July 19, 2018
A. Introduction –
There is an adage which correctly characterizes the comparative importance of hiring in a company’s prospects for success:
“Personnel is always the problem.”
It is hard to overstate the significance of a bad hire. A business plan can be excellent. There may be structured incentives that offer optimal opportunities for every worker. There may be a tradition of corporate success at the company; however, if bad hires have been put into key positions, otherwise optimal conditions will not ensure profitability. Hard times can follow. It is, therefore, true that personnel may always be the problem. But there is a corollary to the maxim printed above:
“Personnel is always the solution.”
Just as one bad employee can pollute an otherwise healthy pool of skilled workers, an excellent hire can inspire and ignite healthy commitments from others. A failing business can be turned around. Great hires can seriously raise a company’s chances for success. The need for good hiring practices should not be minimized. Surely the prospect of a company’s success will often turn on the decisions of who will comprise the work force. Because legal issues seem to impact this area with increasing force, some knowledge of how the web of legal requirements issues will be helpful.
B. Making Sense of State, Federal and Local Employment Laws: A One Page Primer on the U.S. Legal System.
The HR professional will be challenged in understanding multiple layers of regulation associated with employment law in Arizona. Some general principles that will promote quick understanding include the following:
* Without stating the obvious, the Federal Government has highest level of authority in America. Under the Federal Constitution’s Supremacy Clause, a federal law will prevail when it conflicts with a state or local law. But federal regulation may not always be judicially permitted.
* Federal law wasn’t intended to have the full range of influence available to state law: The theory in federal law is that the U.S. Constitution must authorize a particular type of decision making before Congress may act. Congress cannot simply step into an area and legislate as it deems appropriate. The clause within the Constitution authorizing Congress to regulate commerce between the states is the most frequent source of constitutional authority for federal legislation involving employment matters. The federal government is constitutionally empowered to regulate interstate commerce. However, if an employer’s act has absolutely no conceivable nexus to interstate commerce (a business with one person which sells to a limited area of town), in most cases, that business may may not be subject to federal regulation. The litigation involving the constitutionality of the Affordable Care Act included arguments on this point. However, it is typically assumed that when a certain number of employees (e.g. 50) are involved, the acts will impact interstate commerce. As a result, Congress will be authorized to legislate in the area.1
* States are given the authority for plenary regulation. Under the misleading phrase of “police power,” states may regulate on most subjects when the health, welfare or safety of its citizens are involved. This covers almost everything. States have greater latitude in issuing regulations because of this general power. This is why federal regulation may not be judicially permitted. In most every instance, States, however, cannot impose regulations or legal requirements within tribal lands. Indian nations are understood to be sovereign. This sovereignty can be subject to what is referred to as the “plenary” or overriding authority of Congress.
* County, city and other municipal governments are typically subject to limitations imposed by their states.
* Both the state and federal court systems employ modified “common law” legal systems. The essence of a common law system is “case law” issued by judges, typically by appellate courts. “Common law decisions” are judge made decisions that follow from an established body of judicial decision making, often over centuries. A “common law system” is often distinguished from a “code system” through which most conduct is regulated by legal statutes which comprehensively include many legal areas. Code systems often have a lack of “precedent” and the application of those codes.
* In practical application, the common law system is actually a modified version of both codes, civil laws and judicial decision making. A ruling by an appellate court may be binding on lower courts in the same jurisdiction but that decision may be, in some circumstances, modified by state legislative body. In other areas (e.g. rules of court), the judiciary normally has the final word. Whether or not a legislature might have the authority to issue such a modification would be decided in the U.S. by courts under a system of “stare decisis.” This term refers to the concept that similar cases should be resolved under similar rules so that similar results are reached.
The HR professional will need to differentiate “common law” (judge-made ruling on topics like negligence) from legislative requirements. A basic understanding of the legal framework just expressed is helpful for HR professionals because of the constant influx of state, federal and sometimes tribal regulators. An HR professional will likely be called upon to ensure that common law decision making concerning negligent hiring is respected in the workplace. See, e.g. Kassman v. Busfield Enterprises, Inc., 639 P.2d 353, 356, App. 1981.
That same HR professional will likely have to harmonize negligent hiring decisions with limitations imposed by the Arizona Legislature and the nocodified Arizona Employment Protection Act. See A.R.S. § 23-1501, et seq. At the same time, an HR professional will also be obligated to ensure compliance with applicable federal laws and their associated regulations. These are not always easy tasks.
1. Arizona is an “Employment at Will Jurisdiction.” The Navajo Nation is not.. The Doctrine of “Employment at Will” is now a legislatively adopted rule in this state. The Doctrine was approved by the legislature in Arizona in response to an Arizona Supreme Court decision issued in 1985. Wagenseller v. Scottsdale Memorial Hospital, 147 Ariz. 370, 710 P.2d 1025 (Ariz. 1985). At issue in this decision was whether a hospital’s termination of a nurse violated the public policy of Arizona. The nurse had contended that her refusal to participate in a lewd and mischievous skit among hospital personnel during a river trip provided the actual factual reason for her termination. The hospital responded by indicating that the nurse was an at- will employee only, but the Court held that a broad notion public policy can override the doctrine of employment at will. The court held that the nurse was entitled to a trial on the merits. Employers feared that the decision would mean that employment at will was being seriously undermined. They argued to the legislature that the Wagenseller decision would create a volatile legal environment for employers. Who could tell what the public policy of Arizona was? Wouldn’t judges be all over the map? Do all judicial decisions need to be studied before a firing took place? Couldn’t those decisions be viewed differently by different claimants?
Immediately after Wagenseller, unhappy workers could turn to the public policy exception to employment at will in order to challenge undesired terminations. But the employers who went to the legislature found a sympathetic ear. The legislature, in essence, amended Wagenseller. A.R.S. 23-1501 et seq, Although employees could thereafter challenge terminations, they would be mostly limited to showing that public policy was grounded “in the form of statutory provision.” The subjectivity of the inquiry was reduced. If a termination wasn’t for a statutorily protected or otherwise specified right, the employer should prevail. A few additional exceptions were provided but the wide gate opening of Wagenseller was closed a bit through the legislature’s enactment of the Arizona Employment Protection Act, A.R.S. § 23-1501. The Doctrine of Employment At Will was expressly embraced. A.R.S. § 23-1501(A)(2) specifically provides:
“The employment relationship is severable at the pleasure of either the employee or the employer unless both the employee and employer have signed a written contract to the contrary setting forth that the employment relationship shall remain in effect for a specified duration of time or otherwise restricting the right of either party to terminate the employment relationship”
Arizona thus returned to expressly adopting “employment at will.” Despite this, very few employment lawyers will advise employers to heavily rely on this doctrine. Firing decisions are still being challenged. A better approach for an employer is to fire for a good reason and to be able to document it. Even Wagenseller stated: “We hold that an employer may fire for a good cause or for no cause. He may not fire for bad cause – that violates public policy.” 710 P.2d at 1033. Public policy was said to be reflected by the violations approved I the act itself. In addition to the limitations recognized by the Arizona Employment Protection Act, there remain a host of federal provisions which restrict an employer’s prerogatives. It is well known that any employee with a court filing fee may challenge his or her firing by contending that the termination was not for performance deficiency but rather because of some protected characteristic (e.g. age under the Age Discrimination Employment Act or other identified and protected criteria).
State Statutes do not govern an employer’s decision making on most tribal lands. The employment at will concept that an employee can be fired for almost any reason at all has not been adopted in the Navajo Nation. 15 N.N.C. § 604 (section 604 of Title 15 within the Navajo Nation Code) imposes is the following requirement:
“All employers shall not penalize, discipline, discharge nor take any adverse action against any Navajo employee without just cause.” Employers doing business within the exterior boundaries of the Navajo Nation should take pains to become familiar with additional provisions of the Navajo Preference in Employment Act, the jurisdiction of the Office of Navajo Relations (ONLR) and the authority of the Navajo Nation Labor Commission. The requirements of documentation are strong. A claimant can easily file an ONLR complaint without counsel.
2. Avoiding “Negligent Hiring”
A limitation on a company’s prerogatives in choosing employees is the judicially created doctrine of negligent hiring. The principles governing ‘negligent hiring’ have been issued by judges in Arizona, not the legislature. In a real sense, the lessons taught by appellate decisions in Arizona are simply amplifications of the common law (judge-made law) of negligence. In Arizona, Negligence is defined as “the failure to use reasonable care.” (Revised Arizona Jury Instructions (Civil) (4th ed., Fault 1, Page 32). Employers are called upon to use reasonable care. Negligence may consist of “action or inaction.” More to the point, negligence is defined in Arizona as “the failure to act as a reasonably careful person would act under the circumstances.” (Ibid.) When a victim of an employee’s negligence (automobile accident, premise liability, etc.) shows up in a lawyer’s office, a lawyer will consider whether the employer may be independently responsible for negligent hiring. There is indeed a judicially created doctrine of respondeant superior which imposes responsibility on the employer for the acts of the employee without independent fault attributable to the employer. Anderson v. Gobea, 18 Ariz. App. 277, 280, 501 P.2d 453, 456 (1972). The rule usually is strongest in its impact when the employer is entitled to control the employee. State v. Superior Court (Schraft), 111 Ariz. 130, 132, 524 P.2d 951, 953 (1974). There are exceptions to this rule. In any event, there will be an inquiry as to whether or not the employer is independently responsible under common law principles for “negligent hiring.” Gerger v. Rubin, 106 Ariz. 114, 471 P.2d 726 (1970).
The focus on such a case will be whether or not the employer to act as a reasonably prudent employer would act under the circumstances. For example, a hiring entity would likely want to ensure that anyone involved in the manufacturing of dangerous weapons would be a reasonably trustworthy individual. An employer who placed a new hire in the position of having access to weapons when that new hire may have been convicted earlier for weapons misconduct would not be acting prudently. Whether or not a statute prohibited this activity, the requirement to act as a reasonably careful hiring manager would suggest that the acquisition was bad. Similarly, any entity dealing with children (e.g. a pre-school) will need to make a significant effort to ensure that predatory workers are avoided. Any hire may be subject to a later judicial review under the doctrine of negligent hiring.
Some Arizona cases place this in focus. An early example of judicial decision making in this context was issued in Kassman v. Busfield Enterprises, Inc., 131 Ariz. 163, 639 P.2d 353 (App.
1981). At issue was the appropriateness of a bar’s hiring of a bouncer. A customer sued after being shot by a bouncer. The facts indicated that the customer had been at Bar #1, got into an argument and took off. The bouncer at Bar #1 chased him until he got to Bar #2. The first bouncer yelled to the Bar #2 bouncer, “Armed robbery, get the police.” The Bar #2 bouncer then shot the customer after the customer took off running.
The court in Kassman approved the following principles from the Restatement (Second) of Agency, s 213 (an established source of authoritative information for judges): “A person conducting an activity through servants or other agents [read employer] is subject to liability for harm resulting from misconduct if he is negligent or reckless: . . .
(b) in the employment of improper persons or instrumentalities in work involving risk of harm to others; . . .
(d) in permitting or failing to prevent, negligent or other [wrongful] conduct by persons whether or not his servants or agents, upon premises or with instrumentalities under his control.” 131 Ariz. at 166.
The court indicated that the record [from the jury trial] didn’t indicate any “evidence showing that [bouncer B] was known to be a vicious or careless person when he was hired.” 131 Ariz. At 167. The court further pointed out the difference in the acts of Bar #2 as “employment and personal references were checked by the project manager for [Bar #2] prior to [the bouncer’s
employment] and this disclosed no prior employment problems. The Court went on under the facts of the case to conclude that the second bar had probably not negligently hired its bouncer, even though that individual shot someone. Under reasoning that today may be challenged, the court further held that an employer was not under a duty to inquire about the employee’s possible criminal record.” Critical to this context was an understanding that guns were not be used on the job. However, it is specifically suggested that any employer that hires an individual with access to guns should absolutely pursue, among other inquiries, an exploration of the potential employee’s criminal background.
Another Arizona decision which focused on negligent hiring was issued in Pruitt v. Pavelin, 141 Ariz. 195, 685 P.2d 1347 (App.1984). In that case, a real estate agency hired a salesperson who would defraud a seller by forging signatures on a sales contract. Key evidence in the trial focused on the fact that the hire had been involved with previous forgery. The hiring employer even knew that the prospective worker had previously passed NSF checks and had lied. The court in the case determined that “an employer will not be liable for an act of any employee that was not foreseeable.” However, the court found that a chain of misrepresentations about which the employer had knowledge should not have been disregarded. The court reasoned that “it was easily foreseeable that an employee so casual with the truth would use her position to cheat members of the public with whom she dealt.” Independent employer responsibility was found. The list of failures associated with the employer in Pruitt v. Pavelin is important because it provided a basis for yet additional exposure to the employer: Punitive Damages. The court recognized that independent negligence in hiring an unqualified person (failure to use reasonable care) might be so egregious that punitive damages could issue under this theory (in contrast to respondeant superior where the employer would just be vicariously – not independently - responsible for the acts of the employee. Punitive damages in Arizona are not awarded to compensate but rather are available to “punish” and “deter others” from similar misconduct in the future. Revised Arizona Jury Instructions, (Personal Injury Damages), 4th Ed., p. 111. In plain terms, a really bad hire can lead to a later award of punitive damages if a member of the public is badly injured or swindled by a foreseeably bad hire. In addition, a negligent hiring claim beyond the respondeant superior (vicarious liability) assertion could be used, if it served to include aggravating facts which would support an award of punitive damages.
3. Some Legal Steps to Follow Upon Hiring
* Report to Arizona New Hiring Reporting Center (notify DES). Arizona Revised Statute (“A.R.S.”) §23-722 now requires reporting of employees to the Department of Economic Security. The presence of a new hire must be communicated within twenty (20) days. It can be accomplished electronically at the website or by down-loading a form, filling it out and sending it in. See www.az-newhire.com.
* Personnel Files. Ensuring that employee benefits and personnel files are established will assist in providing an orderly workplace. In Arizona, employee handbooks are not required but virtually all commentators suggest the desirability of having an employee handbook to be followed. There are many means by which the rules of the road can be identified for employees in a positive and encouraging manner.
Employee handbooks are good business.
* Immigration Requirements. Fill out forms I-9 (for U.S. Citizenship and Immigration Services (USCIS). See www.uscis.gov.
* Workers Compensation. The requirement of worker’s compensation in Arizona is established by our Constitution (Art. § 18, § 8). In Arizona, state law requires an employee to obtain worker’s compensation insurance for all workers. A list of companies providing this coverage can be found at www.id.state-az.us. If coverage isn’t obtained the employer can be liable for all medical expenses resulting from a worker’s injury.
* Internal Revenue Service. Comply with IRS W-4 requirements. The amount of withholding will depend on the number of allowances an employee may have for tax purposes. When this form is filled out, employers can identify the proper amount of tax to be withheld. A good idea is to ask employees to fill out a new W-4 form each year. This is a step to be taken for employees in contrast to independent contractors.
In addition, employer identification number should be used on tax returns and can be obtained by filing IRS Form SS-4. It is available through the IRS website (www.irs.gov).
* Posting Notices. Ensure workers have access to required notices. It seems each year there are more postings required of employers. It is possible that there is so much data, that employees will not take the information seriously. However, required federal posters can be identified at www.dol.gov/elaws/posters.htm.
* Safety Rules: Safety rules need to be in place. Safe workplaces are now the rule. Compliance with the Occupational Safety and Health Administration requirements is strict business. OSHA requirements and eligibility can be identified at www.osha.gov * Personnel Files. Ensuring that employee benefits and personnel files are established will assist in providing an orderly workplace. In Arizona, employee handbooks are not required but virtually all commentators suggest the desirability of having an employee handbook to be followed. There are many means by which the rules of the road can be identified for employees in a positive and encouraging manner.
Employee handbooks are good business.
* Insurance Protection. When employees are hired, liabilities can be foreseen. In Arizona, employers will likely be responsible for the negligent acts of their employees. Many of the problems created by such increased liability can be handled through procurement of commercial general liability coverage through your insurance company. When hiring an employee, always ensure that there is some coverage to protect the corporate individual/partnership employer against the possible careless acts of an employee or the premises.
* Probationary Period. Avoid identifying the first month (60 days, 120 days), etc. as a probationary period. This can be used by an employee to later claim that once he/she made it through probation, a reasonable expectancy of dismissal only “for cause” might issue. Under the terms of A.R.S. § 23-1501, et. seq., a new hire should be considered an at will employee. However, a company can change that desirable circumstance by agreement and in some cases, conduct. The term of “probationary period” or similar characterizations can cause trouble for the company down the road.
* Confirm the Status of New Hire as Employee (and not as an Independent Contractor). Much of the presentation within these pages assumes your new hire is an employee – but your hire could be an Independent Contractor. The distinction is critical. There are far more responsibilities that follow the hire of an employee in contrast to an independent contractor. However, many business owners achieve savings by relying upon independent contractors rather than employees for recurring work. There is typically reduced responsibility for an independent contractor - the contractor may be responsible for wrongdoing rather than the employer. There will be less impact on a business owner’s benefit plans. Withholding taxes usually don’t have to be computed (Medicare, Social Security, income tax). Likewise, contractors can be expected to pay taxes that they incur. The reporting on income will be the contractor’s responsibility. While such factors often provide incentives for employers to turn to contractors rather than employees, problems can follow. If a worker is referred to as an independent contractor, when that person’s work more closely comprises the substance of an employee, the “contractor” will be considered an employee for several legal purposes. A misclassification for the employer can be expensive and disappointing.
This can include reimbursement for wages that should have been paid under federal law (e.g. minimum wage), back taxes for social security and benefits that should have been made available (e.g. retirement). It is now well established that there is no one factor that will answer the question of whether an individual is a contractor or an employee. According to the Small Business Administration, the following guidelines should be considered:
1. The extent to which the services rendered are an integral part of the principal’s business
2. The permanency of the relationship
3. The nature of the alleged contractor’s investment in facilities and equipment
4. The nature and degree of control by the principal
5. The alleged contractor’s opportunities for profit and loss
6. The amount of initiative, judgment or foresight in open market competition with others that is required for the success of the claimed independent contractor
7. The degree of independent business organization and operation.”
Few employment decisions are less pleasant than the firing of a company worker. The response of the worker is often predicted, but is ultimately unknown. Despite this, economic and other circumstances frequently require a termination: There is not real choice. The task of firing is important. If done wrong or with needless insensitivity, the likelihood of further entanglements can be prevented.
2. Considerations and Factors to be Weighed before Firing.
Several Factors Need to Be Weighed in the Decision to Fire. They Include:
* Is there a paper trail? A documented trail of performance deficiencies for an employee will reduce the likelihood of legal liability for the termination decision. Regrettably, it is often rather the exception than the rule in small business that this paper trail will be lengthy and compelling. Not every performance deficiency is always documented.
Sometimes simply bringing the deficiency to the employee’s attention may be omitted for any number of human reasons. While termination may be for “any reason at all,” any employee with a filing fee can challenge such a determination and file a lawsuit in Arizona. While baseless suits can be dismissed, employers will prefer avoiding even the filing of lawsuits. While the mantra is well understood that firing here can be for “any reason,” a jury will see things otherwise when called upon to consider the case. A jury will likely believe that there must have been “some” reason for the firing. People rarely act without a reason.
* Identify a Reason. Bosses typically fire workers for no reason. Just as there was a reason for the hiring, so too will there be a reason for a firing. As a result, a good firing procedure will want to consider and document a stated basis (“reason”) for the termination.
Vindictive terminations are often the most fraught with legal peril. Quick decisions are often poorly made. Statute abound that provide protection to so called “whistle blowers.” In addition, the Arizona Employment Protection Act provides protection for employees who are fired for requiring adherence to state laws. See A.R.S. § 23-1501, et. seq.2 2 Arizona’s approval of “employment at will” should not be confused with its additional adoption of a “Right to Work” provision within its State Constitution. Article 25 of the Arizona Constitution sets forth the so-called “Right to Work.” It provides that that an Identify a justifiable and defensible reason for the firing and stick with it. Ensure that the firing isn’t personal. Making a termination personal will only promote the chance for unnecessary liabilities.
* Performance deficiencies that are not signed by the employee. Perhaps the best paper trail, as discussed above, is one which reflects notice to the employee and a signature of the employee of a recognized performance deficiency. However, if there is an employee failure that resulted in harm to the business – and circumstances don’t result in a documented warning going to the employee – memorialize it anyway. Make a memo to the file. Indicate the time, date and purpose for the memorandum. It may be placed confidentially in the file and can be later used in court to refresh the recollection of the employer if necessary. See e.g., Rule 612, Ariz. R. Evid. (writing may be used to refresh memory; Rule 803(b) (record kept in regularly conducted activity may be received into evidence as exception to hearsay rule.
* Being non-provocative. Avoiding personal issues will allow the process to proceed with less potential for volatility. Make this known to the employee. Treating the employee with as much courtesy as possible makes good business.
* Ensure a good investigation. If a firing was for misconduct, there can be an expected appeal to the unemployment insurance division of the Department of Economic Security. Too, it can be expected that a challenge will be launched by the employee who may see this differently. Ensure that the incident giving rise to the termination is investigated thoroughly.
* Meet with a witness in a private place. The termination interview is one of the least desirable moments in a HR worker’s week. It will likewise be upsetting to the employee. Ensuring that the employee won’t be seen by others is helpful. The presence of a witness will likewise promote the avoidance of a “he said, she said” dispute of what was said during the interview process. A memorandum of the meeting should be made following its occurrence.
* After the firing. There is still work to do. Ensuring that the employee is not unnecessarily criticized or disparaged will promote morale among employees. An employee may be told that the decision wasn’t “personal,” ensuring that the handling of it was not “personal” will promote a possible court finding that the termination was a regrettable but necessary business decision.
* Pay the employee. Arizona has a number of requirements for payment. If an employee has commissions due, a calculation of those amounts in advance is recommended. Arrange for salary compensation to be ready with a check.
* Polygraph Testing. Employers may seek confirmation that suspected misconduct has occurred. After all, thorough investigations are recommended. There are not always confessions corroborating evidence in cases of misappropriation or theft. Accordingly, a polygraph may be viewed as a helpful tool in seeking to confirm the innocence or culpability of an employee. This would typically be a bad idea for a private employer. Most states, however, now prohibit use or severely limit the use of a polygraph by employers. While Arizona does not have such a law, employees here are likely covered by the board reach of the federal Employee Polygraph Protection Act of 1988. 29 U.S.C. § 2001, et seq. The U.S. Department of Labor confirms that most employers are subject to the EPPA: If a private company minimally engages in interstate commerce, it will probably be covered.
1 The Occupational Safety and Health Act, 29 U.S.C. § 651 assumes a sufficient impact on interstate commerce to be present for applicability of the legislation when there are eleven or more employees. The Civil Rights Act of 1964, 42 U.S.C. § 2000d and 2000e and the Americans With Disabilities Act (“ADA”), 42 U.S.C. § 12101 become applicable with 15 employees being hired. The Age Discrimination in Employment Act, 29 U.S.C. § 621 and COBRA, 42 U.S.C. § 1161‐1168 become applicable with twenty employees.
Federal requirements imposed by the Family Medical Leave Act (“FMLA”), are triggered by the hiring of fifty employees. The courts assume that the presence of this threshold number of employees provide a basis for rationally assuming that the regulated business impact on interstate commerce. Interestingly, Fair Labor Standards Act does not specify a threshold number of employees for determinations of applicability.