The New Malpractice

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Diana L. Holland, a young secretary from Los Angeles, is suing her former employer, Lifecare Services Inc., a manufacturer of medical respirators, for $2 million.

The suit claims that Lifecare Services refused to take action against one of Holland's former co-workers who allegedly harassed her by repeatedly slamming a door that was near her desk, making obscene suggestions, and trying to force her out of the company. Holland eventually left.

Gerald Knudson, the attorney for the Boulder, Colo.-based company, regards it as "a specious case." "The company did investigate it and found that the complaint was unfounded," he explains. But Lifecare, a small, closely held business with annual sales of less than $10 million, is still saddled with the expense and inconvenience of a lawsuit. And Joseph Posner, Holland's attorney, doesn't regard the charges -- "wrongful discharge, breach of the covenant of good faith and fair dealing, intentional infliction of emotional distress, and employment discrimination" -- as specious. His specialty is suing employers, and he does it quite successfully.

Posner, a Los Angeles tort lawyer who now deals primarily with employment issues, enjoys a lively and lucrative practice based on what have come to be called "management malpractice" suits. Now, because of recent developments in the law, disgruntled employees not only have access to unions and federal and state agencies, but they can also seek relief in the courts, asking juries to right wrongs and to award stiff compensatory and punitive damages. Management malpractice promises to do to business what medical malpractice has done to physicians.

Since 1975, the number of lawsuits initiated against companies by current or former employees has increased from 10 to 20 times, according to David W. Ewing, managing editor of Harvard Business Review and author of Do It My Way Or You're Fired.

If Posner's practice is any indication, the figures are conservative. "I've got over 40 of these cases in litigation right now, and I just finished dictating six close-out letters -- letters indicating that I don't want to take a case," says Posner.

The suits may involve firings in which sex, race, age, national origin, physical handicap, or union activities has played a part. But, increasingly, they allege "unjust dismissal" -- a termination that violates a contractual or implied "covenant of good faith and fair dealing" between employer and employee.

No business, regardless of its size or type, seems safe. Posner's clients have sued restaurants, hospitals, banks, a liquor wholesaler, a stockbrokerage, a magazine publisher, aerospace companies, and manufacturers of pillows, medical equipment, and toys seeking damages ranging from $15,000 to $2 million. Of 29 termination suits resolved in California during the past few years, 26 resulted in findings for the employees, he notes, and the average award was "up in the six figures."

The proliferation of suits and major awards stems from a number of developments: society's growing litigiousness; increased awareness of legal remedies; court decisions that have extended an employee's rights and access to damages, including punitive damages; juries with an antibusiness bias; imaginative extensions of the law by tort attorneys, and a new attitude that, in the words of business writer Peter F. Drucker, regards "the job as property right."

Drucker notes that the United States is following the lead of European countries, which have made it more and more difficult, and more and more expensive, for companies to dismiss employees. All 10 countries of the European Community, as well as Sweden and Norway, prohibit the "unfair dismissal" of workers who have completed their probationary period. When termination does occur, significant severance pay (six months' salary) or redundancy payments (payments made when, through no fault of his or her own, an employee's job becomes unnecessary) are exacted. That hasn't occurred here, but the notion that a job is an important "right" that a person should enjoy as long as he or she performs satisfactorily is being established by litigation.

"There is virtually no aspect of employment decision-making -- from hiring someone, through appraisals, promotions, and retention -- that doesn't have legal ramifications and potential liability for the employer," observes James Sharf, an industrial psychologist with the Washington, D.C., corporate consulting firm of Richardson, Bellows, Henry & Co.

Historically, aggrieved employees have sought satisfaction through unions or federal and state agencies: A welder fired after engaging in organizing activity could file a complaint with the National Labor Relations Board; a black computer programmer constantly passed over for promotions could approach the Equal Employment Opportunity Commission. Remedies generally were limited to reinstatements, back pay and benefits, or other compensatory damages. What has happened, however, is that the worker's rights to his or her job and to damages have expanded -- a nonunion employee who sabotages an assembly line to protest hazardous working conditions may be involved in "protected" activity; a "whistle-blower" cannot be fired if his or her act touches on "public policy" (for example, a federal employee disclosing cost overruns). The most significant departure from the past is the notion that workers may forgo the NLRB or EEOC in favor of a private-sector lawsuit.

"Before, employees were looking to make things better," notes Jerold E. Glassman, a senior partner in the labor law firm of Grotta, Glassman & Hoffman, in Roseland, N.J. "Now they're going for blood."

And getting it. In two recent California decisions, juries presided over virtual bloodbaths. In Kringer v. Plastic & Rubber Products and Sardan Standard Precision, plaintiff Hillel Chodos, seeking $150,000 in damages, was awarded $1,486,000, $1.2 million of it for emotional distress and punitive damages. Chodos, an industrial contractor, claimed that he was fired without "good cause." And, in Thomas Rex Horton Jr. v. Kaiser Steel Corp., a shift foreman who was terminated at the company's Fontana, Calif., plant and demanded $100,000 was granted $4,739,599. Norton charged that Kaiser had discharged him to avoid paying pension benefits. The jury's award was set aside by a thunderstruck judge, who ordered a new trial.

Michael L. Wolfram, a Los Angeles attorney with Morgan, Lewis & Bockius who frequently defends companies against such suits, observes, "It's significant that 12 jurors decide that, even though some guy is making no more than $20,000 a year and probably won't make $1 million in his entire working life, he's entitled to $1 million in damages . . . That obviously expresses a great deal of outrage at employers [for] not dealing responsibly and fairly with their employees."

Such decisions have done major damage to the long-standing doctrine of "employment-at-will" -- the belief that, in the absence of a contract or applicable legislation, either party may terminate employment at any time, and essentially for any reason. At least seven states now recognize "unjust dismissal" as a legitimate cause of action, and several have gone further, indicating that it is a tort and therefore subject to punitive as well as compensatory damages. California has led the way in liberalizing standards (Cleary v. American Airlines; Tameny v. Atlantic Richfield Co.; Pugh v. See's Candies Inc.) and has unleased a horde of aggressive and imaginative tort attorneys on the state's businessmen.

"The tort bar has jumped into these cases with a vengeance," says Wolfram. Glassman compares the development to the Marvin Mitchelson palimony phenomenon, but the most common point of reference is medical malpractice. "This sort of suit is about to explode the way medical malpractice did a few years ago," says one counsel for the defense, noting that if a ruling now pending in New York validates "unjust dismissal," dozens of other states will quickly follow suit.

California now acknowledges that every contract of employment (whether real or implied) contains a "covenant of good faith and fair dealing." "I'm not sure that any of us knows what that means," complains Wolfram. In practical terms, it means that the employer's liability is growing exponentially: He may now be sued for back pay, benefits, emotional distress, intentional infliction of emotional distress, libel, slander, and even loss of consortium.

Clearly, the employee's legal champions are just getting started. For example, Daniel Ernsberger, a Pittsburgh attorney, advertises his "unjust dismissal" services in the local press: "Malicious discharge, age discrimination, grievance complaints, intentionally discouraging work assignments -- To learn whether you have a cause of action, make an appointment today. Minimal charge for initial interview."

"I'll tell you where the next step is going to come," says Posner, "and that's the unjust demotion."

Management has responded to the new threat much in the manner of a person being mugged: It has shielded its head, tried to hold on to its wallet, and, only afterwards, considered what steps to take to ensure its future safety. The measures include rewriting employee handbooks to eliminate problematic promises, educating personnel directors about the legal ramifications of their work, instituting formal grievance and arbitration procedures, scheduling more frequent and demanding evaluations of employee performance, and reviewing any termination with a disinterested third party before firing. But the most fundamental response is to forge a new working relationship with one's attorney.

Owners, executives, and other managers who have been through the ordeal uniformly decline to discuss it -- at best, it means unflattering publicity; at worst, more lawsuits. As one of Posner's victims attests, "Once was enough. This thing took me unawares, was unfounded, cost me $15,000 in damages, plus that much more in legal fees . . . After it's over, you've got an entirely new attitude about your employees."

Unfortunately, the situation is likely to grow worse rather than better. The courts seem determined to confirm "the job as property right," and the only legislation surfacing that deals with the issue extends, rather than restricts, the equity of employees.

Added responsibilities, a more paranoid workplace, and sobering liabilities -- the plight of the employer -- are leavened only by what may be the eventual outcome of the "management malpractice" furor: lawsuits initiated by employers.

"Should an employer be able to sue an employee if the employee quits without good cause?" wonders Ernsberger.