition Law. Although some have suggested that the settlement was based on peculiarities in California overtime law, which generally is more favorable to employees than federal law, the litigation and the settlement raise significant questions regarding how stockbrokers are paid and whether stockbrokers really may be exempt from payment of overtime under state and federal law. To address the ramifications of the Merrill Lynch settlement, Dorsey & Whitney is preparing a survey which will be sent to clients to better understand current practices. The responses will then be compiled and shared at a roundtable discussion next month. We will also prepare a white paper which will address the issue and provide insight to guide clients in evaluating their practices.

Financial Consultant, Who Resigned Claiming Sex Discrimination, Awarded Both Front Pay And Reinstatement

On July 20, 2005, a three-person arbitration panel ordered a former employee of Merrill Lynch & Co., who resigned in 1997 amid allegations of sex discrimination and had already received a $2.2 million damages award (discussed in an earlier eUpdate), reinstated as a financial consultant and admitted into the company's management training program. See Sumner v. Merrill Lynch Pierce Fenner & Smith Inc. (July 20, 2005). While reinstatement is rarely ordered (or even sought) in employment discrimination cases, this decision is even more surprising because the arbitration panel allowed the employee to keep $300,000 in front pay previously awarded to her and a signing bonus she received from a subsequent employer. The panel did require that the employee give up her current job as a condition of returning to Merrill Lynch.

The panel specifically rejected Merill Lynch's argument that front pay was ordered in lieu of reinstatement, noting that front pay was intended to compensate the employee for the "continuing and cumulative adverse effect of Merrill's discrimination on her earning capacity," which would have accrued "even if Claimant had not terminated her employment with Merrill." In reaching this conclusion, the panel favorably cited Garza v. Brownsville Indep. Sch. Dist., 700 F.2d. 253 (5th Cir. 1983), but rejected as not controlling a later, and seemingly contrary, decision from the same court, Jurgens v. EEOC, 903 F.2d 386 (5th Cir. 1990).

The employee's attorney, Linda Friedman, described the arbitration panel's order as significant because it found that front pay and reinstatement are not mutually exclusive remedies and that an employee may recover even where he or she has voluntarily resigned under circumstances not amounting to a constructive discharge.

The arbitration panel was convened as part of a special dispute resolution process set up under the terms of the settlement of an earlier class action lawsuit brought against Merrill Lynch. Accordingly, the decision has limited precedential value, but the anomalous result nonetheless highlights the bottom line cost savings that a set of coordinated and well-communicated training programs, discrimination and harassment polices, and complaint and intervention procedures can yield.

The Department of Labor Adminstrative Review Board recently ruled that a stock analyst had not engaged in protected whistleblowing under that Sarbanes-Oxley Act, simply through her unexplained refusal to change a stock rating, as requested by management. See Getman v. Southwest Securities Inc., DOL ARB, No. 04-059 (July 29, 2005).

In overturning an administrative law judge's contrary finding, and $170,000 damages award, the ARB held that a silent refusal to act upon an employer's request does not amount to whistleblowing under the statute, which requires some affirmative protest by an employee against perceived fraudulent or illegal activity. Accordingly, the stock analyst's termination more than six months later for attendance and performance issues could not have been in retaliation for engaging in protected activity as a matter of law.

This decision obviously limits the circumstances under which an employer could be found liable for retaliation under the Sarbanes-Oxley Act, by requiring the employer to have received fair and clear notice that an employee is complaining about business practices prescribed by the Act. This interpretation is consistent with that applied to federal and state employment discrimination statutes with similar anti-retaliation provisions, which generally require the articulation of something more than vague complaints about unfairness or favoritism.

Nonetheless, the fact that the administrative law judge initially accepted the claim that the stock analyst's mere refusal to change a stock rating should have been understood as a protest that giving the stock a more favorable rating would have fraudulently misled the investing public, illustrates the challenges confronting an employer contemplating an involuntary termination decision. In addition to actual job performance and numerous protected class issues, an employer may also find itself having to answer for failing to interpret properly an employee's past inaction or silence. A decision-making process that combines front-end training, thoughtful vetting of the salient facts, and expert counsel has become a matter of business necessity in this increasingly complicated field.

Under its terms, the Sarbanes-Oxley Act prohibits retaliation by any corporate "officer, employee, contractor, subcontractor or agent" of a publicly traded company. Previous decisions have required that non-public subsidiaries of public companies are subject to the Sarbanes-Oxley Act only so long as the operations of public parent and non-public subsidiary are closely intertwined and both entities are named in any complaint. Previously reported decisions had concluded, however, that a non-public "agent" that contracts to provide services or products to a public company is not subject to liability under the Act.

On July 18, 2005, however, an administrative law judge ruled that the plain language of the whistleblower provisions of Sarbanes-Oxley Act applied to a private consulting firm providing temporary management services to a public company during bankruptcy and dissolution proceedings. See Kalkunte v. DVI Financial Services, Inc., 2004-SOX-56 (OALJ July 18, 2005). Accordingly, an employee of the public company could bring a claim for retaliation independently against the private consulting firm.

Undoubtedly, this determination was influenced by the nature of the relationship between the two companies, in which the private consulting firm played an unusually more substantial role in managing the public company, its assets, and its employees through bankruptcy and dissolution. In particular, the employee of the private consulting firm identified as primarily responsible for the allegedly retaliatory conduct was operating as the company's interim President & CEO and also had been appointed to the company's Board of Directors.

Nonetheless, the administrative law judge did not expressly limit his holding to these unique facts, and the decision is likely to be cited in the future by complainants seeking to expand the respondent and/or recovery pool in Sarbanes-Oxley Act cases. Moreover, because virtually every private company has some sort of contractual relationship with a public company, all companies need to be aware the basic requirements of the Sarbanes-Oxley Act, adopt sound corporate governance practices and non-retaliation policies, and seek qualified outside counsel when confronted with employee complaints or termination or discipline decisions.

The financial services team in Dorsey's Labor & Employment group has extensive experience counseling and representing clients regarding the unique legal issues confronting financial services employers. The attorneys on our team are available to review and update personnel and ethics policies to insure that they not only meet the requirements of federal, state, and local law and the regulatory bodies governing financial services employers, but also are effective and practical for your business. We provide experienced counsel to financial services employers contemplating particular employment decisions, such as termination or discipline, and assist with investigation of employee complaints. Finally, we offer unsurpassed, nationwide legal representation to financial services employers in litigation and arbitration. Please contact any of the attorneys on our financial services team to learn more about the issues addressed in this eUpdate or any of the services we provide.

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