To Shred or Not to Shred? The Importance of Developing an Effective Document Retention Policy
To Shred or Not to Shred?
The Importance of Developing an Effective Document Retention Policy
Oregon Lodging Association’s "Lodging News"
July 2003
Most of you are probably familiar, at least in passing, with the Enron scandal and the demise of one of the country’s leading accounting firms, Arthur Andersen. The illegal shredding of documents by individuals within these businesses was a key factor in imposing criminal sanctions against corporate executives and underscored the importance of having an effective and enforceable records-retention policy, not only for large public corporations, but for businesses of all sizes, including yours. A records-retention policy can help to make sure that your business’ employment, financial, and guest records are kept for the periods of time required by law and, perhaps more importantly, that such records are destroyed in a timely manner as allowed by law.
If you or your business have ever been sued or audited, you likely already know that among the first things that will be requested by the plaintiff or the IRS are all documents and records relevant to the pending inquiry. Under both state and federal law, these documents must be produced. Further, what is considered "relevant" is extremely broad and includes any records that "appear reasonably calculated to lead to the discovery of admissible evidence." While I certainly do not intend to bog you down with legalese in this article, it is crucial that you understand the importance of this standard. It means that regardless of whether you think a document is relevant, and regardless of whether such a document can ultimately be used against you in trial, you will often be required to produce that document to the plaintiff in a lawsuit with only very limited exceptions for so-called "privileged" documents and other records. The penalties for failing to produce the document, or destroying the document to avoid producing it, can be quite severe and may even include hefty fines and criminal penalties.
In many instances, such as in the employment context, the law is fairly specific with regard to how long you are legally required to keep a document before you are allowed to throw it away. For example, under the federal Age Discrimination in Employment Act ("ADEA"), certain employee payroll and related records must be retained for three years; however, records relating to personnel actions must only be kept for at least one year from the date of the action. These records include job applications, resumes, records of promotion, demotion, etc. The difficult question lies in whether you want to keep such records for longer periods of time for use in defense of an employee’s age discrimination claim, or whether you want to dispose of such documents after the expiration of one year to avoid having such documents used against the business, whether it be to prove age discrimination, or some other form of discrimination. Unfortunately, there is no easy answer. To make matters more complicated, employees have two years, and possibly up to three years, to file a lawsuit under the ADEA, whereas an employee has only one year to file a lawsuit under the Civil Rights Act (discrimination based on sex, religion, race, color, national origin and disability bias) or the Americans with Disabilities Act. This disparity raises the question of whether the employer wants to risk having too few records to adequately defend an age discrimination claim, or whether it wants to have too many records that could be used against it in defending a discrimination claim under the Civil Rights Act.
Another context in which to consider this issue relates to the retention of guest records. Many lodging facilities have in place, or should have in place, a privacy policy with regard to guests’ personal and financial information and how the facility will use that information. However, once that information is no longer needed, it is important to promptly and properly dispose of that information to avoid it being inappropriately used or released. The last thing you want is a lawsuit alleging negligence on the part of your facility from a former guest whose credit card number was stolen by an employee or the garbage collector.
Finally, courts are not likely to be very forgiving when faced with a business who is unable to produce records that should have been retained by the business. This is due in large part to the corporate accounting scandals over the past couple of years, which prompted Congress to enact the Sarbanes-Oxley Act to address corporate fraud and abuse, including guidelines for record retention. We recently represented a very small closely-held company in a lawsuit brought by the Oregon Bureau of Labor and Industries. Our client in no way resembled Enron, Global Crossing, Worldcom, or any of the other giant mega-corporations that we have seen engaging in accounting mischief and defrauding investors. Nevertheless, a judge in Multnomah County Circuit Court actually cited the corporate accounting scandals as part of her reason to hold our client liable for actions that had nothing to do with accounting or investor fraud. This incident should give pause to any public or private company who is not appropriately retaining and disposing of its financial, tax and other business records. Just because you are a small business, the apparent bloodlust in our society to come down hard on those businesses who are alleged to have violated some sort of ethical or fiduciary duty should encourage you to take these issues seriously and take steps to minimize your business’ exposure to these types of claims.
The point of this article is not to encourage you to go out and destroy documents to avoid being found liable in a lawsuit. In fact, if you even think you might be sued and you have records that would be relevant to the lawsuit, destroying such records may be considered a violation of the law. The point here is that by implementing and enforcing a good records retention policy, you will have a guide for use by you and your managers which clearly sets forth what documents to keep, how long you should keep them, and when you should destroy them. We highly recommend that you develop a good filing system so that documents can be easily identified for prompt retrieval and disposal when the time comes. Ideally, such a policy will significantly reduce staff time spent in reviewing old files and boxes and determining on an ad hoc basis which records to throw away. A good records retention-policy will also provide peace of mind so you can sleep well at night knowing you have taken the appropriate steps to protect your business and livelihood and to put your business in the best position possible to defend whatever claims employees, guests, or the government might bring.