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Legal Report

A Publication of the Society for Human Resource Management

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The Legal Case for Eliminating Performance Reviews PAGE 5

APRIL 2011

New Traps: Whistle-Blower Protections In the Dodd-Frank Act

By Karen J. Petrulakis and Alyssa Soares Parsons

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act contains powerful new incentives for whistle-blowers as well as enhanced anti-retaliation protections. These whistle-blower protections reach well beyond the financial services industry and are not limited to public companies. Public and private employers across all industries need to be aware of how these new whistle-blower laws could impact their businesses so that they can take steps to safeguard their companies from whistle-blower claims.

Whistle-Blower Incentives

Section 922(a) of the Dodd-Frank Act amends the Securities Exchange Act of 1934 to create a substantial financial incentive for whistle-blowers who voluntarily report "original information" directly to the Securities and Exchange Commission (SEC) that leads to successful enforcement and the recovery of more than $1 million in monetary sanctions. Qualified whistle-blowers shall be awarded 10 percent to 30 percent of the collected monetary sanctions, with the specific amount within this range determined at the discretion of the SEC. "Original information" must be "derived from the independent knowledge or analysis" of the whistle-blower and must not be known to the SEC from any other source nor exclusively derived from an allegation in a judicial or administrative hearing, from a governmental audit or investigation, or from the media. The amendments allow the whistle-blower to anonymously

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provide the information through counsel, but disclosure of identity is required to receive an award. Under proposed regulations issued by the SEC in November 2010, "information leads to successful enforcement" where the original information the whistle-blower gave the SEC caused the staff to commence an examination, to open or reopen an investigation, or to inquire concerning new or different conduct as part of a current examination or investigation, and the whistle-blower's information significantly contributed to the success of the action. If the conduct was already under investigation when the information was submitted, the information must not have otherwise been obtained without the whistle-blower and must have been essential to the success of the action. In addition to the people excluded under the Dodd-Frank amendments from being considered for an award--employees of certain government agencies and anyone convicted of a crime in connection with the conduct--the proposed regulations further exclude the following categories of people from being

the SEC has had authority, under Section 21A(e) of the Securities Exchange Act, to award bounties of up to 10 percent of the penalties recovered in insider trading cases. What is new, however, is the size and scope of the new program. The new incentives in the Dodd-Frank Act are more broadly applicable and promise to be significantly more lucrative for whistle-blowers than those under the prior program, which historically resulted in few awards. Employers face the risk that the lure of a large payout to the first person to provide "original information" to the SEC or the CFTC may lead employees to hasten to report suspected violations directly to the government rather than using internal complaint procedures. Not only could this result in a flood of meritless complaints, but companies may lose the chance to investigate and address potential problems before a government investigation begins. The SEC's proposed regulations recognize, but do not entirely alleviate, these concerns. To encourage employees to use internal compliance programs, the regulations provide that an employee would be treated as a whistle-blower as of the date the employee provides the information internally as long as the employee provides the same information to the SEC within 90 days. This 90-day "grace period" enables employees to use internal compliance procedures while preserving their place in line for a possible award from the SEC. In addition, the SEC has stated that it will "consider higher percentage awards for whistle-blowers who first report violations through their [company's internal] compliance programs." Second, to help reduce meritless complaints, the proposed regulations require a whistle-blower to submit the information to the SEC under penalty of perjury to qualify for a bounty award.

considered for a whistle-blower bounty award: anyone with a pre-existing legal or contractual duty to report their information, outside attorneys, independent auditors, and people who learn about the violations through a company's internal compliance program or have a position of responsibility for an entity and the information was reported to them with the expectation that they would take appropriate steps to respond to the violation. Section 748 of the Dodd-Frank Act amends the Commodity Exchange Act to establish a similar financial incentive--an award of 10 percent to 30 percent of the collected monetary sanctions (exceeding $1 million)--for whistle-blowers who voluntarily provide "original information" to the Commodity Futures Trading Commission (CFTC). The concept of a "bounty program" to encourage whistleblowers to come forward is not new. For more than 20 years,

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The new incentives in the DoddFrank Act are more broadly applicable and promise to be significantly more lucrative for whistle-blowers than those under the prior program, which historically resulted in few awards.

Anti-Retaliation Protections

In addition to containing new financial incentives, Section 922(a) creates a private right of action for securities whistleblowers who claim to have suffered retaliation. This provision prohibits employers from discharging, demoting, suspending, threatening, harassing or otherwise discriminating against a whistle-blower because of any lawful act by the whistleblower in either reporting or participating in the investigation or prosecution of violations of the securities laws, including disclosures that are required or protected under the SarbanesOxley Act of 2002 (SOX). Under the SEC's proposed regulations, Dodd-Frank's anti-retaliation cause of action does not require an actual violation of the securities laws, but instead protects whistle-blowers that provide the SEC with information relating to a potential violation of the securities laws.

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This anti-retaliation cause of action goes beyond protecting employees of public companies who blow the whistle on securities law violations, potentially covering employees of private companies who report other violations, too. The private right of action in Section 922(a) is made expressly available to whistle-blowers protected under 18 U.S.C. section 1513(e), which prohibits retaliation against individuals who report the commission of any federal offense to law enforcement. In other words, if an employee of a private company is fired after reporting his company's mail fraud to the FBI, that whistleblower could bring a Section 922(a) retaliation claim. Employers should also be aware that Section 929A of the Dodd-Frank Act amends SOX to extend whistle-blower protection to employees of subsidiaries and affiliates of publicly traded companies, if the employer's financial information

provides important procedural advantages to securities whistle-blowers compared to the SOX whistle-blower antiretaliation provision. First, Section 922(a) allows an employee to sue directly in federal district court. There is no administrative exhaustion requirement in Section 922(a); SOX, on the other hand, requires that the whistle-blower first file a claim with the Department of Labor. Second, employees have a dramatically longer time period in which they can assert a retaliation claim. Unlike the 180-day statute of limitations for SOX whistle-blower claims, Section 922(a) retaliation claims may be brought up to six years after the retaliation or three years after its discovery (not to exceed 10 years after the retaliation). Third, available relief is expansive, including reinstatement, double back pay with interest, and compensation for litigation costs, expert witness fees and reasonable attorneys' fees. Section 748 establishes a substantially similar private right of action in the Commodity Exchange Act for whistle-blowers who suffer retaliation as a result of providing information to the CFTC or participating in a CFTC investigation or enforcement action. This provision is less favorable to employee whistle-blowers than Section 922(a), in that the statute of limitations is only two years and only straight back pay may be awarded rather than double back pay.

Financial Services Employees

is included in the consolidated financial statements of the public parent company. This is a significant expansion of SOX whistle-blower protections that effectively overturns prior interpretations, which held that employees of non-public subsidiaries of a public company were not entitled to bring a SOX whistle-blower retaliation claim. Because SOX whistle-blowers are also protected from retaliation by Section 922(a), employees of subsidiaries and affiliates of public companies, as well as employees of public companies, will likely have the option of filing a claim under either SOX or the Dodd-Frank Act. The Dodd-Frank Act, in Section 922(c), amends SOX to lengthen the statute of limitations for a SOX retaliation claim from 90 days to 180 days and to clarify that employees are entitled to have SOX retaliation claims tried before a jury. However, even with these procedural enhancements, the new anti-retaliation cause of action set forth in Section 922(a) still Section 1057 of the Dodd-Frank Act enhances whistleblower protection for financial services employees by prohibiting retaliation against employees who disclose or otherwise object to fraudulent or unlawful conduct related to the offering or provision of a consumer financial product or service. The reach of this anti-retaliation provision of the Dodd-Frank Act extends to a wide range of public and private employers in the business of providing financial products or services to consumers primarily for personal, family or household purposes. This section protects whistle-blowers who: Disclose to the newly created Bureau of Consumer Financial Protection, the employer, or any government authority or law enforcement agency information that the whistle-blower reasonably believes to be a violation of the Consumer Financial Protection Act of 2010 (Title X of the Dodd-Frank Act).

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Testify at an enforcement proceeding under the Consumer Financial Protection Act or other laws subject to the bureau's jurisdiction. File an action under any federal consumer financial law. Object to, or refuse to participate in, any activity, policy, practice or assigned task that the employee reasonably believes violates any law subject to the bureau's jurisdiction.

Employees have 180 days from the date of the alleged retaliation to file a complaint with the secretary of labor. Remedies may include an order requiring that the employer take affirmative action to abate the violation; reinstatement; compensation, including back pay; and reimbursement of all costs reasonably incurred (including attorneys' fees). Notably, both this provision and the SOX amendment prohibit the waiver of rights and remedies provided to SOX whistleblowers and to financial services whistle-blowers in "any agreement," potentially barring the release of a SOX claim or a Section 1057 claim in a general release or settlement agreement. This section further precludes the enforcement of any predispute arbitration agreement that requires arbitration of either a SOX or Section 1057 retaliation claim.

confirm that effective internal controls are in place to ensure compliance with all relevant laws and regulations, particularly securities laws.

Create an internal company culture that encourages, values and rewards employees and managers who meet compliance-related goals. Establish mechanisms, such as anonymous hotlines and employee surveys, that make it easy for employees to report potential violations internally without fear of retaliation and with confidence that the company will take those complaints seriously. Take steps to limit the number of employees with knowledge of any investigation of a potential legal violation or a whistleblower complaint to limit the number of individuals who could be lured by the bounty provision to make an early report to federal agencies. Maintain strong whistle-blower and anti-retaliation policies, and train managers regarding their obligation not to retaliate against whistle-blowers. Consult with counsel before taking any adverse employment action against employees who have engaged in protected conduct, and document any investigation taken with regard to a whistle-blower complaint as well as the legitimate business reasons supporting any decisions made, including any adverse employment actions taken. Examine pre-dispute arbitration clauses to confirm that they do not purport to require arbitration of SOX or Section 1057 retaliation claims.

False Claims Act Expanded

Section 1079A establishes a uniform three-year statute of limitations for a retaliation claim under the False Claims Act. This section also broadens the range of activity protected under the False Claims Act and adds protection for associational discrimination by expanding the definition of protected conduct to include lawful acts by "associated others" in addition to the employee, contractor or agent, in furtherance of an action to stop violations of the False Claims Act.

What Employers Can Do

The Dodd-Frank Act's potent financial incentives and enhanced anti-retaliation protections dramatically increase the risks to employers from employees seeking to blow the whistle on alleged corporate wrongdoing. The contours of these risks will not be fully defined until the SEC and CFTC issue final regulations implementing the new whistle-blower provisions, anticipated to occur in April 2011. In the meantime, while there is no safe harbor for employers, the following are actions that can and should be taken to manage the risks posed by these new whistle-blower statutes:

Review and strengthen internal compliance programs to

Karen J. Petrulakis is deputy general counsel--litigation, labor & employment for the University of California. Alyssa Soares Parsons is an associate in Crowell & Moring's Litigation Group.

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Review and strengthen internal compliance programs to confirm that effective internal controls are in place to ensure compliance with all relevant laws and regulations, particularly securities laws.

The Legal Case for Eliminating Performance Reviews

By Judith Droz Keyes

Who would have imagined that National Public Radio, the Wall Street Journal and BusinessWeek all would have carried stories on a subject as mundane as performance reviews? Who would have dreamed that a behavioral scientist in Boston, Charles S. Jacobs, and a management professor in Los Angeles, Samuel A. Culbert, would have published books within a year of each other that argue against performance reviews? As a practitioner of management-side employment law who has been anti-performance review for many years, I am delighted. I never imagined that the debate would be so publicly engaged, or that the arguments for the elimination of this unproductive practice that consumes so much time and results in so much angst for so many would be so well-supported. In this article, I add my vote to the argument that performance reviews should be relegated to the recycling bin, and I offer the legal reasons why. But to begin, it is helpful to examine briefly the reasons for having performance reviews. And I'll say right off that I disagree strongly with professor Culbert, who attributes their existence and persistence to insecure human resource professionals who regard them as, in effect, job security. In my experience, HR professionals are just as weary of this artifice as are any other members of management.

Why Have Performance Reviews?

Except some governmental and union employers, no employer is required by law to review employee performance. Various rules may require that governmental employers evaluate employee performance, and both governmental and privatesector employers with union contracts may have contractual obligations to do so. Performance reviews are a recent phenomenon that I understand came into being with the best of intentions: to give employees an honest and accurate assessment of their job performance relative to the employer's standards and, perhaps, relative to the performance of other employees. In this way, performance reviews are intended to motivate improved performance and job success--and thereby improve employee morale and the company's bottom line.

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Subsidiary purposes are to inform merit-based compensation, promotion and layoff decisions, and, in the case of poor performers, to forewarn them about the negative consequences of a failure to improve and to lay the groundwork for discipline or termination if they don't improve. All of these reasons are perfectly legal and laudable. It also should be observed that performance reviews came into their own with the advent of nondiscrimination laws in the 1960s and 1970s. As employers and their lawyers learned that they could be called on to prove that an employment decision was based on legitimate considerations untainted by unlawful discrimination or retaliation, the performance review became one of the accepted pieces of evidence. After all, if all employees are evaluated at the same intervals according to the same criteria and standards, then decisions based on those evaluations should be unassailable, right? Once upon a time, we thought so. Now we know better.

all biases and personal preferences? Even as to criteria and circumstances that can be measured objectively, there are sometimes extenuating circumstances, real or imagined. ("She always got the easier cases, and I get the harder ones.") But the bigger problem with objectivity is consistency. It is rare when both the supervisor and the employee have been in their respective positions for the entire period of a long-term employee's tenure--and not at all uncommon for there to be a change in supervisors midway through a review period. Who has not heard of a new supervisor coming in and being convinced that his predecessor was too lenient? And what about other changes in an employee's job--changes in technology, product, measurement or expectation? Objectivity is an elusive concept.

To begin with, performance reviews routinely fail to deliver on the stated purpose. Here are some reasons why: Less-than-honest feedback is the norm. Performance reviews are usually written by first-line supervisors, subject to the review and editing of higher management and human resources. Supervisors are seldom experts in management technique, and even those who are may not be effective communicators or good judges of people or job performance. Supervisors have to work with their supervisees on a day-to-day basis and naturally are more concerned about collegiality than they are interested in confrontation. For better or worse, many of us were taught that, "If you can't say something nice, don't say anything at all." Our ability to function in the workplace may depend on building and maintaining positive relationships. Supervisors are rarely evaluated on the quality of their performance reviews. They have little motivation to rock the boat by giving an employee, especially a long-term employee, a negative review even when warranted--especially if the supervisor has one foot out the door (or on the next rung of the corporate ladder). And now, behavioral scientist Jacobs confirms what supervisors have long known: Performance reviews are not likely to change behavior anyway, especially the behavior of a long-term employee. All of these are realities. And all of them prevent candid, honest performance reviews. Lack of objective, timely feedback is the norm. Who among us can claim to be truly objective--to have eliminated

And then there is timeliness--or the lack thereof. Most review cycles are annual, with employees throughout the company all being reviewed at the same time. While there are sometimes more-frequent mini-reviews, and supervisors are always encouraged to communicate with employees about their performance much more frequently (although few do), the reality is that, except for the occasional standout event, reviews mostly address what happened most recently. Add to that the fact that reviews are usually completed and delivered to employees weeks, or even months, after the close of the time period that they ostensibly cover. This is a function of the system, busy supervisors, and a variety of workplace realities such as vacations, part-time schedules and leaves of absence. There is no way around it.

The law seemingly precludes honest, accurate feedback. Employers have learned that there are many aspects of an employee's performance that, from a business/management perspective, may be frustrating, disappointing, annoying, and contrary to the company's goals and bottom-line results--but that cannot be held against the employee or even mentioned in the performance review because the law says so. "Excessive

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So What's the Problem?

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Supervisors have to work with their supervisees on a day-to-day basis and naturally are more concerned about collegiality than they are interested in confrontation.

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absenteeism" that comes within the parameters of intermittent family leave and "unprofessional appearance" that is attributable to the employee's religion cannot be held against the employee and should not be mentioned in the performance review. Reviews must "factor out" disability accommodations and absences for a protected reason. And even when the assessment is within fair territory, employers must always be on alert for situations that may suggest discrimination or retaliation. Consider, for example, a supervisor evaluating an employee after the employee has accused the supervisor of sexually harassing him or her. Or the 30-year-old newly promoted supervisor who has to evaluate the 65-year-old employee with 25 years of service? It is a whole lot easier to give these employees falsely positive reviews than accurately negative ones. And besides, the performance of the 25-year employee is unlikely to change as a result of the review. These realities all point in the direction of where I end up: convinced that, in addition to performance reviews being counterproductive and wasteful, there are legal reasons for getting rid of them.

promotion. A few cases involved a challenge to the review itself, with the employee claiming that the review was illegitimate in some way. A case in point is Sandell v. Taylor-Listug Inc., 188 Cal. App. 4th 297 (2010). Because this case so clearly exemplifies the problem, I present it largely in the words of the court in its published opinion. I have no firsthand knowledge about the case, but I interject a few observations from my own experience along the way. Background facts. In February 2004, Robert Sandell was hired by Taylor-Listug Inc., a guitar manufacturer, as its senior vice president of sales. With 30 years of experience in the music business, Sandell was recruited by the company's CEO, Kurt Listug. Sandell reported directly to Listug. In August 2004, Sandell suffered a stroke requiring a leave of absence. He returned part time in October 2004 and full time in December 2004. He had to use a cane, and his speech was slower than it had been before the stroke. In October 2007, Sandell turned 60 years old. A few days later, Listug decided to terminate Sandell's employment primarily for "lack of leadership in providing direction to the sales team and in producing satisfactory sales results." In May 2008, Sandell sued for disability discrimination and age discrimination. In May 2009, the trial court ordered summary judgment in favor of the company. Sandell appealed. After examining the trial court record, which included all of Listug's reviews of Sandell's performance, the court of appeals reversed and sent the case back for trial on both claims. Performance reviews. Listug reviewed Sandell's performance a total of three times. The first review covered performance from 2004 and was given to Sandell in January 2005 by Listug (who had taken a sabbatical from June 2004 through the end of the year and thus had worked personally with Sandell for only four months). The court first described the company's performance review form: "The Taylor-Listug performance review document includes 13 sections, or areas for review. For each of the first eight areas of review, the document asks the employee to rate himself in that area by marking a box next to `must improve,' `meets requirements,' and/or `exceeds requirements.' Under these boxes, the form provides space for the employee to provide written comments to explain his or her self-evaluation. Under the employee's comments for each section, the supervisor is asked to rate the employee on the same scale, and to

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The Legal Case

In 35 years of practicing employment law, I can count on one hand the number of times a performance review was of significant help to my employer-client in defending against an employee's legal challenge. Even in those few cases, the employer's position would likely have been just as strong without it. Almost all the time, especially in the case of long-term employees, it's the opposite: The performance review is "Plaintiff's Exhibit #1," supporting the employee's position-- and thus stands in the way of the employer's terminating the employment of at-will employees clearly unsuited to the job. In writing this article, I did a simple word search for "performance evaluation" or "performance review" in published decisions only in the federal and state courts in California and only for a six-month period. There were 40 decisions where the performance review was cited by the court as a material fact in the case. In all but one of the cases, the review was cited not by the employer to support its defense but by the plaintiffemployee to prove his or her claim. In about half of these cases, a negative review was cited as proof of discrimination or retaliation; in slightly less than half, a positive review was cited as proof that the employee did not deserve a subsequent adverse employment action, such as termination or denial of a

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provide comments explaining the rating given. The final five sections--`strengths,' `weaknesses,' `challenges to overcome (how can I do a better job and provide more value),' `goals for next period' and `overall comments'--do not ask for a rating, but, rather, simply provide space for written comments by both the employee and the supervisor." I pause to observe that the company's review form was, in my estimation, reasonably good. It invited employee comments, had only three levels of rating (as opposed to the problematic five levels) and was forward-looking, at least in part. But I am convinced that there is no perfect performance review format. Anyone who has been in a U.S. workplace will surely have had experience either trying to develop such a form or having to use such a form--or multiple forms over time--and will recognize the accuracy of this observation. Although some forms are decidedly better than others (for example, what really is the difference between "outstanding" and "exceeds expectations," and whose expectations are we talking about anyway?), there is no ideal form. So, to continue with the story of Sandell, the court described his first review: "Sandell's written evaluation for 2004 indicated that Sandell was meeting or exceeding requirements in all of the areas in which he was reviewed, with the exception of one area entitled `results.' In that area, Listug noted `must improve.' However, in his comments under this section, Listug indicated that he felt he `[had] to say' that because sales had declined that year, for the first time in 20 years. Listug also took some of the blame for the poor sales by noting that Sandell had come into a sales department that was `in some turmoil' after the departure of the previous vice president of sales. Listug indicated in his comments that Sandell had already introduced helpful new approaches for the sales department." I pause to observe a natural tendency: Typically, if a supervisor says something "constructive" (i.e., negative) about an employee's performance, something positive is immediately added to balance it--or, actually, to contradict it. Naturally, the employee focuses on the negative at the time of the review. But later, in litigation, the employee is likely to accentuate the positive. A year later, Sandell was given his second performance review. According to the court, "Sandell's 2005 review indicated that Sandell was meeting requirements across the board, and that he was exceeding requirements in some areas. However, in the written comments associated with some of the areas of review, Listug indicated some subjective concerns. For example, Listug said that while he agreed with Sandell's self-evaluation regarding his `attitude,' Listug `sure would like to see more enthusiasm from Robert.' Listug added, `He frequently seems

bored, or he at least comes across that way. It would be nice if Robert were more outgoing and friendly.' " I pause to observe that these sorts of remarks are typical. For reasons better understood by behavioral scientists than by lawyers, supervisors often unhelpfully record what "would be nice" and what they would "like to see" instead of what is required. I am sure the supervisor thinks that this is more persuasive, or at least is better than saying nothing at all. Not really. Back to Sandell, about whose third and final performance review the court went into greater detail: "In 2006, Listug rated Sandell's performance as meeting requirements in three areas. In three other areas, Listug rated Sandell's performance as needing improvement. For the final two areas of review, Listug marked both the `must improve' and `meets requirements' boxes. Listug also gave Sandell both positive and negative reviews on other subjective criteria. For example, under the area entitled `teamwork,' Listug states, `Robert has a stable good attitude. He usually has good constructive feedback or input. He's easy to work with, and doesn't politic. In this sense, he's earned the trust of others. However, he does not provide enough leadership or drive to have the level of respect he should for the position he has.' "Under the portion of the review sheet where Listug was to identify Sandell's `weaknesses,' Listug wrote, `Robert does not have the drive that this position requires. ... Maybe he's never had to actually lead sales in other companies he's worked for, or inspire people to perform at a higher level, or put the fear of God in them if they don't. But he does not put anywhere near the amount of passion, life, energy or drive into leading sales.' Under `goals for next period,' Listug indicated that he wanted Sandell to `[l]ead and manage [his] staff with [his] emotion and personality, and with inspiration and life.' Below that, however, in the `overall comments' section, Listug wrote, `Robert's a good man, and he's contributed positively to the company. He's provided stability to the sales area that was lacking. The sales staff like interacting with him, and respect his opinion and his experience. He's generally on top of what is happening in sales.' " Termination and challenge. It was seven or eight months after this review that Taylor-Listug terminated Sandell's employment, after which Sandell sued for disability and age discrimination. In defense, Taylor-Listug presented substantial evidence of declining sales figures and other legitimate nondiscriminatory reasons for its decision to let Sandell go. Here is the way the court reacted to the company's position. It's lengthy, but I quote it in its entirety because it tells the tale:

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"Sandell presents evidence that places in dispute the validity of the reasons that Taylor-Listug offers for its termination of Sandell's employment. For example, Taylor-Listug broadly asserts that `all of [Sandell's] performance evaluations document multiple problems and concerns.' However, a review of the record does not support this assertion. "Sandell's first performance review, January 2005, for the 2004 review period, shows that Listug rated Sandell's performance as `[m]eet[ing] [r]equirements' or `[e]xceed[ing] [r]equirements' in all areas except one. In that one area, entitled `results,' Listug noted that Sandell's performance `[m]ust [i]mprove.' However, Listug's contemporaneous comments about this rating are telling: `I have to say "must improve" because the company's sales declined in 2004 for the first time in more than 20 years. I can't in all honesty say this "meets requirements." Robert did accomplish the above [i.e., the positive results that Sandell had listed in his own review of his performance]. He came into a difficult

situation, with [the prior vice president of sales] having just been terminated, and the sales department in some turmoil. He did a very good job of gaining people's trust, and was cognizant of not changing things that have been working. The territory quotas and MSA/BPI approach have been very helpful, and the territory reviews have become more thorough than they were before Robert joined us.' "Sandell had been working at Taylor-Listug for only approximately six months before he suffered a stroke, and was not back working full time until December of that year. This fact, considered in the context of Listug's comment that the sales department had been `in some turmoil' prior to Sandell's hiring, and evidence that Listug, himself, took a six-month sabbatical beginning in June 2004, could lead a reasonable fact finder to conclude that Listug's `must improve' rating, and the lagging sales figures that year, were attributable to forces outside of Sandell's control and unrelated to his actual performance as vice president of sales. Further, one could reasonably conclude that this performance review was, overall, quite positive. "Listug rated Sandell's performance as `meet[ing] requirements' across the board in his 2005 review. It was only in Sandell's third and final performance review that Listug indicated that Sandell's performance `must improve' in three of the eight performance areas.* Further, in light of the fact that Listug's complaints about Sandell's performance were often subjective, one could reasonably infer that these complaints, and the negative performance evaluation, were themselves motivated by discriminatory animus. "* Listug rated Sandell as `meet[ing] requirements' in three other areas. In two of the performance areas, Listug marked both the `must improve' and `meets requirements' boxes." There was other evidence in the case to be sure, including comments allegedly made by Listug about employees' ages and about Sandell's needing a cane. But in ruling against the company's motion for summary judgment and in favor of Sandell's position that his claims should be tried by a jury, the court said: "[A] fact finder could reasonably conclude that Sandell's performance reviews demonstrated that he completed his tasks and that he was generally performing satisfactorily. ... Although there may have been areas in which the company wanted to see improvement in Sandell's performance, there were other areas in which he exceeded expectations. In all, Sandell presented evidence that he was still qualified for his job at the time that Taylor-Listug terminated his employment, and that he was performing satisfactorily on objective measures."

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So there it is. A clear example of what employers' lawyers see all too frequently: Performance reviews that no doubt took a lot of time to create, vet and deliver not only failed to improve the performance of this relatively short-term executive-level employee but also played a substantial role in his or her legal victory. It's time to recognize performance reviews for what they really are: security blankets that serve no real purpose and that can actually be detrimental to the employer's position. It's time to give them up.

perceive to achieving excellent performance, and what ideas they have for improvement of the department and the function. Conversations with supervisors would be more about their own performance and less about the performance of the employees in their department. Conversations would be as confidential as performance reviews currently are, but no more so. Conversations could be documented by way of short summaries of any agreements reached or goals set, but there would be no numerical rating or bottom-line assessment, and the summaries would not be kept in employees' official personnel files at all or for very long. Annual salary adjustments would be made between management and HR. A while back, merit-based salary increases supplanted annual cost-of-living adjustments (COLA)--at least in theory. The reality is, an annual across-theboard increase is usually a significant component of a salary adjustment. When no one at the company gets an increase,

Without Performance Reviews, What?

IImagine that performance reviews were simply gone. What would this brave new workplace look like? The following ideas will require fine-tuning and individualized adaption to be sure, but let's get the conversation going. Supervisors would provide feedback to employees on an ongoing basis. There would be no annual trigger and no routinized supervisorial review process driven by HR. Instead, supervisors would be expected to talk with employees on an ongoing basis about successes and failures--and to take note of exceptional performance, good or bad. It would be a selfmotivated, self-enforced practice. Those supervisors who were good at it would be more likely to have productive, positive employees than those who weren't. Supervisors would be evaluated on the quality of the result produced, not the process used. Training would be available. HR quality assurance specialists would talk with supervisors and employees on a regular basis. Much as there are now specialists in recruiting and in benefits, within HR there would be quality assurance (QA) specialists. These specially trained HR professionals would be responsible for accomplishing what performance reviews are now supposed to accomplish but don't: communicating with employees with the goals of improving the quality of their and the company's performance by motivating them to achieve and succeed, and identifying employees who are in the wrong position or the wrong company and should move on. It would be the job of the QA specialist to talk with supervisors and with employees, usually separately but sometimes together, on a regular basis--say, once per quarter. Goals and objective data would be available and reviewed, as would supervisors' and others' observations, before the conversation. There would be no written review, and the discussion would be both structured and informal. For example, employees could be asked what barriers they

it is based on the company's financial situation, not merit. When everyone at the company gets an increase except those who are (or should be) on disciplinary action, it is based on a COLA-type consideration, not merit. When the norm is, say, a 2 percent increase with strong performers getting 3 percent and exceptional performers getting 4 percent, the 1 percent and 2 percent increments arguably are merit-based--but there are often other factors at play. Regardless, it doesn't take a formal performance review to justify a compensation decision that truly is meritbased. Without performance reviews, at salary review time management simply would assess employees' relative contributions (factoring out prohibited considerations) and would provide the result and the rationale to HR, much as is done now under the guise of performance reviews. What would be avoided is what now is all too common and unhelpful among employers: employees whose performance

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It would be the job of the QA specialist to talk with supervisors and with employees, usually separately but sometimes together, on a regular basis--say, once per quarter.

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reviews reflect mediocre or even sub-standard performance being given "merit" increases. Promotion or layoff decisions would be made based on "real-time" evaluations. In situations such as an employee's being considered for a promotion or the company's needing to conduct a reduction in force, an evaluation of an employee's individual or relative competency is required. In these situations, the evaluation would be made between HR (including the QA specialist) and management with the specific situation and relevant criteria in mind. An evaluation form could even be created for this purpose. This would be a significant improvement over the current practice of trying to fit "square peg" annual reviews into skills-based "round hole" decisions. Discipline and termination decisions would be justified, and documented, by other means. Instead of waiting for the next annual review to respond to an employee's unacceptable conduct or performance failure, supervisors would have no incentive (or excuse) to postpone disciplining the employee or implementing a performance improvement plan. The response likely would be more prompt and, therefore, more impactful. When termination of employment is being considered, the process would be much like it is now: Supervisors would document the problem and review with HR the history of communication with the employee about the problem (also known as "progressive discipline"). The only difference would be the absence of a contradictory history of "satisfactory" performance reviews and "merit" increases. The situation would be cleaner, and the company's legal case stronger.

The Society for Human Resource Management (SHRM) is the world's largest association devoted to human resource management. The Society serves the needs of HR professionals and advances the interests of the HR profession. Founded in 1948, SHRM has more than 250,000 members in over 140 countries, and more than 575 affiliated chapters. Visit www.shrm.org. The SHRM Legal Report is a newsletter intended as general information, and is not a substitute for legal or other professional advice. The opinions expressed by the authors do not necessarily reflect those of the Society for Human Resource Management. Editors: Allen Smith Joanne Deschenaux

Copy Editor: Erin Binney Designer: John R. Anderson Jr. © 2011 Society for Human Resource Management 1800 Duke Street Alexandria, VA 22314 USA +1-800-283-7476 (U.S. only) +1-703-548-3440 (Int'l) +1-703-548-6999 TTY/TDD +1-703-535-6490 FAX Internet: www.shrm.org/law E-mail: [email protected] Please contact the Copyright Clearance Center for permission to reprint complete articles or article excerpts by calling +1-800-772-3350. If you would like to order glossy reprints or seek to reproduce an article on your web site, please contact the YGS Group by calling +1-800-5019571.

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Conclusion

There is nothing to be lost by eliminating performance reviews--certainly not a diminution of the role of HR. To the contrary, not only would huge amounts of otherwise wasted time be devoted to more productive activities, but the employer's legal position would be enhanced. In this economy and in this legal environment, it's time to rate performance reviews as "unsatisfactory" and for HR to "exceed expectations" by leading their companies along a different route to "excellent."

Judith Droz Keyes is a partner in Davis Wright Tremaine's Labor & Employment Group, practicing out of the firm's San Francisco office. She can be reached at [email protected] or (415) 276-6512.

APRIL 2011

LEGAL REPORT 11

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