Employees Illness Complicates TerminationProcess A manufacturer located in Orange County, Calif.,is experiencing higher employee benefit costs, declining sales anddecreasing margins on its products. The company, which has 2,500employees, decided to save costs by decreasing the size of itsmanagement team and selecting one of its high-level executives fortermination.

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The employee at issue is a 25-year veteran of the company, overthe age of 60, and one of the highest paid executives. He earnsapproximately $175,000 per year and is entitled to a $50,000 bonusper year.

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He has a range of stock options, some of which have vested andothers which are due to vest within 60 days. His past jobappraisals do not evidence any significant performance problems,but the appraisals for the executive team are not verythorough.

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The company determined he was the most expendable of all of themembers of the management team and decided to terminate him withinthe next 45 days.

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A few days after the company made this decision, the employeesuffered a stroke and was hospitalized. He took a leave of absenceand is expected to be able to return to work within 45 to 60 days,although he has lost the use of his non-dominant hand due to thestroke.

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The company has no documentation to substantiate its decision toterminate the executive prior to his taking of a leave of absence.The company called the EPL hotline for advice in proceeding withthe termination.

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EPL Counseling Advice:

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This is a situation fraught with risk. The executive isprotected by federal and state laws prohibiting age discrimination,disability discrimination and retaliation for taking a leave ofabsence.

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In the event of legal action, the financial exposure presentedby such claims is also significant.

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Damages under age discrimination laws include back pay and frontpay, plus a doubling of these damages if the executive proves thatthe company acted willfully.

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Compensatory and punitive damages are also recoverable fordisability discrimination, and while such damages are capped at$300,000 under the applicable federal law (the Americans WithDisabilities Act), California state law (the California FairEmployment & Housing Act) has no cap on damages.

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Similar remedies are recoverable for retaliation against anemployee who takes a leave of absence pursuant to federal law orstate law.

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On top of that, the executive would be entitled to prejudgmentinterest (compounded daily at the prime rate) if he were successfulin his case, along with an award of attorneys fees and costs. Giventhe executives total compensation package of approximately $225,000per year, potential damages are easily in the seven figurerange.

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It is also common for plaintiffs attorneys to argue that oneelement of damages includes the loss of the value of stock optionsthat the executive could have exercised had he remained employedand could not exercise but for the discriminatory termination.Stock options, insurance benefits and fringe benefits are forms ofmonetary relief included within “back pay” and “front pay” forpurposes of employment discrimination laws. Assuming the stockappreciates, this could push potential damages even higher.

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The company certainly has a legitimate reason to terminate theemployee if his performance is less than satisfactory. Complicatingthis issue, however, is the fact that there is no one act or eventwhich is the “straw that broke the camels back” to prompt thefiring decision.

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The case appears to be one of a highly compensated executivewhose once acceptable performance is no longer sufficient towarrant the company keeping him on the payroll. The fact that hisperformance was satisfactory over the past 25 years is a factor inthe executives favor, but performance which was once acceptable andthen declines over time is sufficient to support the decision tofire an employee.

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The crucial issue is whether or not the employee was performingin a satisfactory manner at the time of his termination.

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Putting aside these legal principles, the risk in this situationis a function of the companys proof (or lack thereof).

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The companys case could be strengthened significantly if it hadprepared contemporaneous documentation to evidence the fact that ithad put the executive on notice of his performance deficiencies andprovided him with an action plan to remedy those problems (or,alternatively, put him on notice that continued poor performancecould result in a firing).

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While the lack of documentation is not fatal, the company mustbe prepared to demonstrate that it selected the executive fortermination because his performance was not as strong as the othermembers of the executive team. Assuming the company has anecdotalevidence to demonstrate that fact, it should have sufficientgrounds with which to defend its personnel decision.

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Timing issues are also important in this situation. Theexecutives stroke is not necessarily something that makes him“termination proof,” as the company made the decision to terminatethe employee prior to the time he suffered a stroke. The companywill need to demonstrate that its decision was not “made up afterthe fact,” i.e., due to the leave or the medical problem.

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While its decision was not documented contemporaneously, therehad been a meeting where the issue was discussed and a decision wasmade well prior to learning of the event precipitating the leave.Presumably, several members of the management team can testify thatthe meeting occurred and that the decision was made.

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While the employee had an absolute right to take the leave, theemployer also has a right to terminate the employee on his leave ifthe company had already decided to terminate the employee.

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In order to minimize its EPL exposure, the company may wish toconsider keeping the employee on the payroll through his leave ofabsence and for a short time after his return to the workplace.This will assist the employee in transitioning to another positionor minimizing the financial impact of his termination.

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The company should notify the employee of its terminationdecision once the employees medical condition is stable. It isbetter at this point to be up-front with the employee than to“ambush him” when he returns from his leave of absence.

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Given the monetary exposure and the circumstances of thetermination, it is highly likely that a plaintiffs lawyer would beinterested in prosecuting a lawsuit on behalf of the executive.Therefore, the company should expend considerable effort tonegotiate a severance package with the employee in return for arelease of claims. Given the financial exposure of the potentiallegal action, it is not unusual in these circumstances to pay up toa year or more of compensation to a high-level executive to securea release.

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The company also should consider allowing the executivesremaining stock options to vest and paying the cost of healthinsurance premiums under COBRA. While the overall costs ofnegotiating this exit package will be substantial, those costs palein comparison to the exposure and cost of defending any EPLlitigation arising out of the executives termination.

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Lisa Bee is director of EPL risk management for LexingtonInsurance Company in Boston. Gerald L. Maatman Jr. is a partnerwith Seyfarth Shaw in Chicago.


Reproduced from National Underwriter Edition, April 7, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.


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