Almost 99% of today’s information created by businesses is generated and stored electronically.  The ability to easily and conveniently store large amounts of data has created a hidden liability that did not exist in the age of when companies maintained its information primarily in paper format.  The effect of this hidden liability is twofold.  First, companies create more information then they know what to do with. Second, companies sometimes delete or destroy data and information that they actually do need.

For the unwary, these hidden liabilities may become exposed when your company is faced with a lawsuit.  In today’s litigation, the age of electronic data has generated a paradigm shift away from traditional paper documents to digital information.  This shift has changed the discovery process in litigation by changing what attorneys are looking for; how they are looking; and where they are looking for relevant information.  Companies can expect in today’s litigation that the way it stores and preserves electronic information will be a central topic during the discovery process that will involve not only your record custodians, but also your information technology department.  How well a company manages and preserves its electronic information may be an outcome determinative factor for it in litigation.

Today, companies that find themselves involved in a lawsuit oftentimes are faced with attacks through the discovery process as to how they typically store and delete electronic information.  The purpose of this inquiry is to set the expectation as to what electronic information, such as e-mails, the company should or should not reasonably have at its disposal for discovery purposes.  Companies that do not have a well-drafted record retention plan that addresses electronic information and which incorporates a comprehensive litigation hold policy may find themselves at a significant disadvantage in trying to defend what might otherwise be a winning case.   That is why it is more important than ever for all companies, both large and small, to effectively manage their electronic information.  This means that companies must be litigation-ready by taking affirmative actions that allow the company to effectively manage and retain electronic information. It is simply too late to start thinking about the manner and method of retention and destruction of electronic data after you have been served with a lawsuit.

The best tools to avoid these hidden liabilities is a record retention policy that addresses electronic information as well as a litigation hold policy that is designed to preserve electronic data once litigation is reasonably anticipated.  A record retention policy should be designed so that your company does not destroy information that it is obligated to maintain and at the same time the policy should be designed to destroy or delete information that the company no longer needs and/or is no longer mandated to maintain.  Most companies have some sort of document retention policy.  These retention policies were originally implemented to manage the volume and space occupied by paper documents.  Companies have been less diligent, however, in applying their retention policies to the electronic information that they store on their servers and individual computer hard drives.  This lack of diligence in managing electronic data has created a treasure trove for plaintiffs’ lawyers looking for the proverbial “smoking gun,” such as that e-mail that explains exactly what motivated the company’s decision to terminate that troublesome employee.

A litigation hold policy has long been an important concept in litigation.  In simple terms, it means that once you are sued, you have to stop destroying documents.  It is an easy concept to understand when applied to paper documents, but it becomes a much more complicated task when dealing with electronic information.  Electronic evidence can easily disappear, be altered or destroyed if not properly preserved.  For example, some companies’ computer systems provide for automatic deletion of e-mails and documents, so stopping that process takes an affirmative effort on behalf of management.  When implementing a legal hold, a company needs to approach the hold requirement with a coordinated team effort.  Business units, IT, records management and custodial personnel, and either in-house or outside counsel need to be involved and work together in the process of implementing the hold.

The failure to have a properly drafted record retention policy as well as a litigation hold policy may result in serious and adverse consequences for your company and may compromise your company’s ability to defend itself in a lawsuit.  For example, failure to have these policies in place can result in court-imposed sanctions, adverse jury instructions and significant monetary awards.

For example, a federal district court in Illinois recently agreed to permit the jury to be instructed that it can assume computer data destroyed by an employer would be unfavorable to its defense in an employee’s lawsuit under the Americans with Disabilities Act when the employer permitted a software program to automatically overwrite computer data relevant to the claims in the case.  It made no difference that the employer did not act intentionally in deleting the information, rather, the district court found that the employer’s failure to prevent the automatic deletion made it “at fault” relative to its duty to preserve evidence that was discoverable pursuant to the Federal Rules of Civil Procedure.  Consequently, thinking ahead and addressing the hidden liabilities created by your electronic information can save your company time and money, and, more importantly, potentially prevent your company from having to incur an unfavorable judgment as the result of electronic information being inadvertently deleted.

The EEOC is statutorily obligated to enter into confidential conciliation efforts with an employer prior to commencing a lawsuit.  Only if the EEOC is unable to secure a conciliation agreement acceptable to it may it bring a civil action, as conciliation is a condition precedent to the EEOC’s power to sue.  The purpose of this requirement is to encourage settlement of discrimination cases through voluntary compliance, rather than litigation.  If the EEOC commences suit against an employer without first engaging in a good faith effort to conciliate the case, the employer may seek dismissal of the lawsuit because conciliation raises a quasi-jurisdictional issue.

Despite case law to the contrary, the EEOC has now attempted to argue that a federal district court is without authority to review the EEOC’s pre-suit conciliation efforts.  In EEOC v. Mach Mining, the EEOC has argued that an employer cannot challenge the EEOC’s pre-suit conciliation efforts because Title VII prohibits disclosure of conciliation efforts in a subsequent proceeding.  The federal district judge, however, was not persuaded by the EEOC’s argument as he found that the prohibition was in conflict with Title VII’s mandate that the EEOC must attempt to conciliate with the employer prior to bringing a civil action.  Moreover, the federal district judge also held that Title VII’s prohibition regarding disclosure of conciliation efforts goes to the introduction of such evidence relative to the merits of the case and not to introducing such evidence for the purpose of determining whether the EEOC first satisfied its prerequisite to bringing suit.

Nevertheless, the federal district judge granted the EEOC’s motion to seek an interlocutory appeal before the Seventh Circuit because there exist a split between the federal circuits as to the scope of a court’s review of the EEOC’s conciliation efforts – an issue that the Seventh Circuit has not yet addressed.  Some circuits employ a “deferential standard” inquiring only whether the EEOC made an attempt to conciliate whereas other circuits apply a “heightened scrutiny standard” which requires the EEOC to make a sincere and reasonable effort to negotiate by providing the employer with an explanation as to the reasonable cause for its belief that Title VII has been violated and an adequate opportunity to respond to all charges and negotiate a possible settlement.

The federal district court certified the following two questions for the Seventh Circuit on appeal: (1) Is the EEOC’s conciliation process subject to judicial review?, and (2) if so, is that level of review a deferential or heightened scrutiny level of review?  It would be anticipated that the Seventh Circuit will hold that the EEOC’s conciliation is subject to judicial review and will most likely find that a district court’s scope of review will include a determination as to whether the EEOC in fact engaged in conciliation and whether that effort was made in good faith.  We will update this blog article when the Seventh Circuit issues its decision.

OSHA has literally opened the door for union organizers to enter an employer’s non-union facility during an OSHA walkaround inspection. In a February 21, 2013 interpretation letter, Richard E. Fairfax, OSHA’s Deputy Assistant Secretary, opined that employees without a collective bargaining agreement may designate a person affiliated with a union or community organization to act on their behalf as a walkaround representative. Mr. Fairfax opined that the OSH Act, specifically, 29 U.S.C. § 657(e), authorizes participation in the walkaround portion of an OSHA inspection by “a representative authorized by the employer’s employees.” Mr. Fairfax further attempts to support his opinion by citing to the underlying OSHA regulations, 29 C.F.R. § 1903.8, which explicitly allows walkaround participation by an employee representative who is not an employee of the employer when, in the judgment of the OSHA compliance officer, such a representative is “reasonably necessary to the conduct of an effective and thorough inspection.”

Mr. Fairfax’s interpretative letter conveniently fails to acknowledge that permitting a non-employee to participate in the walkaround inspection is an exception to the express part of the regulation that provides that “[t]he representative(s) authorized by employees shall be an employee(s) of the employer.” Further, Mr. Fairfax fails to acknowledge that the exception permits only those third parties with special expertise or knowledge to participate in a walkaround inspection, such as a hygienist or a safety engineer. OSHA’s interpretative letter fails to clarify what special skill or knowledge a union or community organizer may bring to the inspection.

OSHA’s interpretative letter also fails to clarify when an alleged “employee representative” is “authorized” by the employees. Can a minority faction of employees claim that an union organizer is their “authorized” representative when other employees may object to such individual as their authorized representative? It appears that OSHA’s interpretative letter takes a very liberal interpretation of who is or can be an “authorized” employee representative. If an employer is confronted with this scenario, should it halt the inspection and provide the compliance officer the option of conducting the walkaround without the union organizer or should the employer require OSHA to seek a warrant if the compliance officer insists that he or she will only conduct the walkaround if the union organizer is permitted to accompany the compliance officer? Obviously, these significant issues, as well as others, should be discussed with experienced legal counsel prior to permitting an OSHA compliance officer to proceed with a walkaround inspection under such circumstances.

To maintain its relevancy and expand the scope of its authority, the NLRB continues its attack upon non-union employers’ policies. This time the NLRB has positioned its cross-hairs upon employers’ “at-will” employment policies or statements. Most non-union employers include within their employee handbook a statement that employees’ employment is “at-will,” meaning either the employee or the employer may end the employment relationship at any time, for any reason, either with or without notice. Most “at-will” statements further provide that no agent or representative of the employer may enter into any agreement to the contrary unless done so in writing and signed by the president or CEO of the company. These types of statements reflect nothing more than the reality of the legal relationship between the employer and the employee.

The NLRB, however, has recently taken a different viewpoint, finding that such “at-will” statements have a chilling effect upon employees’ Section 7 rights. In American Red Cross Arizona Blood Services Region, an administrative law judge found that the employer had violated Section 8(a)(1) by maintaining the following language in a form that employees were required to sign acknowledging their at-will employment status: “I further agree that the at-will employment relationship cannot be amended, modified or altered in any way.” The NLRB found this language to essentially constitute a waiver by the employee of his/her Section 7 rights to “advocate concertedly … to change his/her at-will status.”

The NLRB applies a two-step inquiry to determine if a work rule would “reasonably tend to chill employees in the exercise of their Section 7 rights.” First, a rule is unlawful if it explicitly restricts Section 7 activities. Second, if the rule does not explicitly restricted protected activities, it will nonetheless be found to violate the National Labor Relations Act upon a showing that: (1) employees would reasonable construe the language to prohibit Section 7 activity; (2) the rule was promulgated in response to union activity; or (3) the rule has been applied to restrict the exercise of Section 7 rights.

Due to a significant uproar from employers, the NLRB issued two sets of advice memoranda on October 31, 2012 and February 4, 2013, back-pedaling on its position with regard to “at-will” employment statements. In these advice memoranda, the NLRB now takes the position that an “at-will” statement will not be considered to interfere with employees’ Section 7 rights if the statement (1) does not explicitly restrict Section 7 rights, or (2) was promulgated in response to union or other protected activity, or (3) that the policy had been applied to restrict protected activity.

While most employers’ at-will statements will pass the NLRB’s scrutiny relative to employees’ Section 7 rights, this does not mean that all “at-will” statements, especially those that imply that there can never be any other employment relationship between the employee and employer, will be considered lawful under the National Labor Relations Act. To be prudent, employers should review their “at-will” employment statements in their employee handbooks to make sure that such statements do not foreclose to its employees the possibility of a potential modification of the at-will relationship.

The National Labor Relations Board (NLRB) has taken the position, in a recent Advice Memorandum dated January 29, 2013, that an employer’s confidentiality rule may unlawfully interfere with employees’ Section 7 rights. Section 7 of the National Labor Relations Act (29 USC § 157) guarantees employees the right to engage in concerted activities for the purpose of collective bargaining or other mutual aid or protection. Many employers incorrectly assume that if they do not have a unionized workforce, the NLRA does not apply to them. However, many of the protections afforded under the NLRA apply to both union and non-union employers alike.

Many employers have written policies providing that employees must maintain the confidentiality of internal investigations for such matters involving employee misconduct, employee theft or workplace harassment. During the investigation process, most employers warn employees involved with the investigation to keep matters discussed during the investigation strictly confidential and not to share such information with other employees. The obvious purpose of such admonition is to maintain the integrity of the investigation and to prevent employees from fabricating or colluding to get their respective stories straight.

The NLRB, however, takes a different view. The NLRB holds that an employer violates Section 8(a)(1) of the NLRA when it maintains a work rule that reasonably chills employees in the exercise of their Section 7 rights. According to the NLRB, employees have a Section 7 right to discuss discipline or disciplinary investigations involving their fellow employees.

An employer may prohibit employees’ discussions during an investigation only if it demonstrates that it has a legitimate and substantial business justification that outweighs employees’ Section 7 rights. The NLRB’s position is that the employer must show more than a generalized concern with protecting the integrity of its investigations. Rather, an employer must show that in any particular investigation that witness(es) needed protection, evidence was in danger of being destroyed, testimony was in danger of being fabricated, or that there was a need to prevent a cover-up. Consequently, any blanket rule prohibiting employee discussions of ongoing investigations is invalid and will be held by the NLRB to violate employees’ Section 7 rights.

Most, if not all, employers recognize the importance of employees maintaining the confidentiality of any pending internal investigation. Even the NLRB has not gone as far as to hold that employees have an unfettered right to communicate about internal investigations. Employers should review their employee handbook and other policies that address confidentiality of internal investigations and make sure such policies do not contain a blanket rule regarding confidentiality. In addition, where applicable, employers should add savings clauses to their policies providing that the employer’s policy shall not be construed or interpreted to interfere with employees’ Section 7 rights. Finally, to avoid NLRB interference, employers should address the issue of maintaining the confidentiality of any internal investigation on a case-by-case basis when it can be demonstrated that maintaining confidentiality is significant to preserving the integrity of the investigation. When such a need arises, employees should be instructed on an individual basis regarding the need to maintain confidentiality about the investigation.

James DeJong has been elected the next chair of the Carroll University Board of Trustees. He will serve as chairman for three years on the board, which oversees academic, financial, and operational decisions for the private Waukesha University.

James G. DeJong, a 1973 graduate of Carroll, is president of the Milwaukee law firm O’Neil, Cannon, Hollman, DeJong and Laing and has served as a member of the University’s board since 2008.

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Attorney Jim DeJong was featured in an article appearing in the 2013 Summer Edition of the Marquette Lawyer Magazine.  Read the article about Jim here.

Effective January 1, 2013, pursuant to the Patient Protection and Affordable Care Act, 26 U.S.C. § 1411 imposes a 3.8% Net Investment Income Tax on individuals, estates and trusts which have “Net Investment Income” and modified adjusted gross income above specified statutory threshold amounts. For individuals, the tax is imposed on the lesser of: (A) the Net Investment Income for the taxable year, or (B) the excess of modified adjusted gross income for the taxable year over the threshold amount ($250,000 for married individuals filing jointly; $125,000 for married individuals filing separately; $200,000 for single individuals). For estates and trusts which are subject to the tax, the tax is imposed on the lesser of: (A) the undistributed Net Investment Income for the taxable year, or (B) the adjusted gross income for the taxable year over the dollar amount at which the highest tax bracket for an estate or trust begins for the taxable year.

For purposes of the tax, “Net Investment Income” is defined as the sum of the following, less any applicable deductions:

• Gross income from interest, dividends, annuities, royalties and rents, which amounts were derived from a passive trade or business activity (as defined by 26 U.S.C. § 469), or from a trade or business involved in trading in financial instruments or commodities (as defined in 26 U.S.C. § 475(e)(2))

• Other gross income derived from a passive trade or business activity, or from a trade or business involved in trading in financial instruments or commodities

• Net gain, to the extent it is taken into account in computing taxable income, which is attributable to the disposition of property from a passive trade or business activity, or from a trade or business involved in trading in financial instruments or commodities

Applicable deductions may include expenses related to investment interest, advisory and brokerage fees, rental and royalty income, and state and local income taxes which are allocable to items included in Net Investment Income.

Net Investment Income specifically does not include such items as wages, unemployment compensation, operating income from non-passive business activities, social security benefits, alimony, tax exempt interest, self-employment income, Alaska Permanent Fund Dividends, and distributions from certain qualified retirement plans. However, these items may be subject to the .9% Additional Medicare Tax.

The following paragraphs highlight a few of the rules specific to particular types of income which may or may not be subject to the tax.  The information provided herein is not intended to address all sources of income subject to the tax, or provide an exhaustive summary of the applicable rules.  

S-Corporations.  Generally, an interest in a pass-through entity such as an S Corporation is not property held in a trade or business, so that any gain or loss from the sale of such interest would be Net Investment Income. However, the IRS has limited the amount of gain or loss from the disposition from an interest in an S Corporation to the net gain or loss that would result if the S Corporation sold all of its assets at fair market value immediately before the disposition of the interest. 

Working Capital.  Any income, gain or loss attributable to capital set aside for the future needs of a trade or business is Net Investment Income.

Child’s Interest.  Any amount included on a parent’s Form 1040 as a result of filing Form 8814 for Parent’s Election to Report Child’s Interest and Dividends is included in calculating Net Investment Income, but does not include any amount excluded on Form 1040 due to threshold requirements.

Pension and Deferred Compensation Distributions.  While Net Investment Income does not include distributions from certain qualified employee benefit plans, such distributions are included in determining the threshold amounts if they are included in the taxpayer’s gross income.

The rules regarding the Net Investment Income Tax are complex and continue to evolve as final regulations are determined. In making a determination of how you may be impacted by the tax, it is important to contact a professional who may advise you as to the application of specific rules to your particular situation.

If you have any questions regarding this article, please contact Attorney Megan Harried at O’Neil Cannon at 414-276-5000.

The Milwaukee Justice Center, organized by Milwaukee County, Milwaukee Bar Association, and Marquette University School of Law provides legal assistance to individuals who cannot afford legal representation. In 2012, the volunteers of the Center served nearly 9,000 hours of pro bono service to 10,659 unrepresented civil litigants.

Sixteen attorneys from the law firm of O’Neil, Cannon, Hollman, DeJong and Laing contributed to the success of the Milwaukee Justice Center to include:

• Doug Dehler
• Megan Eisch
• Miles Goodwin
• Megan Heinzelman
• Grant Killoran
• Justinian Koenings
• Claude Krawczyk
• Gregory Lyons
• Sarah Matt
• Joseph Newbold
• Laura Now
• Jason Scoby
• Steven Slawinski
• Steven Strye
• Timothy Van de Kamp
• Peter Walsh

Grant Killoran has been elected to serve on the Board of Directors of the Milwaukee Debate League.

The Milwaukee Debate League works in partnership with Milwaukee-area high schools to support academic debate teams.  Created in 2007, the Milwaukee Debate League provides unique youth development programming targeting high school students, blending competition and rigorous work in academic high school debate with fun. Through this spirited competition, students have the opportunity to become articulate and informed leaders in their schools and effective advocates for themselves, their families and their community.  For more information on the Milwaukee Debate League, visit www.debatemilwaukee.org.

Grant Killoran is the Chair of the Litigation Practice Group at O’Neil, Cannon, Hollman, DeJong and Laing.  He previously was involved with academic debate at both the high school and collegiate levels, both as a debater and debate coach.  He continues to benefit in his legal practice from the skills gained during his involvement with academic debate and is honored to serve on the Board of the Milwaukee Debate League.

Grant Killoran has significant and diverse trial experience representing clients in Wisconsin State and Federal Courts, and courts around the country, focusing on complex business and health care disputes. Mr. Killoran devotes a portion of his practice to arts and entertainment law, with an emphasis on the music and film industries. He is a Fellow with the American Bar Foundation, has served as one of the State Bar of Wisconsin’s five Delegates to the American Bar Association’s House Delegates and is a Co-Editor of the ABA Section of Litigation’s Health Law Litigation Newsletter.