The Illinois Supreme Court has expanded the liability that parent companies may face when an employee of a subsidiary is injured or killed at work. In Forsythe v. Clark USA, the court established that parent companies may be subject to "direct participant liability" and held that a corporate parent may not be protected by the Worker's Compensation Act's exclusivity provisions. This determination will open the door to suits by injured employees against parent companies and could result in liability for a parent that is far beyond that which the subsidiary would have faced.

Worker's compensation has long been a system of give and take for employers. Under the Illinois Worker's Compensation Act, employers are required to make payments for on-the-job injuries to employees regardless of whether the employer was at fault. However, at the same time, the Act restricts the employer's exposure in situations where it may have acted negligently or recklessly, thus significantly limiting employer liability. This protection, referred to as worker's compensation exclusivity, is a strong bar to claims brought in court against employers.

In Forsythe, two employees died in a fire at the oil refinery where they worked. Their widows received worker's compensation payments from their husbands' employer, Clark Refining. Seeking more, they brought suit in court against Clark Refining's parent company — Clark USA — claiming that Clark USA should be held liable as a direct participant in the incident that led to the deaths. In particular, the widows argued that Clark USA should be separately liable because it required that Clark Refining operate in "survival mode," which (the widows argued) Clark USA knew would adversely affect safety by reducing expenditures in training and maintenance. The widows also pointed to the fact that the individual who oversaw the budget cuts served both as Clark USA's president and Clark Refining's CEO (and that some of the key budgetary determinations were documented by him on Clark USA letterhead).

Clark USA claimed that it's relationship with Clark Refining was merely that of an investor or shareholder and argued that "direct participant liability" should not be recognized in Illinois. Clark USA argued that it could not be held to have a duty to the employees or be liable for their deaths unless the widows met the high standard of establishing that Clark Refining and Clark USA were, in essence, a single entity. It also argued that even if such a duty existed, Clark USA should be protected by the Act just as the employer was protected.

The Illinois Supreme Court agreed with the widows and found that Clark USA could be subject to "direct participant liability" for the deaths of its subsidiary's employees. Considering whether the corporate parent had "an obligation of reasonable conduct for the employee's benefit," the court rejected Clark USA's argument that the widows had to establish that the parent and subsidiary were one and the same (or, in other words, "pierce the corporate veil" between parent and subsidiary) in order to state their case. Rather, the court stated that where a parent company "specifically directs an activity, where injury is foreseeable, [the corporate parent] could be held liable." The court further explained that "if a parent company mandates an overall course of action and then authorize[s] the manner in which specific activities contributing to that course of action are undertaken, it can be liable for foreseeable injuries." The court noted that allegations of budgetary mismanagement, without more, are not enough for a parent to be held liable as a direct participant, but held that when budgeting authority is combined with implementation of policy or some other "specific direction or authorization," the parent may be held liable.

The court also agreed with the widows that Clark USA could not claim protection under the exclusivity provisions of the Worker's Compensation Act. The court held that the individuals who died were the employees of Clark Refining — not Clark USA. Neither Clark Refining's employment of the decedents nor its payment of worker's compensation benefits to their widows was a sufficient basis to bring Clark USA within the Worker's Compensation Act's exclusivity provisions. As a result, despite the fact that worker's compensation payments had been made to the widows by Clark Refining, Clark USA was not entitled to any of the protection contemplated by the Worker's Compensation Act.

This decision is important for two primary reasons: First, it establishes the theory of "direct participant liability" in Illinois, which for the first time allows a parent company to be held liable even if the plaintiff is unable to establish that the parent and subsidiary should be considered a single entity. Second, it gives plaintiffs a "back door" around worker's compensation exclusivity, which will undoubtedly lead to increased suits against parent companies in cases of employee injury and death.

The Schiff Hardin Labor and Employment Group will keep you informed of further developments in the area of direct participant liability. In addition, the firm's lawyers are available to review companies' practices and policies and assist in implementing procedures that will help insulate parent companies from this kind of liability in the future. Please contact any member of the Labor and Employment Group for assistance.

The Employee Free Choice Act, which has been passed by the United States House of Representatives and is currently pending before the Senate, is widely regarded as the most sweeping labor relations proposal in decades. The primary significance of this proposed legislation is its impact on the way that employees decide whether to accept or reject union representation.

Currently, if 30% or more of the employees within a potential bargaining unit sign union authorization cards, the National Labor Relations Board conducts a secret ballot election to determine whether a majority of the employees want a union. This election process — long considered the primary vehicle for employees to make union membership determinations — ensures that an employee's vote on union membership is private.

The Employee Free Choice Act would eliminate the secret ballot election, provided that the union gathers signed union authorization cards for more than 50% of the potential bargaining unit. In this event, the company would be required to recognize and bargain with the union without an election.

Critics of the proposal argue that reliance on authorization signatures, rather than a secret ballot vote, could lead to widespread coercion of employees — in an effort to intimidate them into signing authorization cards on behalf of the union. As Labor Secretary Chao has stated, "The right of a worker to a private-ballot election is a fundamental right in our democracy that should not be negotiated away by either management or labor, nor legislated away at the behest of special interest groups."

The proposed legislation also sets forth timetables for the negotiation process after union certification, and for mandatory arbitration if the negotiations for the collective bargaining agreement fail to conform to the stated timetables.

The House passed the Employee Free Choice Act by a vote of 241-185. The proposal is expected to receive a tougher test in the Senate, and President Bush has pledged to veto the Employee Free Choice Act if it passes. Even if defeated now, observers have acknowledged that this legislative effort will set the stage for another attempt after the 2008 elections. We will continue to provide you with updates on the progress of this legislation.

A recent decision from the Seventh Circuit Court of Appeals serves as an important reminder to companies considering the sale or purchase of an entity that their obligations under the Worker Adjustment and Retraining Notification Act of 1988 ("WARN") may be greater than expected. WARN requires, among other things, that companies with 100 or more workers at any location provide at least 60 days' notice before subjecting 50 or more workers to an "employment loss." The Seventh Circuit's March 15 decision in Phason v. Meridian Rail Corp. underscores that this obligation exists if there will be any break between the employee's termination by the seller and hiring by the buyer.

In Phason, the company reached a "handshake deal" to sell the company and announced to its workforce that the company was being sold. The company then terminated its employees and encouraged them to apply for jobs with the successor corporation. Within eight days, the sale formally closed, and shortly thereafter, all but 40 of the employees were rehired by the new entity. Despite the fact that less than 50 employees were affected by the sale of the company, some former employees sued claiming a violation of the WARN Act. They argued that more than 100 employees suffered an "employment loss" because there was an eight day gap between when the employees were terminated and the formal sale of the company.

The trial court found that there was no WARN violation because the purchaser had hired all but forty of the former company's employees within short order, but the Seventh Circuit disagreed. It held that the WARN Act is triggered when employment is terminated, and here, all of the employees were terminated prior to the closing of the sale of the company. The court found that it did not matter that all but 40 of the employees were eventually hired by the successor corporation — all of the employees suffered an "employment loss" and therefore, the company was liable under WARN for failure to provide the required notices. The court explained that the statute must be applied literally, and that a "handshake deal" to sell a company is not a "done deal," and that many companies who thought they had a "done deal" soon discovered that the deal was not going to be closed. As the court found, saying to an employee: "You're fired, but you have prospects of catching on with someone else real soon now" qualifies as a "termination" under WARN.

This case serves as a reminder that companies should carefully consider the termination of employees in conjunction with a sale of the company, as such action may trigger liability under WARN. Additional obligations may also exist under parallel state laws. Please contact any member of Schiff Hardin's Labor and Employment Group for additional information about this case or for more information regarding potential liability under the WARN Act.

The prosecution of both illegal immigrants (charged with violating immigration laws) and executives of companies (charged with knowingly hiring illegal workers) are making front page headlines. In addition, legal employees are filing civil lawsuits against their employers alleging Racketeer Influenced and Corrupt Organizations Act ("RICO") violations for conspiring to keep wages low by hiring illegal workers. The frequency of these news reports has gained the attention of employers across the country who want to know how they can protect themselves against such charges and lawsuits and maintain a legal workforce. While Congress works on a solution to the growing illegal immigration problem, employers should be aware of their obligations under the law.

Criminal Prosecutions of Illegal Workers and Company Executives

The Immigration and Customs Enforcement bureau ("ICE") of the Department of Homeland Security has stepped up its efforts to enforce immigration laws by using undercover informants and conducting raids on unsuspecting companies to catch both workers who have entered our country illegally and employers who have knowingly hired illegal immigrants. Several news sources have reported on the arrests of both illegal immigrants and executives of companies who allegedly had knowledge of the workers' illegal status. In particular, there have been reports about the recent guilty pleas of five ex-IFCO executives for employing illegal workers. This followed a story by the Wall Street Journal discussing the facts of the case and highlighting the potential problems for employers across the country.

At the same time, employers are having great difficulty finding workers to perform unskilled labor and menial tasks at wage rates that are not much above the minimum wage. The pressures to find legal workers within a company's labor budget have led many employers to turn a blind eye to circumstances that may indicate the illegal status of workers.

Civil Lawsuits Filed by Legal Workers Against Their Employers

By contrast, employees who are legally eligible to work in the United States ("legal employees"), and who work side by side with illegal immigrants, often have a problem with the continued hiring of illegal workers. Indeed, they have begun to fight back. In a series of lawsuits, employees have sued their employers claiming that the employers knowingly hired illegal immigrants in order to keep wages low and unions out of the workplace.

In Mendoza v. Zirkle Fruit Co., a class of legal employees alleged that two employers and their labor recruiter artificially deflated wages by means of a scheme to hire illegal workers at very low wages. Specifically, the legal employees claim that these employers knowingly hired illegal immigrants in violation of immigration law. They claim they were direct victims of the alleged illegal conduct and suffered damages by way of lower wages. The trial court found that the alleged damages to the workers were indirect and too speculative, but the Ninth Circuit disagreed. Rather, the Ninth Circuit ruled that the legal employees could show they were direct victims of the alleged illegal conduct and that the alleged damages were plausible enough to survive a motion to dismiss. Back at the trial court level, this case has now been certified as a class action.

The Second, Sixth, Ninth and Eleventh Circuit Courts of Appeals have all allowed such lawsuits to proceed with class actions claims alleging the employers knowingly hired illegal immigrants in violation of immigration law. These employees claim they were direct victims of the alleged illegal conduct and suffered damages by way of lower wages. Nonetheless, the task of proving these damages at trial is expected to be extremely difficult.

Only the Seventh Circuit, to date, has dismissed such allegations on the basis that the damages are too speculative and the harm to the legal employees was indirect. In Baker v. IBP Inc., union-represented, legal employees alleged that their employer and a labor recruiter operated a scheme to hire illegal workers who presented false documents. Unlike the cases noted above, however, the Seventh Circuit dismissed this case on several grounds. The grounds for dismissal included that the union, which bargained with the employer about wages, and was found to be an indispensable party, was not sued by the employees. Furthermore, the employer and the recruiter did not have a shared purpose sufficient to allege a RICO claim. In addition, the Court found that the legal employees' alleged damages were too speculative.

As result of these criminal prosecutions and civil lawsuits against employers, it is important for every employer to understand their obligations under immigration laws.

Accurate and Timely Completion of I-9 Forms

The U.S. Citizenship and Immigration Service ("CIS"), formerly known as the U.S. Immigration and Naturalization Service ("INS"), requires employers to complete a Form I-9 for each individual they hire for employment within three working days of the new employee's employment. The employer must verify the individual's employment eligibility by identifying documents presented by the employee and recording the document information on the Form I-9. The form must be fully completed, dated and signed by a both the worker and a designated representative of the employer. Where a translator is needed, the translator must also sign the document. A photocopy of the documents relied upon to verify employment eligibility should be attached to the Form I-9 and placed in the employee's file — of course it is critical that the documents relied upon and copied are acceptable documents. For instance, while a certified, government-issued birth certificate is a valid document for I-9 purposes, a hospital-issued birth certificate is not. As a result, if a hospital-issued birth certificate is relied on, the I-9 form is invalid. Form I-9 must be kept by the employer either for three years after the date of hire or for one year after employment is terminated, whichever is later. The form must be available for inspection by authorized U.S. Government officials.

Employers are encouraged to review their employment eligibility procedures to make sure that they have taken the proper steps to verify employee eligibility to work. In completing this task and on application forms, employers may not question a new employee's citizenship. They may only ask whether the individual is legally authorized to work in the United States. An individual who provides the appropriate paperwork, as listed on the Form I-9, is presumed to be authorized to work in the United States.

Responses to Social Security No-Match Letters

The Social Security Administration ("SSA") has also gotten involved in the efforts to enforce immigration laws. When employers send in Social Security payments for their workers and the numbers do not match the Social Security numbers maintained by the SSA, a "no-match" letter is sent out to the employer requesting the employer to verify that they have sent the SSA the correct Social Security number as provided by the worker. The employers are warned not to take adverse action against these employees, but to only verify that the information they have provided to the SSA is accurate based upon information obtained from the employee. However, employers must be careful that their receipt of the "no-match" letter does not provide them with constructive knowledge that employees are not authorized to work in the United States.

It is not entirely clear what steps an employer must take in response to a "no-match" letter. Proposed regulations issued in June 2006 provide employers with guidelines which, if followed, would provide the employer with a "safe harbor." To obtain this "safe harbor" an employer would first review its files to confirm that the no-match is not the result of a clerical error. Assuming no clerical error, the employer would tell the employee that she must resolve the issued with the SSA. If the employee does not do so, the employer would have to obtain a new Form I-9 for which the employee provides a photo I.D. and does not rely on the Social Security number that was the subject of the no-match. All of these steps would have to be taken within a set period of time and new information provided would have to verified. Of course, because the regulations setting forth the "safe harbor" have not been finalized, these steps are not yet required. However, allowing them should give employers some comfort that their response to the "no-match" is reasonable.

What to do when an Employer has Suspicions of Illegal Status

As a result of the widespread crackdown on illegal immigration, and the criminal prosecutions and civil lawsuits that have been filed, it has become apparent that a growing percentage of unskilled workers are illegal immigrants and that they have presented forged documents or have taken on someone else's identity in order to obtain employment in the United States. With the sophisticated technology available today, it is difficult for employers to determine whether the paperwork they are given by new employees to verify their eligibility to work in the United States, is authentic or a fake. There are, however, several clues that may indicate that the documentation presented to verify employment eligibility has been stolen, is forged or is fake.

For example, where an employer may receive a call or letter indicating that a worker is using someone else's identity; where the name on the green card or Social Security card does not match the name of the worker given to the company or used by others at the jobsite; where the picture on the document does not resemble the individual who presented it; the worker may have been seen tearing up W-2 forms; or where the worker may admit to a co-worker or supervisor that he is not a legal immigrant. In such cases, the employer should conduct a prompt and thorough investigation. The investigation should be documented. If the results of the investigation demonstrate that the paperwork submitted to verify employment eligibility is unauthentic, the employee should be terminated for failure to produce evidence that he/she is legally authorized to work. This determination should only be made when the overwhelming evidence supports the conclusion. When the investigation is inconclusive, the employer should continue to employ the worker until further evidence suggests otherwise, so as to avoid a discrimination claim. In addition, all employers should make it clear to recruiters not to provide any illegal workers. This clarification should be put in writing and repeated on a yearly basis.

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Catherine Hobart Thompson, "Immigration Law for the Construction Industry," Atlanta Electrical Contractors Association, Atlanta, Ga. (May 3, 2007)

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