Labor and Employment Law Weekly Update

03 October 2011 Publication

Legal News: Employment Law Update

Employers Should Heed FTC’s Recent Reminder About Endorsements
Written by: Yonaton Aronoff

Celebrity Ashton Kutcher recently got into hot water with the FTC while serving as a guest editor of an online-only version of Details magazine (http://tinyurl.com/3qrzghz). The magazine issue in question profiled several Internet companies in which Mr. Kutcher invests, without disclosing those investments. In an interview with The New York Times, the FTC’s assistant director of advertising practices, Richard Cleland, indicated that Mr. Kutcher’s conduct “could be investigated” by the FTC for potentially running afoul of FTC guidelines on product endorsements.

Although the FTC later appeared to back away (http://tinyurl.com/6z75rhn) from those comments, the episode serves as a useful reminder for employers crafting and implementing social networking policies for their employees. Effective December 1, 2009, the FTC issued revised guidelines on endorsements and testimonials in advertising, codified at 16 C.F.R. § 255. Under the revised guidelines, employers and employees may be subject to liability for an employee’s failure to clearly and conspicuously disclose his or her employment relationship when promoting the employer’s product or service via a social networking platform. As a result, employers must ensure that their social networking policies include a requirement that their employees clearly and openly disclose their relationship with their employer when promoting the employer’s product or services. As these recent events demonstrate, the issue is clearly on the FTC’s radar screen.

Does Your EPLI Policy Cover Lawsuits Brought by the EEOC?
Written by: Julie Angelini

A federal court in Tennessee recently ruled that an employer’s employment practices liability insurance (EPLI) did not cover a $2.7 million settlement of a lawsuit brought by the EEOC (http://www.eeoc.gov). After 10 Cracker Barrel Old Country Store employees filed charges of race and/or sex discrimination with the EEOC, the EEOC sued Cracker Barrel under Title VII. Cracker Barrel eventually settled the underlying EEOC lawsuit, entering into a consent decree obligating it to place $2 million into a settlement fund. In addition, Cracker Barrel incurred more than $700,000 in defense costs.

Although Cracker Barrel gave proper written notice of the EEOC lawsuit to its carrier, the Court ruled that Cracker Barrel was not entitled to recover any of the $2.7 million under its EPLI policy. The Court held that the language in the EPLI policy did not extend to the EEOC lawsuit because the policy limited “claims” to proceedings brought by employees, and the EEOC was not Cracker Barrel’s employee. The specific language in the policy defined a “claim” as “a civil, administrative or arbitration proceeding commenced by the service of a complaint or charge, which is brought by any past, present or prospective ‘employee(s)’ of the ‘insured entity’ against any ‘insured.’” Based on this language, the Court found that the definition of claim under the policy has a clear meaning that a covered proceeding must be brought by an employee. The Court rejected Cracker Barrel’s argument that the underlying charges upon which the EEOC lawsuit was based were brought by employees. As such, Cracker Barrel was not entitled to collect any of the $2 million settlement funds under its EPLI policy. The Court also found that the insurance carrier had no duty to defend Cracker Barrel in the EEOC lawsuit, and thus, Cracker Barrel was not entitled to recover its $700,000 in defense costs either.

Employers should review the definition of “claim” before entering into an EPLI policy to ensure that certain proceedings, such as lawsuits brought by the EEOC or other administrative agencies like the Department of Labor, are not excluded from coverage under the policy.

Labor and Employment Trivia

Last week’s question: What is the “control test” and where is it used?

Answer: The control test is used to determine if someone is an employee or independent contractor. It is used to analyze the degree of “control” a company exercises over an individual. Facts that provide evidence of the degree of control and independence fall into three categories: 1) Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? 2) Financial: Are the business aspects of the worker’s job controlled by the payer? (e.g., how worker is paid, whether expenses are reimbursed, who provides tools/supplies, and so forth) 3) Type of Relationship: Are there written contracts or employee type benefits (i.e., pension plan, insurance, vacation pay, and so forth)? Will the relationship continue and is the work performed a key aspect of the business? Both the IRS many state governments, in an effort to increase tax collections, have increased enforcement efforts against employers who misclassify independent contractors.

This week’s question: The Social Security Act was signed into law by President Franklin D. Roosevelt in 1935. What was the bill’s original name and how did the name change?

Please continue to send suggestions for trivia questions to mneuberger@foley.com


Legal News is part of our ongoing commitment to providing legal insight to our clients and colleagues. If you have any questions about or would like to discuss these topics further, please contact your Foley attorney or the authors of this week’s issue.

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