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How company owners can protect themselves from employee litigation.
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And you thought your employees liked you? With recent changes in the law turning workplace litigation into a gold mine for lawyers, it's not only large companies that find themselves on the sharp end of an employee lawsuit. Is there anything you can do to protect yourself?

If you want to hear someone bash the American legal system, talk to an employer who feels he has been wrongly accused of workplace discrimination. You'll get an earful about an area of law commonly called "legalized blackmail." A business owner or manager who has been ensnared in this bewildering web of jurisprudence has likely turned deeply resentful of a system that critics say has gone haywire.

Employment litigation has exploded. The number of discrimination lawsuits has risen by more than 2,200% over the past two decades; they now account for an estimated one-fifth of all civil suits filed in U.S. courts. Already an epidemic, employment litigation is sure to worsen as the work force grows more diverse.

The ramifications of the explosion are creating havoc in thousands of companies. Legal-defense costs in employment lawsuits can be staggering. Awards to plaintiffs can cripple small businesses. Moreover, the litigation often lasts for several years, consuming huge amounts of management's time and energy. Even for employers who are ultimately vindicated, the process itself is punishing. And in the wake of one of these fights, companies often undergo a sort of personality change, turning legalistic and strained as management moves to prevent exposure to claims from job applicants and employees.

"The whole country is much more litigious, but employees are phenomenally more litigious," says Miami lawyer Elizabeth du Fresne, who once represented plaintiffs and now defends management.

Few people would argue that antidiscrimination laws are uncalled-for. There are still racists. There's still discrimination against older people and people with handicaps. And there are still managers -- of both sexes -- who think putting their hands all over the help is a fringe benefit of being the boss.

Still, the impression that emerges from interviews with numerous lawyers and employers is of a well-intentioned body of law that has become tremendously burdensome and abused. Berserk, warped, twisted, absurd: those are the sort of terms employers use when describing their nightmarish legal tangles with workers.

One small-company president, who spent $50,000 on legal fees fighting a wrongful-termination charge, sums up his feelings this way: "We've been in business and owned by the same family for 80 years. We had a nice reputation in the community. The fact that this employee was able to drag us through the courts on an utterly worthless claim and cost us all this money and aggravation made it clear to me that the system is out of control."

Even lawyers are appalled at the abuses they see. Robert Fitzpatrick is a Washington, D.C., lawyer who has practiced employment law for 25 years, representing both management and employees. He is fervid about eradicating discrimination -- he cut his teeth as a civil-rights lawyer in Mississippi in the 1960s. Still, he is disturbed by what he now regards as "a legal war" in the workplace.

"There's always a small percentage of cases where the person was blatantly and egregiously wronged, discriminated against on the basis of race, age, sex, disability, whatever," Fitzpatrick says. "Those are the cases that a judge and jury ought to hear. But that's not how the system works now. It's just everybody trying to rip off some money whenever they get offended. It's an outrage when you have to pay $100,000 to defend yourself against something that anybody can tell in two hours is bogus."

Judges, too, sometimes think things have gone too far. Consider a 1991 discrimination case in Los Angeles, in which the plaintiff, a 56-year-old construction-company executive, claimed he was forced to quit his job because of his age. After a 38-day jury trial, he was awarded $2.1 million in economic damages, $2 million for emotional distress, and $1.6 million in attorneys' fees and costs -- a total of $5.7 million.

In reviewing the case last year, an appellate-court judge upheld the verdict and award as legally valid. But then, in his decision, he took the highly unusual step of writing that this area of law "is quickly running out of control and the citizens of California will be the ultimate victims and losers....Commerce in California cannot flourish with such multimillion dollar verdicts readily attainable."

* * *

Expanded Legislation
Starting in 1963 with the Equal Pay Act, Congress began a long legislative campaign to expand employees' rights. Part of the impetus was a big drop in labor-union memberships. For several decades before, unions had shielded roughly a third of the work force from the whims and caprices of management. Their decline left a growing number of employees without recourse for perceived wrongs. Increased legislation essentially made the courts a de facto replacement for union grievance procedures.

Four federal laws have generated most of the ensuing litigation. They are Title VII of the Civil Rights Act of 1964, which prohibits discrimination on the basis of race, religion, sex, or national origin; the Age Discrimination in Employment Act of 1967 (ADEA), which protects workers who are at least 40 years old; and the Americans with Disabilities Act of 1990 (ADA), which outlaws discrimination against people who are disabled, including the obese. Finally, there's the Civil Rights Act of 1991, which has set off a gold rush by plaintiffs and their lawyers.

State lawmakers followed Washington's lead. As a rule, they incorporated the federal statutes into the states' legal codes. With a number of the laws providing for so-called concurrent jurisdiction, plaintiffs have the option of bringing charges in federal or state court, whichever is more advantageous. In practice, most discrimination suits end up in the federal system.

Meanwhile, another major trend was sweeping over state judiciaries. Until the early '80s most states recognized the common-law doctrine known as "employment at will." Once a cornerstone of free-enterprise philosophy, the "at will" principle holds that an employer can fire someone for a good reason, a bad reason, or no reason at all -- so long as the firing isn't discriminatory or doesn't violate a collective-bargaining agreement.

By 1989, however, courts in 45 states had accepted several theories that eroded the "at will" rule, giving rise to claims for wrongful termination. Among them was the "implied contract" exception, under which job rights may be inferred when no explicit contract exists. (Sometimes rights are construed from the language in employee handbooks.) Then there's the broadly defined public-policy exception. Under that one, employers cannot fire a person who, for instance, blows the whistle on some fraudulent or criminal activity involving the employer.

Perhaps the most far-reaching example, though, is the "good faith and fair dealing" exception. It implies that a dismissal must always be for cause.

In 1992 Rand Corp., a research organization based in Santa Monica, Calif., issued a landmark report on the impact of those new doctrines. It found that only five states still maintained a "fire at will" policy unencumbered by the new protections -- Louisiana, Mississippi, Georgia, Florida, and Delaware. All three exceptions had been embraced by courts in eight states -- Alaska, Arizona, California, Connecticut, Idaho, Massachusetts, Montana, and Nevada.

There is no federal wrongful-termination law, so under those doctrines fired employees bring action in state courts, often adding on a discrimination claim. Multiple charges are, in fact, the norm. "It is very infrequent that someone sues just for discrimination anymore," says Miami lawyer du Fresne. "They also sue for battery, for intentional infliction of emotional distress, for negligent hiring, or negligent retention. All of these have unlimited compensatory and punitive damages. And they can be brought against companies and individuals alike, so managers' personal assets are now on the line."

Employers understandably feel besieged. "There are so many laws that they hardly know what to do," says Adrienne Fechter, a Tampa lawyer who once defended management but switched to the plaintiffs' side after the Civil Rights Act of 1991. "They're afraid that almost anything they do could be a violation."

It's not just the crazy quilt of laws that irks employers, it's also their complexity. A single termination now can arguably violate dozens of statutes. They sometimes overlap and even contradict one another.

Observes Miami employment lawyer Michael Casey: "Nowadays it's rare that a fired employee will not have some basis for a claim to get into court. So the message from Congress to employers is, Before you fire minorities, women, or anyone over 40, or before you fail to hire or promote them, you'd better have your ducks lined up in a row 10 miles long. Meaning, Don't do it."

And even what many would consider scrupulous employment practices are no guarantee of protection. Indeed, says Pittsburgh employment lawyer Laura Candris, "there is nothing you can do to insulate yourself from all risk of being sued. Nothing can preclude all possibilities of having a claim brought."

More and more employers are learning that the hard way. The number of discrimination claims has jumped sharply in recent years. According to the U.S. Equal Employment Opportunity Commission (EEOC), some 270,000 allegations were filed last year with it and its 82 state and local counterparts. Complainants numbered just over 150,000 -- some had lodged more than one charge -- up from 125,000 in 1992 and 110,000 in 1990.

Of the roughly 52,400 cases fully investigated by the EEOC in 1992, only 10,500 of them -- 20% -- were determined to have reasonable cause for action. But even when the EEOC renders a no-cause finding, the "wronged" employee may still file a lawsuit.

Leading the list of recent filings were claims based on race and sex discrimination, including sexual harassment. Next came age-related charges. But claims under the ADA are building fast. In 1993, the law's first full year, they nearly hit 25,000. The ADA issue is still new to the courts, but as the case law surrounding it develops, action is likely to heat up quickly.

"You are heavily into sex and age as the issues being litigated in courts right now," says du Fresne. "But two years from now, disability may be hotter than anything else." If so, the ADA could become a highly volatile and vexing problem for companies. Employers are not required to accommodate disabled employees under workers' compensation laws, for example, but they are required to do so under the ADA.

* * *

Lawyers, Juries, and Money
Nothing else has fueled the current onslaught of workplace litigation more than the Civil Rights Act of 1991. There are three big reasons for that: juries, money, and a giant surplus of lawyers.

Before 1991 a plaintiff in an employment-discrimination case appeared before a judge, not a jury. If the plaintiff prevailed in such a "bench ruling," he or she was entitled to equitable relief -- reinstatement with back pay and perhaps front pay, plus attorneys' fees and costs. It was basically a make-whole remedy.

With no provision for damages, the potential for recovering serious money was virtually nil. Thus, the odds of a plaintiff's bringing a lawsuit were diminished by the unavailability of lawyers willing to take the cases.

"If I'm a plaintiffs' lawyer sitting in my office, and you walk in and describe your case to me, the first thing on my mind is, 'Will I get a fee for it?" explains Martin Payson, a partner in a large employment-law firm in White Plains, N.Y. "Bear in mind that the individual is most likely out of work and probably can't afford my fee. Unless there is the possibility of a substantive recovery, it doesn't pay to take the case."

That changed dramatically when, under the 1991 act, plaintiffs in Title VII and ADA cases became entitled to compensatory and punitive damages, plus back pay and legal fees. In the political firefight that erupted over the legislation, business lobbyists extracted one break: the damage awards are capped under a sliding scale. For a company with more than 14 and fewer than 101 employees, the cap is $50,000. (It's worth noting that Title VII and the ADA don't apply to businesses with fewer than 15 people.) The awards top out at $300,000 for companies with more than 500 employees.

By piling on multiple tort claims, however, a plaintiff's lawyer can sidestep the caps. In a sexual-harassment case against a Miami businessman in Florida, for example, Fort Lauderdale lawyer Karen Coolman Amlong won approximately $1.5 million for her client. In addition to sexual harassment and sex discrimination, Amlong charged the man with battery, invasion of privacy, and intentional infliction of emotional distress. Moreover, under the laws of some states, such as California and New Jersey, there are no caps on damages.

In any case, the caps could soon be gone. The Equal Remedies Bill, which would abolish them, is pending on Capitol Hill, and it has strong support. "The caps enable companies to budget for discrimination," argues Ellen Vargyas, senior staff counsel at the National Women's Law Center, in Washington, D.C. "For a highly profitable firm with under 100 employees, $50,000 is nothing -- it's lunch money. We think plaintiffs should get whatever damages they can prove."

Besides damages, the 1991 act also gives plaintiffs the right to a trial by jury. That greatly raises the stakes for employers, because juries tend to empathize with plaintiffs. According to another study by Rand, plaintiffs win 70% of jury trials.

Plaintiffs' attorneys often object to the suggestion that juries might be biased against businesses. "If we don't trust juries, we don't trust democracy and we don't trust ourselves," insists New Jersey plaintiffs' lawyer Nancy Smith. "I have confidence in people's ability to do the right thing."

But not everyone is so sanguine about jurors' objectivity. Lynn Lloyd Laughlin is one skeptic. He practiced employment law for 20 years before founding Employment Dispute Resolution Inc. (EDR), an Atlanta outfit that seeks to resolve claims through binding arbitration. One reason companies become EDR's clients is that employers have a near-visceral fear of juries, especially in discrimination suits.

"The question is whether an employer or a manager can get a jury of his or her peers," Laughlin says. "Rarely do managers, let alone company owners, end up on juries. It's really a jury of the employee's peers."

That is very clear in age-discrimination cases, he adds. "Juries are notoriously sympathetic to age claimants. The average awards are running twice what they are for any other discrimination claim. The reason is that everyone on the jury either is in the protected class [40 or older] or hopes to be. And if the plaintiff looks like someone's mother, say, or grandfather, the plaintiff is halfway home."

Maybe juries favor plaintiffs. Maybe they don't. But either way, they are unpredictable, and that throws a wild card into the equation for accused managers trying to decide if they should fight a case to the finish or settle and be done with it. There aren't many options.

* * *

The Cost of "Legalized Blackmail"
Unhappily for employers, the combination of jury trials and damage awards coincides with a third explosive ingredient -- an overcrowded legal profession. There are about 740,000 lawyers in the United States, and by some estimates, as many as a third of them are unemployed or underemployed.

"Out here, big law firms in San Francisco and Los Angeles are laying off 10% to 20% of their work forces, so there are a lot of hungry lawyers around," says William Smith, a plaintiffs' lawyer in Fresno, Calif. "You have lawyers who, five years ago, would not have listened to someone talk about a sex-harassment case. Now they do listen because they need the business."

The National Employment Lawyers Association, a San Francisco-based bar group for plaintiffs' lawyers, has about 1,900 members and is growing by about 50 a month. In addition, personal-injury lawyers, skilled at playing to juries, are pouring into the field in search of a big hit. Many accept cases on a contingency-fee basis; if they win, they usually take 33% to 45% of the award.

"This is now much less a field that lawyers go into to do good and much more a field that people get into to make money," says Miami lawyer du Fresne. Indeed, to thrive, lawyers representing discrimination claimants need not hit a punitive-damages jackpot. The mere threat of a lawsuit -- even just a letter on legal stationery -- can be enough to persuade companies to settle.

And no wonder. In all-out litigation, defense costs run anywhere from $20,000 to $200,000, depending on the length and complexity of the case. Fees like that can dwarf settlement costs.

"My rule of thumb is that the blackmail value of a Title VII case prior to the 1991 amendments was $2,000 to $5,000 for a quick settlement," says Lynn Laughlin. "Now it's more like $20,000. It can cost employers between $5,000 and $20,000 just to defend themselves through the charge-filing stage, where claims are brought before the EEOC or a state agency. That's before a formal lawsuit is filed. To hire a good defense lawyer, it will generally cost about $5,000 just to open a file."

Then there's the nuisance factor. Suppose you are a business owner who has been wrongly accused of discrimination. You are so angry, and feel so betrayed, that you decide to fight. Damn the costs, the principle of the thing is too important. You will quickly face a blizzard of legal paperwork -- discovery requests, interrogatories, notices of deposition.

All that takes time and money. Then your lawyers may do position statements, motions, pretrial statements, courtroom exhibits, jury instructions, and maybe a trial brief. You may have to hire an expert witness and pay that person, too.

"You incur a heavy expense and loss of productive use of your staff," says Pittsburgh lawyer Laura Candris. "Not only is your reputation damaged, but you're not there to run your business. That's why clients refer to these things as legalized blackmail. The cost of achieving justice is so high and burdensome that the rational thing to do is settle and move on."

Finally, even if you're willing to endure all that, you may end up in court months or years later, only to face a hostile jury. How's that for a bargain?

Bill Buckingham knows firsthand how demoralizing an employment lawsuit can be. He is president of Buckingham Computer Services Inc., a $3-million, 41-employee computer consultancy in Midland, Mich. He and his company were sued for wrongful discharge and sexual harassment after firing a woman for inadequate performance. "I'll get even," Buckingham says she told him as she left.

"Her comment was that I had touched her on the back, which I had," Buckingham explains. "We're a pretty close-knit company, and there was no question that I had patted people on the back. Nothing sexual. I'd tell people that they were looking sharp today, ask if that was a new dress, stuff like that. That's basically what the suit was based on. And it was really tough on me because I didn't feel I was that kind of person."

The woman's lawyer at first demanded a settlement of more than $100,000. That would have wiped out a year's profit. Thinking the charge was absurd, Buckingham decided to fight.

But after 18 months and $25,000 in legal fees, he finally opted to settle. The amount he paid is confidential, but it was far less than the cost of taking the case to court, he says. "She demanded a jury trial, and that's what scared the heck out of me. You can be found guilty even if you're innocent. Part of the reason I took this as far as I did, however, was that if I hadn't, any other employee here could try the same thing. It comes down to blackmail."

There are, of course, economic consequences to the employee-rights revolution.

The Rand study of the effects of wrongful-termination liability found that after a state adopts the most liberal tort versions of the covenant of good faith and fair dealing, its aggregate employment drops by 2% to 5%. The horror stories in the headlines and the threat of suits, the authors said, are affecting companies' personnel practices in ways that boost the costs of doing business, make workers more expensive, and decrease the incentive to add people to the permanent payroll.

That squares with what employers told us. "People are not hiring as much," says Ron Cohen, president of Cohen & Co., an accounting firm in Cleveland, and president of National Small Business United. "They are using a lot of temporaries. They're working people overtime. These legal issues are so serious that employers are avoiding the potential things that create the problems, and those things are, essentially, hiring employees. There is just too much baggage that comes with them."

* * *

Lawyer-Proofing Your Company
While there's no ironclad way to lawyer-proof a company, smart companies are implementing comprehensive preventive strategies.

A good example is the Community Bank of Homestead, in the Hurricane Andrew-devastated area south of Miami. Twelve years ago the independent, then 75-employee bank brought in an experienced human-resources professional named Marlene Porter to set up its personnel department. Before that, the bank had few formal personnel policies. Porter has designed a soup-to-nuts program that has successfully kept the bank out of court despite the fact that, during her tenure, roughly 200 employees have been let go. The total number of Community Bank employees is now 160. The areas Porter addressed are smart ones for any company to think about in the context of potential employee lawsuits:

Screening. Porter's first step was to ensure that Community Bank was hiring the right people and then positioning them in the jobs most appropriate for their skills.

Under her new system, the first step for a prospective employee is filling out an application, which includes a release form giving the bank the right to check the individual's background and conduct a test for use of illegal drugs. If the bank is interested in the person, an appointment for an interview is set. Before any interviewing starts, however, the job hopeful completes a two-page "personality test" that measures such things as attention to detail, patience, and competitiveness. The point of such a rigorous screening, though there are no guarantees, is to spot potential employees whose skills, temperament, or work style will be a bad fit -- before they are hired.

Interviewing. Porter has personally schooled all the bank's managers in discrimination laws, and she continues to conduct training for supervisors every month. During interviews, for instance, they know exactly what can and cannot be asked. Illegal questions include, How old are you? Are you married? and even, Do you have a car? "The car question could be perceived as discrimination against low-income people," Porter says.

The trick, she adds, is to ask open-ended questions. "People love to talk about themselves," says credit manager Roberta Greaves. "You can learn a lot just by listening." All the interviewers fill out a work sheet, giving their impressions of the candidate and stating whether he or she should be hired. If each interviewer says yes, Porter herself conducts the final interview. By that stage, she has assembled all the data needed to reach an objective hiring decision -- credit checks, work histories, the psychological profile, drug tests -- and it's all documented.

Clarifying the ground rules. Once hired, a new bank employee receives a handbook. Among other things, it lists offenses that can lead to termination: reporting to work under the influence of alcohol or illegal drugs, use of profanity or abusive language, possession of firearms, insubordination, fighting or assault, theft, destruction, defacement, gambling, and falsifying or altering bank records. To make sure the handbook covers all the bases and implies no contracts with the employees that the company can't deliver on, Porter subscribes to a personnel-policy service that, for a fee of several hundred dollars a year, supplies a thick volume of lawyers' explanations of all key personnel issues, as well as updates as required.

Instituting a progressive system of evaluation, documentation, and action. Even with its intensive hiring procedures, the bank sometimes brings in people who don't perform as expected. It deals with them under a progressive system, handled by the supervisors.

"If an employee does something significant enough that it could result in termination, the manager documents it on what we call our employee-counseling form and sits down with the individual," Porter says. "That's the beginning of a progressive system of evaluation and action. You talk with the employee, and they have an opportunity for rebuttal. But it sets a time limit -- usually 30 to 90 days -- for the shortcoming to be corrected. If the situation is no better after that, you sit down with the employee again. You warn them that there will not be a third counseling session. We try to take the monkey off our back and put it on theirs, because generally they terminate themselves if they don't do what we're asking them to do."

Throughout the process, supervisors are required to put all actions down in writing. "You have to document everything, because if you don't, you don't have a leg to stand on," says credit manager Greaves. "I did have to terminate someone, and there was talk of legal action. But because we had full documentation, nothing came of it."

Creating a good working environment. By installing legally sound and defensible policies, it's possible to reduce the likelihood of being sued, but perhaps the greatest defense against potential litigation is creating a well-managed, fair, and motivating company. If all your company's management practices stress fairness and openness, you're likely to be as lawyer-proofed -- and, by the way, productive -- as you can be. "Our philosophy is that if we're good to our employees, they're going to be good to our customers," Porter says. "And we're very good to our employees." For the Community Bank of Homestead, that's good business. Its net profits were up 416% last year. "And," Porter continues, "though we have had to terminate people, we have never had a lawsuit."

Knock wood, Marlene.


AN EMPLOYMENT-LITIGATION INDEX

740,000 Number of lawyers in the United States

$200,000 Average range for the cost of defense to $20,000 in an employee litigation

125,000 Number of complainants lodging charges with the Equal Employment Opportunity

Commission in 1992

52,400 Number of those cases fully investigated by the EEOC

10,500 Number of those cases determined by the EEOC to have reasonable cause for action

2,200% Amount by which employment-discrimination lawsuits have risen since 1974

10% Portion of the entire federal case load represented by employment litigation

5 Number of states that still maintain a "fire at will" employment policy

2% to 5% Rand study estimate for the drop in aggregate employment in a state that adopts the most liberal tort versions of the covenant of good faith and fair dealing

Last updated: Apr 1, 1994




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