Incentive-based compensation can have legal downside
Here's an interesting article about incentive compensation.
Such compensation is a great boon to productivity, and great way to reward employees for individual achievement, right? Yes, perhaps, but be careful what you wish for -- you just might get too much of it, resulting in unintended and undesirable employee conduct. If the conduct causes an accident or violation of the law, a plaintiff's attorney might have a field day with the incentive system.
The following article provides some examples worth considering:
"Compensation systems also have legal negatives" (by Chiree McCain for the Birmingham Business Journal)
In the long-haul trucking industry, for instance, the way many drivers are paid provides incentive for driving beyond the legal limits for speed and hours on the road. . .This conundrum does not mean employers should avoid all such incentives; the upside may very well exceed the down.
Ann Arbor, Mich.-based Domino's Pizza Inc. learned a lesson about its compensation strategy 10 years ago, after a spate of litigation related to separate auto accidents involving delivery drivers.
To encourage delivery within the pizza shop's 30-minute guarantee, some stores paid drivers a bonus of 1 percent for delivering a minimum number of pies on time . . .
Some argued the bonuses . . . encouraged drivers to speed or run stop signs in order to make deliveries. Whether the compensation structure played a part, Domino's paid for it more than once.
In 1993 . . . a St. Louis jury awarded a woman injured by a Domino's driver who ran a red light $750,000 in actual damages plus $78 million in punitive damages. . . The company ended its 30-minute guarantee a few days later. . .
[T]here are several areas where it's possible to have tension between [encouraging] employee productivity [and] provid[ing] temptation to break the law.
In manufacturing, for instance, bonuses for accident-free days could discourage employees from reporting accidents, a legal requirement under some circumstances.
Even benefits such as stock options could fuel unethical or illegal behavior. Read more
It does mean they should be carefully examined, and perhaps coupled with training and monitoring directed at avoidance of the undesirable behaviors that may be unwittingly encouraged by incentive plans.
For example, bonuses for accident free days would be coupled with training on legal reporting obligations and strict disciplinary enforcement of failure to report even relatively minor accidents.
posted by George @ 10/06/2004 05:33:00 PM 
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Jury says Hills Materials owes $5 million in punitive damages
By Vicky Wicks, Journal Staff Writer
RAPID CITY — A Pennington County jury awarded a plaintiff $5 million in punitive damages against Hills Materials and its parent company, Oldcastle Materials, after a six-day trial that ended Tuesday.
The verdict awarded former Hills Materials employee Ron Hubbard $65,000 in compensatory damages and $5 million in punitive damages.
The jury heard evidence that Hills Materials, under Oldcastle's policies, failed to report employees' injuries to the South Dakota Department of Labor or the federal Occupational Safety and Health Administration, discouraged employees from taking days off or restricting activities because of injuries, and resisted payment of workers' compensation claims.
At issue was a November 2000 workers' compensation claim that Hubbard filed to cover $5,998 in bills for surgery he had to relieve carpal tunnel syndrome that was aggravated by his job as a welder at Hills Materials.
According to a 48-page brief filed by Hubbard's attorney, Mike Abourezk, Hubbard told his supervisor that he needed to have the surgery, and the supervisor said that Hills Materials would probably pay for it but that it was important that Hubbard not miss any time from work.
Hubbard went through two surgeries and, at the advice of his doctor, took a day off from work after each.
Hubbard submitted his medical bills to Liberty Mutual Insurance Company, Hills Materials' workers' compensation provider, but he was denied compensation because his condition was pre-existing.
Hubbard then filed a claim with his previous employer, Dakota Steel, where he was working when his carpal tunnel syndrome was first diagnosed. According to the brief, Hubbard's condition had been successfully treated before he left Dakota Steel but recurred after he went to work for Hills Materials, where his job was more physically strenuous.
Dakota Steel denied his claim because Hills Materials should be liable under the "last injurious exposure rule," established in state statute and case law. According to the brief, liability for a
condition aggravated or developed over time lies at the site of the last exposure to injury.
At the time he was submitting requests for payment, Hubbard was not aware that Hills Materials' safety director, Jim Johnson, was contacting Liberty Mutual to say that Hubbard's claim should be denied. Johnson hired attorney Ben Eicher to also contact Liberty Mutual. Eicher, who had not seen Hubbard's medical bills, also told the claims representative that the claim should be denied, the brief stated.
Hubbard also was not aware, according to the brief, that Hills Materials was operating under goals set by Oldcastle, a Washington, D.C.-based company that bought the Rapid City company in 1998.
Oldcastle set a goal of less than one day of lost time due to injury for every 100 full-time employees. In 1999, Hills Materials paid almost $400,000 in incentive bonuses to 41 supervisors and in 2000, paid more than $400,000.
Johnson, who was one of the supervisors, earned more than $10,000 in bonuses in the same year he was insisting that Liberty Mutual reject Hubbard's medical claims.
In April 2001, Hubbard, pressured by medical providers for payment, took out a second mortgage on his house and paid for his surgery. In June 2001, he hired an attorney.
After a 17-month delay, Hills Materials and Liberty Mutual paid the claim. During the delay, Eicher said that Hills Materials would pay the medical bills if Hubbard agreed that his claim was "doubtful and disputed."
If Hubbard had entered into that agreement, the brief stated, Hills Materials "would retain enormous leverage" in avoiding paying Hubbard's future medical bills and could dodge a claim of bad faith.
Hubbard's attorney at the time, Jim Leach, wrote to Eicher three times — in July, September, and October 2001 — to say that Hubbard would not agree his claim was "doubtful and disputed." Eicher responded that as long as Hubbard sought payment under workers' compensation, "the insured is not offering payment. It's that simple."
On May 8, 2002, Hills Materials admitted responsibility and paid the medical bill. It isn't clear why the company changed its position.
Hubbard sued Hills Materials, Oldcastle and Liberty Mutual for bad faith. The insurance company settled, but the employers went to trial.
To justify punitive damages, Abourezk outlined statistics indicating that Hills Materials and Oldcastle developed policies of underreporting or failing to report injuries by employees.
In 1998, before Oldcastle bought the company in November, Hills Materials had 53 injuries and 306 days lost from work recorded for OSHA, according to the brief.
In 1999, with Oldcastle's policies in place, Hills Materials reported 10 injuries to OSHA with zero days lost from work or requiring restricted duty. In 2000, there were nine injuries reported and, again, no days lost to injury or requiring restricted activities.
Abourezk's investigation revealed more than 20 injuries resulting in lost time or restricted duty during a three-year period that were not reported to OSHA. There were "yet another 15 cases of injuries" with no first report of injury filed with the South Dakota Department of Labor as required by state law.
During the trial, Hills Materials was ordered by the court to produce additional records for the years 2003-2005 that revealed numerous other injuries that hadn't been reported, Abourezk said.
Injuries reported to OSHA can trigger inspections and require a company to install safety measures, the brief said.
Depositions taken by the plaintiff turned up one Hills Materials worker who required surgery for fractures. When the employee tried to stay home from work to recover, "his supervisor told him that the company has a ‘no lost time policy,'" the brief stated.
Because the employee could not drive, the supervisor picked him up at home and drove him to Hills Materials, where "supervisory staff placed him in a chair in the office area where he slept from the effects of the narcotic pain medications." Eventually, the supervisor drove the employee back home but the next day, picked the employee up again.
Another employee said that Johnson asked him not to seek medical attention for a puncture wound in his shoulder caused by flying rock from a dynamite blast. Hills Materials had been criticized recently for damage caused to homes by rocks from blasts damaging nearby homes. The employee agreed "not to seek medical attention and to keep the affair quiet," according to the briefs, and OSHA logs did not reflect any report from Hills Materials that the employee's work duties were restricted.
The brief also cited a case decided May 25, in which the South Dakota Supreme Court noted that Hills Materials, fighting a workers' compensation claim of an employee badly injured in a car wreck on her way to a job site, failed to report the injury to the state as required by statute.
Although Hubbard was awarded more than $5 million in damages, Abourezk said that his client wouldn't collect the money immediately and might never get it. Hills Materials has fought Hubbard's claims for three years, he said, and "will continue to fight for years to come."
Hubbard would agree to a reduced verdict "if Hills Materials would publicly acknowledge the wrongdoing that has taken place and take steps to stop punishing workers who receive injuries and who come forward to report them," Abourezk said.
Edward Carpenter, attorney for Hills Materials, said that an appeal is "virtually a certainty." His client's first recourse is to ask Judge Janine Kern, who presided over the trial, to grant a new trial or to reduce the award. If that fails, the defendant might appeal to the South Dakota Supreme Court.
Carpenter said that Hills Materials has been a "good corporate citizen in Rapid City" and that the case "points up the need to look at the punitive damages part of the court system, because juries are put in a position of deciding these issues without really being aware of what the parameters are and the constitutional limitations are."
Contact Vicky Wicks at 394-8318 or vicky.wicks@rapidcityjournal.com
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