USA – How to Manage the Risk of Employee Lawsuits

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Time to read: 5 min

Every employer should manage the risk of employee lawsuits.  Many companies believe that they treat their workers well and that their employees are happy.  As a result, they believe that they are not at risk of a lawsuit.  But in my work, I frequently see employment relationships sour and employees surprise management by retaining a lawyer.

Employers should proactively manage this risk instead of hoping lawsuits never come.  Defending a business against litigation by a current or former employee takes a lot of time and can be very expensive.  It can also be incredibly frustrating to see an employee the company once trusted making false and damaging allegations.  But employers can take steps before a dispute arises to reduce the impact of a lawsuit.  I discuss eight such steps below.

First, employers should consider purchasing insurance that may cover employee claims.  In the United States, this insurance is called Employment Practices Liability (“EPLI”) Insurance.  These kinds of insurance policies may pay for a lawyer to defend the company in the event of a lawsuit.  They may also pay the employee the amount he or she demands or that a court awards.  Although insurance costs money, many companies prefer to pay regular and foreseeable premiums than sudden, steep, and unpredictable legal fees and employee payouts.

Second, employers should implement and enforce sexual harassment policies.  Policies like these discourage the type of behavior that can subject a company to liability.  But in many jurisdictions, they may also provide a defense to a company in the event an employee sues the company for allowing the harassment to take place.

Third, employers should seriously examine disparities in pay and job roles.  If the highest paid employees at a company are largely male and the lowest paid employees are largely female, then an employee may claim that the employer engages in sex discrimination.  Similarly, if the executives of a company are largely white but its blue-collar workers are largely people of color, an employee may allege that the company engages in racial discrimination.  Rather than litigate these issues, a company should investigate whether those disparities exist in its own workplace and address them if they do.

Fourth, employers should consider whether they want employment disputes to go to arbitration instead of to court.  Employers can largely determine this by including an arbitration clause in the offer letters they send to employees upon hiring them.  Arbitration has some advantages: it tends to move quicker, it is private, it has the reputation for being a friendly forum for employers, and it tends to cost less.  But it also has some downsides: it does not permit appeals on the merits of the dispute and it can cost more than litigation depending on the kind of case.

Fifth, any time an employee discloses that he or she has a health issue, the company should immediately consider how to accommodate that issue.  Many employers may disregard the disclosure of a health issue if it does not seem important to the employee’s job.  But if the employee later believes that the employer penalized him or her because of the health issue, the employee may claim discrimination.  Before that happens, an employer should work with an employee to make sure the health issue does not impede job performance.

Sixth, employers should ensure they make consistent decisions.  If an employer allows one employee to work from home, other employees may want the same treatment.  And if an employer lays one employee off, she may wonder why another employee did not meet the same fate.  Employers may reduce the risk of a lawsuit by setting firm policies and abiding by them.

Seventh, employers should frequently consult a lawyer they trust when employment issues arise.  Spending a few hundred dollars to speaking to a lawyer for an hour before firing an employee or before responding to an employee complaint can help an employer avoid a lawsuit that may cost tens or even hundreds of thousands of dollars.

And finally, employers should consider settling disputes with employees, even if they are meritless.  No company wants an employee to take advantage of them.  But lawsuits are often more expensive and a hassle than the cost of a settlement.  Spending a lot of money on defense, even if successful, may be more expensive than just compromising and paying the employee a fraction of what they demand.

William Newman
  • Alternative Dispute Resolution
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