Medical Device Link.

Originally Published MX September/October 2002

BUSINESS PLANNING & TECHNOLOGY

Managing Employment Liability

A complete risk management program encompasses all types of employee–employer relationships.

Joni E. Johnston

For most medtech executives, the concept of company legal risks brings to mind issues of regulatory compliance and product liability exposure. Recent United States Supreme Court decisions, however, in conjunction with some key medical device industry trends, signal the need for medical technology companies' risk management programs to include a strong employment liability component.

Employment liability diagnosis and management is indeed an area of increased focus in the medical device industry. Three industry forces lie behind this: the growth of global economic interrelationships, the recognition by senior management that risk and reward decisions made within an organization are interrelated, and the increasing evidence that top management decisions regarding risk management affect shareholder value directly.

This article examines the current employment liability atmosphere, identifies trends and risk factors specific to employment liability in the medical device industry, and then outlines some parallels between employment liability and product liability. It offers an employment compliance model that takes into account the growth stages of a business and that borrows from strategies already established to make medical device use safe. The objective is to provide a structure for minimizing employment liability exposure.

The Employment Liability Landscape

Many employment risks are unforeseeable outcomes; the risk in these cases is not something that can be directly managed or controlled. Wrongful-termination lawsuits, for example, cannot be completely eliminated. However, the factors that create the risk are manageable and, in many cases, controllable. The manner in which layoffs and terminations are handled is much more predictive of the court-determined validity of subsequent employment claims than whether or not alleged events actually occurred.

In addition, warning signs, indicators of potential employment-related risk, are there for the alert to see. Medical device industry executives who keep abreast of employment laws (see Table I), who are aware of risk factors specific to their industry and particular company, and who establish policies and procedures that minimize claims and the severity of their impact will bolster investor confidence and protect a robustly growing company from potential harm. Luckily, two Supreme Court decisions have provided medtech leaders with specific guidance on the mitigation of employment risk.

In 1998, the Court provided employers some relief by creating an affirmative defense for certain types of harassment and discrimination claims.^1,2 The affirmative defense exists if an employer "takes reasonable care to prevent and correct promptly" harassing behavior and the harassed employee unreasonably fails "to take advantage of any preventive or corrective opportunities provided by the employer or to otherwise avoid harm." Further district and circuit court decisions since 1998 have clarified that, to be viable, an affirmative defense must include, as a basic requirement, a well-publicized harassment and discrimination policy, training of employees and managers in compliance issues, and a policy for effective complaint reporting.^3,4

Another Supreme Court verdict, issued in 2000, sent a clear message to employers to base all adverse employment actions on reasons that are legitimate and nondiscriminatory.⁵ At issue was the legal precedent for requiring plaintiffs to offer prima facie evidence of discrimination before the case could go before a jury.

The Court made the burden of proof for the employee lighter, holding that after a plaintiff produces evidence that the employer's stated reason for an adverse action is false, a jury may conclude the employer acted unlawfully. "In appropriate circumstances the trier of fact can reasonably infer from the falsity of the explanation that the employer is dissembling to cover up a discriminatory purpose. Once the employer's justification has been eliminated, discrimination may well be the most likely alternative explanation, especially since the employer is in the best position to put forth the actual reason for its decision," the Court wrote.

This ruling has implications for the conduct of employment decisions and for the amount of training in the interpersonal aspects of employment decisions supervisors and managers receive. Research consistently shows that procedural and interpersonal justice—that is, how fair the employment procedures are perceived to be and how respectfully they are administered—has more influence on the subject's proclivity for subsequent litigation than does distributive justice, which is to say, what the employment decisions actually are. Medtech executives who actively promote procedural fairness and a high standard of business conduct in human resources management at their companies maximize the odds that adverse disciplinary or employment decisions will be accepted by staff without their feeling a desire for revenge or monetary compensation.

The Attitude of Jurors

One problem a medical device company in employment litigation faces is the courtroom phenomenon known as healthcare spillover. Fairly or not, juries historically have held the healthcare industry to a higher standard of behavior than others, and punished them with notable severity when this standard was violated. Postverdict interviews with jurors suggest that the "helping profession" stereotype works against healthcare companies involved in employment litigation. Jurors have an expectation of industry altruism that, when unfulfilled, translates into an attitude that the company should have known better.

This built-in bias comes on top of an already plaintiff-favoring jury pool in employment cases. Virtually every prospective juror has an opinion about what they understand sexual harassment to be. In addition, an uncertain though substantial percentage of female prospective jurors have had workplace experiences with men that they consider, especially in retrospect and in the context of a trial, to have been sexual harassment.

In fact, in most employment cases, the company in the defendant's chair is essentially guilty until proven innocent. Jury instructions on the burden of proof to the contrary, most jurors' experience leads them to identify with the plaintiff, that is, the employee. This personal experience also guides jurors in organizing the information presented at trial. It determines how they look for patterns in events and documents, how they attribute motivations to the parties, and how they weigh evidence. In rare cases, jurors ignore the judge's charge to follow the law and instead follow their own indignant attitudes in the practice of jury nullification.

The overwhelming majority of jurors who find for the plaintiff are, of course, finding against the company. This dynamic is a key to assessing risk. Even a terrible plaintiff can bring real employment management problems into the light. Jurors will focus on the company's policies and procedures. To defend itself successfully, a company must marshal facts demonstrating how it properly addressed the plaintiff's concerns.

Just one prior complaint about workplace discrimination or harassment by an employee of the defendant, even years ago, is seen by a significant number of jurors as having put the company on notice. To some jurors, even a casual word spoken to an immediate supervisor or lower-level human resources staffer outside the workplace is enough notice for the company. Finally, no matter whether the victim pleads that nothing be done pursuant to the complaint, the company must act. Failure to do so creates the potential for disaster at a later trial. In this sphere, juror attitudes comport with the law. The company must investigate any discrimination or harassment complaint, even if the complainant would prefer that the complaint be handled anonymously.

Against this backdrop, companies are mandated—both legally and from a risk management standpoint—to adopt, implement, and maintain effective complaint and investigation procedures and strict policies against discrimination. Any exception made in the company's application of its policies and procedures voids the rule. If a plaintiff's counsel can find even one instance in which a similarly situated employee had been treated differently from the plaintiff, then the imputation of subjective sporadic enforcement of policies causes major juror concern. Jurors are likely to be very receptive to a plaintiff's attorneys' arguments, such as that retaliation or discrimination could be the explanation for the difference in treatment.

Jury attitudes toward damages in employment lawsuits are particularly troubling. Not only do most jurors have a preconceived proemployee orientation, but their assumptions about corporate decision making prompt distrust of the business explanations for employment actions that companies often proffer. Most do not believe that an award of a few million dollars extracted from a large corporation will have any impact on the company's health. In fact, jurors commonly argue that unless an award in the millions is given to the plaintiff, executives will be able to bury the issue.

Trends That Challenge Employment Risk Management

Against this backdrop of increasing employment-related liability, medtech executives must stay attuned to the pertinent trends that signal greater risk in this area. Company size, for example, is a risk factor for most medical device companies, which tend to be small; the most common targets of federal discrimination claims are private companies with 15 to 100 employees (41.5% of claims).⁶

Medical technology company leaders always have to deal with the enhanced government scrutiny inherent in bringing a medical device to market. They also must be prepared, in the event of a lawsuit, to cope with healthcare spillover. In addition, they must take active steps to minimize the litigation potential in several industry trends. Four such trends affecting medical device manufacturers are globalization, the aging workforce, the greater urgency of time-to-market, and consolidation through mergers and acquisitions.

Globalization. The global medical technology products market is forecast to expand by 7% annually over the next three years. While the United States represents almost half the current market, new markets are emerging in Latin America and Asia. Many of these are growing three or four times faster than markets in the industrialized world. According to data from Standard & Poor's, these new markets will account for about 25% of total global medical device sales by 2005.⁷ Naturally, U.S.-based companies are expanding their operations in these regions.

Those companies can expect to see U.S. employment laws applied to their foreign divisions. Maintaining a balance between employment risk prevention and local cultural norms will be a challenge. What, for example, is the liability exposure for U.S. companies whose employees are working in France, where sexual harassment laws are struck down because flirtation is considered a national pastime? With the blending of cultures, exposure to discrimination suits will be continual. Savvy medtech executives might strike that desirable balance by adopting global standards for the core of a worldwide employment policy but allowing local management to modify portions of the program to acknowledge customs of the country. Such modifications would require the approval of the company's general counsel.

Changing Demographics. The world is expected to contain nearly 700 million people over 65 years old by 2025. By 2030, some 20% of the U.S. population will be 65 or older. Demand for medical and pharmaceutical products will rise at above-average rates in the future as these populations age; older people are disproportionately large users of medical products. These demographics ensure an expanding global market for cutting-edge biotechnology, pharmaceuticals, and medical devices for some time to come.

The other side of this trend, however, is growth in employment liability risk. The number of people covered by the Americans with Disabilities Act (ADA) and the Age Discrimination in Employment Act will increase with, and at a rate faster than, the U.S. population. The average worker in medical device manufacturing is 39 years old, significantly older than the average manufacturing employee in other industries. The medtech industry can expect to see more ADA-, age discrimination-, and pension-related claims in coming years. In addition, companies will be challenged to keep their older workers focused on adding value on the job rather than musing about their retirement.

A Stronger Time-to-Market Imperative. Product cycles are shorter than ever. New technologies that are being developed through aggressive R&D investments are revolutionizing the biotechnology cluster, and the introduction of new products is a primary driver of industry growth. Lately, more than one-third of global growth in the pharmaceutical sector has come from products on the market less than two years.⁸

In parallel with this trend, careers will be changing with much greater frequency. There will be less job security and less loyalty. Increased personnel turnover creates more opportunities for potential lawsuits related to negligent hiring, wrongful termination, and discrimination. In particular, medical device companies must take care not to allow the pressures of market competition to make managers deaf to medical device problems reported from within the organization. Not only can ignoring internal notice of potentially adverse performance increase product liability, it can also set the stage for a solid future claim of wrongful termination based on public policy (that is, constructive discharge for whistle-blowing).

Consolidation through Mergers and Acquisitions. The recent spate of mergers and acquisitions in the pharmaceutical and medical device sectors, expected to continue for a while, has been driven largely by the need to pool financial resources; such pooling helps companies compete more effectively and absorb the escalating costs of R&D and commercialization. Another important driver of the consolidation trend has been the growth of managed care. Cost-conscious managed-care buyers and hospital management chains force companies to discount prices and create critical mass.

Mergers and consolidations tend to engender employment issues. New corporate relationships, with the inevitable clashing of corporate cultures, prompt claims arising from perceived age discrimination, breach of contract, or race discrimination, or the barrier of a glass ceiling.

Approaches to Employment Liability Prevention

A Plan Tailored to the Company. Medical device industry executives constantly have to prioritize corporate risks and strike a balance between profit and loss. As a practical matter, they will find that what constitutes effective risk management depends on the size and structure of the organization they head. Whether the company is large or small and whether operations are under a single roof or spread across multiple facilities are considerations that warrant different approaches. A workplace that operates on double rather than single shifts requires a customized employment liability prevention plan, as does one with a multilingual workforce.

A plan that can grow and change with the organization can help medtech executives to monitor employment compliance effectively. Elements can be added strategically in response to leaps in staff size or a pending corporate structuring event.

Lessons from Product Liability. Medtech executives have an advantage over their counterparts in other industries in the matter of managing employment liability, owing to their experience with FDA regulations and product liability exposure. Some of the strategies for product liability risk management apply likewise to employment risks. For example, device company compliance officers, well aware of the risk that medical device reports can be used as evidence in product liability lawsuits to show that the manufacturer knew the product was defective, have significantly reduced this risk by teaching their staff to document medical device problems appropriately when generating reports. Staff supervisors, similarly, should receive training in effectively documenting the hiring interview, the disciplinary conference, the termination meeting, and complaints of harassment and discrimination. Poor employee performance must be clearly and consistently documented, and a progressive discipline implemented.

Medtech leaders can take an active role in promoting such effective risk-reducing documentation. Potentially litigious employment situations such as involuntary terminations, downsizing and layoffs, the hiring process, and investigations of complaints of offensive behavior are well worth the attention of upper management.

Figure 1. Human factors constitute 80% of the risk of employment liabilities leading to litigation. Source: Lind et al.9 (click to enlarge)

Human Factors in Employment. Human factors play as significant a role in employment litigation as they do in product liability (see Figure 1).⁹ Unfortunately, many employment lawyers often focus on the 20% of the employment litigation burden contributed by the employment equivalent of the product use environment rather than on the 80% that is attributable directly to company practices. Poor management interfacing with employees and the ineffectiveness or underutilization of company policies and procedures regarding employment issues and complaints are the predominant sources of liability.

Device company executives can reduce a firm's liability by ensuring that supervisors and managers have the interpersonal skills and sufficient knowledge of the legal ramifications of their performance to represent the organization effectively in all interactions with employees. They also can see that policies and procedures are developed that ensure that those responsible for carrying them out are high enough in the organization to understand the business implications of employment risk management, without being so exalted that they are inaccessible or intimidating to employees.

The Bottom Line

As maturing medical device companies shift from an emphasis on product development to one of executing business strategies effectively in a competitive industry, employee collaboration and teamwork becomes a greater predictor of organizational success. At the same time, employment liability risks are growing in response to demographic and industry trends and as employees become more sophisticated.

The ability to predict, and control, risk in all areas of the company is now an essential component of an effective medical device business strategy. Medtech executives will do well to take the same thoughtful approach to employment liability management that they have applied to product development. They should diagnose and manage existing employment risk factors. They should implement employment practices, policies, and procedures that fit the needs of the existing and future company. And they should develop an employment liability compliance program that can be expanded in response to rapidly changing industry and company-specific circumstances, as well as be monitored for effectiveness.

References

1. Burlington Industries Inc. v. Ellerth, 118 S. Ct. 2257 (1998).

2. Faragher v. City of Boca Raton, 118 S. Ct. 2275 (1998).

3. Fall v. Indiana University Board of Trustees, 12 F. Supp. 2d 870, N.D.Ind. (1998).

4. Indest v. Freeman Decorating Inc., 164 F.3d 258, 5th Cir. (1999).

5. Reeves v. Sanderson Plumbing Products Inc., 530 US 133, 120 S. Ct. 2097 (2000).

6. Employment Practices Liability: Jury Award Trends and Statistics, Jury Verdict Research Series (Horsham, PA: LRP Publications, 2001).

7. "Innovation and Its Importance in the Medical Device Industry," in MIT Enterprise Forum of Cambridge [conference excerpts, on-line] 16 September 1998 [cited 12 August 2002]; available from Internet: http://www.mitforumcambridge.org/cases/c_sep98.html.

8. "Biotechnology Cluster: The Cluster in Illinois," in Illinois Department of Commerce and Community Affairs [on-line] (Springfield, IL: Illinois Department of Commerce and Community Affairs, 2002 [cited 12 August 2002]); available from Internet: http://www.illinoisbiz.biz/tech/tech_biotech_pop.html.

9. EA Lind et al., "The Winding Road from Employee to Complainant: Situational and Psychological Determinants of Wrongful Termination Claims," Administrative Science Quarterly 45 (2000): 557–590.

10. Employment Discrimination: An Overview [on-line] (Ithaca, NY: Legal Information Institute, Cornell Law School, 2002 [cited 15 August 2002]); available from Internet: http://www.law.cornell.edu/topics/employment_discrimination.html.

11. Facts about Employment Discrimination [on-line] (Washington, DC: U.S. Equal Employment Opportunity Commission, 2002 [cited 15 August 2002]); available from Internet: http://www.eeoc.gov/eeoinfo.html.

12. J Jones, "Special Report: D&O Claims Keep Rising," in The NonProfit Times [on-line] July 2002 [cited 12 August 2002]; available from Internet: http://www.nptimes.com/Jul02/sr1.html.

Joni E. Johnston, PsyD, is president and CEO of WorkRelationships Inc. (Del Mar, CA), a consulting firm that specializes in helping companies transform unnecessary employment liability into employee retention.

Copyright ©2002 MX