The Next Asbestos? The Next FLSA?

Asbestos Litigation

A 2005 RAND report states that asbestos litigation arose as a result of millions of individuals’ exposure to asbestos and as a result of many asbestos product manufacturers’ failure to protect workers against exposure and failure to warn their workers to take adequate precautions against exposure. The history of the litigation has been shaped by the rise of a sophisticated and well-capitalized plaintiff bar, heightened media attention to litigation, and the information technology revolution.

According to the RAND report:

• At least 8,400 entities have been named as asbestos defendants through 2002.
• Defendants are distributed across most U.S. industries.
• Total spending on asbestos litigation through 2002 was about $70 billion, broken down as set out in the diagram below.

FLSA Litigation

The Fair Labor Standards Act (FLSA) is the federal law of broadest application governing minimum wage, overtime pay, and youth employment. Employees who are covered by the FLSA are entitled to be paid at least the Federal minimum wage as well as time and one-half their regular rates of pay for all hours worked over 40 in a workweek, unless an exemption applies.

Although FLSA litigation can involve a variety of claims, two of the most common are misclassification claims—i.e., allegations that an employer has misclassified an employee, or a group of employees, as exempt from the FLSA’s overtime requirements—and “off-the-clock” claims—i.e., allegations that an employee, or group of employees, has not been paid for all of the time they worked for the employers.

These and other claims under the FLSA can be brought individually or on behalf of all “similarly situated” employees and former employees. As a result, FLSA cases can involve a large number of employees and present significant financial exposure for employers. For instance, in 2008 Walmart agreed to pay as much as $640 million to settle 63 federal and state class actions claiming the company cheated hourly workers and forced them to work through breaks.

The multitude of wage and hour claims and lawsuits that workers have filed under the FLSA, and its state law counterparts, have made wage and hour law the nation’s fastest growing type of litigation. All industries (including retail, financial services, hospitality, construction, technology, and communications) have been susceptible to these lawsuits.

As shown in the graph to the left, the number of wage and hour lawsuits increased significantly over the past reporting year to 8,126, up another 4.7% over the prior 12-month period. 

This is the seventh straight year of increases in federal court wage and hour lawsuits and ups the continuing explosion in these cases over the past decade to 237% and since 2000 to 438%. 

Although anecdotal, a partner at a major labor and employment defense law firm believes that those numbers would be substantially greater if wage and hour lawsuits filed in state courts under state pay practices, tip laws, meal and rest break requirements, independent contractor rules, and the like, were added.

Employment Testing Litigation

Employment testing litigation will have many parallels with asbestos and FLSA litigation, but on an even larger scale.

There are potentially tens of millions of plaintiffs

• Any person who takes an assessment, if the assessment is determined to be a medical examination will be a plaintiff. Appellate courts have held consistently that the prohibition on medical examinations extends to all persons, including persons who are not disabled (see, e.g., decisions from the Second, Sixth, Eighth, Tenth and Eleventh Circuits).
• Any class of disabled persons (i.e., those with mental illness) where the assessment tends to screen out those persons from employment consideration. Unlike disparate impact claims under other employment discrimination laws the ADA  does not require statistical evidence if an expert can confirm that the test would screen out persons with disabilities or categories of disabilities.
• Federal and state agencies seeking to recover billions of dollars spent on SSDI/SSI disability awards, Medicare/Medicaid and other costs expended on persons who were illegally and invidiously discriminated against as a consequence of the use of employment assessments.

There are potentially hundreds of thousands of defendants

• Employers utilizing testing will face claims by (A) applicants and employees for both the illegal use of a pre-employment medical examination and the failure to treat information obtained from such medical examination as confidential medical information, (B) federal and state agencies seeking recovery of costs incurred (disability awards, Medicare/Medicaid, etc.) as a consequence of the illegal testing, (C) claims by insurers denying coverage and (D) claims by testing companies denying liability/rejecting indemnification.
• Testing companies will face claims by (A) applicants whose information was not treated as confidential medical information (a separate cause of action that does not require exhausting of remedies with the EEOC), (B) employers seeking indemnification from the testing companies for claims made against the employers by applicants, government agencies and others, and (C) claims by insurers denying coverage. 
• Insurance companies who underwrite policies for employers and testing companies will face claims from those they insure as well as individuals and government agencies making claims against those employers and testing companies.

Costs to employers, testing companies and their insurers will be in the tens (if not hundreds) of billions of dollars, including:

• Defense transaction costs, including the costs of outside counsel, internal management and employee time, public relations, lobbying, etc.
• Gross compensation, including awards to applicants and payment of costs and fees (i.e., counsel, expert witnesses, e-discovery).
• Reputational damage costs, including lost/reduced sales and brand damage.
• Business restructuring and/or “disinfectant” costs – The employers and testing companies retention and use of confidential medical information in violation of the ADA safeguards has resulted in the applications and solutions that illegally use this data. The data derived from the hundreds of millions of assessments over the past years has created a virus that has "infected" the employer and testing company solutions that integrate this data. 

When the First Domino Falls: Consequences to Employers of Embracing Workforce Assessment Solutions

The success of workforce science companies in developing employment personality and assessment tests over the past twenty years has created "systemic risk" for their employer customers. If one employer has violated the law and subjected itself to significant liability as a consequence of its use of an assessment provided by a workforce science company, then all customers of that company are similarly at risk. Workforce science companies provide their services to thousands of employers, including many of the largest employers in the U.S. 

The lack of diversity in the psychological model underlying many of the personality tests offered by workforce science companies (the five-factor model of personality or Big Five) also means that if one workforce science company's personality tests that use the Big Five is found to be an illegal medical examination under the Americans with Disabilities Act (ADA), all workforce science companies that use the Big Five (and, more importantly, their customers) are similarly at risk. Please see ADA, FFM and DSM.

Sizing the Risks

There are multiple risks to employers arising from the use of personality tests and workforce assessments, including: 

1. Claims under the ADA and the Rehabilitation Act of 1973 that the personality tests are illegal medical examinations or that they illegally screen out persons with mental illness (as set out above); 
2. Claims under the ADA and the Rehabilitation Act of 1973 that the employer fails to select and administer the assessment in the most effective manner to ensure that the assessment results accurately reflect the skills, aptitude or whatever other factor that the assessment purports to measure, rather than reflecting an applicant’s impairment; 
3. Claims that employers and workforce assessment companies fail to properly safeguard confidential medical information obtained from the personality tests and illegally use that confidential medical information in violation of the ADA; and
4. Claims under Title VII of the Civil Rights Act that the workforce analytics cause there to be a disparate impact on the hiring of blacks and Hispanics.

As to the potential size of the plaintiff classes for the claims listed above, they range from a percentage of all applicants (in the case of claims that the tests illegally screen out persons with mental illness and claims of disparate impact under Title VII) to all applicants over the past 12 months (in the case of claims that the personality test is an illegal medical examination) to all applicants, employees and ex-employees over a longer period of time (in the case of claims that employers and workforce assessment companies failed to safeguard confidential medical information).

For some employers, the potential class size can be measured in the millions of plaintiffs. Consistent with the 2011 Supreme Court decision in Wal-Mart Stores, Inc. v. Dukes, plaintiffs in a class action suit predicated on the use of personality tests and workforce analytics will be challenging a uniform, company-wide practice. The uniform use of testing by an employer demonstrates that "there are questions of law or fact common to the class," or commonality, as required by the rules governing class actions.

Brand Damage and Lost Revenues

Employers who continue to use personality tests and workforce assessment tools to illegally screen out persons with mental illness and other disabilities risk losing the significant revenue opportunity associated with the largest “niche” market in the U.S.

Some numbers: (i) there are more than 37.3 million persons with disabilities; (ii) 58 percent of persons with disabilities own their own homes; and (iii) there are more than 20 million families in the United States that have a member with a disability. 

As an example, psychiatric medications are among the most widely prescribed and biggest-selling class of drugs in the U.S. In 2011, Americans spent $18.2 billion on antipsychotics to treat depression, bipolar disorder and schizophrenia, $11.0 billion on antidepressants and $7.9 billion on treatment for ADHD. These three categories of prescription drug sales accounted for approximately 11.6% of all prescription drug sales in the U.S. for 2011.

Persons with mental illness, their family members and other loved ones provide a material percentage of the pharmacy companies' overall revenue each year. How do some of these companies repay this customer loyalty? By utilizing an unlawful personality tests and workforce assessments to screen out persons with mental illness from consideration for employment. Why should persons with mental illness, their family members and other loved ones, and other concerned persons continue to shop at their stores? Good question. 

The CVS Example

In July 2011, CVS and the Rhode Island Civil Liberties Union (ACLU) entered into a voluntary settlement addressing the ACLU’s complaint challenging CVS’s use of a pre-hire questionnaire that the ACLU claimed could have a discriminatory impact on people with certain mental impairments or disorders. 

The CVS questionnaire contained statements to which applicants were required to respond, including: “You change from happy to sad without any reason,” “You get angry more often than nervous,” “Your moods are steady from day to day,” and “There’s no use having close friends; they always let you down.”

Responding to a complaint filed by the ACLU, the Rhode Island Commission for Human Rights had issued a finding in February 2011 that there was "probable cause" to believe that the questionnaire used by CVS violated state anti-discrimination laws that bar employers from eliciting information that pertain to job applicants' mental or physical disabilities.

Although employers may legally ask questions designed to help determine an applicant’s personality or aptitude for a job, the ACLU’s complaint argued that questions found in the CVS pre-offer assessment “could have the effect of discriminating against applicants with certain mental impairments or disorders, and go beyond merely measuring general personality traits.” 

Pursuant to the settlement agreement, CVS agreed to permanently remove the questions at issue from its online application.

Illusory Indemnification?

The potential size of the liability will be something that captures the attention of the senior management of employers. It will not be a matter addressed internally by the HR departments, in part because the employer’s finance and control group will need to determine whether and to what extent to accrue for the damages as contingent liabilities under GAAP.

While the EEOC and court processes may take years, it seems reasonable to believe that the market will speak much more quickly. To meet their fiduciary obligations, senior management will need to review the testing and workforce assessment processes and, in relatively short order, make a decision as to whether to continue with their usage.  There are several options, including continuing on with no change (in which case each applicant - of which there are thousands a day for some companies - will have a potential claim against the employer) and stopping the use of the personality testing and workforce assessments (which will cap the number of potential plaintiffs, as no new ones are being added).

Senior management will be influenced by a number of factors, including the workforce assessment company's ability to provide indemnification. As noted above, the success of workforce assessment companies in marketing personality tests and workforce analytics over the past twenty years has created "systemic risk" for its customers. If one employer has violated the law and subjected itself to significant liability as a consequence of its use of a solution provided by a workforce assessment company, then all customers of that workforce assessment company are similarly at risk.

Even assuming workforce assessment companies are willing to provide indemnification to all customers, those employers to independently assess whether the workforce assessment companies and their insurers have adequate resources to indemnify all customers. 

As Kenexa, an employment assessment company, consistently noted in its annual 10-K risk factor disclosures prior to its December 2012 acquisition by IBM:

The failure of our solutions to comply with employment laws may require us to indemnify our customers, which may harm our business. Some of our customer contracts contain indemnification provisions that require us to indemnify our customers against claims of non-compliance with employment laws related to hiring. To the extent these claims are successful and exceed our insurance coverages, these obligations would have a negative impact on our cash flow, results of operation and financial condition.

Litigation Benchmarks

Personality testing and workforce assessment testing litigation will have many parallels with asbestos litigation and Fair Labor Standards Act (FLSA) litigation, but on an even larger scale because: (i) there are potentially tens of millions of plaintiffs (any person who takes an assessment will be a plaintiff if the assessment is determined to be a medical examination); (ii) there are potentially hundreds of thousands of employer defendants – any company that utilizes pre-employment assessments; (iii) there are potentially hundreds of thousands of claims against assessment companies, both by the applicants and by the employers (seeking indemnification); and, (iv) there are potentially hundreds of thousands of claims against insurers who underwrote general liability and employment practices liability insurance (EPLI) coverages for employers and testing companies.  

Costs to employers, testing companies and their insurers will be in the tens (if not hundreds) of billions of dollars, including: (A) defense transaction costs (i.e.,outside counsel, internal management and employee time, public relations, lobbying); (B) gross compensation, including awards to applicants and payment of costs and fees (i.e., counsel, expert witnesses, e-discovery costs); and, (C) reputational costs, including lost/reduced sales and brand damage. 

In addition, if personality tests are found to be illegal “medical examinations” under the ADA, most of the information collected from the applicant would be confidential medical information and subject to a variety of safeguards and use restrictions (including no disclosure to third parties or use for any other reasons by the employer). Employers and testing companies have freely passed this information back and forth among themselves. In a sense, the information is a “virus” that has “infected” many databases, systems and solutions of employers and assessment companies.  If the information is confidential medial information, there will be massive business “disinfectant” costs, as companies are forced to “scrub” their systems.