Mitigating the Risk of Employee Litigation

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Historically, between one half and one third of all small and mid-sized businesses will be sued in any given year.  Over a business’s lifetime, approximately 90% will face litigation.  While litigation costs vary depending on the type of lawsuit, today’s business owner can anticipate legal costs alone over  $125,000. This number does not account for judgment costs if you lose. And, or win or lose, business disputes can damage your business reputation and result in loss of revenue because you and your employees are distracted by a lawsuit and not doing business.

While every business owner wants to avoid litigation, not every business owner has developed the right plan to do so.   The best course of action in mitigating risk and put your company in the best position possible to win any lawsuit that is brought against your business. As employee lawsuits are one of the most dominant sources of business litigation. Consider the following topics as you evaluate your litigation risk, and what steps you can take to lower it.  Addressing these issues will help you avoid employee claims and save you time, money, and create a healthier business climate. 

  1. Update and Circulate Company Policies – Every company should publish a detailed employee handbook that outlines your company’s policies and expectations of employees so that there are no misunderstandings about how the employee is supposed to conduct themselves. Here are some quick tips:
  • Circulate and update company policies regularly. Make sure that everyone knows about policies relating to equal employment opportunities, anti-retaliation, and anti-discriminatory practices. 
  • Make reasonable rules. 
  • Have a clear system discipline, and document it
  • Keep rules limited to workplace performance standards
  • Conduct periodic employee evaluations, and give them an opportunity to provide feedback
  • Use “at-will” language in both employee handbooks and employment applications
  • Don’t discriminate, and be wary of policies that have discriminatory application

If you have a well-drafted employee handbook and can demonstrate that the employee was provided a copy and properly informed of your policies and expectations, most types of employee lawsuits will have little ground to stand on.

  1. Know and Follow the law – Easier said than done as employment laws are voluminous.  Here are some quick tips on common issues:
  • Understand nonexempt status. If employees work more than 40 hours per week, they are entitled to overtime pay unless they meet strict criteria for ineligibility according to the Fair Labor Standards Act. Employees cannot waive their right to overtime pay.
  • Avoid asking Employees to “work” off the clock. Hourly employees must be paid for all the time they work, even if an employer has not asked them to do it.
  • Pay based on job requirements. Company salaries should be based on market standards, not on what someone made in their last job or other questionable variables. Two people performing the same job should make roughly the same pay.  Allowances for experience and performance can be considered.
  • Treat Employees equally. A business owner who is trying to encourage diversity may seem to be favoring certain segments of the workforce. Make sure your company mission supports your diversity mission. 
  1. Train Management and Employees – Invest in your employees. Consider scheduling annual meetings to review important employment policies. 
  • Conduct employee reviews on time and consistent with company policy. 
  • Make sure evaluation forms with the particular job the employee performs. 
  • Review completed evaluations to ensure that individuals are not being overrated or underrated. 
  • Standardize the procedures used for communicating and implementing terminations 
  • Be accurate and straightforward in evaluating employees, both in praising and criticizing when warranted. 
  • Insist on thorough and complete documentation, including efforts to help an employee improve, and employee’s failure to respond to counseling. 
  • Never provide a letter of reference that contains inaccurate statements (either positive or negative) regarding a terminated employee.
  1. Create Infrastructure that Shields Your Personal Assets – The proper corporate structure will ensure that your personal assets are not at risk in case of an employee lawsuit.
  • If you are operating as a sole proprietorship, form an S or C Corporation or a limited liability corporation (LLC) to shield your personal assets. 
  • Maintain proper insurance coverage.
  • Execute employment contracts for key personnel. 

Takeaway

Your employees should be an asset—not a liability. Contact CASHMAN LAW today for a free consultation to see how we might advise you in managing, or avoid, disputes. 

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The contents of this blog are intended to convey general information only and not to provide legal advice or opinions. The posting and viewing of the information on this blog, should not be construed as, and should not be relied upon for, legal or tax advice in any particular circumstance or fact situation. While effort is taken to update the information presented, it may not reflect the most current legal developments. Please contact CASHMAN LAW FIRM LLLC (Hawai’i)/ CASHMAN LAW LC (California) to consult with an attorney for advice on specific legal issues.