All posts by Karen Marshall

Wilke Fleury partner Daniel Egan recently spoke at the 2010 CALAFCO Annual Conference on the topic of municipal and public entity bankruptcy and dissolution. Mr. Egan explained the procedures, as well as the advantages and disadvantages, of bankruptcy and dissolution for public entities facing financial distress.

CALAFCO is an organization dedicated to assisting member LAFCOs (Local Agency Formation Commissions) with educational and technical resources.

Wilke Fleury partner, David A. Frenznick, successfully negotiated the settlement of one of the longest running construction defect cases in Northern California history. Filed in 2003, the case involved the design and construction of a multi-unit co-housing project located in Chico. Wilke Fleury combined forces with another local attorney to represent the Valley Oaks Village Homeowners’ Association against the general contractor and multiple subcontractors, all of whom constructed the project in 1996. The case was weeks away from trial when a Butte County judge erroneously ordered its dismissal. The Third District Court of Appeal ultimately reversed the trial judge’s order and reinstated the case.

“The case focused on the design and construction of roofs, balconies and other structural elements. The bottom line was that each and every unit leaked badly and mold developed in many of them,” Frenznick said. “Ultimately our client received sufficient settlement funds to make repairs. Unfortunately, it took much too long for that to happen.”

Wilke Fleury associates Samson R. Elsbernd and Natalie A. Johnston have recently been admitted to the Milton L. Schwartz/David F. Levi American Inn of Court. The Schwartz/Levi Inn is designed to improve the skills, professionalism and ethics of the bench and bar, and is affiliated with the American Inns of Court. The Inn meets monthly in Davis, California, and is made up of members from the Sacramento and Yolo County legal communities. Samson and Natalie are among the most recent additions to the Inn, which includes area judges, lawyers, legal scholars, and law students.

Investigators are frequently called upon to conduct investigations of complaints that involve a particular statute, such as California’s Fair Employment and Housing Act, the Family and Medical Leave Act, California’s Whistleblower Protection Act, or Labor Code section 1102.5. A recent Court of Appeal decision highlights the care that must be taken by the investigator who is conducting such an investigation to thoroughly understand the legal requirements of the statutory scheme, including the definition of terms used within the statute at issue, and to appropriately apply those requirements. A failure to do so may invalidate the investigator’s findings and leave the client who relies upon the investigation open to liability.

The Facts and Findings of Ohton
Ohton v. Board of Trustees of the California State University (2010) 180 Cal.App.4th 1402 involved a trainer who worked for the San Diego State University Athletic Department. In February, 2003, Ohton responded to an Athletic Department audit by submitting a confidential report asserting that members of the Athletic Department had violated National Collegiate Athletic Association rules and engaged in other inappropriate conduct. Among his allegations were that he had heard rumors that the head football coach had gotten seriously drunk before one away game and had been seen walking out of a strip club at 1:00 a.m. the morning of another game.

In August, 2003, Ohton filed an internal complaint with the school, claiming that the football coach and other members of the Athletic Department had retaliated against him because of his report in violation of California’s Whistleblower Protection Act. He claimed the football coach obtained a copy of his confidential report and circulated it to other members of the Department. Ohton claimed he had been retaliated against when the Interim Athletic Director informed him that the football coach wanted a different strengthening and conditioning coach. He was thereafter relieved of all responsibilities for the football team, and his schedule was changed.

CSU retained an attorney to investigate Ohton’s complaints. The investigator concluded that Ohton was removed from the football program because he reported “personal and program-related” improprieties, not because he reported NCAA violations. As to the schedule change, the investigator concluded that the change was punitive and was made because of Ohton’s perceived antagonism towards the current football program, as illustrated by some of the allegations and accusations in Ohton’s report. However, with respect to Ohton’s allegation regarding the football coach’s public drunkenness, the investigator concluded that, while the allegation was arguably one of gross misconduct or incompetence, the evidence relied upon by Ohton was hearsay and was fully refuted. Moreover, the investigator noted that the accusation appeared in only two sentences on the 98th page of a 103 page document. Based on this, the investigator concluded that the accusation was not intended to “blow the whistle” on specific conduct and was not a “protected disclosure” as is required to support a claim for whistleblower retaliation.

CSU forwarded the investigator’s report to Ohton and he responded to it. The investigator was then given an opportunity to comment on Ohton’s response, which he did, as follows:

Regardless of [Ohton’s] subjective intent, the statute requires a finding of “good faith” disclosure. The comments that contributed to Ohton’s reassignment and hour restrictions were not good faith disclosures; rather, they were personal attacks based on faulty or incomplete information, improper assumptions or innuendo, and/or were accusations that did not involve improper governmental activities. [¶] It is my opinion that Ohton’s accusation that Head Coach Tom Craft was intoxicated in public was a factor in the timing of and the decision to remove Ohton as the Strength and Conditioning Coach, and that such accusation was not made in good faith.

Finally, the investigator noted that a separate investigation had been conducted by another investigator regarding the allegation of public drunkenness by the coach. During that investigation, Ohton claimed that he heard the allegation from one Booster, who had in turn heard it from two others. The “two others” were interviewed and denied the incident had occurred, as did the coach. Ohton’s source did not confirm it either. The investigator concluded that Ohton had related the very serious accusation due to disrespect for the coach and that Ohton’s false assertions of purported fact were not made in good faith.

CSU sent Ohton a final letter of determination resolving his complaint, in which it stated that it disagreed with the finding of the investigator that Ohton’s written report was not a protected disclosure. However, CSU concluded that the particular disclosure relating to the coach’s public drunkenness was not a protected disclosure because it was not made in good faith. CSU agreed with the investigator that the accusation was false and was motivated by Ohton’s personal and vindictive agenda against the coach. CSU concluded that Ohton was removed from the football program for independent legitimate, non-retaliatory reasons but that the restriction of Ohton’s hours was retaliatory. As a result, CSU rescinded the instructions regarding the limitation of Ohton’s work hours.

Ohton filed a petition for writ of mandate, requesting a determination of whether CSU had satisfactorily addressed his internal complaint within the meaning of Government Code section 8547.12. The Court of Appeal concluded that CSU had applied an incorrect definition of good faith and that the result it reached was contrary to law.

The Court first analyzed the determination that Ohton did not act in good faith in reporting the football coach’s alleged public drunkenness, because that determination led to the finding that his disclosure was not protected. The Court determined that CSU had applied an incorrect definition of good faith and had, therefore, reached a result that was contrary to law. Specifically, the Court noted that Government Code section 8547.2 defines “protected disclosure” to mean “any good faith communication . . . that discloses or demonstrates an intention to disclose information that may evidence (1) an improper governmental activity or (2) any condition that may significantly threaten the health or safety of employees or the public if the disclosure or intention to disclose was made for the purpose of remedying that condition.” While “good faith communication” is not defined, the Court noted that an employee may file a written internal complaint only with a sworn statement that the contents of the complaint are true, or are believed by the affiant to be true under penalty of perjury. Accordingly, a finding of good faith, or its absence, involves a factual inquiry into the complainant’s subjective state of mind. Did he/she believe the action was valid? What was his/her intent or purpose in pursuing it? The Court noted that a subjective state of mind will rarely be susceptible of direct proof; usually it will be inferred it from circumstantial evidence. However, “the phrase ‘good faith’ in common usage has a well-defined and generally understood meaning, being ordinarily used to describe that state of mind denoting honesty of purpose, freedom from intention to defraud, and, generally speaking, means being faithful to one’s duty or obligation.” The Court noted that, although the investigator questioned Ohton’s motive for disclosing the allegation that the coach was seen drunk in public, the investigator did not conclude that Ohton had been knowingly dishonest. Furthermore, CSU did not dispute the investigator’s finding in that regard.

The Court went on to criticize the good faith analysis on other fronts as well. Specifically, the investigator had concluded that Ohton did not act in good faith because his disclosure was based on hearsay and was fully refuted. The Court disagreed that a whistleblower’s reliance on hearsay precluded a finding that the complaint was a good faith protected disclosure, noting that improper governmental activity is frequently difficult to uncover and whistleblowers will often need to rely on hearsay evidence. The Court also concluded that it could not be the case that a lack of good faith could be imputed simply because an investigation ultimately concluded the allegation was false. Whether the disclosure is made in good faith, the Court noted, is properly determined based on whether the complainant believed it was true or had reason to believe it was true at the time it was made. It is then the investigator’s role to ascertain the truth or falsity of the complaint. A post-investigation conclusion that the complaint was unfounded does not necessarily mean the complaint was made in bad faith.

Finally, the Court noted that, even if Ohton’s report had been motivated because of a personal and vindictive agenda against the coach, it did not follow that the complaint was made in bad faith. Government Code section 8547 does not require the impossibly high standard that the complainant’s motives be pure and untainted. Rather, the statute merely requires an honest belief in the truth of the allegations. The Court further criticized the fact that, even though one Booster identified by Ohton acknowledged seeing the football coach drunk in New Mexico, that fact was omitted from CSU’s final determination letter because the Booster stated he did not wish to be involved. The Court found that the omission of that fact undermined the conclusion that Ohton did not make a good faith report.

Lessons from Ohton
Ohton provides several valuable lessons to workplace investigators. First, if you are conducting an investigation that involves a particular statutory scheme, it is imperative that you understand the legal terms used in the statute. Achieving such understanding may involve conducting legal research or otherwise assuring yourself that you are applying the appropriate legal standard. This is particularly important where terms used within a statute may be subject to a lay understanding which is different from that imposed by law. It was unclear in Ohton how the investigator came to his definition of “good faith.” There is no suggestion in the Court’s opinion, however, that the investigator defined how he was using the term, or that he cited to any authority for the definition of good faith he used. In the event a legal term is central to your finding, as was the case in Ohton, it may be appropriate to not only research the proper definition of the term, but also to cite your sources when referencing that term. In Ohton, the employer’s entire determination ultimately unraveled because of an incorrect standard applied by the investigator.

The Court in Ohton also pointed out another error: selective omission of contradictory information. Specifically, one Booster identified by Ohton as a source of information confirmed that he had seen the coach drunk in New Mexico. However, that Booster said he did not want to be involved in the investigation. CSU excluded that information from its determination letter, undermining its conclusion that Ohton’s report was not made in good faith. Although it is unclear from the decision whether that omission was made by CSU or the investigator, the lesson to be drawn is clear. Where an investigator comes across information which refutes one of the investigator’s findings, it is important to address that information head on and explain why the conclusion stands in spite of the information. Disregarding the information implies either a sloppy report or an inability to reconcile the findings with the contradictory information. In either event, should your investigative report be relied upon by your client and litigation results, you can be sure you will be vigorously cross-examined on any omission of or failure to account for information that contradicts your findings.

Finally, be clear in your findings. In Ohton, the investigator questioned Ohton’s motive for disclosing the allegation that the coach was seen drunk in public, but did not specifically conclude that Ohton had been knowingly dishonest. Given that a finding of dishonesty was a prerequisite to a finding of bad faith, this omission proved critical. While not every investigation requires specific findings of honesty or dishonesty, most investigations do involve conclusions regarding witness credibility. Your determination regarding whether a witness is honest or dishonest will impact the amount of weight you give the information you receive from the witness. If you are going to disregard a witness’ testimony because you believe he is not credible, make sure you include such a statement in your findings. Likewise, if you are giving one witness’ testimony more weight than another’s, explain why that is so. Do not leave your reader guessing as to your conclusions regarding witness credibility where you have, in fact, made such conclusions. Of course, where you have not made such conclusions, you may wish to include a statement to that effect as well. Most importantly, however, where you are conducting an investigation in which the complainant’s good faith (or lack thereof) is central to your findings, make sure you specifically address whether you find the complaint to have been made in good faith or not and explain why you made that finding. You should cite to the specific evidence upon which you have relied so that the basis for your finding will be obvious to anyone reading your report. In the event your client is required to establish that it acted reasonably in relying on your report, your transparency will make that task easier. Your client may not be the only one to benefit, however; in the event litigation ensues and you are called to testify many months or even years later, you will be able to easily refresh your recollection as to the facts you relied on when you made your findings.

Construction law is constantly changing. A savvy contractor keeps abreast of those changes and adapts his or her business methods to conform to new requirements. Here are some recent legislative updates and court decisions that may affect your business.

Economic Loss Doctrine Does Not Bar Contractor’s Claim Against Architect for Tortious Interference with Contract
A Delaware court recently allowed a contractor’s claim to proceed against an architect for intentional interference with contract despite the argument that it violated the economic loss doctrine. In Commonwealth Construction Co. v. Endecon, Inc., 2009 WL 609426 (Del. Super. Ct. 2009), a church hired a contractor to perform renovation work under a contract that provided that in the event of a dispute, the matter would be submitted to the architect, who would then decide the dispute in good faith and without partiality to either party.

A dispute arose concerning payment. Based upon the architect’s advice, the church refused to pay and a mechanics’ lien was filed. Ultimately, a judgment was entered in favor of the contractor, who then sued the architect for tortious interference with contractual relations.

The architect moved to dismiss arguing that the claim was barred by the economic loss doctrine, which bars recovery in tort for damages unrelated to a claim for personal injury or damage to other property.

The court allowed the contractor’s lawsuit to proceed holding that the economic loss doctrine did not apply to claims for intentional torts such as defamation, fraudulent inducement of breach of contract, intentional misrepresentation and intentional interference with contractual relations. While the architect argued that his advice was truthful, honest and within the scope of his duties, the contractor’s complaint alleged the opposite. Ultimately, the court found that early dismissal of the case was improper because the court, in a motion to dismiss, is required to accept the allegations of the complaint as true.

Contractor Cannot Recover Compensation Unless Licensed At All Times During Performance
In Goldstein v. Barak Construction (2008) 164 Cal. App. 4th 845, plaintiff homeowners filed an application for a Right to Attach Order and an Order for Issuance of a Writ of Attachment against a contractor and his business. The court granted the application against the business and ordered the contractor not to sell, encumber, or diminish the value of his residence until further order of the court. The contractor appealed.

The court concluded that the homeowners’ claim against defendants was one on which attachment could issue. The homeowners provided evidence that the defendants were unlicensed at the time a home improvement contract with the homeowners was executed, and performance under the contract commenced while the defendants were still unlicensed. The record also showed it was not until several months afterwards that defendants obtained their license. The Court found that the homeowners presented a prima facie case under Bus. & Prof. Code, § 7031, subd. (b), of the Contractors’ State License Law justifying the issuance of a right to attach order. In addition, because defendants were not licensed at the time performance under the contract commenced, they were not entitled to any recovery for work performed even if they obtained their license during construction. “Extras” undertaken in furtherance of the contract were subject to the licensing requirements. That defendants may have undertaken work for the homeowners not strictly listed within the four corners of the parties’ written contract would not forestall application of the licensing law to such “extras.”

In an effort to streamline or prevent construction defect litigation and with the aim of promoting affordable housing by reducing the cost of such litigation, the California Legislature enacted SB 800 (California Civil Code section 895 et seq.) in 2002. The so-called “Fix-It Bill,” amongst other things, adds notice, repair, and mediation procedures to residential construction defect claims. It must be noted from the outset that in order for a builder to avail itself of the pre-litigation procedures provided by SB 800, it must provide notice of those procedures. To provide effective notice, a builder must record on title a notice of the SB 800 pre-litigation procedures along with a notice that those procedures impact the legal rights of the homeowner. Further, this information must also be included in the original sales documentation and must initialed and acknowledged by both the purchaser and the builder’s sales representative. Failure to provide the required notice eliminates the builder’s right to compel compliance with SB 800 procedures.

Written Notice of Claim Required
The pre-litigation procedures created by SB 800 begin with the homeowner providing written notice to the builder which describes, in reasonable detail, any alleged defects. The builder must acknowledge receipt of the homeowner’s claim within 14 days and it may then conduct an inspection within 14 more days. A second inspection by the builder may be conducted within an additional 40 days. After completion of these inspections, the builder has 30 days in which it may offer to conduct repairs or to make a cash payment in lieu of any repairs.

After receiving the builder’s offer to repair or to make payment, the homeowner then has 30 days to accept the offer, request the names of three additional contractors to conduct the repair, or to request mediation. If mediation is requested, it must occur within 15 days and, unless the homeowner agrees to pay for half of the cost of the mediation, the mediator is chosen and paid for by the builder. If the homeowner chooses to pay for half of the mediation costs, then the mediator is chosen jointly. This mediation is limited to four hours unless extended by the parties. At the end of the mediation, the homeowner and builder either agree to a resolution or the homeowner must allow the repair to be performed. The repairs must be completed as soon as is reasonably possible with every effort made to complete the repair within 120 days. Alternatively, the builder may offer a cash payment in lieu of any repair and it may obtain a reasonable release in exchange for that payment.

Hidden Cost if Homeowner Chooses Alternative Contractor
One hidden cost to builders under SB 800 involves the homeowner’s right to request the names of three alternative contractors to complete the repair work. Often, the original subcontractor is obligated to repair defects without cost to the builder. However, if the homeowner chooses an alternative contractor to complete the repair, then the builder will have to come out-of-pocket for that alternate contractor instead of obtaining the repairs from the original subcontractor without cost.

In any event, after the repair has been completed under SB 800, and if no prior mediation has taken place, then the homeowner must request mediation with the builder if they wish to bring further action. The statute of limitations to bring such further action is generally extended during the repair and mediation process until 100 days after they are completed. If a homeowner ultimately sues under SB 800, then damages are limited to the reasonable value of repairing any SB 800 violation, any damages caused by the original repairs, the cost of removing and replacing any improper repairs completed by the builder, reasonable relocation and storage expense, lost business income if the residence is used as a principal place of business licensed to be operated from the residence, reasonable investigative cost, and all other costs or fees recoverable by contract or statute.

Statutory Defenses Available
If a builder is sued under SB 800, there are a number of defenses available to it pursuant to California Civil Code section 945.5. These defenses include (a) unforeseen acts of nature such as weather and earthquakes and manmade events such as war, terrorism, or vandalism; (b) failure by the homeowner to reasonably minimize or prevent damages including failure to give timely notice of the alleged defect; (c) failure to follow builder’s or manufacturer’s recommendations or commonly accepted maintenance obligations which were provided at the time of sale; (d) ordinary wear and tear, misuse, abuse or neglect; (e) statute of limitations; (f) defects for which the builder obtained a valid release; (g) successful repairs which corrected the defect; and (h) all other available affirmative defenses.

While well intentioned, the “protections” afforded by SB 800 have been a mixed blessing for builders. These protections can lessen the burden of construction defect litigation in the right circumstances, but the cumbersome and rigid mechanism it puts in place is difficult to comply with and can often lead to wasted effort for even the most conscientious builders.

Strict Compliance Required
SB 800 requires strict compliance to both notice and time requirements. Any failure allows the homeowner to immediately bypass the SB 800 procedure and file his or her lawsuit. Because the time limits are so short and the consequences of a mistake so devastating, builders who wish to avail themselves of the pre-litigation protections of SB 800 may want to consider consulting a construction attorney immediately upon receipt of notice of an SB 800 claim.

With the declining economy, bankruptcy filings are on the rise. The bankruptcy trend in the past few years has hit both residential and commercial developers, as well as general and subcontractors. This trend has impacted all facets of the construction industry—virtually all trades, vendors and suppliers. Frequently, businesses find themselves in trouble because their own clients fail to pay their bills timely or themselves filed bankruptcy. Cash flow is key in any business, but it is particularly important in construction businesses. Those in the construction industry faced with slow paying customers, receivables that become non-collectible, pressure from banks and reduced demand for their services, often find themselves considering bankruptcy.

You should be aware of the various options that businesses have in connection with bankruptcy. Generally, businesses can file for two types of bankruptcy protection: Chapter 7 and Chapter 11. When a business files bankruptcy, either Chapter 7 or Chapter 11, an automatic stay is created which prohibits creditors from pursing any actions against the business debtor to collect a debt or pursue a claim.

Chapter 7 Bankruptcy 
In a Chapter 7 bankruptcy, a trustee is appointed and typically immediately shuts the business down. Thereafter, the trustee may perform a liquidation of the business assets and pay creditors from the liquidation proceeds. Once the trustee has liquidated the business and paid creditors, the bankruptcy case is typically closed but the business debtor does not receive a discharge of its remaining debts. However, the business is usually dissolved following the liquidation as there is nothing left for the benefit of creditors. The length of a business Chapter 7 bankruptcy varies depending on the trustee’s analysis of the case, the time to sell assets and time to pay creditors, but could range from 6 months to a year.

Chapter 11 Bankruptcy
In a Chapter 11 bankruptcy, the business debtor can often stay in control and avoid the appointment of a trustee. The goal of a Chapter 11 bankruptcy is to get the court to approve a Plan of Reorganization that provides new terms upon which the business debtor will pay back its creditors, often at a fraction of the original amount. In the Plan, Chapter 11 debtors can extend matured loans; pay certain creditors less money than is owed; reject leases; and even possibly adjust interest rates on loans to the current market rate. Once the court approves the Plan, it rewrites the deal with the businesses’ creditors and the business emerges from the bankruptcy intact. Keep in mind that a Chapter 11 bankruptcy is a complicated, expensive and time consuming process. As a result, it is important to consult a bankruptcy professional and consider all of your options before filing a bankruptcy.

The Sacramento Business Journal recently reported Wilke Fleury’s representation of over 50 West Sacramento homeowners in a construction defect lawsuit against national builder Meritage Homes. The litigation, headed up by partner David A. Frenznick, seeks rescission of the sales contracts or money damages sufficient to make repairs.

“Our experts believe that all of the homes were built to the wrong wind exposure standards,” Frenznick said. “The homes are moving, which causes cracking, which then allows the entry of water into the homes."

Read more: 50 homeowners file suit against Meritage Homes

As recently reported in the Sacramento Bee, the firm has filed suit on behalf of Falcon Technologies against Pro-Tech Industries. The suit alleges that Pro-Tech executives, once installed as Falcon officers, assumed control of Falcon and subsequently resigned before the merger was completed. The suit charges that Pro-Tech then instituted a "reverse merger," using former Falcon employees, contracts and equipment.

Read more: Falcon Technologies Sues Merger Target

Six of Wilke Fleury’s attorneys have recently been named either "Super Lawyers" or "Rising Stars" by the 2010 Northern California Super Lawyers Magazine. Phil Birney, Tom Redmon, Ron Lamb, and Dan Egan were named "Super Lawyers." It was Mr. Birney’s fifth year to receive this honor and Mr. Redmon’s fourth. Dan Baxter and Megan Lewis were named "Rising Stars" for the second year in a row. The list of honorees is compiled through a multiphase process of peer nominations and evaluations, as well as third party research. Just five percent of the lawyers in California are selected for the "Super Lawyers" designation, and no more than 2.5 percent are named "Rising Stars." Wilke Fleury congratulates these six outstanding lawyers on their achievement.

Michael G. Polis and Natalie A. Johnston recently presented a day-long continuing legal education seminar for the National Business Institute entitled Accounting 101 for Attorneys. The seminar took place in Sacramento and was attended by a variety of private attorneys, in-house legal counsel, business managers, and controllers. Mr. Polis and Ms. Johnston lectured on a variety of topics, including basic accounting terms, how to read financial statements, understanding GAAP, interpreting the numbers, identifying fraud, using accounting and financial records as evidence, and complying with ethical standards. Mr. Polis has a wealth of experience in accounting, both in his previous career as a certified public accountant and in his current position as managing partner of Wilke Fleury. Mr. Polis also has extensive experience teaching. He has been an instructor for the California State University, Sacramento, University of California, Davis, and the University of Phoenix. Ms. Johnston obtained her accounting knowledge from the University of California, Davis, Graduate School of Management, where she received her Masters in Business Administration in 2008.

The California Board of Governors has appointed Wilke Fleury associate Samson R. Elsbernd to the State Bar’s California Young Lawyers Association (CYLA). CYLA advises the Board of the interests of California young lawyers, develops strategies for increasing young lawyer involvement and participation in the State Bar, and facilitates the development of programs and services that would assist young lawyers in their professional and leadership advancement and programs that benefit the public.

CYLA members serve as ambassadors of the State Bar to the young lawyer organizations within the state. A California young lawyer is defined as a member in good standing of the State Bar of California who is in his or her first five years of practice in place California or who is age 36 or under. Mr. Elsbernd’s appointment will begin at the close of the 2010 State Bar Annual Meeting on September 26, 2010.

Wilke Fleury obtains judgment in Bankruptcy Court trial. Megan Lewis and Jason Cinq-Mars recently obtained a $204,000 judgment following a trial in the Bankruptcy Court for the Eastern District of California.  Ms. Lewis and Mr. Cinq-Mars represented a client that had emerged from Chapter 11 bankruptcy proceedings and sued to recover monies the client had paid to purchase invalid medical claims. Ms. Lewis and Mr. Cinq-Mars regularly represent clients in all aspects of Chapter 7 and 11 bankruptcy proceedings.

California employers that receive federal funding may now be subject to disability discrimination claims from independent contractors under the Rehabilitation Act of 1973. In a surprising decision, the Ninth Circuit recently held that section 504 of the Rehabilitation Act should be broadly construed to protect all individuals denied participation from federally-funded programs, including independent contractors.

The Rehabilitation Act of 1973
The Rehabilitation Act was the first major federal statute designed to protect disabled individuals in this country. Section 504 of the Act creates a private right of action for individuals subjected to discrimination by any federally-funded program or activity. Specifically, the Act provides that an individual who is otherwise qualified cannot be excluded from participation in, denied the benefits of, or subjected to discrimination under any federally-funded program or activity solely because of his or her disability. A federally-funded program for purposes of the Act include businesses that receive any amount of federal funding. Further, section 504(d) provides that the standards used to determine a violation of the Act in an employment discrimination case are the same standards applied under Title I of the Americans with Disabilities Act (“ADA”).

Recently, various courts have been attempting to resolve the issue of whether section 504 covers only employees where the claim arises in the workplace or whether it also covers non-employees, such as independent contractors. In a recent Ninth Circuit case, Fleming v. Yuma Regional Medical Center, the court held that section 504 should be interpreted to cover independent contractors, which would allow them to bring discrimination claims under the Act.

Fleming v. Yuma Regional Medical Center
In Fleming v. Yuma Regional Medical Center, Dr. Lester Fleming applied for a position with the Yuma Regional Medical Center as an anesthesiologist. Upon learning that Dr. Fleming suffered from sickle cell anemia, Yuma informed him that it would not be able to accommodate his operating room and call schedules. Dr. Fleming declined to accept this condition, which effectively cancelled the contract. He then brought suit against Yuma for employment discrimination in violation of section 504 of the Act.

Yuma asked the Court to dismiss Dr. Fleming’s case, arguing that he was not an employee, but was instead an independent contractor who could not bring a claim a for discrimination under the Rehabilitation Act. The lower court agreed and granted Yuma’s motion, finding that Dr. Fleming was an independent contractor and that independent contractors are not protected by the Rehabilitation Act. Dr. Fleming appealed.

The Ninth Circuit agreed with Dr. Fleming, finding that the Rehabilitation Act (unlike the ADA) is not limited to employees but also applies to independent contractors and the entities that hire them. The Court reasoned that the Act covers any “otherwise qualified individual” denied participation in, benefits of, or subjected to discrimination from any program that receives federal funds. The Act defines “program or activity” broadly to include all operations of covered entities, not only those pertaining to employment. Based on the language of the Act, the Court concluded that it is broad enough to cover employees and independent contractors alike.

What this means for you:
It has long been understood that only employees may bring claims for disability discrimination. This case radically changes that notion. If you hire independent contractors and you receive any federal funding, you must now be aware of your obligation to reasonably accommodate a contractor who is disabled.

Beginning on June 21, 2010, federal contractors and subcontractors that enter into new federal contracts, subcontracts or make modifications to existing contracts must post a notice informing employees of their rights under the National Labor Relations Act (“NLRA”). Executive Order 13496 applies to all federal government contracts and subcontracts for the purchase, sale, or use of personal property or non-personal services. The government contracts must exceed $100,000 and subcontracts must exceed $10,000. Contracts and subcontracts for work performed exclusively outside of the United States, as well contracts and subcontracts exempted by the Secretary of Labor, do not fall under the provisions of the Executive Order.

Contents of the Required Notice
The notice required by the Executive Order sets forth the employees’ rights under the NLRA to organize and bargain collectively with employers, and their right to engage in protected concerted activity. The notice also sets forth the types of employer and union actions the NLRA considers illegal, as well as the contact information for the National Labor Relations Board. The required notice may be obtained from www.dol.gov or any field office of the DOL’s Office of Labor-Management Standards and must be in 11×17 size.

How to Comply:
You must display the required notice in conspicuous places in and about the plants and offices where it can be readily seen by employees engaged in activities related to the performance of the contract. The notice must be posted everywhere notices to employees about employment conditions are posted and not just where legal notices are placed.

If you customarily use electronic means to post notices, you must prominently post this notice on websites you customarily use. The electronic notice must include a link to the Department of Labor’s (“DOL”) website that contains the full text of the poster. The link must read, “Important Notice about Employee Rights to Organize and Bargain Collectively with Their Employers.” If electronic means are used, you must also physically post the notice in the workplace. The notice must be provided in the language spoken by a significant portion of your workforce.

Additionally, the Executive Order requires that federal contracts and subcontracts include certain prescribed language (the “employee notice clause”). The employee notice clause requires employers to comply with the notice requirement. The prescribed language does not need to be copied into a contract, but may instead be made a part of the contract by reference to 29 CFR Part 471, Appendix A to Subpart A.

Consequences for Non-Compliance:
The Office of Federal Contract Compliance Programs (“OFCCP”) is responsible for investigating employee and other complaints alleging non-compliance with the Executive Order. If you fail to comply with the Executive Order, your contract may be cancelled, terminated, or suspended. In addition, an order of debarment preventing you from entering into further government contracts may be issued.