• EMPLOYER LIABILITY FOR NEGLIGENTLY CAUSING HARASSMENT
• LLCs and LLPs in Tennessee

On claims of sexual harassment, an employer might defend tort claims such as assault, battery, or intentional infliction of emotional distress with evidence that the harasser acted outside the scope of his employment, and therefore the employer cannot be liable under ordinary agency principles. The federal employment discrimination law has limitations including administrative filing requirements and dollar limits on damages, and requires action in federal court, which plaintiffs' lawyers may regard as an unfriendly forum. One way plaintiffs may seek to avoid these limitations is to claim under state law that the negligence of the employer itself in the hiring, retention, or supervision of the alleged harasser was the proximate cause of the harassment.

Negligence in hiring is measured on facts available pre-employment, while negligent retention may be based on facts learned by the employer after the decision to hire. Historically, negligent hiring and retention claims were based on an employer's failure to recognize the employee's incompetence, which in turn caused injury to the persons or property of others. By contrast, claims of sexual harassment are often a poor fit under these precedents, because many harassment claims result in no physical injury and the issue is not the employee's functional competence but rather his propensity for committing what often amounts to criminal acts. Traditionally, the criminal acts of an employee were regarded as unforeseeable events for which an employee was not held responsible.

Virginia.

Virginia courts have recognized claims for negligent hiring and negligent retention. See Southeastern Apartments Management, Inc. v. Jackman, No. 981000 (Va. Supr. Ct. February 26, 1999). Apparently, however, there is no claim for negligent supervision in Virginia. In Chesapeake and Potomac Telephone Co. of Virginia v. Dowdy, 235 Va. 55, 365 S.E.2d 751 (1988), the Supreme Court held that Virginia law imposes no duty of reasonable care on an employer for the supervision of its employees. 365 S.E.2d at 752-54; see Tennant v. American Home Products Corp., 1994 WL 1031390 (Richmond Cir. Ct. 1994). Dowdy has been interpreted to mean that the employer has no duty to prevent sexual harassment. See Spencer v. General Electric Co., 894 F.2d 651, 656-57 (4th Cir. 1990).

Negligent hiring imposes liability on an employer for placing an "unfit" person in an employment situation involving an "unreasonable risk of harm to others." J. v. Victory Tabernacle Baptist Church, 236 Va. 206, 372 S.E.2d 391 (1988). The employer's liability results from placing a person whose propensities are known or "should have been discovered by reasonable investigation" in an employment situation in which "because of the circumstances of employment, it should have been foreseeable that the hired individual posed a threat of injury to others." Southeastern Apartments Management, Inc. v. Jackman, No. 981000 (Va. Supr. Ct. February 26, 1999). If the employer puts an unfit person in such a situation, the employer can be liable for resulting harm even though the actions of the bad employee were not within the scope of his employment.

The element of "an unreasonable risk of harm" has been held to require "the threat of serious and significant physical injury." Parker v. Geneva Enterprises, Inc., 997 F. Supp. 706, 713 (E.D.Va. 1997). In the context of sexual harassment, this element could eliminate the employer's exposure for negligent hiring claims where the bad employee engaged in discriminatory or harassing behavior that did not reach the level of physical contact.

The Virginia cases emphasize that the plaintiff claiming negligent hiring must produce evidence about the bad employee that would have caused a reasonable employer to not hire him. Proof that the bad employee had not been specifically trained in avoiding conflicts or the law of sexual harassment would not be sufficient to show that the employer should have known the employee would engage in bad behavior. The employer's duty to investigate varies with the circumstances and the nature of position. The Supreme Court has upheld a finding of negligence per se against a company that hired without any background check an incompetent contractor to perform especially dangerous work. See Philip Morris, Inc. v. Emerson, 235 Va. 380, 399-401, 368 S.E.2d 268, 278-79 (1988). A complete failure to make a background check might nevertheless be reasonable where the risk of harm to others was slight, as where the position involved minimal contact with others. Compare Terrell v. Rexrode, 1991 WL 835274 (Fairfax County Cir. Ct. 1991) (bridge construction workers not expected to be in contact with public). Recently, on a claim that the employer/landlord was negligent in failing to prevent the rape of a tenant by an employee, the Supreme Court held that an landlord's reliance on its employee's responses to a detailed job application was sufficient to meet the employer's duty of care. Southeastern Apartments Management, Inc. v. Jackman, No. 981000 (Va. Supr. Ct. February 26, 1999).

Virginia cases also emphasize that the employer's duty is limited to preventing foreseeable harm. In many contexts, Virginia law recognizes that there is no duty to control the behavior of third parties, and this rule is "especially the case when the third person commits acts of assaultive criminal behavior because such conduct cannot reasonably be foreseen." Marshall v. Winston, 239 Va. 315, 389 S.E.2d 902, 904 (1990). A physical touching or an assault is a criminal act. Absent specific evidence that the bad actor had committed similar assaults in the past, the employer should have a strong argument that the employee's conduct was not foreseeable and therefore the employer did not act unreasonably in hiring him. Usually, information that the employee has been involved in petty offenses or has some history of substance abuse problems would not be sufficient to put the employer on notice of a propensity for violent sexual misconduct.

Tennessee.

Tennessee recognizes a cause of action for negligent hiring. An employer "is liable for harm resulting from [its] negligent conduct in the employment of improper persons or instrumentalities in the work involving risk of harm to others." Phipps v. Walker, 1996 WL 155258 (Tenn. App. 1996). To establish negligent hiring, the plaintiff must show that the applicant was unfit for the job, that the applicant would if hired pose an unreasonable risk to others, and that the employer knew or should have known that the applicant's past bad acts would be repeated. "[D]epending on the particular employment and unless put on notice, an employer has no duty to check every job applicant's background. This rule applies with greater force to a routine, non-sensitive position." Gates v. McQuiddy Office Products, 1995 WL 650128 at *2 (Tenn. App. 1995).

Unlike in Virginia, the Tennessee Supreme Court has concluded that negligence in hiring cannot be the proximate cause of torts committed the scope of the bad actor's employment. See Corder v. Metropolitan Government of Nashville, 852 S.W.2d 173, 181 (Tenn. 1992). This distinction makes the negligent hiring claim much less useful to the Tennessee plaintiff, who must prove that the scope of the bad actor's employment encompassed the alleged bad acts.

The Tennessee courts have emphasized the requirements of foreseeability and proximate cause, which often eliminate claims of employer negligence. The criminal act of an employee may unforeseeable and a superseding, intervening cause that would cut off any liability to the employer. The Tennessee courts have recognized that a criminal record or substance abuse problem in itself does not put the employer on notice that an employee is likely to commit all manner of crimes.

Unlike Virginia, Tennessee recognizes a claim for negligent supervision. On such a claim, "it must be shown that the employer was in complete charge of the work being performed by the employee." Gates, 1995 WL 650128 at *3 (citing East Vollentine Courts, Inc. v. Fouch, 376 S.W.2d 320 (Tenn. App. 1963)). Strict application of this requirement would preclude many harassment-based claims, as one might expect that "supervised" harassment is increasingly rare. The case law recognizes that in most cases, employers of necessity cannot provide supervision of their employees at all times.

In Hays v. Patton-Tully Transp. Co., 844 F. Supp. 1221 (W.D. Tenn. 1993), the court concluded that there could be a claim for negligent supervision under Tennessee law based on acts of sexual harassment where the bad employee had committed some kind of actionable tort against the plaintiff. The plaintiff in Hays claimed the employee was guilty of sexual harassment that was actionable as intentional infliction of emotional distress. Although there is some suggestion in Hays that the employer can be liable for acts outside the scope of the bad actor's employment, this holding is probably wrong, in light of other Tennessee cases to the contrary. See Gleaves v. Checker Cab Transit Corp., Inc., 1998 WL 639109 (Tenn. App. 1998) (rejecting claim based on conduct outside the scope of employment for lack of causation).

Conclusions.

To avoid liability for negligence in hiring or retention of its employees, the employer must be reasonable in acting on the available information that would reflect on the likelihood that an applicant or current employee would harass co-workers. The employer should include in its hiring process an inquiry about arrests or convictions for assault and any past claims for sexual harassment. The employer should also check references and enforce uniform discipline against applicants and employees who are shown to have lied or made unreasonable omissions on their job applications.

Once the applicant is hired, the employer must investigate claims of sexual harassment. Risk management as to state law negligence claims cannot be viewed in isolation. Today's employer must establish and adhere to adequate policies and procedures to prevent sexual harassment claims.

Steven R. Minor

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LLCs and LLPs in Tennessee

On the 17th day of June, 1999, Governor Sundquist signed a bill into law which dramatically affects tax due on limited liability companies (LLCs) and limited liability partnerships (LLPs) in Tennessee. Effective July 1, 1999, all persons, except those having not-for-profit status, doing business in Tennessee shall pay an annual excise tax equal to six (6%) percent of its net earnings done in the State. Tn. Code Ann. § 67-4-2007. Also, effective the same date, all persons, except those exempted, shall pay a franchise tax of twenty-five (25¢) cents per one hundred ($100) dollars of the taxpayer's net worth, determined in accordance with generally accepted accounting principles (GAAP). Tn. Code Ann. § 67-4-2106. A "person" or "taxpayer" under this title "means every corporation, subchapter S corporation, limited liability company, registered limited liability partnership, limited partnership, cooperative, joint-stock association, business trust, regulated investment company, real estate investment trust, state-chartered or national bank, state- or federally-chartered savings and loan association and any other organization or entity engaged in business; but does not include sole proprietorships or general partnerships." Tn. Code Ann. § 67-4-2004(16). In essence, LLCs and LLPs, among other entities, are now subject to an excise and franchise tax, which corporations have already been paying. However, despite this change in taxation, the basic reason for having LLCs and LLPs still exist.

Recent Misinformation

Recently, many people have been contacted or information has been disseminated to persons doing business in Tennessee which is not the complete picture. This misinformation has caused great confusion among those expecting to form business entities in the state. However, as stated above, all that has happened is that LLCs and LLPs are now susceptible to the same excise taxes and franchise taxes paid by corporations in Tennessee. Admittedly, this significantly raises the cost of doing business as one of those entities in the state and eliminates one benefit of operating as an LLC or LLP in Tennessee, but it does not eliminate the two basic reasons most people seek either LLC or LLP status: limited liability coverage and partnership taxation.

What the Law Still Provides

Two major reasons for having limited liability organizations are (1) for the limited liability and (2) for the partnership structured taxation. In other words, a LLC or LLP provides members or partners with the same liability protection enjoyed by corporate shareholders. The limited liability acts as a shield to owners against the business entity's liabilities. In other words, personal liability does not exist, unlike exposure one finds in a general partnership or sole proprietorship. So only if one is not worried about potential personal liability exposure should one consider operating as a general partnership or sole proprietorship. A further benefit of a LLC or LLP is that there has been no change in treatment of these entities by the Internal Revenue Service (IRS). Both LLCs and LLPs are still treated as a partnership for federal taxation purposes.

Out-of-State LLCs

If you live in Virginia (West Virginia, Kentucky, North Carolina, etc.), and you either have in existence a LLC or LLP that is doing or which you expect will be doing business in Tennessee, or if you are thinking of creating a LLC or LLP in another state to do business in Tennessee, your business organization is still exposed to Tennessee excise and franchise taxes. A taxpayer doing business both within and without Tennessee when calculating its Tennessee excise tax shall be able to proportion its net earnings, net loss, or net worth by a formula set-out in the Code. Tn. Code Ann. § 67-4-2006(6)(c). The measure of the taxpayer's franchise tax shall be based on the actual value of property owned, or property used, in Tennessee, excluding exempt inventory. Tn. Code Ann. § 67-4-2108(a)(1). A taxpayer must also remember that in states, such as Virginia, which have income taxes, any income derived from the Virginia activities of that LLC or LLP, are subject to Virginia income taxes.

Summary

All states have different tax forms. If you do business in those states, you will be exposed to the tax consequences of doing business in that particular state. Nonetheless, whether you are in Virginia, Tennessee, or any another state, the two basic reasons for having a LLC or LLP still exist: limited liability coverage and partnership taxation treatment. Therefore, regardless of where the LLC or LLP is doing business, it's members or partners still enjoy the same liability protection provided to corporate shareholders, and still receive partnership taxation treatment by the IRS. Both of which are two very important business benefits for most business operators.

James Wm. Elliott, Jr.