Many small-business owners respond to employee lawsuits with grudging acceptance that, regardless of whether the company broke any laws, the sooner it pays a plaintiff to go away, the better. As repugnant as this may sound, it is a cost of doing business. That, at least, is one approach.
Others do not subscribe to this belief. Here, several small-business owners and lawyers offer practical advice to protect against employee litigation:
DEFINE WORK EXPECTATIONS: When an employee is terminated, it should come as no surprise, said Daniel J. McCoy, an employment lawyer at Fenwick & West in Mountain View, Calif. Though a small-business owner is not legally obligated to take and document progressive disciplinary measures, McCoy said this was a good practice regardless of company size.
Employees must know how success will be defined and how they are doing, said David Handmaker, who owns Next Day Flyers, a printing services company in Rancho Dominguez, Calif., with 160 employees. Handmaker said he learned his lesson after failing to document performance issues regarding an employee who later sued. “We didn’t realize the hole we were digging ourselves into,” he said.
TERMINATE WITH CARE: At the moment of termination, an employee can feel either inflamed or treated fairly, McCoy said. To help ensure a less combustible situation, Paul Fichter, who owns Taphandles, a beer marketing company in Seattle, said he offered terminated employees a severance amount that would “smooth things over” and required them to sign a release to collect it.
CONSIDER LIABILITY INSURANCE: Premiums and deductibles are not cheap, but neither is defending a lawsuit. Jeffrey Herold owns West Coast Trends in Huntington Beach, Calif., which makes golf bags, luggage and related accessories, and averages $10 million to $15 million in annual sales. He has faced three employee lawsuits alleging wrongful termination since Herold founded it in 1990. Herold estimated that he paid between $80,000 and $115,000 per case, out of pocket, to defend previous matters.
All business owners should conduct cost-benefit analyses and understand their insurance options. Matthew Soleimanpour, Herold’s lawyer, said it was crucial for small-business owners to negotiate with their underwriters for the right to select their lawyer, and for a requirement that the insurance company get the owner’s consent before settling. It is also important to seek a per-claim, not per-claimant, deductible.
FOLLOW THE LETTER OF THE LAW: You need not do anything wrong to be sued. But when you are facing a lawsuit, it helps to be able to prove you have done everything by the book. This includes posting all labor- and employment-related materials in the workplace that are required by state and federal governments.
Employers should draft employee handbooks with assistance from a trusted employment lawyer or human resources consultant, and make sure employees sign any handbook updates. And when considering prospective employees, treat everyone identically. “If someone emails me and says they have a friend who wants a job, I tell them to apply using the usual process,” Fichter said.
TRAIN LIKE A BIGGER COMPANY: Regardless of whether your state mandates employee training on discrimination for a company of your size, you should consider it required, Herold said. “Do it even if you only have 10 employees,” he said.
BE REALISTIC: Ultimately, business owners must know whether truth is on their side. If not, Herold said, “Just settle and get it over with.”