In an effort to attract the most qualified employees, employers sometimes make promises that they cannot keep.  But what may once have been considered harmless exaggeration by employers can now be the basis for a costly lawsuit.  Several recent cases have held that employers can be liable for fraud if their representations about a job do not pan out.

Overstating earning potential costs employer over $1.2 million
In a recent case, an employer that overstated an applicant’s earning potential was hit with a $1.2 million damage award.  The employee in that case earned $5,800 to $5,900 a month at his old job.  He applied for a new job and, during the interview, told the employer that he needed to earn at least $5,700 a month.  The employer then pulled out a financial statement, made some calculations, and stated that if the employee had been with the company between January and September of 1999, he would have made $70,000 (which would have been well over $5,700 a month).  Based on this representation, the employee accepted a position with the new employer and quit his old job.  In his first three months of employment, however, his monthly paychecks amounted to $4,400, $5,100, and $4,800 respectively.  The employee complained but received no response, and shortly thereafter was fired.  Although he re-applied for a job with his old employer, it had a strict no-rehire policy.  He eventually found another job that paid less than $4,000 a month.

The employee sued for fraud, arguing that the employer falsely promised him a salary of at least $5,700 per month, and that he left his old job in reliance on that promise.  The jury agreed with the employee and awarded him $490,913 in economic damages, $50,000 for pain and suffering, and $1.5 million in punitive damages, which the trial court later reduced to $675,000.  In upholding the jury’s decision, the appellate court noted that the employee was entitled to recover the income he lost when he left his old job in reliance on the employer’s false promise about salary, so long as such damages were not speculative or remote.

Employer can be liable if it overstates job security

In another case, an employee claimed he was induced to leave a steady job in New York for a new job in California based on false promises of job security.  The employee earned $120,000 a year in New York as the president of a small family-owned company.  He was actively recruited by a California company that wanted him to accept a job as its general manager.  During the recruitment process, the employee told the employer he was concerned about giving up a secure job and moving his family across the country.  He asked the employer to assure him that his job would be secure.  In response to these concerns, the employer told him that he would continue to be employed so long as he performed his job well and achieved certain goals.  The employer also told the employee that that the company was strong financially and that it anticipated solid growth and a stable and profitable future.  The employee ultimately accepted the new position and moved his family to California.

Approximately two years later, the employee was terminated.  He was told that his job was being eliminated because of a management reorganization, and that the termination had nothing to do with his performance.  The employee sued the employer for, among other things, fraud.  The court found that the employee could state a claim for fraud if he could prove that the employer induced him to leave his job in New York by making promises that it knew it could not keep.  The court also held that, if the employee could prove his fraud claim, he would be entitled to recover the costs of moving to California and the loss of job security and income associated with his former job in New York.

Tips to Follow
As these cases make clear, employers can be held liable if their representations to prospective employees later prove to be false.  In order to avoid costly lawsuits, here are some tips to follow when interviewing employees and extending job offers:

•    Provide training to interviewers so they do not misrepresent the employer’s financial condition or the applicant’s salary potential or job responsibilities.

•    Review all job postings carefully to ensure that you are not making any unintended or unauthorized promises.

•    Write down the terms and conditions of a prospective employee’s employment in a detailed offer letter.

•    Use two interviewers at once, since this provides an employer with a witness if a dispute later arises.

The bottom line:  Do not make promises you cannot keep.

Have you been disposing of old personnel or job applicant files by tossing them into the trash can?  Effective June 1, 2005, such a practice could run afoul of a new regulation promulgated by the Federal Trade Commission.  The regulation implements a provision of the Fair and Accurate Credit Transactions Act (“FACTA”) that requires “any person that maintains or otherwise possesses consumer information, or any compilation of consumer information, derived from consumer reports for a business purpose [to] properly dispose of any such information or compilation.”  Under the new regulation, businesses that dispose of records that contain certain types of information about their employees and applicants must take reasonable measures to protect against unauthorized access to that information.

Who must comply with the new regulation?
The new regulation applies to any business, regardless of size, that maintains or possesses consumer information.

What is consumer information?
Consumer information means any record about an individual, whether in paper, electronic or other form, that is a consumer report or is derived from a consumer report.  A consumer report means any communication by a consumer reporting agency that bears on an individual’s character, general reputation, personal characteristics, mode of living, or credit worthiness that is or may be used to establish an individual’s eligibility for employment, insurance, or credit.

In the employment context, the classic example of a consumer report is a background check on a current employee or a job applicant that is prepared by a third party.  Both the background check itself and any record that is derived from the background check are covered by the regulation.  Depending on your business, there may be other types of consumer reports or information that you maintain or possess which would also be covered.

Note that consumer information only includes information that identifies a particular individual; it does not include information that does not identify a particular individual, such as aggregate information or blind data.

What does the new regulation require?
The new regulation requires anybody who maintains or possesses consumer information to properly dispose of such information by taking “reasonable measures” to protect against unauthorized access to or use of the information in connection with its disposal.

What measures are considered reasonable?
Although the new regulation does not actually define “reasonable measures,” it provides several examples, including the following:

•    Implementing and monitoring compliance with procedures that require the burning, pulverizing, or shredding of papers containing consumer information so the information cannot practicably be read or reconstructed.

•    Implementing and monitoring compliance with policies and procedures that require the destruction or erasure of electronic media containing consumer information so that the information cannot practicably be read or reconstructed.

•    Contracting with a third party engaged in the business of record destruction to dispose of consumer information in a manner consistent with the regulation.  Employers who contract with a third party to dispose of their consumer information must take reasonable steps to ensure that the third party complies with the new regulation.  Such steps could include reviewing an independent audit of the disposal company’s compliance with the regulation, obtaining information about the disposal company from several references or reliable sources, requiring that the disposal company be certified by a recognized trade association or similar third party, reviewing and evaluating the disposal company’s information securities policies and procedures, or taking other appropriate measures to determine the competency and integrity of the potential disposal company.

What steps should you take to comply with the new regulation?
•    If you already have document retention and disposal policies in place, carefully review those policies to ensure they comply with the new regulation.

•    If you don’t already have document retention and disposal policies, establish and implement ones that comply with the new regulation.

•    Regularly train your employees on proper disposal procedures.

•    Monitor compliance regularly to ensure your policies are being followed.

•    If you contract with an outside company to handle your document disposal, take reasonable steps to ensure that the outside company is complying with the regulation.