Legal Trends: Is It Shredding Time Yet?

Filing employee records may be a pain, but deciding when it's safe to throw them out is even tougher

In some areas, the law is clear. Document retention, unfortunately, is not one of those areas. For example, there is no single, clear answer on how long documents should be retained. However, despite the confusion in this area, employers can develop document retention programs that are logical, effective and offer solid legal protection.

The key is to take into account a number of legal and practical factors. When you do, you’ll probably find that the amount of time you’ll need to keep your documents will add up quickly.

This article discusses retention strategies for four types of records that HR professionals frequently deal with: personnel files, pre-employment files, payroll data and medical data. This article does not address other types of corporate documents, policies or practices.

Personnel Files

When deciding how long to retain personnel files, employers must start by considering the statutory document retention requirements set forth under federal equal employment opportunity laws. The three most prominent laws in this area—Title VII of the 1964 Civil Rights Act, the Americans with Disabilities Act (ADA) and the Age Discrimination in Employment Act—require that personnel records be maintained for the term of employment, plus one year.

However, federal requirements are only the beginning. Most states’ non-discrimination laws also have document retention requirements for personnel files. In some states, these requirements last longer than federal requirements. For example, California requires that personnel records be retained for the term of employment, plus two years.

Accordingly, employers must review the personnel file retention requirements of the non-discrimination laws in each state in which they operate. In some states, employers will have to retain their personnel files for longer than the federal one-year mandate.

In addition, employers would be well advised to consider the retention requirements and statutes of limitations for other types of claims that may involve personnel records. The result is that employers may opt to retain records beyond the statutory minimum.

For example, both the Family and Medical Leave Act (FMLA) and the Fair Labor Standards Act (FLSA) have a statute of limitations of two years—three years for willful violations. As a technical matter, the FMLA and FLSA require that only certain records—not the entire personnel file—be retained for three years. But, as a practical matter, it is best to retain the entire file for three years so that the records will be available in the event a claim alleges a willful violation. ›

Other types of legal claims actions that could require personnel files for an employer’s defense include state common law fraud, tort and contract claims.

For example, an employer could be accused of fraud for misleading applicants about their jobs. Tort claims could include defamation and invasion of privacy. And contract laws come into play when employees take issue with their employment contracts or argue that you implied that an employment contract existed.

The difficulty here is that the statutes of limitations for these claims vary from state to state. For example, Texas’ statute of limitations for fraud is four years; New Jersey’s is six.

To be safe, look at the common law statute of limitations for tort, contract and fraud in each state in which you operate. Generally, you should retain personnel records in the applicable state for the longest statute of limitations.

However, you still aren’t done. The decision on how long to retain records is further complicated by the fact that some states have different statutes of limitations for oral vs. written contracts. For example, Florida has a four-year statute for oral contracts, but a five-year statute for written contracts.

In some states, the time periods are exceedingly long. For example, Illinois has a 10-year statute for written contracts (and a five-year statute for oral contracts).

Making the matter even more complicated is the fact that what constitutes a written contract under state law may be interpreted very broadly. In some states, even an informal memo or e-mail might qualify as a contract.

In those states that have extremely long statutes of limitations for written contracts, employers will need to balance the potential benefit of retaining personnel files for the entire length of a statute of limitations against the potential costs. Those costs include not only the administrative burden and expenses of warehousing records but also the potential legal consequences of retaining old records that may document questionable practices long since abandoned.

In many states, there is also a “catch-all” statute of limitations that covers all claims not covered under a specific statute of limitations. Often, this catch-all statute of limitations is set at six years. When plaintiffs’ lawyers realize that the statute has run out on all the known claims available, it is not uncommon for them to try to create a new claim that would fall under the longer catch-all statute of limitations.

For this reason, employers may wish to adopt a six-year rule. This should cover most fraud, tort and contract claims. (The one potential exception would be for employers in states that have a longer statute of limitations for written contracts. In these situations, the employer will have to conduct a risk-benefit analysis as described above.)

A six-year rule may be particularly appropriate for employers that operate in multiple states. This avoids having different retention requirements for employees in different locations throughout the country.

Pre-employment Records

Pre-employment records for job applicants who are hired should be retained with the employee’s personnel file for the term of employment, plus the designated period thereafter.

But what about applicants who are not hired?

Federal non-discrimination laws again impose a relatively short time frame on such records—one year. Again, however, employers need to see if their state laws require a longer period of time. For example, in California, applicant records must be retained for two years.

Employers that are subject to affirmative action rules will face longer retention requirements. Generally speaking, affirmative action employers must retain pre-employment records for two years after creating the record or taking the personnel action involved, whichever is later. (A one-year rule applies for affirmative action employers with fewer than 150 employees and for those employers with contracts that are less than $150,000 in value.)

However, all employers may benefit from retaining such records for two years—even if they are not legally required to do so. The reason: The best way to fight a discriminatory-failure-to-hire claim is to show that other applicants—ones who do not fall in the plaintiff’s protected group—were rejected for the same or similar legitimate reason. By keeping records for two years, rather than one, you increase your chances of finding appropriate comparators.

As with employees, applicants also can bring common law claims under tort, fraud and contract laws. Accordingly, under the most cautious approach, an employer might elect to keep all pre-employment records for the longest statute of limitations applicable to tort, contract or fraud.

However, common law claims from rejected applicants are not that common. For this reason, retaining pre-employment documents beyond two years (or a longer deadline if required by a particular state law) may be too cautious.

Indeed, it actually may be unwise if the employer has recently enhanced its diversity efforts. In such an event, the older documents would fail to reflect this change and could actually hurt the employer more than they would help.

Payroll Data

Under the FLSA, payroll records and related documents must be retained for a minimum of three years. Certain back-up documents (for example, time cards) must be retained for only two years. However, because the back-up documents may be necessary to defend a claim for a willful violation, they should be retained for at least three years also.

However, virtually every state has its own wage payment and collection law. In some of these states, the statutes of limitations are much longer than those of the FLSA. For example, New York has a six-year statute of limitations for wage and hour claims.

Where a state wage payment law provides a longer statute of limitations than does the FLSA, employers should retain all payroll records for the longer statute of limitations.

Again, however, employers may wish to consider not only statutory but also common law claims. As with personnel records, employers may wish to retain payroll data for as long as the longest statute of limitations for contract, fraud or tort—or perhaps for a uniform period of six years, as mentioned previously.

Two final notes about payroll records:

First, in contrast to personnel files, payroll records do not need to be retained for the term of employment plus a specified period of time. Instead, payroll records should be retained on a rolling basis beginning with the date on which they were created (as opposed to the date on which employment ends).

Second, although beyond the ken of this article, payroll records may be helpful in defending an IRS audit of an employer’s corporate deductions. In some circumstances, payroll records more than six years old may be relevant to an IRS audit. Accordingly, employers may want to retain certain payroll records for longer than six years.

This is a complex issue, so your best bet is to consult a tax adviser to determine what documents should be retained for tax purposes—and for how long.

Medical Records

As we all know, the ADA requires that medical records be retained separate and distinct from personnel records and that their access and disclosure be severely restricted. The Health Insurance Portability and Accountability Act (HIPAA) reinforces this legal and business imperative.

Like personnel records, medical records should be retained for the term of employment. The question is for how long after.

The FMLA requires that all leave-related documents—including medical data—be retained for three years, which also is the statute for willful violations under this law.

However, there is another federal law that should be considered. The Employee Retirement Income Security Act has a six-year statute of limitations for breach of fiduciary duty. As a result, when employers make fiduciary decisions related to medical or related benefits, they should retain all relevant medical documents for the term of employment plus six years. (This also should cover the statute of limitations for most common law claims as well.)

Even when employers’ health plans are fully insured, they still should retain their medical records for the term of employment, plus six years. That’s because some courts have held that when employers—acting as plan administrators—determine who is eligible to participate in fully insured plans, they are making fiduciary decisions.

Employers also need to keep in mind special rules that apply under the Occupational Safety & Health Act (OSH Act). The Occupational Safety & Health Administration and the OSH Act require that employers retain for the duration of an employee’s employment, plus 30 years, certain employee medical and exposure records. Excluded from the 30-year retention requirement are, among other records, health insurance claim records maintained separately from the employer’s medical program as well as first aid records of one-time treatment for certain minor injuries.

Application

Whatever record retention rules an employer adopts, it is critical that it comply with them. Destroying documents ahead of schedule will suggest that you have an invidious motive to eliminate incriminating evidence, even if that is not the case.

As important, an employer has a duty to preserve documents beyond the time frames set forth in its retention policy if a claim or government investigation is conducted or even threatened. In such situations, documents (both electronic and written) that are even arguably related to the claim or investigation must be retained until the claim or investigation’s final disposition (including appeals).

This requirement is expressly stated in the record retention provisions of most federal and state equal employment opportunity laws, as well as the recently enacted Sarbanes-Oxley Act. That law states that an individual can be imprisoned for up to 20 years and fined if he or she “knowingly alters, destroys, mutilates, conceals, covers up, falsifies or makes a false entry in any record, document or tangible object with the intent to impede, obstruct or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under Title 11, or in relation to or contemplation of any such matter or case.”

For this reason, employers are well advised to have a protocol in place to ensure that documents are retained beyond the guidelines as necessary and that a person with significant authority be responsible for ensuring adherence to the protocol.

Authors note: This article should not be construed as legal advice or as pertaining to specific factual situations

Jonathan A. Segal, Esq., a contributing editor of HR Magazine, is a partner in the Employment Services Group of WolfBlock LLP, a Philadelphia-based law firm. His practice concentrates on counseling clients, developing policies and strategic plans, and training managers to avoid litigation and unionization.