Opinion
No. 134461
Decided February 16, 1970.
Civil service — Discharge of liquor store employee — Failure to reimburse bonding company for unidentified loss — Not cause for discharge, when.
1. The imposition of a vicarious liability, for the default of unknown persons, upon an employee of the state of Ohio by regulation, inconsistent with statute, is arbitrary, unreasonable and unlawful.
2. The discharge of such an employee for failure to reimburse the company carrying the employee's fidelity bond for its payment under an unidentified loss coverage provision is arbitrary, unreasonable and unlawful.
3. Failure of an employee of the state of Ohio to comply with an arbitrary, unreasonable and unlawful regulation is not a ground for removal.
Messrs. Lucas, Prendergast, Albright, Gibson, Brown Newman and Mr. Peter J. Gee, for appellant.
Mr. Paul W. Brown, Attorney General, and Mr. Gregory F. Bixler, for appellee.
This matter was submitted on appeal from an order of the State Personnel Board of Review which affirmed an order by the Department of Liquor Control discharging the appellant because of a cancellation of his fidelity bond for "unspecified acts" as a state employee.
The order of removal charges that, as Retail Store Clerk II, appellant was guilty of nonfeasance in that the Buckeye Union Insurance Company terminated its liability under a public employees blanket bond "for any acts committed as an employee of the Department of Liquor Control." This is specification numbered (2) of the order of removal. Specifications (1) and (3) were stricken from the removal order by the finding of the personnel board and physically stricken on the copy of the removal order attached to the transcript of the proceedings. The stricken items did not identify or explain the "acts" referred to in item (2) which were relied upon for termination of the bond and removal from employment.
Appellant's removal was sustained by the personnel board because he was no longer bonded. It found that the appellant was innocent of any guilt or complicity in a shortage of fourteen hundred dollars. It failed to find any of the statutory reasons for removal. The board did not consider whether the bond was properly cancelled or whether appellant was properly discharged under the Civil Service Act.
The novelty of the situation requires an explanation.
The appellant had been assistant manager (not the manager) of Store 61 in Dayton. The chief of store management testified that as a result of a four-month audit there was a shortage of over fourteen hundred dollars, in cash or inventory. The precise nature of the shortage was unknown. Acting under a regulation of the director and with utterly no knowledge of the person responsible, if any, half of the shortage was assessed arbitrarily against the manager and half against the assistant manager. The former paid the share assigned to him and no action was taken against him. This appellant did not do so and a demand was made upon the bonding company under an unidentifiable employee clause.
The chief testified:
"I told Mr. Gee (attorney) that if we did file a bond claim that he would be subject to removal because if the bonding company did pay the bond it was part of their decision in paying that claim that at that point he is no longer covered under the bond." (Emphasis added.)
This use by the state of a threat to file an unidentified employee claim and to obtain a decision by its bonding company to terminate the bond and eligibility of a specific employee, requires an examination of the policy (which appears in the record) and the basis upon which the decision to effect a removal was made by the bonding company with the cooperation and approval of the director.
The policy is not merely a blanket fidelity bond as required by statute for employees. In addition to the fidelity requirements it contains a separate provision for comprehensive coverage protecting the state from other losses even though the employee or other person responsible cannot be identified.
Item four of the umbrella policy covers "loss caused to the insured through the failure of any of the employees * * * to perform faithfully his duties or to account properly for all monies and property received by virtue of his position or employment * * *." (Emphasis added.) This is the fidelity provision required by statute. The record shows there was no violation of faithful performance or of the fidelity bond by the appellant. The personnel board so found.
For the general protection of the state there is a separate provision for unidentifiable employees which provides that in case a loss is caused through acts or defaults by an employee "* * * and the insured cannot designate the specific employee causing such loss, the insured is covered provided that the evidence submitted reasonably establishes that the loss was in fact caused by such employee * * *." (Emphasis added.) This is additional, comprehensive coverage and is not related in any way to the blanket fidelity coverage required by law for state employment. In other words, any loss to the state in this case is covered under the separate comprehensive provision of the policy regardless of the inability to establish the responsible party or cause. Proof of such loss is determined upon a reasonable burden of proof, which is not defined. It is what may be decided by the insurance carrier and the director as to employees they cannot even identify.
In view of the condition of "inability" to identify or establish, the requirements for proof are less than acceptable in any court or under any law for the determination of individual employee responsibility.
This provision for an "unidentifiable employee" is a condition for the benefit of the state generally and is not a part of item four of the blanket fidelity agreement required for employees.
The personnel board found that there was no evidence, reasonable or otherwise, to find that the appellant failed to perform faithfully his duties or to account properly for all moneys and property he received.
However, it appears that the liquor department has a regulation that the store manager is personally responsible for all moneys received or expended by the store. The department holds each manager personally responsible for all losses in the store in excess of those allowed by law, regardless of cause. The allowed element of breakage and the like, provided by law, is not involved here.
The record in this case does not indicate that the regulation imposing absolute liability upon store managers is extended to assistants. Leave was granted to introduce the regulations, if counsel desired to develop this point; however, in view of the decision of the court, this case may be determined upon other grounds.
The record indicates that the state obtained the bond containing fidelity and comprehensive coverage. It made a claim upon the bond, admittedly without claim or proof of guilt or complicity by this appellant. The shortage was arbitrarily divided in half. One half was charged to the store manager, who paid the amount demanded. One half was charged to the appellant, as assistant store manager, and he refused to pay.
The bonding company paid the portion arbitrarily assigned to appellant under the comprehensive coverage for an "unidentified employee." It promptly demanded reimbursement from appellant under the threat of termination of appellant's bond. When appellant refused, his fidelity bond was cancelled by the company and the department promptly instituted removal action because the company had cancelled fidelity coverage. The employee was discharged because he would not reimburse the bonding company for the unidentified bookkeeping loss. The record indicates that it was not known whether the loss was in cash or inventory although there is reference to a certain number of cases of liquor.
The discharged employee then appealed to the personnel board, as previously indicated.
Law
Why did the state make the claim, tolerate the termination of the employee's fidelity bond and bring a removal action, not for infidelity, guilt or complicity, but only because its insurer recognized its liability to the state under the separate comprehensive coverage of the policy?
The explanation offered is that a regulation provides for absolute liability for store managers, and possibly assistant store managers.
Three questions of law arise:
1. May the director or the liquor department by regulation impose vicarious liability upon employees regardless of fault, guilt or complicity?
2. May the director remove an employee because the insurer for the state terminated the employee's fidelity bond when a claim was paid under unidentified loss coverage when there was and could be no claim under the employee's fidelity bond?
3. Is the delegation to the insurer of the control over the continuance of employment under this arrangement with the bonding company an improper delegation of power, an abuse of discretion by the director in approving bonds, or a violation of the Civil Service Act?
Vicarious Liability
Under the director's regulations the manager of a store is personally responsible for all shortages of cash and inventory of the store regardless of fault, regardless of the number of assistant managers or other employees handling cash and stock, regardless of the volume of business and, carrying this to a reasonable conclusion, regardless of larceny, embezzlement and robbery by others, employees or otherwise.
Under this regulation and the arrangement with the bonding company, the employee was discharged with no notice of hearing on the claimed shortage, no proof of fault, infidelity or incompetency. He was discharged, virtually by the bonding company that decided to terminate its coverage because he refused to reimburse the private company for funds which the record shows he did not receive or take.
The record of the personnel board points out that vicarious liability, above and beyond personal fidelity, was imposed by the director because of the nature of the retail business. The record suggests three known cases for shortage: failure to check inventory received, failure to prevent improper removal of inventory and loss of cash; and further, that removal by employees of overages of state funds is tolerated and often used as a kitty to cover shortages. Employees are said to have been permitted to raffle liquor to make up a shortage. These practices keep the department's books balanced in Columbus, however imperfectly accomplished and however perfectly or imperfectly calculated by man or machine — or so it appears in the record.
It is naive to believe there are only three causes for shortages or that a manager can prevent shortages by watching the drivers make deliveries, the cashiers accept money and the clerks hand out the merchandise. There are other causes for a failure of auditors to balance books. It would not be appropriate to broadcast the suggestions.
The vicarious liability, created by regulation and not by statute, was referred to by the Attorney General in 1962 O. A. G. No. 2944, in which the bonding company requested a salary check that had not been delivered to an employee. The opinion was that the department had only such authority as was granted by law and could not withhold the employee's salary check for the bonding company.
In Weiner v. Crouch (1963), 120 Ohio App. 49, 201 N.E.2d 84, court held that the application of the vicarious-liability regulation to a self-service store where the stock is selected by the purchaser, as in a large grocery store, is an abuse of discretion by the director and unreasonable in the absence of proof of guilt or complicity by the specific employee.
The degree of risk in self-service stores is greater to a slight, barely perceptible, degree. The difference is not significant in relation to the absolute risks imposed on managers by the regulation and does not justify any distinction from the general holding in the Weiner case.
The grounds for removal of a state employee appear in R.C. 143.27 of the civil service statutes. They include, among other things, "violation of such sections or the rules of the Director of State Personnel or the commission." (Emphasis added.) The appellant was charged with none of the statutory grounds. He was not charged with the violation of any rule adopted by the Director of State Personnel or the (civil service) commission.
In view of this conclusion that vicarious liability cannot be imposed by rule, it is not necessary to consider whether anyone other than the Director of State Personnel or the Civil Service Commission could adopt such a regulation. R.C. 4301.03.
The authority of any director, particularly one other than the Civil Service Commission, to adopt rules must be construed in connection with the civil service statutes and, more particularly, R.C. 143.27, which specifically delineates the causes for charges that must be specifically stated as grounds for discharge. The rules that may be adopted and enforced by civil service must be reasonable, and reasonably related to the misconduct, inefficiency or "any other failure of good behavior." (Emphasis added.) There must be a real and substantial relation between the employee's conduct and the operation by the employee of the public service. If not, there is no legal cause for discharge.
In a situation such as we have here, the operation of a store with fifteen employees by a manager and by an assistant manager doing business well in excess of a million dollars a year, the imposition by rule of vicarious liability upon one or more persons, regardless of conduct, fault or inefficiency, has no relationsip to such employee's conduct or misconduct and is an arbitrary and unreasonable abuse of authority and discretion.
Employees of the liquor department are not state officers. This was indicated in the case of Weiner v. Crouch, supra ( 120 Ohio App. 49). Public officers are personally and absolutely responsible for funds and property entrusted to them. The liability is imposed by law or by nature of their office. Such officers appoint, control and are responsible for their deputies. However, state employees in the liquor department have no such authority or responsibility. They probably do not receive the kind of compensation required for the acceptance of such responsibility. They cannot hire and fire those whom they supervise because both are protected by the civil service laws. Regardless of their suspicions they cannot protect themselves or the state from other employees who may be unfaithful or from outsiders; they cannot protect inventories unless the state provides security and protection of twenty-four hour vigilance. No statute or law of Ohio imposes absolute or vicarious liability upon employees. The director of the liquor department does not have authority to create a vicarious liability.
When the state decides that it is necessary to engage in a proprietary business involving the retail distribution and sale of a product it accepts the risk incident to such an activity. It cannot escape or limit such risk or impose it upon its employees except in a manner expressly authorized by law and consistent with the private rights of its employees.
The risk in the marketing of liquor, which includes in the price federal and state taxes, is considerably greater than other products. A rule by the director or commission in charge that attempts to impose a proprietary risk upon employees without giving to such employees compensation for the risk and the power to control the employees is arbitrary as well as unlawful. Such arbitrariness is not overcome by permitting employees to keep overages of the state's funds nor by winking at methods to meet shortages. These factors merely substantiate the evils that arise once the state or a state officer approves a violation of law to preserve the fiction that the state is the perfect proprietor of a private business.
The proprietary risk of a private business operated by the state cannot be imposed by arbitrary rule of a director, department, or a commission. It cannot be enforced, indirectly, under the guise of a comprehensive policy that permits its insurers to deny fidelity coverage to managers against whom the state and its insurer cannot prove any infidelity, fault or direct responsibility for mismanagement.
A word should be said regarding the second stage of the application of the rule by which the director divided the vicarious liability equally against two employees. Whether or not the regulations apply to assistant managers as well as managers may be determined from the regulations, which the court indicated may be filed as additional evidence, if this court cannot judicially recognize them or if there is any doubt on this detail. However, the assessment of vicarious liability upon multiple parties, not according to conduct having any relationship to service, but constituting an arbitrary apportionment upon innocent parties is even more arbitrary, unreasonable and contrary to law.
Fidelity Bond and Unidentified Loss
The questions of law that arise out of the nature of the bond and the cooperation of the director with the state's exclusive bonding company enter this case backhandedly because the removal notice by the department was not on the basis of infidelity or other statutory grounds for removal, but simply on the ground of ineligibility for employment in a position requiring a personal fidelity bond.
The employee was discharged because he would not reimburse the bonding company for an unidentified bookkeeping loss. The state cooperated with the decision of the insurer by taking steps to remove the employee, based upon the company's decision, and without proof of fault or claim of personal fault on the fidelity bond entrusted under statutory discretion to the director for the benefit of the employee as well as the state. The discretion was exercised in this case to assist the insurer in its efforts to collect an uncollectable claim as against an employee who the department admitted was innocent.
The cancellation of the bond was made possible because of the regulation imposing vicarious liability and because of the arrangement by the director for fidelity as well as unidentified loss coverage in the same policy. As conceded in the record, this action was taken by the bonding company with the tacit approval of the director who accepted the insurer's decision and who acted thereon in the absence of proof of guilt or complicity and in the absence of neglect or any other failure by the appellant other than his refusal to reimburse the company for the arbitrary proportion of a loss arbitrarily assigned to managers by a regulation which provides no standard by which fault, fidelity or liability — proportionate or otherwise — can be determined. The action was taken upon the regulation which this court has found to be unreasonable and unlawful.
The question then arises whether the director may remove an employee simply because the state's exclusive insurer cancelled a fidelity bond for its own purposes or for reasons which do not involve infidelity or any claim upon individual fidelity coverage. May the insurer wrongfully cancel an innocent employee's fidelity bond because it paid a claim under a comprehensive clause obligating it to pay even though the employee or other party responsible could not be identified? Is such an arrangement by the director with the insurer to remove an employee a delegation of power?
Appellant claims this arrangement between the state of Ohio and the bonding company is a subterfuge, an improper delegation of power to remove a state employee and violates appellant's rights under the civil service law to a notice and hearing on the specific charges for statutory removal.
The record indicates that other admittedly innocent employees have reimbursed the bonding company to avoid such an indirect discharge; that the result, though unfortunate, is the way the state of Ohio conducts its proprietary business of merchandising liquor; and that it is the only way the auditors in Columbus can balance their books even though, as in this instance, the director and the personnel board find no wrongdoing of any kind by the employee. It is not apparent in this record whether the auditors balanced the books properly. The cause of the shortage, the bond claim and the discharge of the employee are not established.
As has been indicated, the director by regulation shifted all risk of the state's proprietary business operation to its managers regardless of fault, neglect or other acts contributing to the loss. The manager is held accountable under the regulation as an absolute insurer at the will or whim of the department or of the bonding company under the separate comprehensive clause that is not related to a fidelity bond. The court finds that the regulation and the devious arrangement with the insurer are an unreasonable abuse of discretion and unlawful. They also violate the civil service law and the rights of the employee thereunder.
A reason advanced by the personnel board for sustaining the discharge was that it could not reverse and order re-employment unless the exclusive insurer reinstated its coverage. Its decision is based upon a practical difficulty improperly imposed by the department and its single carrier that was approved by the director. To this extent there appears to be, in effect, a delegation of authority, discretion and judgment of the director. It is true that the statute gives the director a discretionary choice in the selection of the type of bond. R.C. 4301.08. Bonds of employees are required to be conditioned according to law — not according to a regulation changing the law or imposing liability contrary to law. Cusack v. McGrain (1939), 136 Ohio St. 27. The discretion required of the director in approving bonds cannot be abused at the expense of employees.
If the department is in a position that it has no right under the civil service statutes to discharge, it would be indefensible to assert that an employee has no job and no legal or equitable relief because the director obtained a blanket bond that permits the insurer to deny fidelity cover age and to wrongfully effect a discharge of state employees on the basis of comprehensive coverage and for a reason other than recognized by law. An unlawful act or an abuse of discretion in the department cannot effect an unlawful discharge to the prejudice of an employee. The finding of the personnel board that it could do nothing because of such arrangement is false. R.C. 3.32 provides generally for bonds and indicates that the section on state bonds does not prevent the giving of a personal bond with sureties approved by the officials authorized by law to give such approval. Further, if one insurer interferes with the right of a state employee, there are others that operate in a manner that does not create an abuse of discretion by the director in accepting a carrier that interferes with the right of employment and uses the state to help it collect reimbursement on an unidentified employee clause.
Since the termination results from one or more abuses of discretion or unlawful acts by the director the solution is a correction of the abuse and not a refusal to grant relief to an admittedly innocent appellant. The solution lies within the power of the executive branch of government under an order of court, if necessary. The personnel board and the courts have ample authority, by reversal in this case, to find the circumstances of this discharge an arbitrary abuse of discretion, unreasonable and contrary to law.
The method taken here by appeal to the personnel board was proper and possibly necessary before resorting to equitable relief. 15 American Jurisprudence 2d 509. Equitable relief, such as was granted in the Weiner v. Crouch case, is an additional, but not an exclusive, remedy. It probably would be denied in this instance because the appeal is, or should be, an adequate remedy. If not adequate, other avenues are open.
As indicated in the closing paragraphs in State, ex rel. Hussey, v. Hyman (1900), 21 C. C. 187, these proceedings are like a court-martial in which a man is entitled to be notified of the things which, it is claimed, he has done to justify punishment and removal. 15 American Jurisprudence 2d 497. The evidence must be confined to the charge and the charge in this instance is actually based upon a breach of fidelity: that is, that appellant received the money or property and failed to account for it, an accusation which is admitted to be false. The charge for which he was notified was a cancellation of his bond, which the record shows was due to an arbitrary abuse of comprehensive coverage obtained by the state. It was not due to any personal act, inefficiency or neglect of duty by the appellant.
The purpose of R.C. 143.27 is like that of a court-martial. It requires notice and proof of the conditions set forth or such others, similar thereto, as the director may lawfully determine by rule, before a state employee may be discharged. This statute does not authorize a rule for the imposition of absolute, vicarious liability upon an innocent civil service employee in the absence of notice and proof of fault, neglect or similar inefficiency or complicity. This statute is designed to avoid just such arbitrary action when the state is the employer.
Obtaining comprehensive coverage protecting the state for losses through unidentified employees and others is a good business practice. When such coverage is added to a blanket fidelity policy, it cannot be used to permit the insurer to remove state employees or to assist the insurer to obtain reimbursement for an unidentified loss that cannot be established against a specific employee.
Assessment of individual liability by the insurer with the knowledge of the director of the liquor department in conjunction with a regulation imposing vicarious liability upon an innocent employee violates the duty of the director with respect to employee fidelity bonds and it violates the rights of the employee under R.C. 143.27 of the civil service statutes.
The enforcement of such an arbtrary rule by cancellaton of a fidelity bond and by an arbitrary demand by the insurer for reimbursement against an innocent employee, all with the knowledge and approval of the state, is not a permissive delegation of the director's responsibilities and is unlawful.
The decision of the State Personnel Board of Review is reversed. It is not supported by the evidence, it is contrary to law and it establishes an arbitrary and unreasonable abuse of discretion by the appellee. The specific grounds for reversal set forth in the notice of appeal are sustained except item four which is not determinative and is unnecessary to resolve in this case.
This decision is not journalized, as is our custom; however, it is ordered filed.
An entry is ordered filed within two weeks.