Give information about the circumstances surrounding a termination only on a need to know basis

by Larry Clark

When the client fired Grace Wrigley for allegedly stealing and concealing a bag of potato chips, they had no idea that their statements to other employees about her separation would be the basis for a costly defamation lawsuit.  While most states have laws that allow managers and supervisors to discuss a worker's perceived adverse conduct (to the extent that such communication is necessary for proper discipline) sharing negative information with non-supervisory personnel is not similarly protected.

In this case, an unemployment compensation appeals referee ruled that there was insufficient evidence to prove that Wrigley stole the chips.   The client did not appeal the decision.   In Wrigley's defamation law­suit, the Superior Court of Pennsylvania, relying upon the unemployment decision to establish the worker's innocence, ruled that the employer un­necessarily shared deroga­tory information with co­workers that did not have a need to know.   Wrigley was a twelve-year employee with a satisfactory record until she was discharged for the alleged on-the-job theft.

According to the employer's argument at the defama­tion trial, her discharge had become the subject of much discussion by employees.  All the talk and speculation about her termination had begun interfer­ing with production.  Accordingly, the employer scheduled a meeting to discuss Ms. Wrigley's separation with the other employees.  The employer apparently hoped that the truth would put an end to employee gossip; unfortunately for the employer, the explanation given to Grace Wrigley's coworkers about her reasons for being discharged were not supported by the unemployment appeal referee's findings of fact.

The application of the findings in one venue to those in a separate cause of action is referred to in the legal profession as collateral estoppel or res judicata (Latin: "the thing has been decided").  The Pennsylvania court ruled that the unemployment appeals procedures had already estab­lished the facts relating to whether or not Ms. Wrigley had stolen the potato chips. Ultimately, Grace Wrigley received a judgment of just under $1.5 million dollars.  Following the judgment, the employer asked the court to reconsider its decision, contending that the appli­cation of collateral estoppel violated their right to a jury trial.

In the last few years, many states have passed laws that preclude the use of unemployment decisions, transcripts, etc. in other legal proceedings.  States that have passed laws to prevent the courts from giving preclusive effect to unemployment decisions involving separate causes of action include, at the time of this writing, Alaska, Arizona, California, Connecticut, Florida, Indiana, Kansas, Maine, New Hampshire, Nevada, Oregon, South Dakota, Vermont, Washington and Wyoming.  A number of other states, including Colorado and Kentucky, have established precedent against using unemployment decisions to preclude the re-litigation of the matters based upon a prior unem­ployment decision.

In Pennsylvania, Rhode Island, and a few other states, the principle of collateral estoppel occasionally can, as in the present case, bar the re-litigation of issues decided at an earlier unemployment appeal hearing.  The findings of fact under these states' unemployment compensation laws can prevent another judicial/administrative body from a contrary ruling in another (collateral) proceeding.

By requesting that the appeals decision of one administrative/judicial body be applied in another forum, the prevailing party in the first proceeding can ask the court to use their favorable decision to pre­clude re-litigation in another forum.  If the employer obtains a favorable decision, such a strategy may thwart contrary claims by a former employee such as wrongful discharge or discrimination.  However, even in jurisdictions where the law still allows collateral estoppel, the courts are not al­ways willing to base their find­ings on prior administrative findings.  The determination as to whether or not a judge (including an administrative law judge) de­cides to bar the re-litigation of a particular issue is based upon several important factors.  Points to be considered include: (A) whether the issue decided in the prior adjudication was identical to the matter at hand, (B) whether the prior adjudication was based upon the merits, (C) whether the party against whom collateral estoppel is being asserted was a party to the prior adjudication, and (D) whether the party against whom collateral estoppel is asserted had a full and fair opportunity to litigate the issue.

Collateral estoppel is a double-edged sword (cutting for the early winner and against the early loser).  The prospect of obtaining unemployment eligibility findings that support their position in some independent legal action sometimes encourages employers and claimants to use unemployment hearings to explore other issues.  This discovery process can transform the unemployment hearing, which was designed to be a relatively informal procedure, into a time consuming and costly ordeal.  Other employers treat unemployment cases lightly because relatively low dollar amounts are at stake.

Winning the unemployment eligibility battle (in collateral estoppel states) occasionally gives the employer multiple victories in those cases where the unemployment victory prevents (or discourages) a claimant from re-litigating certain issues.  It is some­times easier to win at the unemployment level than in other arenas because the rules of evidence are generally more relaxed and state un­employment systems are designed to determine benefit eligibility quickly.  On the other hand, there is ample precedent that the unemploy­ment act is to be liberally construed in favor of finding claimants eligible for benefits.  Consequently, employers sometimes lose at the unemployment hearing when they would prevail in another forum.

We do not recommend that employers allow the limited threat of collateral estoppel (or the admissibility of unemployment hearing documents) to convert the unemployment process into a prolonged pre-trial for every potential employment-related lawsuit.  Nor do we recommend that you abandon sensible unemployment appeals for fear that every lost case will come back to haunt you in another venue.  The vast majority of unemployment hearings determine nothing more than jobless benefit eligibility and/or chargeability.  Nevertheless, employers should take the unemployment appeals process very seriously.  There are obviously some cases where you are better off not making an official record.  However, if you have valid reasons for termination (that are consistent with reasonable work rules and that have been properly communicated to your workers) you should have no fear of presenting your case in an unemployment hearing.

Understandably, qualified human resource profes­sionals and/or legal council should be brought into the loop whenever you are contemplating discharging an employee under circumstances that might place you at risk of legal action.  While the focal point of this article has been the doctrine of collateral estoppel, blocking the presentation of evidence in the defamation trial obviously was not the employer's only problem.  Certainly, application of collateral estoppel limited the employer's defensive strategy.  However, in the absence of the unemployment findings of fact being applied to the defamation case, the employer still would have had to prove theft.  Indisputably, the primary problem was created when the employer chose to discuss the worker's termination with her former coworkers.

There are no absolute guarantees regarding whether an unemployment hearing might impact another proceeding.  I have previously written about a federal case, Baldwin v. Rice, in which a federal judge from the Ninth Circuit Court admitted an unemployment hearing decision as evidence, even though it was in direct violation of California law!  The judge wrote:  "Legislature cannot purport to make binding pronouncements of law concerning what evidence may be privileged or otherwise inadmissible in a court action involving claims based on federal law."  Although the federal court in Baldwin v. Rice ruled that the unemployment decision was admissible, it also reaffirmed that the decision should not be given preclusive effect.  Since any discrimination (Title VII) lawsuit could end up in federal court, even state law is not an absolute safeguard against an unemployment appeals decision being admitted in another venue.  Consequently, whenever employers have concerns about a particular unemployment decision adversely impacting another proceeding, they should seek legal advice.  Whether collateral estoppel is an issue in your state(s) or not, employers always must be aware of the risks involved whenever a worker is involuntarily separated.  Nevertheless, there are times when terminating an employee is the only rational recourse.  Just don't discuss the employee's discharge with his/her former coworkers!

Larry Clark is a principle member of Employer Advocates LLC, and has been in the unemployment cost control industry for 35 years.

Disclaimer:  The information contained in the examples given on this page is general in nature and is not intended as legal advice.  There are no guarantees that a particular state unemployment adjudicator will rule as others have in the cited examples.  Individuals seeking legal advice concerning the handling of similar matters should consult with their attorney, rather than relying upon the information given.

The purpose of this document is to educate clients and potential clients about unemployment compensation. While some effort has been made to address the many differences in laws and procedures in the 53 different jurisdictions (each of the fifty states plus Puerto Rico, Washington D.C. and the Virgin Islands), the primary purpose of this presentation is to review some basic principles shared by many jurisdictions.