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December 02, 2005
Employer Penalized for Destruction of Records

A federal court sitting in New York recently heard a wage payment case illustrating the gravity of the risk a company takes when it destroys documents relevant to ongoing litigation, an act called "spoliation."

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What happened. A group of 11 waiters, busboys, and captains at a Chinatown restaurant sued the restaurant and its owners, claiming violations of state and federal law in the failure to pay tips, minimum wages, and overtime. The employees asked for all records concerning tips and wage payment going back to 1989.

The restaurant handed over some documents, but the employees learned that the restaurant had kept three additional types of documents containing information about the tips they never received. The employees asked for those records as well, but learned that the restaurant had retained them for various amounts of time, then destroyed them­even after the case was filed. The employees asked the court to sanction the defendants for the destruction of evidence.

What the court said. Spoliation is the destruction of evidence for use as evidence in pending litigation. A party seeking sanctions for spoliation must show that: (1) the party maintaining the evidence had a duty to keep it; (2) it was destroyed "with a culpable state of mind"; and (3) it was relevant to the litigation.

In this case, the first factor was satisfied because the filing of the lawsuit put the restaurant on notice of the obligation to keep related documents. The second was satisfied because, even though the restaurant may not have destroyed the documents specifically to thwart the case, the failure to preserve them was grossly negligent and sufficient to show a culpable state of mind. The third factor was satisfied because the court inferred the relevance of the documents.

The restaurant and its owners could have stopped creating some of the requested documents, but instead, they continued to create and destroy them, the court said, noting that such actions are the essence of spoliation. The judge recommended allowing the jury to draw an adverse inference against the restaurant that the evidence it destroyed since the litigation began would have been favorable to the employees. Heng Chan et al. v. 88 Palace, U.S. District Court for the Southern District of New York, No. 03CIV6048(GEL)(JCF) (8/11/05).

Point to remember: Not only must employers maintain relevant evidence once a lawsuit is filed, but federal regulations also require them to preserve the following records for at least 3 years: the total dollar volume of sales or business, as well as the total volume of goods purchased or received.

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