ALERT: The Seventh Circuit Affirms the Right of Employers to Permanently Replace Striking Workers with At-Will Replacement Workers

The Seventh Circuit recently affirmed Jones Plastic & Engineering Co., 351 N.L.R.B. No. 11 (2007), in which the Board held that a replacement worker's at-will employment status does not detract from an employer's otherwise valid showing that the replacement worker was hired to permanently replace a striking employee. United Steelworkers v. National Labor Relations Board, Case 07-3885 (7th Cir. Sept. 15, 2008).

Factual and Procedural Background

Jones Plastic and Engineering Company ("the Company") operates a plastic manufacturing facility in Camden, Tennessee. In April 2001, the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO ("Union") was certified as the exclusive bargaining representative of the production and maintenance employees working at the Camden facility. Thereafter, the parties attempted to negotiate a collective-bargaining agreement but failed to reach agreement. In March 2002, 53 of the 75 bargaining unit members began an economic strike.

In late March 2002, the Company began hiring workers to replace the striking employees. Each replacement worker completed the Company’s standard employment application. In early April 2002, the Company sent each striking worker a letter that stated that: (1) the Company had begun to hire permanent replacements for striking workers; and, (2) any striking worker who did not immediately return to work risked being permanently replaced. By July 31, 2002, the Company had hired a replacement for each of the 53 striking employees. Each of the replacement workers signed a form that stated:

I [name of replacement worker] hereby accept employment with Jones Plastic & Engineering Company, LLC, Camden division (hereafter "Jones Plastic") as a permanent replacement for [name of striker] who is presently on strike against Jones Plastic. I understand that my employment with Jones Plastic may be terminated by myself or by Jones Plastic at any time, with or without cause. I further understand that my employment may be terminated as a result of a strike settlement agreement reached between Jones Plastic and the U.S.W.A. Local Union 224 or by order of the National Labor Relations Board.

Also prior to July 31, 2002, the Company hired an additional 33 employees to replace striker replacement workers who had left its employ. These 33 employees signed a form identical to the form signed by the original replacement workers, except that it stated that the signer was a permanent replacement for "a striker" who was not named.

Additionally, prior to July 31, 2002, the Company’s Human Resources Manager informed a replacement worker that he was a "full-time" and permanent" employee, and another employee that she was a "full-time" employee, and that replacements received the same pay and benefits previously received by the striking employees.

On July 31, 2002, the Union made an unconditional offer to return to work on behalf of all the striking employees. The Company, on the same day, sent the Union a letter stating that it had a full complement of employees, including permanent replacements. As such, the economic strikers would not be immediately reinstated but would be placed on a preferential recall list.

On August 16, 2002, the Union filed an unfair labor practice charge, alleging that the Company violated Sections 8(a)(1) and (3) of the National Labor Relations Act by failing to reinstate 46 economic strikers immediately upon their unconditional offer to return to work. In response, the Company asserted, as an affirmative defense, that it had permanently replaced the striking workers. On February 9, 2004, the parties filed a joint motion to transfer the proceeding to the Board and a waiver of the right to a hearing before, and a decision by, an administrative law judge.

At-Will Employment Status Does Not Detract from an Otherwise Valid Showing of Permanence

In a 3-2 opinion (Chairman Battista, Members Schaumber and Kirsanow; Members Liebman and Walsh dissenting), the NLRB found that the replacement workers hired by the Company were permanent replacements and, thus, the Company was not required to dismiss the replacement workers to allow reinstatement of the returning economic strikers. Accordingly, the Board found that the Company's failure to immediately reinstate the returning economic strikers did not violate the Act and dismissed the complaint.

The Board's decision was premised on several long-standing and well-established principles governing the rights of economic strikers and replacement workers. Citing NLRB v. Fleetwood Trailer Co., 389 U.S. 375 (1967), the Board stated that "an economic striker who unconditionally offers to return to work is entitled to immediate reinstatement unless the employer can show a legitimate and substantial business justification for refusing to reinstate the former striker." An employer may justify its refusal to immediately reinstate the economic strikers by demonstrating that, as a means to continue its business operations during the strike, the economic strikers were permanently replaced. Because the legitimate business justification defense is an affirmative defense, the employer has the burden to prove that the replacement workers were permanent. To meet its burden, the employer must demonstrate a "mutual understanding of permanence" between the itself and the replacement workers.

The Board found that the Company’s use of forms verifying the permanent status of the replacement workers, the oral statements of the Company’s Human Resources Manager, and the letters sent to the striking employees stating that permanent replacement workers had been hired were sufficient, standing alone, to demonstrate that the replacement workers were hired as permanent replacements for the Company’s striking workers. The Board further found that the Company’s at-will employment disclaimers did not detract from the replacement workers’ permanent status. Accordingly, the Board concluded that the Company had met its burden of providing that the replacement workers were permanent and therefore did not violate the Act by delaying reinstatement of the economic strikers.

In holding that the Company’s at-will disclaimers did not detract from the permanent status of the replacement workers, the Board overruled its earlier decision in Target Rock Corp., 324 NLRB 373 (1997), enf’d, 172 F.3d 921 (D.C. Cir. 1998), "to the extent it suggests that at-will employment is inconsistent with or detracts from an otherwise valid showing of permanent replacement status."

In a dissenting opinion, Members Liebman and Walsh criticized the Board majority’s decision to overrule Target Rock, characterizing the majority as "anxious to make a showing of reversing precedent," and arguing that, in its zeal, the majority misread Target Rock. According to the dissent, Target Rock stated neither that at-will employment status is incompatible with permanent replacement worker status, nor that at-will employment status is evidence against a finding of permanent replacement status. Instead, Target Rock "merely stated that an employer’s avowal of an at-will policy does not lend support to an affirmative defense of permanent employment."

Members Liebman and Walsh phrased the issue for resolution as "whether the employer can establish that it and the replacement employees shared a mutual understanding that the replacements were ‘permanent’ within the meaning of Belknap, Inc. v. Hale . . . ." In the dissent’s view, the Company did not establish the requisite mutual understanding. The dissent noted that each replacement worker was required to signed a form whereby he accepted employment with the Company as a "permanent replacement," but found that the Company undercut this statement by telling replacement workers that they were at-will employees. Members Liebman and Walsh concluded that these statements, taken together, demonstrate the Company’s unwillingness to commit to the replacement workers and, thus preclude a finding of mutual understanding of permanent employment.

The Union filed a Petition for Review of the Board’s Order and Decision with the United States Court of Appeals for the Seventh Circuit.

The Seventh Circuit Affirms the Board’s Decision

The Union's Petition for Review was heard by a three-judge appellate panel (Circuit Judges Bauer, Ripple; Circuit Judge Wood concurring) for the Seventh Circuit Court of Appeals on May 30, 2008. As the court noted at the outset of its decision, National Labor Relations Board decisions are subject to deferential appellate review, and only those factual findings that are not supported by substantial evidence are subject to reversal. The Seventh Circuit found that the determinative issue, which it articulated as "whether [the Company] had a ‘mutual understanding of permanence’ between itself and the replacements," was a question of fact and therefore subject to the substantial evidence standard.

On appeal, the Union argued that the Board’s holding is contrary to the Supreme Court’s decision in Belknap, Inc. v. Hale, 463 U.S. 491 (1983). In that case, the Supreme Court held that replacement workers who were discharged to make way for returning economic strikers were entitled to sue the employer under state law for breach of contract or misrepresentation. The Union argued that, pursuant to the Supreme Court’s holding in Belknap, a striker replacement may be found to be a permanent replacement only if that replacement has received an "enforceable promise of permanence" from the employer. According to the Union, the Company did not satisfy the Belknap requirement because it did not employ the replacement workers pursuant to a binding contract and because it did not explicitly promise not to displace the replacements to make way for returning economic strikers. The Union argued that, because the Board’s finding of permanency was not supported by evidence of an enforceable contractual right to permanent employment, the Board’s Jones Plastic Decision and Order is not based on substantial evidence.

In response, the General Counsel for the National Labor Relations Board argued that Belknap does not limit an employer’s right to hire at-will employees as permanent replacements for economic strikers. The General Counsel argued that, contrary to the Union’s claim, Belknap does not require an employer to enter into a legally enforceable employment contract with a replacement worker to demonstrate a mutual understanding of permanency.

After a careful analysis of the Union’s argument, the Seventh Circuit determined the Union had misread Belknap and that the Belknap decision was not, in fact, controlling. According to the Seventh Circuit, Belknap did not state that "an employer may avail itself of permanent replacement employees only if it offers those employees a binding contract actionable under state law." Rather, the Belknap decision relaxed the replacement worker standard, allowing an employer to condition the permanency of replacement workers’ employment on a strike settlement agreement or an Order of the National Labor Relations Board. The Seventh Circuit noted that "the Board consistently has allowed employers to hire permanent employees while concomitantly imposing certain conditions on their retention, so long as there is a mutual understanding that the employer’s desire to reinstate striker[s] will not cause the replacement employee’s discharge." Accordingly, the Seventh Circuit found that the Company demonstrated a mutual understanding of permanence between itself and the workers hired to replace the striking employees, regardless of the replacement workers’ at-will employment status and, thus, the Board properly concluded that the Company had established a legitimate and substantial business justification for its refusal to immediately reinstate the economic strikers upon their unconditional offer to return. Having found that the Board’s decision was reasonably based in law and supported by substantial evidence, the Seventh Circuit denied the Union’s petition for review.

What Does Jones Plastic & Engineering Mean For Employers?

Despite approval from the Seventh Circuit Court of Appeals, it is crucial to remember that Board decisions – especially 3-2 decisions – are often subject to reversal following changes in the Board’s composition. The Jones Plastic decision may be particularly at risk considering that the two dissenting members (both Democrats) vehemently argued that the three-member Republican majority, motivated by its desire to reverse Clinton-era Board precedent, erroneously analyzed Target Rock and, as a result, overruled non existent precedent. In short, new membership may give rise to a new standard.

Accepting Jones Plastic as the operative standard, employers should note that the Board did not alter the proof mechanism historically employed to determine whether an employer has established a "mutual understanding of permanence" between itself and the replacement workers. As the Seventh Circuit reaffirmed, the Board overruled Target Rock only to the extent Target Rock "suggests that at-will employment is inconsistent with or detracts from an otherwise valid showing of permanent replacement status." Accordingly, an employer’s affirmative defense of permanent replacement will still be analyzed under the totality-of-the-circumstances approach.

The Seventh Circuit, rejecting the Union’s argument that the Board’s decision is inconsistent with the National Labor Relations Act, provided some additional guidance for employers operating during an economic strike. Most notably, the court states, under Jones Plastic, an employer may not discharge some replacement workers to make way for some economic strikers while refusing to reinstate the remainder of the strikers on the ground that the remainder of the replacement workers were permanent employees. According to the Seventh Circuit, "such conduct would constitute nearly incontrovertible evidence that the replacements – despite their label as 'permanent' – were not in fact permanent."

This alert is intended to provide a brief synopsis of recent developments in the law and should not be construed as legal advice. For more information, please contact your Jones Day contact, Jacqueline Holmes, or Sarah McClure at 1.202.879.3939.

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