WINTER 2002 ISSUE

SMALL BUSINESSES AND JOB DISCRIMINATION

Number of Employees
The federal Equal Employment Opportunity Commission (EEOC) is responsible for enforcing the most widely applicable federal laws that prohibit discrimination in employment. The smallest of businesses are not subject to most of these statutes. Title I of the Americans with Disabilities Act (ADA), which prohibits employment discrimination against qualified individuals with disabilities, applies only to employers with 15 or more employees. The same is true for Title VII of the Civil Rights Act of 1964 (Title VII), which prohibits job discrimination based on race, color, religion, sex, and national origin. The threshold for coverage under the Age Discrimination in Employment Act (ADEA) is 20 or more employees. The Equal Pay Act, which is intended to prevent wage discrimination between men and women in substantially equal jobs in the same establishment, applies to most employers with at least one employee.

In calculating the number of employees for purposes of coverage of these statutes, all employees are counted, including part-time and temporary workers. Independent contractors are not included, but the distinction between such workers and employees is often difficult to draw without the advice of legal counsel. Situated between the businesses so small as to be excluded from coverage and the Fortune 500 are thousands of small businesses to whom the EEOC-enforced laws apply.

Procedures
Anyone believing that his or her employment rights have been violated because of the types of discrimination covered by the federal laws, or because of retaliation for opposing job discrimination, filing a charge, or participating in proceedings under those laws, may file a charge of discrimination with the EEOC. In most areas of the country, the charge must be filed within 300 days from the date of the alleged discrimination. The EEOC will notify the employer within 10 days of receiving a charge.

If a charge is eligible, the EEOC will give the parties an opportunity to take part in voluntary, confidential mediation to reach mutually agreeable solutions. If all parties agree to participate, neutral mediators will work with them to that end. In the event that mediation is unsuccessful, the charge is referred for investigation by the EEOC.

An EEOC investigation may involve a responsive statement from the employer, collection of documents by the EEOC, and visits and interviews by EEOC personnel. If the EEOC ultimately dismisses a charge, the charging party is notified and has 90 days to file a lawsuit. A finding by the EEOC of reasonable cause to believe that discrimination has occurred will lead to an invitation to the parties to enter into conciliation discussions. If they fail, the EEOC and/or the charging party may bring suit.

Discriminatory Practices
The range of discriminatory practices prohibited by EEOC-enforced laws is much broader than just hiring and firing. If a prohibited discriminatory motive is the root cause of the decision or action taken, an employer can be held liable in such areas as compensation, assignments, transfers, promotions, layoffs and recalls, testing, and fringe benefits. The reach of these laws is also extended by catch-all language prohibiting discrimination in all "terms and conditions" of employment.

Some forms of discrimination are peculiar to a particular statute. For example, a rule requiring that employees speak only English at work may constitute national origin discrimination in violation of Title VII unless the requirement is necessary for conducting business. An employer's failure to reasonably accommodate an applicant or employee is not pertinent to all of the discrimination laws, but it may create liability when the charge is discrimination based on religious beliefs or disability. Workplace harassment can be the subject of proceedings under any of the laws, but in practice it is most commonly asserted by women as a form of sex discrimination under Title VII.

Remedies
An employer found to have discriminated against an individual could be ordered to eliminate its discriminatory practices. It may also be required to take certain positive actions to redress the discrimination, such as hiring, increasing compensation, promoting, and reinstating an employee who was wrongfully terminated. Monetary remedies can take various forms, depending on the statute, including back pay and prejudgment interest, liquidated damages, and compensatory damages for noneconomic injuries such as emotional distress. In Title VII and ADA cases in which the employer has acted with reckless disregard for an individual's federally protected rights, punitive damages may be awarded. The sum of punitive damages and compensatory damages (not including back pay), per person, may not exceed maximum amounts that increase with the employer's number of employees.

CASE BY CASE

Broken Baseball Bats
A state court has overturned a $1 million jury verdict for a young girl who was injured when part of a broken bat struck her as she sat in the stands at a major league baseball game. The girl was seated behind a net that extended down the third base line, but the bat fragment curved around the net and hit her.

The girl argued that baseball officials were negligent in not having more protective screening for spectators. However, most courts apply a more lenient "limited-duty" rule to America's Pastime and this court was no exception. The majority of baseball fans prefer to be close to the action, with no protective screen that would block their view and prevent the possibility of catching a batted ball. Baseball teams reasonably accommodate this majority of their consumers, while providing protected seats behind home plate for those more concerned with safety. Under the limited-duty rule, when a stadium owner has made adequately screened seats available for all those desiring them, it has fulfilled its duty as a matter of law and it will not be liable for spectators injured by an object from the field.

The girl also asserted that the stadium owner had a duty to warn spectators about projectiles from the field. The court rejected this basis for liability because the risk involved was already well known by spectators. As a general rule, there is no duty to warn of open and obvious dangers. Even so, the stadium owner in this case had warned the fans with an announcement, a notice on a video board, and fine print on the tickets. Making no distinction between a broken bat and a baseball, the court quoted the observation of another court that "[n]o one of ordinary intelligence could see many innings of the ordinary [baseball] league game without coming to a full realization that batters cannot and do not control the direction of the ball."

Under-Covered
In another case, a woman called the insurance agency she had done business with for 10 years and told the agent she needed "full" automobile coverage. According to her, no one discussed what level of insurance would provide adequate protection. Instead, she was sold a policy that provided only the minimum amounts required by state law for uninsured and underinsured motorist coverage. The woman and her husband sued the insurance agency for negligence after their son was seriously injured when he was struck by an underinsured motorist and their expected damages exceeded their insurance coverage. The insurance agency, whose line of work is more used to criticism for overzealous selling, was instead in the position of being sued for not selling enough of its product.

Insurance agents are not personal financial counselors or risk managers for their customers. They generally fulfill their duty to the insured simply by providing the coverage requested by their customers, who typically know more about the extent of their assets and their ability to pay premiums. The agents do not have a duty to advise a client to obtain different or additional coverage. In this case, though, the court ruled that an exception to this no-duty rule arose because there was a "special relationship" between the insured and the insurance agent.

Such a relationship can come about in several ways. The theories that applied in this case were the failure of an agent to respond appropriately to an inquiry or request about a particular type or extent of coverage and the failure to clarify an ambiguous request before providing coverage. Although there were factual issues to be resolved, the court ruled that the woman should have a chance to present her case to a jury.

SAVING FOR COLLEGE CAN BE AN ESTATE PLANNING TOOL

529 Plans
The ever-rising cost of a college education has led to the creation of college savings plans that have been given various federal tax advantages. Among these are "529 plans," named after the section of the Internal Revenue Code that sets forth requirements for favorable tax treatment of qualified state tuition programs. 529 plans vary from state to state with regard to investment options, contribution maximums, and state income tax treatment. One type of 529 plan allows taxpayers to purchase tuition credits for a designated beneficiary, thereby locking in today's college costs. A second type allows the donor to contribute to an investment account to pay for a beneficiary's higher education expenses, such as tuition and room and board.

Individuals can contribute up to $50,000 to a 529 plan in one year on behalf of a beneficiary ($100,000 for married couples) without being subject to gift tax. In effect, the $50,000 contribution is treated as five separate $10,000 annual exclusion gifts. Gift tax is avoided so long as no other gifts are made to the beneficiary in the same five-year period.

Anyone can contribute to a 529 plan on behalf of the beneficiary. Grandparents, other relatives, or friends of the family can use 529 plans as an effective estate planning tool. The plans are unusual in that donors still can retain control over the account, and even take it back if necessary, while reducing the size of their estates. Under current law, earnings in a 529 plan are tax deferred, but the 2001 tax law provides that, beginning January 1, 2002, earnings taken out to pay college expenses will be tax free.

Other important changes in 529 plans were made by the 2001 federal tax legislation. Whereas plans previously had to be sponsored by a state or state agency, one or more educational institutions, including private schools, can set up prepaid tuition programs. Under the new law, money from one 529 plan can be rolled over into another such plan up to three times for the same beneficiary without having the transaction considered to be a distribution. A penalty of at least 10% of earnings formerly was imposed if the donor took back the money or the money was used for anything other than qualified expenses, but now there is a flat 10% penalty. Lastly, the new law allows a taxpayer to claim a federal tax credit for paying for a child to go to school while excluding from gross income funds distributed from a 529 plan for the same student, as long as they are used for different expenses.

Coverdell Education Savings Accounts
For individuals who want more control over their investments, a Coverdell Education Savings Account (formerly called an "Education IRA") may be an attractive alternative to a 529 plan. A contributor to a Coverdell account can choose investments and change them, depending on his or her investment strategy. Earnings are tax-free as long as they are used for qualified education expenses. The 2001 tax law also has improved this method of saving for elementary, secondary, and college education costs. Beginning January 1, 2002, the annual limit on contributions will increase from $500 to $2,000.

An increase in the phase-out income range for married taxpayers filing jointly will allow more taxpayers to contribute to a Coverdell account. For beneficiaries with special needs, rules stopping contributions when the beneficiary turns 18 and requiring that the account be emptied when he or she turns 30 have been removed. As with 529 plans, a contributor to a Coverdell account can claim an education tax credit, though not for the same educational expenses for which Coverdell account money was used.

One note of caution: The changes to both 529 plans and Coverdell accounts made by the 2001 tax legislation will expire on December 31, 2010, unless Congress acts before then to continue them.

LESS PAPERWORK FOR EMPLOYERS

The Internal Revenue Service has lightened the paperwork load for about a million small businesses. Employers are required by the Internal Revenue Code to deduct and withhold Social Security and income taxes from the wages paid to their employees. The withheld taxes are then held by the employer in trust for the benefit of the United States. Depending on the amount of employment taxes withheld, at various time intervals an employer must deposit the withheld amounts in an approved bank.

Before the IRS issued the new regulation, an employer could avoid having to deposit accumulated employment taxes every month if the total amount of such taxes was less than $1,000. The new regulation raises that threshold to $2,500. For quarterly and annual return periods beginning January 1, 2001, businesses with less than $2,500 in employment taxes for a return period may pay the full amount with the regular return for that period, rather than having to make monthly deposits.

LANDLORDS, TENANTS, AND SATELLITE DISHES

The argument that the FCC had overstepped the bounds of the authority given to it by Congress failed. Congress has granted the FCC very broad regulatory authority so that it can keep pace with rapidly evolving technologies. As for "direct-to-home" satellite services, in particular, the FCC has exclusive regulatory jurisdiction, and has been charged by Congress to issue regulations to prohibit restrictions that impede viewers from using necessary devices.

In the view of the federal court, it was only a small and appropriate step for the FCC to extend its original authority over local or state land-use restrictions, restrictive covenants, and homeowner association rules to cover provisions in a lease. Given its mandate from Congress to prohibit restrictions on the provision of a regulated means of communication, the FCC can exercise its jurisdiction over a landlord who creates such a restriction even though, in so doing, the FCC alters property rights created under state law.

The FCC's preemptive power over satellite dishes does not leave landlords with no say in the matter whatsoever. First, since the FCC rule only applies to property within the exclusive use or control of the antenna user, a tenant does not have the unfettered right to put equipment on outside walls, rooftops, and other such areas where he may have access but not possession and exclusive control. Second, the rule itself states that a restriction "impairs" installation, maintenance, or use of an antenna if it "unreasonably" delays or prevents such use, "unreasonably" increases the cost of such use, or prevents reception of an acceptable quality signal. Thus, reasonable measures by landlords have their place. Finally, restrictions that would otherwise be prohibited are permitted where they accomplish a safety objective without singling out antennas, or they are necessary to preserve certain historic properties.

FREELANCERS' ARTICLES ARE NOT FREE

The U.S. Supreme Court has given a victory to freelance authors of newspaper and magazine articles, and a defeat to some major publishers of their work. The publishers hired the authors as independent contractors who would contribute articles to what is known in copyright law as a "collective work," that is, a newspaper or magazine. Under federal copyright law, the publishers were the owners of the copyright in the collective work, giving them the right to reproduce and distribute the contributions as part of the collective work or any revision of that work. The writers themselves, however, retained the rights to their individual articles.

The dispute arose when the publishers, without obtaining the authors' permission or agreeing to provide extra compensation to them, licensed the rights to copy and sell articles to a computerized database of periodicals and to the producer of CD-ROM products. When the authors claimed an infringement of their copyrights in their articles, the publishers defended by arguing that making the articles available on line or in a CD-ROM form constituted simply a "revision" of the collective work that was within the copyright of the collective work held by the publishers.

The Supreme Court sided with the writers. The newly created databases no longer presented and distributed the articles as part of the collective work in which they first appeared, or as part of a revision of that work. Instead, the articles stood alone and out of their original context. Each article had become merely a minuscule part of an ever-expanding database. As the Court put it, "The database no more constitutes a 'revision' of each constituent edition than a 400-page novel quoting a sonnet in passing would represent a 'revision' of that poem[.]" Therefore, the electronic reproduction of the authors' works could not be allowed without their permission.