New "Misconduct" Standard for Unemployment Benefits Clarified

Several major amendments to the Wisconsin unemployment law were enacted in January of 2014. The changes were intended to tighten eligibility standards for receipt of unemployment, thus providing relief to employers’ unemployment accounts and the state unemployment fund, which was experiencing a significant shortfall.

Among the key changes were modifications of eligibility standards for employees who are terminated for “misconduct.” Employers were optimistic that the new changes would add clarity to the definition of “misconduct,” and would make it more difficult for employees who fail to comply with workplace rules or expectations to successfully pursue unemployment claims.

Some of that optimism has faded. On April 14, 2016, the Wisconsin Court of Appeals issued a decision narrowing the new “misconduct” criteria, making it more challenging for employers to oppose unemployment claims. The purpose of this article is to explain the new decision and provide guidance on avoiding unemployment liability when employees are terminated for “misconduct”.

Key Provisions of 2014 Unemployment Amendments

Prior to 2014, there was no express definition of “misconduct” in the unemployment statutes. Rather, the circumstances sufficient to disqualify a terminated employee from unemployment benefits were defined by court cases, dating back to the 1941 Wisconsin Supreme Court decision in Boynton Cab v. Schroeder. In Boynton Cab, the Court defined “misconduct” as conduct which evidences a “willful or wanton disregard for the employer’s interests.” In the 73 years following that case, Wisconsin courts and the Labor and Industry Review Commission (“LIRC”) fashioned various iterations of the Boynton Cab definition, but employers remained frustrated with the inconsistencies between those iterations and what appeared to be an ever-relaxing standard in favor of providing unemployment benefits to employees regardless of the egregiousness of their conduct.

In 2014, the Wisconsin legislature attempted to redefine the standards of “misconduct.” The new rules, contained in amendments to Sections 108.04(5) and 108.04(5g) of the Wisconsin Statutes, itemized various types of conduct which constitutes “misconduct.” First, Section 108.04(5) memorialized the general definition of “misconduct” from the Boynton Cab case and added seven other categories of specific behaviors which also constitute misconduct. These included violations of drug and alcohol policies; theft; certain criminal convictions; harassment, assault or physical violence; certain absenteeism; falsification of records; and violations of governmental licensing standards.

The amendments also created a new category of misconduct entitled “substantial fault.” “Substantial fault” was defined as “acts or omissions of an employee over which the employee exercised reasonable control and which violate reasonable requirements of the employer.”

Three exceptions to “substantial fault” were created for the following circumstances:

• One or more minor infractions of rules, unless an infraction is repeated after the employer warns the employee about the infraction.
• One or more inadvertent errors made by the employee.
• Any failure of the employee to perform work because of insufficient skill, ability or equipment.

Employers were encouraged by the clarification of the “misconduct” standard, the recognition of the seven categories of egregious acts, and, in particular, by the creation of the new “substantial fault” standard, which was anticipated to be a frequent basis for defending claims. However, the new standards had not been tested by the courts. This changed in April of 2016 when the Wisconsin Court of Appeals issued its decision in Operton v. Walgreen Co.

Background Facts

On March 24, 2014, a Walgreens’ pharmacy store terminated the employment of Lela Operton. Ms. Operton had been employed as a cashier for just under two years. She had received training in Walgreens’ cash handling procedures, policies for handling checks from the Women, Infant and Children (WIC) program, and on the general written policies and procedures for her cashier’s job. She knew that the failure to comply with the cash and check handling policies would result in discipline.

During her brief tenure, Ms. Operton failed to follow the cash and check handling procedures on multiple occasions, leading to various discipline steps and, ultimately, her termination.

• On 10/19/12, Ms. Operton received a verbal and written warning for failing to follow the WIC check handling procedures, which resulted in a financial loss to the store.
• On 2/12/13, Ms. Operton again violated the WIC check handling procedures, which resulted in a financial loss to the store.
• On 3/6/13, Ms. Operton received a written warning for violating WIC check handling procedures, which resulted in a financial loss to the store. The warning cautioned Ms. Operton that “further failure to follow proper procedure will result in further disciplinary actions to include further write-ups, suspension and up to and including termination”.
• On 7/24/13, Ms. Operton again violated the WIC check handling procedures and received a “final” written warning.
• On 1/1/14, Ms. Operton again violated the WIC check handling procedures. She was again given a “final written warning” and told she was getting “one more chance.”
• On 1/29/14, Ms. Operton again violated the WIC check handling procedures. The store gave her another “final written warning” and a two-day suspension.
• On 3/18/14, Ms. Operton again violated the store cash handling procedures, resulting in yet another “final written warning.” This warning indicated “any cash handling error, no matter the type, will lead to termination.”
• On 3/24/14, Ms. Operton again violated the store cash handling procedures and was terminated.

Walgreens’ believed it had gone “over and above” its legal obligations before terminating Ms. Operton. It had given her numerous warnings, including at least 4 “final” warnings, a two-day suspension and multiple “last” chances.

Walgreens’ also believed that the termination satisfied the elements of “substantial fault.” Its cash handling and WIC check procedures were certainly “reasonable” requirements, and its termination of Ms. Operton was for “acts or omissions over which the employee exercised reasonable control.” Ms. Operton was admittedly aware of the policies and procedures and was aware that violations of those policies and procedures would result in termination (particularly after receiving numerous warnings). Since it had given Ms. Operton many warnings about her violations, the Company felt confident that none of the exceptions to “substantial fault” applied.

When Ms. Operton applied for unemployment, the Initial Determination indicated that she was ineligible because she was terminated for “misconduct.” She appealed, and an Administrative Law Judge found that she was ineligible because she was terminated for “substantial fault.” She then appealed to the LIRC. The LIRC affirmed the denial of benefits on the basis of “substantial fault.” She then appealed to a Circuit Court. The Circuit Court judge also affirmed the finding of “substantial fault.” Finally, she appealed to the Wisconsin Court of Appeals.

To the shock of Walgreens’, the Court of Appeals reversed the prior decisions and held that Ms. Operton was eligible for unemployment because she satisfied one of the exceptions to the “substantial fault” rule.

Operton Decision

The Court of Appeals based its decision on several factors.

First, it held that Walgreens’ termination of Ms. Operton was not for “infractions” of rules or policies, but was for “errors.” The Court pointed to Walgreens’ termination documentation, which recited the reason for Ms. Operton’s dismissal as “repeated cash handling errors.” Many of the earlier disciplinary warnings and steps referred to “errors” as opposed to “infractions” or “violations” of rules or policies. Moreover, the Court noted that Ms. Operton’s supervisor offered to provide her with a recommendation, which it felt would not have been offered had her termination been for rules infractions versus “errors.” The Court surprisingly concluded that “Walgreens never offered any evidence that Operton committed an ‘infraction,’ let alone a ‘major’ infraction.”

The Court then held that the second exception of the “substantial fault” rule applied, concluding that Ms. Operton had been terminated for making “one or more inadvertent errors.”

The Court noted that the dollar amounts of most of the “errors” were relatively nominal (the largest was $399.27, the smallest was 17¢). The Court further noted that Ms. Operton had handled an estimated 80,000 transactions during her 20 months of full-time employment. It also noted that Walgreens’ had described her work and demeanor as “conscientious,” that she was “always on time,” “worked to the best of her ability,” and was “willing to work on her days off.”

Walgreens’ argued that even if the initial violations were classified as mere “errors,” they could no longer be characterized as mere “errors” once she had received multiple warnings which reiterated the proper policies and procedures to follow. At that point, the “errors” were more properly characterized as “infractions” of those rules and policies. The Court rejected Walgreens’ argument declaring, “Inadvertent errors, warning or no warnings, never meet the statutory definition of substantial fault.”

Aftermath of Operton Decision

It is often said that “bad facts make bad law.” The Operton decision is probably a fitting example of this.

Even during the Boynton Cab era, conduct arguably constituting an “error” could preclude employment when that conduct violated policies or procedures and was preceded by sufficient warnings. By failing to provide clear differentiation between an “error” and an “infraction,” the Operton decision has now reintroduced some of the definitional uncertainties that the 2014 amendments were intended to resolve.

The Court may have sympathized with an employee who handled an estimated 80,000 cash transactions during her 20 months of employment with only 8 issues (a success rating of 99.99%), and where the total financial impact of the violations was relatively nominal. Certainly, Walgreens’ could have taken more care to characterize the violations as “infractions” versus “errors” and could have avoided glowing performance evaluations when the employee was at the same time receiving multiple disciplinary warnings. Certainly Walgreens’ could have avoided the humanitarian gesture of offering a reference letter to the employee (never predicting that a Court would in effect punish them for doing so). However, the Court’s failure to provide a bright line definition will, unless the case is clarified by the Wisconsin Supreme Court, likely result in uncertainty and more litigation. This could not have been what the Wisconsin legislature anticipated when it modified the statute.

Takeaways for HR

What should HR professionals do to better avoid the result in the Operton case? There are several important takeaways:

• Avoid Reference to “Errors.” One of the factors which cost Walgreens’ dearly was its tendency to characterize Ms. Operton’s behaviors as “errors” rather than “infractions.” Going forward it is important for HR professionals to avoid using the term “error” in disciplinary warnings and termination documentation.
• Recite the Rule or Policy Being Violated. A corollary to the “error” rule is to always include the specific rule or policy being violated by the employee in discipline and termination documentation. By referring to the specific rule, it will be easier to classify the event as an “infraction” versus an “error.”
• Ensure Evaluations Take Discipline Into Account. A common oversight by managers is the failure to take into account all discipline issued to the employee during the period of time covered by a performance evaluation. Even more problematic is the risk created when the results of the performance evaluation are inconsistent with the discipline issued. In the Operton case, Walgreens’ referred to the employee as being “conscientious” but made no reference to her various disciplinary warnings or to instances where she was less than “conscientious.”
• Review Wording of Responses to Unemployment Claims. Employers often underestimate the importance of the specific wording of their response to an unemployment claim. In some cases, an employer may simply attach a termination form or provide a brief description of the termination. HR professionals should be very cautious and precise when completing responses to unemployment claims and make every effort to meet one or more of the definitional categories of “misconduct” if they intend to oppose unemployment.
• Defend Unemployment Claim on Basis of “Misconduct” and “Substantial Fault.” Another mistake made by Walgreens’ was to focus solely on the “substantial fault” standard of misconduct instead of also relying on the general definition. The Initial Determination in the Operton case held that she was not eligible for benefits under the general “misconduct” standard. However, the successive appellate decisions relied solely on the “substantial fault” standard. Some conduct, particularly violations of policies or procedures which have been preceded by prior warnings, meet both the general “misconduct” standard set forth in 108.04(5) and the “substantial fault” standard set forth in 108.04(5g). Nothing precludes an employer from relying on both sections to oppose benefits.

Conclusion

The Operton decision is the first case to interpret the 2014 amendments. Unfortunately for employers, that decision has muddied the waters concerning the types of misconduct which will qualify as “substantial fault.” HR professionals should learn from the unfortunate experience of Walgreens’ in order to avoid the same result. Care must be taken in the wording of discipline forms, performance evaluations and responses to unemployment claims. Attention must be paid to properly characterize the basis for opposing unemployment benefits, and consideration should be given to using multiple statutory sections to support such opposition.

Additional information on unemployment benefits, unemployment eligibility and the Operton case may be obtained from the LCOJ Employment Law Team.

Written By:
Attorney Gregory A. Grobe