ABC Taxes, Tips & Tools

Smart com­pa­nies edu­cate their employ­ees about accept­able email use and fol­low a pol­icy of reg­u­lar computer-file purg­ing to keep the busi­ness net­work free of unnec­es­sary data storage.

If your orga­ni­za­tion thinks it may be the tar­get of a law­suit your com­pany should not fol­low a reg­u­lar purg­ing pol­icy as email can be sum­moned in lit­i­ga­tion.  Email mes­sages are offi­cial com­pany records so, your com­pany may have to put a lit­i­ga­tion hold on email dele­tion if those mes­sages could be impor­tant to the case.  The same goes for instant mes­sages (IM).  Many busi­nesses don’t have a pol­icy to han­dle elec­tronic dis­cov­ery requests and when noti­fied of a law­suit, the com­pa­nies rarely or never take steps to pre­serve elec­tronic data accord­ing to the Amer­i­can Bar Association.

Two court rul­ings send a strong mes­sage on this issue: Employ­ers who don’t take the right steps to pre­serve elec­tronic data can face big finan­cial penalties.

• Soon after an equi­ties trader filed a sex-bias law­suit, the company’s in-house coun­sel warned employ­ees not to destroy rel­e­vant doc­u­ments.  But that warn­ing didn’t men­tion email mes­sages stored on backup tapes, which the com­pany reg­u­larly recy­cled. As a result, rel­e­vant emails were deleted and lost for­ever. A fed­eral dis­trict court said the com­pany was at fault because it had a duty to pre­serve email and other elec­tronic files, as well as back­ups of those doc­u­ments.  (Zubu­lake v.  UBS War­burg LLC, No.  02-Civ 1243, S.D.N.Y.)
• A fed­eral court penal­ized a com­pany for fail­ing to pre­vent 11 of its top-level employ­ees from delet­ing key emails dur­ing pend­ing lit­i­ga­tion.  The com­pany kept up its prac­tice of auto­mat­i­cally delet­ing emails even after lit­i­ga­tion began, and despite a court order to pre­serve evi­dence;  the court imposed a hefty $2.75 mil­lion fine. (USA v.  Philip Mor­ris USA Inc., No.  99–2496, D.D.C.)

These cases act as a strong reminder that courts will get tough with orga­ni­za­tions that treat elec­tronic dis­cov­ery, reten­tion and preser­va­tion lightly.

The safest way to dis­pose of elec­tronic HR records is to ask ques­tions before actu­ally dis­pos­ing of elec­tronic doc­u­ments. First and fore­most, sus­pend reg­u­lar data destruc­tion if lit­i­ga­tion is likely.  A busi­ness is required to impose a lit­i­ga­tion hold on rou­tine data destruc­tion in cer­tain cir­cum­stances.  This duty to pre­serve comes into play when the busi­ness receives notice that an admin­is­tra­tive or judi­cial claim has been filed against the orga­ni­za­tion and, even sooner, if the orga­ni­za­tion has rea­son to believe that a law­suit is on the hori­zon.  But the duty to pre­serve doesn’t extend to every doc­u­ment and bit of data.  A com­pany only has to save data only if it’s been pre­pared by or for employ­ees who will be key play­ers in the lit­i­ga­tion.  Rule of thumb: When in doubt, don’t throw it out. Before purg­ing email or other files, sort through them to deter­mine which items could have legal sig­nif­i­cance.  Print them out and file the hard copies.  A busi­ness should con­sult with their IT experts about pro­ce­dures to pro­tect data from being arbi­trar­ily deleted or overwritten.

Other mea­sures a com­pany should take:

• Com­pa­nies should estab­lish document-retention peri­ods.  An orga­ni­za­tion must retain cer­tain doc­u­ments even with­out the threat of lit­i­ga­tion.  For exam­ple, all employ­ers must retain fed­eral pay­roll tax records for at least four years from the due date of the tax return they are likely to be used on.  e.g. 2009 pay­roll tax records need to be retained through April 15, 2014.  Truck­ing com­pa­nies must hold onto employee alco­hol test results for five years.  There are other gov­ern­ment man­dated reten­tion rules for tax records, prop­erty dis­posal records, and other employ­ment records.  A com­pany should know what they are and fol­low them.
• Com­pa­nies should apply a time limit on reten­tions of data not reg­u­lated by gov­ern­ment rules. Key busi­ness doc­u­ments should likely be retained indef­i­nitely.  Email in acces­si­ble for­mat, how­ever, should be sub­ject to a short reten­tion period of about 30 days.
• Com­pa­nies should have an elec­tronic com­mu­ni­ca­tions pol­icy and train­ing.  Busi­nesses should train man­agers and employ­ees on their elec­tronic com­mu­ni­ca­tion pol­icy and make them aware that emails are offi­cial cor­re­spon­dence that can be called into evi­dence dur­ing a law­suit.  FAQs are a good way to describe such a policy.
• Com­pa­nies should apply and enforce their pol­icy con­sis­tently.  Incon­sis­tency, say, for exam­ple, let­ting high-level employ­ees destroy data more fre­quently than pol­icy states, could put the com­pany at risk of a charge of bad-faith evi­dence destruction.

As always, small busi­ness ser­vices and tax­a­tion are our busi­ness.  If you need help Please give Art & Busi­ness Con­sult­ing a call.  We would love to engage you as a client.

The usual dis­claimers: Although ABC has made every effort to insure the accu­racy of Taxes, Tips and Tools, mis­in­for­ma­tion, dis­in­for­ma­tion, changes, mis­takes, typos and hack­ers hap­pen, there­fore Art & Busi­ness Con­sult­ing LLC takes no respon­si­bil­ity for any action taken or results based on the infor­ma­tion sup­plied here in.  Inter­nal Rev­enue Ser­vice Cir­cu­lar 230 Dis­clo­sure:  As pro­vided for in Trea­sury reg­u­la­tions, advice (if any) relat­ing to fed­eral taxes that is con­tained in this com­mu­ni­ca­tion (includ­ing attach­ments) is not intended or writ­ten to be used, and can­not be used for the pur­pose of (1) avoid­ing penal­ties under the Inter­nal Rev­enue Code or (2) pro­mot­ing, mar­ket­ing or rec­om­mend­ing to another party any plan or arrange­ment address herein.  Art & Busi­ness Con­sult­ing LLC cur­rently does not have a cer­ti­fied pub­lic accoun­tant or an attor­ney on staff; this infor­ma­tion is purely for edu­ca­tional pur­poses and not to be con­strued as legal or finan­cial advice.  Art & Busi­ness Con­sult­ing LLC and its employ­ees, mem­bers and asso­ciates are not engage to prac­tice law; you always should dis­cuss legal mat­ters with your attor­ney before talk­ing to any­one else.

Tags: electronic data, email, guidelines, litigation hold, purge, record retention

This entry was posted on Friday, March 12th, 2010 at 12:53 pm and is filed under HR Info. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.