by Tim Sukel

The Congressional hearings on the appointment of United States Supreme Court Justice Clarence Thomas, followed by the Paula Corbin Jones saga, have told Americans more than they want to know about inappropriate conduct in the workplace. While many people were disgusted with the details of these incidents, there was a positive side to the media frenzy. Americans were thoroughly educated on what was not acceptable workplace behavior.

Today, most everyone understands that unwanted obscene comments or groping are prohibited in the workplace. Obscene pictures or jokes are not displayed at workstations. Likewise, jokes or comments that are demeaning or offensive to certain classes of people are not discussed around the water fountain. The Clarence Thomas and Paula Corbin Jones matters have taught employers and employees alike that there will be serious consequences for participating in or condoning such behavior.

Unfortunately, with the introduction of the Internet into the workplace, many individuals have forgotten these lessons and lost their common sense at the same time. An individual who would never think of reading an adult magazine at work may very well not think twice about surfing adult/ pornographic Web sites from his/her desktop computer. Similarly, because of a perception of anonymity associated with e-mail, many people will forward jokes or graphics that would be extremely offensive if told or shown in a group of people. Naively perhaps, these individuals, through their cyber activities, are creating a potential "discriminatory or hostile work environment."

These problems are compounded by the fact that much of what is on the Internet is easily downloaded and can then be forwarded to others throughout the organization. The same holds true for an e-mail. People will say things in an e-mail message that they would never dream of setting forth in a formal memorandum. Material never meant to be disseminated throughout the workplace now can be with the click of a mouse.

Moreover, many people are under the mistaken assumption that they can delete an e-mail message, thereby, destroying its existence. Most, if not all business organizations, however, store electronically generated messages on back-up tapes that can be retrieved. The tapes are generally kept for six months to a year and are then destroyed or written over. But electronic data that is erased or overwritten may still be retrievable. A savvy attorney representing a claimant in a discrimination/ harassment case knows this and will certainly seek those tapes in the discovery process.

Besides employment related liability arising through the use of the Internet, employers also have other liability issues to be concerned about. For example, most business application software is provided through a licensing agreement rather than sold. If an employee uploads or copies this software, the employer may face liability for breach of the licensing agreement as well as copyright infringement.

Likewise, employees may unknowingly violate copyright laws by downloading and disseminating protected software, sound, text or graphics files from the web. If done on company time, the employer may have liability.

Finally, an employer may have potential liability under tort law for defamation. There are countless chatrooms and newsgroups on the web. Again, the casual nature of e-mail and the misperceived anonymity associated with it may cause employees to send messages and say things that they would not otherwise say or write. The ease with which e-mail can be forwarded to others facilitates "publication" of the defamatory statement. If these messages are sent during business hours, the employer has potential liability.

Many employers are also naive when it comes to the Internet. Many believe they do not have a problem with their employees. A recent study by Nielsen/Net Ratings (the television survey company) should discourage this notion. The survey found that during the month of January 2000, employees spent an average of twenty-one (21) hours online during business hours using their office computers. The survey also found that most of that time spent surfing the net had nothing to do with their job responsibilities.

Thus, the risks associated with Internet use in the workplace are clear. There are untold benefits to be gained, however, through proper use of this medium of communication. The risks can be contained through other technologies, appropriate policies and procedures and training.

Technology

There is technology available to help protect employers from many of the risks outlined above. For example, there are software filters available that will deny access to Web sites that employers deem inappropriate. The software will also provide an explanation to the employee that access to the site is prohibited by company policy and thus educate employees on what is and is not appropriate workplace behavior. The cost associated with this software is minimal when compared to the potential cost of the liability it may protect the employer from.

There is also monitoring software which will provide information on each employee's use of the Internet; i.e., what sites were accessed, the amount of time spent online, what e-mail messages were sent or if the employee attempted to access a prohibited site. There are, however, employee privacy issues associated with monitoring devices. These issues can easily, and must be, addressed in an "Internet/E-Mail Employee Policy."

Employee Policies/Manuals

If employees are given e-mail/Internet capability, the "Employee Manual" must be updated to address the issues set forth above, and to clearly delineate what is permitted and what is not. The following topics and bullet points should be addressed in most E-Mail/Internet Policies. Depending on your institution's particular business needs, this list may be expanded or retracted as needed. It is suggested that any such revised policy be required reading for all personnel and that they acknowledge having done so in writing.

• E-mail is to be used only for company purposes and constitutes company records.
• the company has the right to monitor, record and disclose all e-mails made using company equipment without prior notice.
• No right of privacy exists for any user of company equipment to produce or receive e-mails.
• Authorized company personnel, for confidentiality reasons, may only access e-mail messages.
• E-mail messages are easily distributed by recipients. If the message is confidential the recipient should be advised not to copy or forward the message.
• E-mail messages should be brief, professional and courteous. Profane or harassing language is Strictly forbidden and is in violation of the company's anti-harassment policy.
• Receipt of obscene, profane or harassing e-mails should be reported immediately to the Human Resources Department and your manager.
• E-mail messages are discoverable in litigation and admissible in court.

• Access to the Internet is for the benefit of the company.
• Internet sessions are company records and the company may monitor and disclose all such sessions without prior notice. Such sessions will be periodically audited without prior notice.
• Downloading of software or information from the Internet must be for business purposes only and requires manager approval.
• Copyrighted materials may not be downloaded or transmitted on the company network.
• Company equipment may not be used to create personal web sites or web pages.
• Creating, forwarding or retaining inappropriate files will result in disciplinary action, up to termination.
• Receipt of inappropriate or offensive files should be reported to the Human Resources Department and your manager.

• Software on workstations is company property and may not be copied or reproduced. Unauthorized copying of company software is a violation of federal copyright law.
• Downloading or installing non-company software into workstations is strictly prohibited.

• Set forth the specific time period when documents will automatically be deleted.
• Require employees to regularly delete e-mail messages after three months. Messages needed for a longer period of time should be transcribed and then deleted from the electronic file.
• Suspend the automatic deletion process once litigation has commenced. Destruction of evidence can lead to serious legal sanctions against the company.

Conclusion

The Internet and e-mail are here to stay. Encourage your employees to take full advantage of these technologies to improve your business. Train them on appropriate uses of these communication mediums and incorporate sound policies to protect your institution. Cyberspace does not have to mean cyber-liability.

A new risk management tool to protect your bottom line! Free of charge to all participants that have purchased Employment Practices Liability Insurance

Employment-related litigation is on the rise and threatens every financial institution's bottom line. Employment Practices Liability Insurance provides protection against financial loss, but only preventive action - sound policies and procedures strictly adhered to - can mitigate the headaches that can accompany even a frivolous lawsuit.

Make sure you're taking prudent steps to address workplace issues while minimizing the bank's exposure to employment-related lawsuits.

The next time you have an employment-related question, call our new Employment Practices Helpline. Attorneys from Jackson Lewis are available to:

• guide you through the proper steps with respect to personnel actions
• answer employment-related legal questions
• identify the best approach for investigating, documenting and resolving workplace issues or disputes

This valuable new tool is available free of charge to all ABA-sponsored insurance program participants that have purchased Employment Practices Liability Insurance.

Helpline conversations create an attorney/client privilege between Jackson Lewis and the financial institution. Conversations are confidential and issues discussed are not reported to the ABA-sponsored insurance program. Any information provided by the financial institution to Jackson Lewis does not constitute notice of a claim to the ABA-sponsored insurance program.

How do I use the Employment Practices Helpline?
There's no pre-registration; the helpline is automatically available to all EPL customers of the program. If you have not yet received the toll-free Helpline number, please call your underwriter at 800-274-5222. Then, all you need to do is call the Helpline and a Jackson Lewis representative will take your information and pass it on to the appropriate attorney who can best address your question. The attorney will return your call within approximately 24 hours.

Is there a limit to the number of calls I can make? There is no limit on the number of times you can use this service. Again, however, use is limited solely to our EPL customers.

If I am sued, am I obligated to use Jackson Lewis? No, you are not obligated to use Jackson Lewis as defense counsel. If you choose to do so, however, we have negotiated a discount rate for our insureds on defense matters.

Should I call Jackson Lewis to give notice of an EPLI Claim? No. Any information provided by the financial institution to Jackson Lewis does not constitute notice of a claim to the ABA-sponsored insurance program. Notice must still be given to Progressive.

What other benefits are available under this program? As an additional benefit to ABA-sponsored insurance program participants, Jackson Lewis will conduct employment practices audits or training seminars for your institution at a discounted rate. These are not free services provided under the Employment Practices Helpline.

What is the cost of the Employment Practices Helpline? There is no cost! It's Free!

How can you benefit from using the Helpline? Employment-related lawsuits - involving performance evaluation, hiring/firing decisions, workplace conditions, alleged harassment, etc. - are on the rise. With all the other "business-related" demands on one's time, becoming an employment law expert is not feasible. Often, managers make quick decisions or take action to dismiss an issue quickly and quietly so they can move on to other important issues.

Even in those situations where financial institutions make an employment decision for valid reasons, a disgruntled employee may bring suit. The best defense to minimize this threat is to ensure that proper procedures are followed. A call to the Employment Practices Helpline can provide you with free legal advice to answer questions such as these:

• An employee wants to take time under FMLA to care for a sick aunt she lives with; do we need to accommodate her?
• A teller has complained that our president, a leader in the community with an impeccable reputation, has made sexually explicit comments to her after hours. We believe that she has psychological problems and put no credence in her allegations. Can we just ignore it?
• Two employees have developed a relationship over the past few months and we are very excited about their upcoming wedding. Could there be ramifications in our office, and how do we address the situation?
• We are about to terminate an employee for habitual tardiness, after giving warnings in accordance with our discipline policy. Today he came in and said that his doctor claims he is suffering from depression. Are we okay to terminate him, as long as we have adhered to our policy?
• An employee was surfing the internet during his lunch hour (which we allow) and a colleague noticed that he was looking at "inappropriate" websites. How do we address this?
• What types of questions are impermissible on employment applications or in interviews?
• As an additional benefit to ABA-sponsored insurance program participants, Jackson Lewis will conduct employment practices review audits or training seminars for your institution at a discounted rate.

About Jackson Lewis
For over 40 years, Jackson Lewis has placed a high premium on preventive strategies and positive solutions in the practice of employment law.

With offices in 20 major cities throughout the U.S., Jackson Lewis combines a national perspective with an awareness of local business environments and experience in all aspects of: employment litigation, affirmative action, race, gender and age discrimination, sexual harassment, preventive labor relations, union avoidance, strikes, collective bargaining, grievance arbitration, employee leaves, pension and benefit administration, immigration, wage and hour, independent contractors, occupational safety and health, substance abuse and drug testing, employee privacy, disability rights, workplace violence, restrictive covenants and non-compete agreements, and alternative dispute resolution.

When a client seeks counsel in any of these areas, an experienced attorney is assigned to deliver the most effective representation. For more information about Jackson Lewis, call Paul Siegel at (516) 364-0404 or access their web site at www.jacksonlewis.com.

by Laura Simmons, EPL Supervisor

Documentation is often the key to avoiding liability in employment-related claims. With good documentation, an employer is no longer dependent on a "he said, she said" scenario, but can offer concrete proof of the actions that it took and the performance problems that may be at issue.

In addition, unless the employee suffered a tangible job detriment, an employer can avoid liability by showing that it took prompt remedial action in connection with a harassment complaint. When an employer takes prompt remedial action and documents such action in comprehensive and timely memos, it dramatically improves its defense of any future claim.

While documentation is important, unfortunately bad documentation can sometimes be worse than no documentation at all. Some documentation can be inflammatory and make the employer's action appear discriminatory. Accordingly, the following should always be considered in connection with any documentation:

• Be fact specific. Set forth the situation and the consequences. For example, if documenting an attendance issue, include the fact that the employee was late or absent and explain the consequences of the absence.
• Draft the document close in time to the incident at issue. Documentation drafted weeks or months after an incident occurs loses its effectiveness.
• Watch adjectives. Sometimes employers use descriptive words to describe employees (i.e., lazy, moody, emotional). Rather than use such words, just set forth the incident in question. It is much more effective to set forth the actual incident than to merely refer to an employee as having a "bad attitude."
• Do not keep drafts of documents or circulate drafts by e-mail. Only the final document should be retained so that there are no apparent inconsistencies in the process.
• Be consistent. Consistently document problems as they occur. Do not let bad habits become ingrained.
• Keep a separate file involving any investigation. Such information should not be contained in an employee's personnel file.
• Picture every document in front of a jury. Would it make a juror mad? Does it make the employer appear fair?

by Tim Sukel

We recently sent a SafeAlert advising of large claims that had been reported to us involving factoring of receivables. Unfortunately, this problem continues and we are seeing community banks throughout the country suffering losses ranging from $500,000 to $5,500,000.

One example of what can happen if appropriate procedures are not followed is a bank that suffered a loss of approximately $1.1MM dollars. Two employees had complete responsibility for the factoring program, a loan officer and a clerk. There was no other oversight. Neither individual had any previous experience in the factoring business. The bank believed this was a relatively risk free venture.

The loss was the result of the bank purchasing bogus receivables and payments being sent directly to the bank's factoring customer, rather than to the established lock box. The bank maintained a 10% reserve account for this customer and performed quarterly confirmations of 30% of the outstanding receivables. It also prepared aging reports that went to the account officer. The bank, however, only received a 10% response to the confirmations. The account officer did not consider no response to a confirmation to be a problem. The fraud went undetected for a seven-month period.

In hindsight, it appears the following factors contributed to the fraud:

1. The bank thought the factoring program was risk free. Accordingly, little was done to establish sound internal controls for the program; i.e., there was no oversight over the two individuals running the program.
2. The program generated significant revenue. Accordingly, this supported the notion that the program was risk free.
3. The individuals running the program had little training. The clerk simply followed instructions in a manual. The account officer did not have any type of fraud training and did not know what should be a warning sign of fraud (e.g., a low response rate to confirmations).
4. The factoring customer was able to manipulate its own customers to misdirect payments from the lock box or in some cases, instructing those customers how to respond to confirmations.
5. The bank was not permitted to have direct contact with the customers named on the invoices it purchased.
6. The factoring customer had a long relationship with the bank. Accordingly, it had complete trust in the customer. A 10% response rate to confirmations did not generate suspicions as it would if a relatively unknown customer was involved.
7. A factoring program may not be suitable for small businesses. These operations already have a tight profit margin and many times, cash flow problems. The 10% or greater reserve account, along with the bank's 3% profit on the purchase of the invoices, may actually cause greater cash flow problems. When this problem is combined with the fact that payments can easily be misdirected and bogus receivables easily generated, a financially strapped factoring customer may be tempted to do whatever is necessary to stay in business.

Similarly, another bank suffered a loss of approximately $750,000. The bank maintained a 10% reserve account and conducted periodic confirmations of the purchased receivables. The factoring program was again run solely by two individuals, an account officer and a clerical person, both of whom had little if any training on fraud or factoring. There was no additional oversight of the program. The factoring customer in question was also a long time customer of the bank. The fraud occurred through the creation of bogus receivables and payments misdirected from the lockbox.

All of the contributing factors noted above were also present in this loss. There was, however, one additional breakdown in controls that played a major role. The clerk was responsible for the confirmation process. Responses were received disputing some of the purchased invoices. The clerk took this information to the account officer who would contact the factoring customer for an explanation. Because it was an established customer, the officer accepted any reasonable explanation to a questionable invoice. Had the officer conducted further inquiry, the fraud would have been detected. Additionally, had the clerk been required to forward negative findings on to someone other than the account officer for follow up, the fraud would have been detected.

Unfortunately for the banks noted above, losses resulting from factoring of receivables is not covered under the financial institution bond. While there is some coverage available in the market place for factoring, all of the banks we have seen suffering losses did not purchase this coverage. They found it too expensive, had absolute trust in their customers and believed there was little, if any, risk associated with this business.

If your institution is involved in the factoring business, or is contemplating doing so, consider the following:

1. Is the factoring program appropriate for a particular business customer; i.e., will it cause greater cash flow problems for that customer?
2. Is there collateral to protect against losses? Although most factoring programs employ reserve accounts, history has shown that these are insufficient protection. Without other sources of recovery, the factoring business is essentially an unsecured commercial loan.
3. Factoring is not risk free. Treat the business the same as the commercial loan portfolio.
4. Train the employees responsible for the factoring program on fraud detection.
5. Implement sound internal controls throughout the program. Do not leave complete oversight for the business in the hands of those responsible for the day to day operations, and;
6. Follow up on questionable responses to confirmations. Do not rely solely on the word of the factoring customer. Inquiries should be made by someone other than the account officer who has an interest in keeping the customer happy. This responsibility should be placed with someone outside of the factoring program, preferably internal audit. Findings should be reported to the account officer and someone else in senior management.
7. The factoring business can generate significant revenues if handled properly. Failure to do so, however, can result in six to seven figure losses; losses which are not covered by the financial institution bond.