In the Matter of:
PATRICIA A. ALLEN, ARB
CASE NO. 06-081
LAURA L. WALDON, (formerly
05-059)
and DANA BREAUX,
ALJ
CASE NOS. 2004-SOX-60
COMPLAINANTS, 2004-SOX-61
2004-SOX-62
v. DATE:
July 27, 2006
STEWART ENTERPRISES, INC.,
RESPONDENT.
BEFORE: THE
ADMINISTRATIVE REVIEW BOARD
Appearances:
For the Complainant:
William H. Reinhardt, Jr., Esq., Tiffany O. Cazabon,
Esq., Blue Williams, L.L.P., Metairie, Louisiana
For the Respondent:
Rebecca G. Gottsegen, Esq., Jones, Walker,
Waechter, Poitevent, Carrere & Denegre, L.L.P., New Orleans, Louisiana
FINAL DECISION AND
ORDER
The Complainants
Patricia A. Allen, Laura L. Waldon, and Dana Breaux filed a complaint with
the United States Department of Labor alleging that their employer, Stewart
Enterprises, Inc., took various adverse employment actions against them and
eventually terminated their employment because they engaged in certain
protected activities. They claim, therefore, that Stewart violated the employee
protection
[Page 2]
provisions of the Sarbanes-Oxley Act (SOX).
After a hearing, a Department of Labor Administrative Law Judge (ALJ) dismissed
their complaint. We affirm.
Background
The Administrative
Law Judge's February 15, 2005 decision provides a detailed accounting of the
facts. We briefly summarize.
Stewart is a
publicly traded corporation that the Securities and Exchange Commission
regulates. Tr. 711. It is subject to the SOX. Tr. 11-12. Stewart provides
death-care services and merchandise. Tr. 708. It contracts with customers for
funeral and burial services either at the time of death or prior to death
(pre-need). By executing pre-need contracts, customers make installment
payments for services Stewart provides in the future. Stewart has a corporate
division based in Jefferson Parish, Louisiana and four operating divisions (the
Eastern, Central, Southern, and Western Divisions) that cover the entire United States and Puerto Rico. Tr. 709-10. Each operating division has a division president and a
Chief Financial Officer (CFO). Id. The corporate division includes the
corporate office and the Shared Services Center (SSC). The SSC handles
accounting and administrative functions for the operating divisions. Tr. 944.
Stewart employed
Breaux and Allen as Quality Assurance (QA) Representatives. Tr. 247, 302,
388-89. QA Representatives provided a liaison between the four operating
divisions and the SSC. Tr. 304. Although Breaux worked in the Eastern
Division and Allen in the Central Division, both employees were based in New Orleans and worked closely together. Tr. 249.
Waldon was
employed as a Director of Administration (DoA) in the Central Division and also
was based in New Orleans. Tr. 49. As a DoA, Waldon supervised three Records
Management Centers (RMCs) in the Central Division. Id. Prior to
assuming her DoA position, Waldon was a finance manager for Stewart in Kansas City, Missouri. During her employment as a DoA, she continued to maintain a home in
Kansas City and leased an apartment in New Orleans. Tr. 49.
AS/400 Faulty Interest
Calculations
From April 2003
until the end of their employment at Stewart, all three Complainants expressed
concerns to Stewart managers about Stewart's AS/400 computer system. Tr. 257,
523. When a customer wanted to pay off the amount he or she owed before the
end of the contract term, the AS/400 did not correctly calculate the interest
owed on the principal. Tr. 863-64. Under these circumstances, the computer
gave an incorrect payoff quote, and if the customer paid the quoted balance,
either the customer would have a credit balance in the account or would owe
additional payments. Tr. 592,
[Page 3]
863-64, 1399. As a result, Stewart issued a
refund to any customer who overpaid and wrote off any amounts that were
underpaid after the account payoff. Tr. 64-66, 327-28.
Stewart first
learned of the AS/400 problem after an internal audit in the fall of 2000. Tr.
1396. By the time the ALJ heard this case, Stewart employees had been working
for four years to find a solution to the interest calculation problem. In
early 2003, managers thought they had found a solution, but it failed during
user testing. Tr. 923-24. While Stewart's technology personnel worked to
correct the computer problem, its Special Projects team, a division of the SSC
under Patricia Beatty's supervision, performed manual amortizations on all
accounts that showed credit balances with a history of pre-payments on
principal. Tr. 1400-01. As noted, if any amortization showed a refund due,
Stewart refunded the money to the customer. Id. Stewart refunded money
to customers for various other reasons such as cancellation of an account or
overpayment. Tr. 614. The AS/400 interest calculation problem accounted for
less than 10% of the approximately 1500 refunds that Stewart issued every
month. Tr. 865. The SSC was responsible for calculating payoffs and refunds.
Tr. 944.
When Waldon or
Allen submitted an adjustment to Special Projects to correct an account on
which the customer had been overcharged because of the AS/400 interest
calculation problem, Beatty told them that these errors would be charged to
their division on the contract error reports issued monthly for each division.
Tr. 68-70, 403-04. Waldon and Allen testified that these errors were linked to
their overall performance records and bonuses. Tr. 69, 119-20, 404. Both
Waldon and Allen worked for the Central Division, which was Stewart's largest
division and always had the largest number of errors. Tr. 768.
The Complainants
testified that they never thought that Stewart intentionally programmed the
AS/400 to overcharge customers. Tr. 171, 488-89. They were aware that Special
Projects was performing manual amortizations as an internal control until the
computer problem was fixed. Tr. 157. But although the Complainants knew that
the company was actively working on a solution for the problem, they believed
that Stewart was taking too long to fix it and that the delay was due to
Stewart's desire to keep the problem a secret. Tr. 330-31.
On April 28, 2003, Breaux and Allen met separately with Beth Schumacher, Stewart's Director
of Internal Audit. Tr. 258-59, 397-98, CX-27, -28. Schumacher was
investigating numerous concerns that Sharon Kirkpatrick, CFO of the Central
Division, had raised. Kirkpatrick had advised Schumacher to interview Breaux
and Allen about the interest calculation problem related to refunds. Tr. 1406.
Breaux and Allen complained to Schumacher that SSC personnel were "stonewalling"
their efforts to accomplish their work. They also complained about the SSC's
failure to communicate with the QA Representatives and the field offices' "unprofessional
attitudes," untimely refunds, and inaccurate interest calculations. Tr.
260-61, 399-400. Breaux told Schumacher that she was concerned that Special
Projects was not effectively communicating with the field offices about manual
amortizations and that the Records Management Centers (RMCs) should have an
amortization schedule so that they could do their own amortizations.
[Page 4]
Both Breaux and
Allen also told Schumacher that Angie Apolinar, an RMC director, had recognized
the interest calculation problem and contacted Patricia Beatty, head of Special
Projects. Tr. 260-61, CX-26, -27. According to Breaux, Apolinar told her that
Beatty had referred to the interest problem as "hush-hush." Tr.
1406-08. Schumacher later contacted Beatty and Apolinar. Apolinar told her
that Beatty had not used the word "hush-hush," but that Beatty had
indicated that the company was not broadcasting the problem. Tr. 1411-12.
Beatty testified that she had not used the word "hush-hush," but that
she had told Apolinar that it was best to tell customers that that they were
entitled to a refund because their accounts had been recalculated. Tr. 256-57,
869-70.
Breaux and Allen
believed that Stewart's handling of amortizations and payoffs, resulting from
the AS/400 interest calculation problem, violated a law, but they were not
certain which law. Tr. 323-24. All three Complainants knew that the SSC was
recalculating customer refunds when field personnel notified SSC or when a
customer complained, but they were concerned that Stewart might be overcharging
customers who did not complain. Tr. 58-60, 453, 511. All three Complainants
were also concerned that Beatty was using incorrect calculations and different
formulas to manually compute refunds, and that Beatty did not distribute a
standard amortization table to employees in the field offices. Tr. 58-60, 317,
425, 524.
In June 2003,
the QA Representatives convened a quality assurance conference in Dallas, Texas, at which both Breaux and Allen discussed the interest calculation problem,
refund requests, and payoffs with field office directors. Tr. 320-21. Stewart
sponsored the conference and paid for attendees' travel and lodging expenses.
Tr. 427, 429-30.
Untimely Refunds
The Special
Projects group, which calculated refunds and payoffs, was overloaded and had a
huge backlog. Tr. 74, 251. In the Central Division, Special Projects took
four to six weeks to calculate refunds. Tr. 119-21. Although Special Projects
created an intranet database to track refunds, the database was inaccurate and
not updated. Tr. 792-93; C. Exh. 98. Breaux, Allen, and Waldon testified that
they believed that delayed refunds exposed the company to litigation from
customers that could thereby affect shareholders. Tr. 299, 453. They were
particularly concerned that the delayed refunds violated Missouri and Texas state law requirements that refunds be issued within 30 and 15 days respectively. Tr.
52, 423-24. They were afraid that this delay could lead to state sanctions,
including revocation of Stewart's license. Tr. 173-74.
Pending Other Source (POS)
Accounts
Allen and Breaux
were also concerned about Stewart's "pending other source" (POS)
system and reported their concerns to Beatty and the CFOs. Tr. 276, 442-43.
Stewart's POS accounts are accounts that a third party, such as an insurance
company, pays fully or partially. In situations where the customer paid their
part of their account
[Page 5]
balance, but the third party did not pay its part, the
customer would receive a statement showing a zero balance. Tr. 442-43. Allen
and Breaux believed that this POS billing system made it difficult for the
company to collect the unpaid balance from the customer and that the company's "bad
debt reserve" would increase and affect revenue if the other source did not
pay the balance. Tr. 377. Stewart managers, however, testified that the POS
billing system did not prevent the company from collecting the balance because
customers with these accounts were contractually obligated to pay any amount
not paid by the third party, and the company used collection agencies to
collect from customers who refused to pay. Tr. 509-10, 838, 932.
SAB-101 Compliance
In 2000, the
Securities and Exchange Commission (SEC) issued an accounting bulletin, Staff
Accounting Bulletin 101 (SAB-101), which prohibits publicly traded corporations
from recognizing sales revenue before they deliver merchandise to the
customer. Prior to this bulletin, Stewart had recognized revenue at the time
of sale. SAB-101 required that Stewart change its accounting practice and
recognize revenue at the time Stewart actually delivered the merchandise. Tr.
1381.
After reviewing
internal accounting reports and speaking with Beau Royster, head of internal
audit, Waldon became concerned that Stewart was not complying with SAB-101.
Tr. 107, 1363. Waldon was aware that Stewart did not submit these internal
accounting reports to the SEC, but she was concerned that the company was overstating
its gross profit. Tr. 184-86. She later discovered that the company was
making adjustments for SAB-101 compliance in the third quarter of 2003. Tr.
98-99, 101.
Waldon became
increasingly concerned about SAB-101 compliance when she heard Ken Budde,
Stewart's CFO, tell investors during a September 2003 quarterly earnings
conference call that costs were up for the most recent quarter due to an
accounting "anomaly." Waldon believed that Budde was lying to
investors about the "anomaly," and that the real reason that costs
were up was because Budde had made adjustments in the accounting to comply with
SAB-101. Tr. 102, 1345. Waldon thought that Budde was talking about costs in
the funeral business, but Budde testified that his comment referred to the
cemetery business, which was not affected by SAB-101. Tr. 1377.
Waldon discussed
her concerns about SAB-101 compliance with Mike Hymel, head of Stewart's accounting
department, who assured her that Stewart was working on making adjustments to
its system for fiscal year 2003. Waldon did not ask Hymel about SAB-101
compliance for fiscal years 2001 and 2002. Tr. 185.
Workspace Relocation
Breaux, Allen,
and Pedro DoCampo, the Southern Division QA Representative, testified that the
QA department workspaces were moved at least four times during their
employment. Tr. 348, 456-57, 1108. In October 2003 Stewart moved the QA
office
[Page 6]
spaces from the fourth to the first floor of the SSC office building to
make room for employees moving in as a result of the relocation of corporate
offices to the SSC in New Orleans. Due to extensive construction at the SSC
building, many other employees were also moved around. Tr. 354-55, 509.
According to the QAs, their new work space location was temporary, and their
cubicles were not a standard size, did not have proper lighting, and were
located next to a storage area. Tr. 248.
Hostile Work Environment
Breaux,
Allen, and Waldon testified that after raising their concerns about Stewart's
accounting practices, they began to experience stonewalling and resistance from
the SSC, exclusion from e-mails and meetings, lack of notification of policy
and procedural changes, and delays in receiving responses from the SSC. Tr. 117-19,
342-47, 393. Waldon also stated that she was not welcomed to New Orleans when
she transferred there and that her supervisor, Bob Crane, began reviewing her
expense reports. Tr. 206-07, 227. Thus, the Complainants argued that Stewart
had subjected them to a hostile work environment. Post–Trial Memorandum
Submitted on Behalf of Complainants (Post-Trial Memorandum) at 19, 21.
Reduction in Force (RIF)
In December
2003, after experiencing several years of declining revenue and decreasing
earnings per share, Stewart announced a company-wide reduction in force (RIF). Bill Rowe, Stewart's Operating Officer, testified that he asked each division
president to determine the positions within their divisions to be included in
the RIF, but he told them that their RIF decisions should not have any impact
on the quality of service provided to customers. Tr. 1260-62. The
company did not give the division presidents any written criteria to assist
them in making their RIF decisions. After the decisions were made the company
gave them a handbook, providing guidance on how to communicate with their
employees about the company's restructuring and the RIF. Tr. 1170-71, 1330-31;
RX-8. Three division presidents testified that they focused on administrative
positions that did not impact customer service, and they looked at job
functions rather than the individuals in the jobs. Tr. 1175, 1227. The
Complainants, on the other hand, argued that Stewart selected them for the RIF because they had complained about the firm's accounting practices. Post-Trial
Memorandum at 18-19, 21, 22.
The presidents
of the Eastern and Central Divisions decided to eliminate the QA Representative
position because it was an administrative support position that did not
directly affect customers. Tr. 1159-60, 1305-06. The Western Division
president did not eliminate the QA position because he considered it to be
essential to the Western Division's operating and training needs. The Western
QA Representative was based in California rather than New Orleans and had
different duties from those of the Representatives based in the other
divisions. Tr. 1216-17. Breaux, Allen, and DoCampo were among the
approximately 300 employees included in the RIF. Tr. 446, 1115-16, 1159-60.
[Page 7]
The last day of
employment for RIFed employees was December 3, 2003. They received placement services to help them find new employment, a letter of reference, use of
Stewart's employee assistance program, 30 days' severance pay, health and other
employee benefits, and a separation pay plan that included separation pay based
on years of service. Tr. 1054-57. Since the RIF involved a restructuring of
the company, the company added 150 new positions between November 25, 2003, and
January 28, 2004, and Stewart provided a job hotline so that RIFed employees
could inquire about the new positions. Tr. 1062. Many employees applied for
jobs and were rehired. Tr. 1058-59. Breaux and Allen did not use the job
hotline or apply for any of the new positions in the company. Tr. 1062-63.
But DoCampo learned of a Corporate Training Consultant position from the
employee hotline, applied for the position, and was re-hired, though at a
salary 20% less than that of his QA position. Tr. 1118-20.
Waldon was not a
QA Representative. She was the Central Division's Director of Administration
and was not on Central Division President Bob Crane's original RIF list. In fact, Crane asked that Schumacher, Stewart's Director of Internal Audit, and
Waldon work together to decide which administrative positions could be moved or
included in the December 3 RIF. Tr. 1424-25. On October 31, 2003, Waldon asked Schumacher how the RIF would affect her position and whether her job was
secure. Tr. 1425. Schumacher told Waldon that she had no knowledge that the RIF affected Waldon's job. She did indicate to Waldon, however, that it was possible that
Waldon's position could be eliminated at a later date and that if it were
eliminated, she would want Waldon to stay with the company in a training
capacity in Kansas City. Tr. 1425.
On November 5,
Waldon told Schumacher that she would not be interested in a potential training
position and recommended another employee for the proposed position. Tr.
1451-52. She also told Schumacher that she would resign with two weeks' notice
if the company did not meet the following list of demands: notice of her
termination date, consideration for out-of-pocket expenses she incurred while
she was residing in New Orleans, and assurances that she would receive her
fiscal year 2003 bonus, her pro rata bonus, and a severance plan. Tr.
1428-29. After several e-mail exchanges between Waldon and Schumacher
regarding Waldon's demands, on November 25, Schumacher e-mailed Waldon a draft separation
agreement. Tr. 1436; RX-24. On November 26, Waldon's name was added to the
Central Division RIF list. Tr. 1423; RX-20. After receiving the separation
agreement from Schumacher, Waldon requested that Schumacher make several
changes to it. Schumacher made the requested changes and e-mailed the
agreement to Waldon on December 2. Tr. 1443: RX-27. Although Waldon never
signed and returned the final draft of the agreement, Schumacher still believed
that she and Waldon had reached an agreement that Waldon would stay with the
company through January 31, 2004. Tr. 1446-47. Waldon, however, did not
believe that she had reached an agreement with the company. Tr. 203-04. Nevertheless,
Stewart paid for the cancellation of Waldon's apartment lease in New Orleans,
paid her 2003 bonus, and paid for the expenses of her one business trip to New
Orleans, all of which Waldon had requested in her original demands. Tr.
203-04. Waldon worked through the January 31 deadline and received the
benefits of the RIFed employees. Tr. 204-05.
[Page 8]
Procedural Background
On January 29, 2004,
the Complainants jointly filed a discrimination complaint under the SOX with
the United States Department of Labor (DOL). They alleged that Stewart had
violated the SOX when it took various adverse actions against them and finally
terminated their employment because they had complained to Stewart officers and
managers that the firm miscalculated interest on customer accounts and failed
to issue refunds in a timely manner in violation of state laws. On May 5,
2004, after investigating, DOL's Occupational Safety and Health Administration
(OSHA) denied the complaint because it found that Stewart terminated the
Complainants' employment for legitimate business reasons. The Complainants
requested a hearing. A DOL Administrative Law Judge (ALJ) held a formal
hearing from August 30, 2004, through September 7, 2004. In a Recommended Decision and Order (R. D. & O.) he issued on February 15, 2005, the ALJ concluded that Stewart did not unlawfully discriminate against Breaux, Allen, and
Waldon in violation of the SOX, and he dismissed their complaint.
The Complainants then
filed a Petition for Review with the Administrative Review Board (ARB or the
Board) on March 22, 2005. The Board issued a briefing schedule and on April
12, 2005, the Complainants filed their opening brief. On May 2, 2005, Stewart
filed a motion to strike the Complainants' brief because it exceeded the page
limitations that the Board set in its briefing order. On May 5, 2005, the
Board issued an Order to Show Cause and Suspending the Briefing Schedule,
requiring the Complainants to demonstrate why the Board should not dismiss
their brief on the ground that it exceeded the prescribed page limitations. On
July 18, 2005, while the Board's decision on Stewart's Motion to Strike was
pending, the Complainants informed the Board that they intended to pursue their
SOX case in federal court.
Therefore, the Board dismissed their appeal. But on April 6, 2006, the United States District Court for the Eastern District of Louisiana issued an Order
and Reasons granting Stewart's request for mandamus relief. The court ordered
the Board to reinstate the Complainants' appeal and rule on its Order to Show
Cause dated May 16, 2005.
[Page 9]
Jurisdiction and Standard of Review
The Secretary of
Labor has delegated her authority to issue final agency decisions under the SOX
to the ARB.
Pursuant to the SOX and its implementing regulations, the Board reviews the ALJ's
factual determinations under the substantial evidence standard.
Substantial evidence is that which is "more than a mere scintilla. It
means such relevant evidence as a reasonable mind might accept as adequate to
support a conclusion."
We must uphold an ALJ's factual finding that is supported by substantial
evidence even if there is also substantial evidence for the other party and
even if we "would justifiably have made a different choice had the matter
been before us de novo."
In reviewing the
ALJ's conclusions of law, the Board, as the Secretary's designee, acts with "all
the powers [the Secretary] would have in making the initial decision . . . ."
Therefore, the Board reviews an ALJ's conclusions of law de novo.
Discussion
The legal
burdens of proof set forth in 49 U.S.C.A. § 42121(b), the employee protection
provisions of the Wendell H. Ford Aviation Investment and Reform Act for the 21st
Century (AIR 21), govern SOX actions.
Accordingly, to prevail, a SOX complainant must prove by a preponderance of the
evidence that (1) she engaged in a protected activity or conduct; (2) the
employer knew that she engaged in the protected activity; (3) she suffered an
unfavorable personnel action; and (4) the protected activity
[Page 10]
was a contributing factor in the unfavorable action.
If the complainant succeeds in establishing that protected activity was a
contributing factor, then the respondent may avoid liability by demonstrating
by clear and convincing evidence that it would have taken the same unfavorable
personnel action in the absence of the protected activity.
Before the ALJ,
Breaux, Allen, and Waldon argued that (1) they had engaged in protected
activity when they complained to their immediate supervisors and other Stewart
managers about irregularities in Stewart's accounting practices; (2) Stewart
was aware of their protected activity; (3) Stewart took adverse action against
them, including termination; and (4) their protected activity contributed to
the adverse action. Post-Trial Memorandum at 2-3. Failure to prove by a
preponderance of the evidence any one of the above listed elements of proof
warrants dismissal of their complaint. Although the ALJ concluded that the
Complainants did not demonstrate by a preponderance of the evidence that they
had engaged in protected activity, he nevertheless assumed arguendo that they
had, and went on to analyze whether they had proved that Stewart had taken
adverse action and whether their protected activity contributed to their
termination.
We will
therefore consider whether substantial evidence supports the ALJ's findings and
conclusions as to each element of proof.
A. Protected Activity
[Page 11]
1. Faulty Interest Calculations Due to
AS/400 Programming Errors
The Complainants
argued before the ALJ that they engaged in protected activity when they
complained to supervisors about Stewart's failure to correct its AS/400
computer program. Post-Trial Memorandum at 3-6. The problem with the computer
was that it was not programmed to calculate interest correctly in quoting
customer payoffs when a customer made a prepayment on principal and requested a
payoff before the end of the contract term. The Complainants argued that this
error in the program adversely affected stockholders' returns on their
investments. While they recognized that Stewart did not intentionally program
the computer to make errors, they believed that by keeping the AS/400 problem secret
and thereby delaying refunds, Stewart was defrauding or attempting to defraud
shareholders. Id.
Substantial evidence supports the ALJ's finding that the
Complainants did not reasonably believe that Stewart's delay in reprogramming
the AS/400 constituted a fraud on shareholders. The Complainants were aware
that the interest calculation problems were the direct result of programming
errors within the AS/400 system. They were also aware that Stewart was
actively working on the problem, both by having technology personnel re-program
the computer and by having accounting personnel perform manual amortizations of
accounts as a temporary back-up to ensure payoffs were correctly calculated. Tr.
157, 312-13, 491. Finally, they were aware that Stewart at one point believed
its staff had fixed the problem, only to have the program repair fail during
testing. Tr. 90.
Breaux also
believed that Stewart intentionally delayed implementation of a new AS/400
program because the company was trying to keep the problem a secret. She
testified about the "hush-hush" comment that Beatty supposedly made
when discussing the interest problem with Apolinar. Tr. 1406-08. But, as the
ALJ found, Beatty did not say "hush-hush." Tr. 538, R. D. & O.
at 90. Moreover, the record reveals that Stewart was not attempting to conceal
the problem. First, Stewart listed correcting the AS/400 problem as a goal in
the company's strategic plan for 2002-03. The strategic plan was distributed
to team leaders, group leaders, and QA representatives within the company. Tr.
981-82. Second, Stewart sponsored a conference in Dallas where QA
Representatives addressed the problem openly with field personnel and paid for
attendees' travel and lodging expenses. Tr. 427, 429-30. Finally, Breaux knew
that the company encountered problems in testing the new program it had
developed to correct the problem. Thus, as the ALJ found, Breaux could not
have reasonably believed that Stewart was hiding the problem.
Therefore, substantial evidence supports the ALJ's
conclusion that the Complainants did not engage in protected activity when they
expressed concerns to supervisors about faulty interest calculations.
[Page 12]
2. Untimely
Refunds
Breaux, Allen,
and Waldon contended before the ALJ that they engaged in protected activity by
complaining to managerial personnel about Special Projects's delays in issuing
refunds. Post-Trial Memorandum at 6-8. They argued that the refund delays
violated Texas and Missouri statutes and could possibly result in sanctions and
revocation of Stewart's license in either or both states. Id. The
ALJ found that the Complainants did not have a reasonable belief that Stewart
was violating the federal fraud statutes that the SOX covers because they
expressed concerns only about violations of state law, and the SOX does not
provide protection for employees who report state law violations. R. D. &
O. at 86, 90, 91.
Substantial evidence supports the ALJ's conclusion that the
Complainants' concerns about delayed refunds do not constitute protected
activity. The record reveals that the Complainants did not express concern to
supervisors that delayed refunds violated any federal law or regulation
pertaining to the SOX. Providing information to management concerning
violations of state law, standing alone, is not protected conduct under the
SOX.
In addition, Waldon argued that delayed refunds could result in a
state's revoking Stewart's license to operate and thus affect shareholders.
Post-Trial Memorandum at 6-7. But the mere possibility that an act or omission
could adversely affect Stewart's financial condition and thus affect
shareholders is not enough to bring the Complainants' concerns under the SOX's protection.
Id. Therefore, we affirm the ALJ's conclusion that the Complainants
did not engage in protected activity when they complained about delayed
refunds.
3. Pending Other
Source (POS) System Errors
Breaux and Allen
argued before the ALJ that they engaged in protected activity when they
reported problems with Stewart's POS accounting system to supervisors. Post-Trial
Memorandum at 10-12. As discussed above, POS or "pending other source,"
refers to those accounts for which a third party has responsibility for
payment. Breaux and Allen claim that a problem arose with the POS statements
when the third party refused to pay. In such a case, the computer system
failed to recognize balances on the customer's invoice that third parties owed,
and the customer received an invoice showing a zero balance. According to
Breaux and Allen, this computer error caused inflated receivables, thereby
affecting shareholders' financial statements, and Stewart regularly lost money
on these accounts whenever a third party denied responsibility for payment.
Tr. 334-35, 454.
[Page 13]
The ALJ
concluded that Breaux's and Allen's reports about problems with the POS system
did not constitute protected activity because they did not reasonably believe
that Stewart was violating the fraud provisions of the SOX by issuing incorrect
balance statements to customers. R. D. & O. at 91. Substantial evidence
supports his conclusion. The record reveals that Breaux and Allen were aware
that Stewart's customers were contractually obligated to pay any balance
remaining when a third party refused to take responsibility for payment and
that Stewart collected any remaining balances through its Customer Service
office and outside collection agencies. Tr. 333-35, 377-78, 509-10. Since
they knew that Stewart was not losing money on its POS accounts and was not in
danger of losing money in the future, they could not have reasonably believed
that incorrect POS statements affected shareholders in any way. Therefore,
they did not reasonably believe that Stewart's flawed POS system violated
federal fraud statutes or an SEC rule related to fraud against shareholders.
Accordingly, substantial evidence supports the ALJ's finding that Breaux and
Allen did not engage in protected activity when they complained about the POS
system.
4. SAB-101
Compliance
The SEC's Staff
Accounting Bulletin 101 (SAB-101) went into effect in 2001. The bulletin
prohibits publicly traded corporations from recognizing sales revenue before
delivery to the customer. SAB-101 required that Stewart change its accounting
practice so that its SEC filings reflect revenue at the time of actual
delivery, rather than at the time the customer contracted with Stewart. Tr.
96-97. Waldon argued before the ALJ that her reports to supervisors about SAB-101
compliance concerns were protected activity. Post-Trial Memorandum at 8-10.
She testified
that Beau Royster, head of internal audit, led her to believe that Stewart was
not complying with SAB-101 when he told her that Stewart had "dropped the
ball in compliance." Tr. 98-99, 101. She stated that she became
increasingly concerned about Stewart's compliance with SAB-101 when she
reviewed Stewart's Central Division internal accounting statements, which
showed cost adjustments for SAB-101 compliance only in the third Quarter of
2003 and when she overheard Kenneth Budde, Stewart's CFO, refer to an "anomaly"
in a September 2003 quarterly earnings conference call with shareholders.
After hearing this "anomaly" comment, she concluded that Budde had
lied to shareholders and that the real reason that costs were up was that Budde
had adjusted merchandise costs in the third quarter accounting to comply with
SAB-101. Tr. 102, 1345. Finally, a phone call with John Ferguson in Stewart's
accounting department convinced Waldon that Stewart did not intend to make
adjustments to 2001 and 2002 accounting statements to comply with SAB-101. Tr.
103, 178. Waldon testified that she discussed her concerns with Mike Hymel,
head of Stewart's accounting department, who assured her that Stewart was
addressing the issue. Tr. 103-04.
The ALJ found
that Waldon did not sufficiently complain or raise concerns about SAB-101
compliance to reach the level of protected activity. R. D. & O. at 87.
The
[Page 14]
record supports this finding. Although Waldon discussed SAB-101 compliance
generally with Royster, Ferguson, and Hymel, she did not complain about Stewart's
failure to comply in 2001 and 2002. Tr. 185. Moreover, the record contains no
evidence that she raised her concerns about SAB-101 compliance with any other
management official.
The ALJ also
found that Waldon did not reasonably believe that Stewart was violating
SAB-101. She testified that she based her concern about SAB-101 compliance on "internal
consolidated financial statements" for the Central Division. Tr. 180,
185. It is undisputed that these documents were not filed with the SEC and
thus did not have to be compliant with SAB-101. Moreover, Waldon herself
testified that she was not aware of any SEC rule or regulation requiring that
these internal documents be filed with the SEC or comply with SEC rules and
regulations. Tr. 184-85.
Therefore,
substantial evidence supports the ALJ's findings that Waldon did not inform any
Stewart supervisor that she believed that Stewart was violating SAB-101, and
that she did not reasonably believe that Stewart was violating the federal
fraud statutes or an SEC rule related to fraud against shareholders.
Accordingly, like the ALJ, we conclude that Waldon did not engage in protected
activity when she complained about SAB-101 compliance.
B. Adverse Employment Action
Although the
Complainants' failure to meet their burden of proof that they engaged in
protected activity alone warrants dismissal of their complaint, the ALJ went on
to determine whether Stewart was aware of the Complainants' alleged protected
activity, whether Stewart subjected them to adverse employment actions, and,
assuming protected activity, whether it contributed to the adverse actions.
After finding that Stewart was aware of the Complainants' alleged protected
activity, which is undisputed, the ALJ addressed the Complainants' allegations
that Stewart subjected them to the following adverse employment actions:
logging increased error rates against the Central Division (where Breaux and
Waldon worked), relocating Breaux and Allen, creating a hostile work environment,
and terminating each Complainant' s employment.
R. D. & O. at 92.
The SOX
prohibits covered employers from discharging, demoting, suspending, threatening,
harassing, or in any other manner discriminating against an employee in the
terms and conditions of employment because of the employee's protected
activity.
In
[Page 15]
determining whether Stewart took adverse action against the
Complainants, the ALJ applied both the
"tangible job
consequences" test
and the "detrimental effect" test. A "tangible job
consequence" is one that "constitutes a significant change in
employment status, such as hiring, firing, failing to promote, reassignment
with significantly different responsibilities, or a decision causing
significant change in benefits." Under the "detrimental
effect" test, an employment action is adverse if it is reasonably likely
to deter employees from making protected disclosures.
1. Error Rates
and Workplace Relocation
Special Projects
generated contract error reports each month as a training tool to help prevent
errors and promote efficiency. A contract error is anything that would cause a
data entry employee to enter incorrect data into the computer system, such as
an incorrect address or a misspelled word. Waldon and Allen argued that
Special Projects was charging errors against their division (the Central
Division) in retaliation for their complaints about Special Projects's delays in
issuing refunds. The ALJ found that the increased error rates did not
constitute adverse action because the negative error reports against the
Central Division did not result in tangible job consequences for Waldon and
Allen. R. D. & O. at 94. Nor would the error rate reports deter others
from engaging in protected activity. Id. at 95.
The record
reveals that increased error rates had no effect on Waldon's and Allen's
employment. Although error rates for the Central Division increased, the
record contains no evidence that Waldon's and Allen's individual error rates
increased. And since they continued to receive not only good work evaluations,
but also pay raises and bonuses, the error reports would not have deterred
others from protected activity. Tr. 203-04, 305-06, 457-58.
Substantial
evidence also supports the ALJ's conclusion that Breaux's and Allen's workspace
relocation was not adverse action. The new workspace was small, dark, and
located next to a storage area. It also lacked overhead storage, a personal
storage area, and the lighting and desk space of their previous work areas.
Allen and Breaux testified, however, that these conditions did not affect their
ability to perform their work. As noted above, they also continued to receive
good evaluations and bonuses. Tr. 300, 306, 451, 458. Therefore, the
relocation, though inconvenient and perhaps vexing, did not significantly
change Breaux's and Allen's employment status. Furthermore, they
[Page 16]
adduced no
evidence that the problems they experienced with their new locations would
deter other employees from making protected disclosures. R. D. & O. at 95.
Accordingly, we
affirm the ALJ's conclusion that neither the increased error rates nor the
workspace relocation were adverse actions.
2. Hostile
Work Environment.
The
Complainants argued before the ALJ that stonewalling and resistance from the SSC,
exclusion from e-mails and meetings, lack of notification of policy and
procedural changes, friction with the SSC, and delays in receiving responses from
the SSC constituted a hostile work environment. Tr. 117-19, 342-47, 393.
Waldon also claimed that Stewart exhibited hostility by not welcoming her to New Orleans and by reviewing her expense reports.
Tr. 206-07, 227. But the ALJ concluded
that Stewart did not subject the three the Complainants to a hostile work
environment. R. D. & O. at 97, 98.
A
hostile work environment claim involves repeated conduct or conditions that
occur over a series of days or perhaps years. To recover, the employee must
establish that the conduct complained of was serious and pervasive.
Circumstances germane to gauging a hostile work environment include the
frequency of the discriminatory conduct, its severity, whether it is physically
threatening or humiliating, or a mere offensive utterance, and whether it
unreasonably interferes with an employee's work performance.
We
agree with the ALJ that the Complainants did not submit sufficient evidence to
establish a hostile work environment. They did not allege or offer evidence
that the "stonewalling" and "friction" they experienced in
working with the SSC were severe, pervasive, or humiliating, or that these
problems with the SSC interfered with their work performance. The other
conditions that the Complainants cite as indicative of a hostile work
environment are similar to the "petty slights,
minor annoyances, and simple lack of good manners" that often take place
at work and that all employees experience. These ordinary tribulations
of the workplace do not rise to the level of adverse actions because they do
not result in tangible job consequences or deter employees from engaging in
protected activity.
Waldon also
argued that she was subjected to other conditions indicative of a hostile work
environment, i.e., Stewart did not "welcome" her and give her a
permanent office upon her arrival in New Orleans, and Crane began reviewing her
expense reports.
[Page 17]
But the record does not support these allegations. Rather,
the record reveals that Waldon's office was still being built when she arrived
in New Orleans and that she was provided with a rental car until a company car
became available for her use. And according to Crane's testimony, which the
ALJ credited, Crane began reviewing everyone's expense reports to monitor
costs, and he reviewed Waldon's in particular because Stewart had agreed to pay
some of her expenses while she worked in New Orleans. Tr. 1256-57.
Therefore,
substantial evidence supports the ALJ's conclusion that the Complainants did
not experience a hostile work environment.
3. The RIF Terminations Were Adverse Actions, but the Complainants' Alleged
Protected
Activity Did Not Contribute to the Termination of their Employment
Breaux and Allen
do not contest the fact that Stewart's decision to conduct a RIF was a
legitimate business decision. Rather, they contend that their selection for
the RIF was discriminatory retaliation for their protected activity. They
argue that Stewart's lack of documentation to support their selection for the
RIF and Stewart's failure to follow its own Manager's Resource Guide in making
its RIF decisions prove that Stewart had a retaliatory motive. In other words,
they claim that their selection for the RIF was a
[Page 18]
pretext. If Breaux and Allen
were able to prove by a preponderance of the evidence that Stewart's reasons
for selecting them for the RIF were false, they might have prevailed.
But the record does not support their pretext argument.
The testimony of
three division presidents reveals that the decision to eliminate the QA
positions in the Central and Eastern Divisions was a legitimate business
decision. The Central Division President said that he considered the QA
position primarily "back office people or support people," and he
decided to eliminate the position because the duties of the QA position (Allen)
did not include meeting with clients and because other RMC managers could
perform the QA's liaison function. Tr. 1265-66. The Eastern Division
President stated that he placed the QA position (Breaux) on the elimination
list early in the process since he regarded the job as a disposable "support
function." He did not review Breaux's performance record to determine if
she was suited for another position with the division because the RIF was not a "redeployment" of personnel, but a restructuring of the division.
Tr. 1159-60, 1195. The Western Division President stated that he concentrated
on eliminating "functions" that were not "delivering services to
the families." But he decided not to eliminate his QA position because
the Western QA Representative was based in California, not in New Orleans like
Breaux, and the position had different duties from those of the Representatives
based in the other divisions. Tr. 1216-17. Finally, although the Southern
Division President did not testify, the record reveals that he included the QA
position on his initial RIF list as well. Tr. 1305-06.
This consistent
testimony from the division presidents constitutes substantial evidence that
they eliminated positions, not persons. The ALJ nicely summed up the evidence
on this issue:
The
QA representative position was an entire job function with only one incumbent
per division. It is undisputed that the QA representative did not deal with or
interface directly with customers or clients. Each divisional president
operated independently and used their judgment in selecting function
elimination. I find the record is bereft of any evidence that Mr. Stephens [Eastern
Division President] and Mr. Crane [Central Division President] conferred with
[CFO's] Mr. Tullier and Ms. Schumacher, respectively, before selecting the QA
function for elimination. Complainant's argument that the CFOs, who had
knowledge of Ms. Breaux and Ms. Allen's alleged protected activity, influenced
the divisional presidents to select the QA function is unsupported and without
merit.
R. D. & O. at 104.
Therefore, like the ALJ, we conclude that Breaux's and Allen's protected
activity did not contribute to their RIF terminations.
[Page 19]
Waldon was not a
QA, and her DoA position was not included on the Central Division's initial RIF list. On October 23, 2003, Waldon, who was aware of the impending RIF, asked Schumacher
whether her DoA job was secure, and Schumacher told Waldon that she did not
know. Schumacher did indicate, however, that it was possible that the company
would decide to eliminate Waldon's job. She then asked Waldon if she would be
interested in a new training position that might be created in the future. Tr.
128-29. Several days later Waldon declined the offer of a potential training
position and presented an ultimatum to Schumacher, threatening to give her two
weeks' notice of resignation if Schumacher would not give her a definite
termination date, a severance plan, her bonus, and reimbursement for the
expenses for her move to New Orleans. Tr. 1428-29. After several e-mail
exchanges between Waldon and Schumacher regarding Waldon's demands, on November
25, Schumacher e-mailed Waldon a draft of a separation agreement. On November
26, Waldon's name was added to the Central Division RIF list. Tr. 1423, 1436;
RX-20, 24. Waldon claims that Stewart terminated her employment. Post-Trial
Memorandum at 18. Stewart argues that Waldon "opted to leave the company."
Post-Trial Memorandum of Respondent, Stewart Enterprises, Inc. at 20.
Substantial
evidence supports the ALJ's finding that Waldon was not RIFed. Waldon did not
sign the separation agreement that she had been negotiating with Schumacher, but
she nevertheless continued to work at Stewart after the RIFed employees left on
December 3. Schumacher thought that she and Waldon had agreed that Waldon
would stay until January 31, 2004. Tr. 1446-1447. The separation agreement
specified as such. RX-24 at 2-3. And Waldon's last day of work
was January 31. Tr. 133. Also, both Crane and Schumacher credibly testified
that Waldon would still be employed as Director of Administration for the
Central Division if she had not presented Schumacher with her list of demands.
Tr. 1273, 1447; R. D. & O. at 107. Moreover, as additional evidence that
Waldon was complying with the terms of the separation agreement, in March 2004,
Waldon requested through her attorney that Stewart pay her lease expenses and a
pro rata share of her 2004 bonus. Tr. 1445. The lease and bonus payments both
were specified in the separation agreement. RX-24 at 2-3.
As noted above,
all three Complainants contended before the ALJ that the lack of documentary
evidence setting forth standards for managers to apply in selecting employees
for the RIF is evidence that Stewart's reason for terminating them was a
pretext and that its real reason was their protected activity. Post-Trial
Memorandum at 25-26. The division presidents testified that they did not have
written instructions for the RIF because CEO Rowe allowed them to make RIF determinations independently based on each division's particular needs. Moreover, Rowe
told the presidents to keep the details of the RIF secret so that word would
not leak out to employees. Tr. 1165-66. Finally, according to the presidents'
testimony, they did not keep notes concerning their decisions, and they had no
need to document standards because they were focusing on positions, not persons,
and primarily eliminating administrative positions that had the least amount of
interaction with customers. Therefore, we reject the argument that lack of
documentary evidence evidences pretext.
[Page 20]
Breaux and Allen
also argue that Stewart's failure to follow its own Manager's Resource Guide,
which the company distributed to give managers guidance in communicating with
employees about the RIF, is evidence that their selection for the RIF was a pretext. Specifically, the Complainants contended that Stewart failed to follow
the Guide's requirement that their supervisors evaluate their skills before
selecting them for the RIF. Post-Trial Memorandum at 21, 23, RX 8 at 4. But
the Guide provides that skills be considered only when the company reduced the
number of employees in a particular job function. Id. In Breaux's
and Allen's cases, Stewart eliminated their entire job function. In Waldon's
case, skills did not come into play because Waldon chose to leave rather than
wait for her job to be terminated at some unknown date. Tr. 200-01. Therefore
we reject the argument that Stewart's failure to follow the Guide demonstrates
pretext.
Conclusion
Substantial
evidence supports the ALJ's conclusion that Allen, Breaux, and Waldon did not
engage in protected activity when they complained about irregularities in
Stewart's accounting practices. Substantial evidence also supports the ALJ's
conclusions that the Complainants' increased error rates and Breaux's and Allen's
workspace relocation were not adverse employment actions, and that none of the
Complainants demonstrated the existence of a hostile work environment. Finally,
even if we assume, as the ALJ did, that the Complainants had engaged in
protected activity, substantial evidence supports the ALJ's conclusion that
protected activity did not contribute to Stewart's decision to select the QA
positions for the RIF. We therefore DENY their complaint.
SO ORDERED.
OLIVER M. TRANSUE
Administrative
Appeals Judge
M.
CYNTHIA DOUGLASS
Chief
Administrative Appeals Judge
