Chipotle and the Need for HR Oversight In Settlement Avoidance Strategies

By: Matthew Lowe

Introduction

When litigation looms for large corporations, settlement becomes a key part of the strategy discussion. In order to avoid the costliness associated with, and reputational damage from, lengthy trials, it is not unexpected for a company to dip into its litigation budget and pay a premium to avoid the hassle. Some companies, however, adopt the opposite strategy: settlement avoidance. If a company is to adopt such a strategy, it will also need to adopt proper defensive measures, such as the implementation of adequate Human Resources (“HR”) oversight, in order to effectively ride out the storm of the trial.

Background

Following Chipotle Mexican Grill, Inc. (“Chipotle”) going public in January of 2006, it came to be known as an “industry darling”.[1] Recognized for its transparency and its commitment to utilizing farm-fresh, high-quality ingredients, Chipotle was a trendsetter and leader in the fast-casual movement in dining.[2] In 2009, the restaurant was even featured in a subplot of the popular animated television series, South Park.[3] However, proving that what goes up must come down, the restaurant’s success has come to a screeching halt – in fact, it is currently on the decline. As of January 2016, Chipotle’s sales have sunk 36%, following a previous drop of 14.6% for the October-to-December quarter of 2015, which marked the first quarterly decline since Chipotle’s IPO in 2006.[4] Further, its stock has fallen 31% over this same period.[5]

One likely culprit for this downward spiral is the reputational damage Chipotle has incurred following the myriad lawsuits filed against it over the years. In the past five years alone, Chipotle has had to manage 115 federal employee lawsuits.[6] While dealing with many lawsuits – often many at once – is commonplace for large companies, this number far exceeds what would typically be expected in this industry for a company of similar size. The 115 federal suits represent approximately “4.85 legal actions per 100 stores, more than three times the rate of two of its peers, Panera Bread and Starbucks”.[7] Justin Swartz, a lawyer at Outten & Golden, has described the number of suits as “striking”.[8] Mr. Swartz and his firm are currently representing over 500 former Chipotle employees.[9] Indeed, while the types of lawsuits filed against Chipotle in the past half-decade have varied, the vast majority has been employment-related, with former employees citing, inter alia: underpayment, termination without just cause, and discrimination.[10] Even the recent outbreak of E. coli found in Chipotle foods has been speculatively attributed to high levels of labor law violations by industry experts. These violations have led to working conditions conducive to the spreading of illness.[11]

In March of 2013, three former employees of Chipotle filed a lawsuit on account of alleged gender discrimination. Stephanie L. Ochoa, Tina M. Reynolds, and Elizabeth A. Rogers, all general managers in the Greater Cincinnati locations, claim that they were fired from their positions unfairly. Ochoa, who was commended for her helping to improve her location by “100%” by supervisors and who had previously been earning bonuses every six months, was fired in March of 2012 and replaced by a male employee.[12] Reynolds had been promoted numerous times, receiving a bonus, an “above expectations” in two categories of her employee evaluation, and an increase in pay in 2011. Later that same year, she was terminated and replaced by a male employee.[13] Finally, Rogers, following a series of allegedly hostile encounters with an area manager, Herman Mobbs, was fired in November of 2011; the facts surrounding the termination alluded to the termination allowing for the hiring and retention of male employees.[14] What’s more is that all of these women were terminated when similarly situated males with worse evaluation scores were not.[15]

Analysis

Studies show that settling cases is often the best choice. This is reflected by the fact that the vast majority of cases do settle 80%-92% of the time.[16] In a study published in the Journal of Empirical Legal Studies, it was found that in only 15% of cases that went to trial were both sides right to have done so.[17][18] Thus, there is a statistical misalignment in the thought process between the decision to go to trial and the outcomes of trials. Jeffrey J. Rachlinksi, a law professor at Cornell, has concluded that “most of the time, one of the parties has made some kind of miscalculation or mistake.”[19] Despite this empirical reality, Chipotle seems to adopt a strategy, or, at the very least, a tendency to attempt to avoid settlements, according to Katherine Neff, an attorney at Freking Myers & Reul LLC, who worked on the aforementioned gender discrimination suit against Chipotle.[20]

On February 8, 2016, an Ohio federal jury ordered Chipotle to pay approximately $607,000 to the three plaintiffs. Jurors awarded the women between $111,000 and $123,000 in back pay, along with $85,000 each in punitive damages.[21] For those seeking to mount effective defensive strategies and to learn from past mistakes, the question is: where did Chipotle go wrong? Embracing an aversion to settlement options necessarily requires tight oversight measures and, especially with regard to labor and employment disputes, an effective human resources department to monitor that oversight.

The importance of an HR department cannot be overstated. Katherine Neff explained:

            Chipotle eliminated its “on the ground” HR folks a few years before our Plaintiffs were terminated.  As such, there was no HR oversight for the termination decisions.  Chipotle also eliminated the use of progressive discipline, so Plaintiffs had not received warnings prior to their terminations.  Therefore, Chipotle neither had a “paper trail” nor a “neutral” review by HR to support the manager-bad actor’s decision.  According to the jury, this was a fatal flaw for them.  Most large companies have both HR review and some form of progressive discipline that they follow before terminating an employee.  It simply makes business sense to have this in place.  That way if an employee disputes the termination decision, the company has something to point to in support of the termination decision.  While progressive discipline and HR oversight is not always full proof, it makes it harder for employees to demonstrate discrimination if there is a paper trail and HR involvement.  Also, in this case, several of the plaintiffs received positive performance reviews shortly before their terminations.  One received a raise and a bonus in her final paycheck.  Receiving good reviews, raises and/or bonuses does not support the employer’s claim that these folks were poor performers.  These are things that perhaps a skilled HR person would catch prior to authorizing a termination decision.   I would guess that any HR person that has undergone training on EEO laws would question the mixed signals being sent to the employee that received a good review/raise, and/or bonus at the same time the manager is recommending termination.[22]

In this case, Chipotle essentially had to justify its termination of women who had evidence to show that their performance exceeded expectations and received high praise from superiors. To do that without an established HR team and without a paper trail to at least counter the one that the plaintiffs had accrued made the steep hill ultimately insurmountable. The organizational procedures put in place by Chipotle’s management are questionable because those measures, absent HR oversight, also contributed to their loss at trial. In other words: one wonders why they would use the evaluative means discussed when doing so would amount to an easy and unfavorable comparative metric.  At the end of the day, it was proven difficult for defense counsel to talk its way out of the fact that the women terminated excelled and the males retained or hired after-the-fact did not. But the devastating illustration made possible by these evaluative tools was not the silver bullet; it was one of quite a few factors that went into a decision for the plaintiffs. As Neff notes, “I’m not sure whether we would have defeated summary judgment if all that we had were the audit scores of other male comparators who were not terminated.  With this particular judge, that may not have been enough, but with others it may have been.”[23]

In order to ensure short-term success in defeating Chipotle’s motion for summary judgment and long term success in the trial, Neff had to delve into two crucial factors: 1) the comparator evidence, which was the evidence that showed that other individuals outside of the protected class engaged in similar conduct but were not terminated;[24] and 2) changing reasons, which exist “when different witnesses provide varying testimony about the reasons for the termination, but also changing justifications offered by management for the terminations.”[25] In addition to these factors, Chipotle made the case even easier for the plaintiffs through an overall lack of a paper trail and a lack of notification.[26] With regards to notification, “one of the plaintiffs received a warning prior to her termination. In the warning she was told her manager would follow up with her in 2 weeks, but he ended up deciding to terminate her just a couple of days later.”[27] The role of HR is to address all of the issues that culminated in bringing Chipotle to its knees. Since Chipotle did not have an “on the ground” HR staff to ensure compliance with labor laws, follow-through of the organization’s procedures, and proper execution of hiring-and-firing techniques, the outcome of this lawsuit should not have come to a surprise for the severely exposed restaurant.

If one were to imagine how things would have played out for Chipotle had they not eliminated its HR forces, the evaluations would likely have been put to better use such as the use for which they were intended: to ensure that good employees like plaintiffs were retained and employees with actually poor scores would be terminated. If plaintiffs had to be terminated, they would have received proper notice. Further, the uniformity of such procedures would have been offered to justify the terminations. In other words, because HR plays such a crucial role in termination decisions, they could have been called upon to testify and provide uniform justifications for those decisions. While HR oversight may not have guaranteed summary judgment, its presence would have made it significantly harder for the plaintiffs to win at trial.

Conclusion

Chipotle has found its way into a crisis and with all of the decisions it could pursue in an attempt to crawl out of its hole, it seems to be making the wrong ones. While it still has a chance to turn things around, there is also a lesson here for other companies seeking to adopt similar settlement-avoidance strategies. While there have been myriad exposure points outlined, the key takeaway is to rely more on the establishment and role of HR. Companies should defer less to regional managers when it comes to labor and employment matters and more so to those who specialize in the area in order to eliminate drastic procedural missteps. Something as seemingly simple as hiring and firing can get very complicated and corporations need to appreciate that and allocate resources accordingly. At a time when its sales have been declining for two fiscal quarters in a row, its stock value has fallen, and these issues are being attributed at least in part to reputational and financial cost of employment-related litigation, reducing HR’s local capacity has proven to be a very bad decision. Chipotle should amend that decision and other companies should try to avoid the same mistake.


 

[1] Brad Tuttle, How Chipotle Went From Industry Darling to Restaurant to Avoid, Time (Dec. 8, 2015)

[2] Id.

[3] South Park: Dead Celebrities (Oct. 7, 2009)

[4] Eric Schwartzberg, Chipotle Lawsuit Alleges Gender Discrimination, Dayton Daily News (Feb. 3, 2016)

[5] Id.

[6] Lisa Fickenscher, Employees Can’t Stop Suing Chipotle, New York Post (Mar. 23, 2016)

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] Schwartzberg, supra note 4

[13] Id.

[14] Id.

[15] Id.

[16] Jonathan D. Glater, Study Finds Settling Is Better Than Going to Trial, New York Times (Aug. 7, 2008)

[17] Id.

[18] “Right to have done so” is assessed based on measuring the outcomes; in these cases, the defendant paid less than the plaintiff had wanted but the plaintiff got more than the defendant had offered during settlement negotiation

[19] Glater, supra note 14

[20] Katherine D. Neff, classroom lecture at the University of Illinois on Feb. 11, 2016

[21] Id.

[22] E-mail from Katherine D. Neff, Attorney, Freking Myers & Reul LLC (Feb. 18, 2016, 14:43 CST) (on file with author)

[23] Id.

[24] Id.

[25] Id.

[26] Id.

[27] Id.

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