A look at problems employers face from employees seeking legal suits, and some ways to guard against such suits.
A legal climate that has arisen from a legitimate need to protect employees has, unfortunately, made suing one's employer a no-lose proposition. Here's a sampling of sometimes-unbelievable horror stories about . . .
Last year Daniel Kriek* hired the "sweetest little old lady you'd ever want to meet." This year he wishes he never had. The founder of seven-year-old apparel maker Alpha Blouse Corp. (ABC) met the woman when she called on ABC for a job "at any wage, just to finish out my time." Kriek put her to work cleaning desks, hardly suspecting that the time she had in mind was exactly 10 working days. Employed on June 1, 1993, she requested a furlough on June 15. "You just started!" Kriek thought -- but didn't have the heart to utter. "When you're ready to come back," he said instead, "give us a call."
The woman never phoned. But her lawyer did. His little old client was filing a claim against ABC, the solicitor informed Kriek, because she had gotten double carpal tunnel syndrome, a job-related debilitation that prevented her from performing work of any kind. But not to fret: generous severance pay would be recompense enough for her to drop the claim. "How can you get carpal tunnel from 10 days behind a duster, even if you swing the feathers wrong?" Kriek demanded. The answer came months and "lots of legal fees" later, when the case, contested to the end by the incensed founder, was settled on the courthouse steps. "She knew what she was doing, big-time," an embittered Kriek concludes. "She was going for $20,000 per wrist." His investigation revealed that she'd engaged the lawyer before applying to ABC.
One bad apple in an otherwise contented and loyal workforce? Perhaps. But more likely, as bitten-from-below entrepreneurs like Kriek are discovering, just another wise-to-the-system worker exploiting modern employment statutes for reward and vendetta. And why not? When venerable institutions like IBM and GM can lay off tens of thousands with a single impersonal decree, you can't expect some sweet little old lady to care for Alpha Blouse.
Legislation such as the 1991 Civil Rights Act and the Americans with Disabilities Act (ADA), plus the de facto revocation of a business owner's long-presumed prerogative to dismiss employees whenever he or she feels like it, "is intended to protect a class of people that needs to be protected," grants lawyer Joseph J. Ortego, a commercial litigator in Uniondale, N.Y., specializing in the corporate side of wrongful-termination cases. A major side effect, however, has been that "the laws give leverage to plaintiffs who don't have genuine causes of action. It puts a chill in an employer's mind to have to discharge someone, because the employer can end up getting sued for wrongful dismissal."
It also puts a bee in less-scrupulous lawyers' bonnets about where to hustle clients. After a California company terminated two employees, they went to file unemployment claims, as was their due. While in line they were approached by a lawyer who promised them, "I can get you a better deal than hanging around here will." Charging post-termination stress, the employees filed multi-thousand-dollar claims against their employer. And once a law firm gains a reputation for collecting on such workplace complaints -- at contingency rates that sometimes exceed 50% -- "the line forms at their door," says Ortego.
In part because California's notoriously liberated compensation laws placed on employers an excessive burden in litigation and insurance costs, many businesses left the state. California attempted to redress the imbalance by, among other restrictions, disallowing stress claims filed after termination. But that didn't stop an employee of another small company, who, in anticipation of being fired, brought in a lawyer while he was still at work to establish grounds for job-related stress. The employer countered by bringing in a doctor, who refuted the allegation by issuing the employee a clean bill of health. The two specialists canceled each other out. "After a lot of wrangling back and forth," says the business's owner, "all that happened was that our insurance premiums went up."
To be fair, insists Lonny H. Dolin, a law partner specializing in employee litigation at Dolin & Modica, in Rochester, N.Y., in situations that involve allegations of job injury, it's not always the employee who should be blamed so much as the system. "Workers' comp rewards an employee if he's worse off, and requires an employer to counter that he's not hurt at all. It doesn't motivate the right behavior, which would be to get the person back to work as soon as possible."
Whether federal and state statutes have triggered a countrywide rise in illegitimate and fraudulent claims is debatable. Says Dolin, "What I'm seeing is that individuals who feel they may have been wronged are now more comfortable picking up the phone and calling attorneys. In a climate where the guarantee of finding other work is no longer there, the willingness to explore whether or not something unfair happened is greater because it's an economic necessity."
What Ortego is seeing, on the other hand, is bolder exploitation of opportunity. "Employees angle for severance because they have nothing to lose. And not only do they sue your company, they sue you personally. An owner of a small business can't deal with going to court on a regular basis like a big business can."
Whatever the motive is, arithmetic dictates that more laws inspire more lawsuits. Now ostensibly aggrieved employees go for broke against even the most modest enterprises. And instituting an action is so easy -- a matter of filling out a form -- that vengeful employees can, virtually without cost, get the courts to put muscle in their grudges by acting as their own lawyers and enjoying the same subpoena power as $200-an-hour counsel.
"That technique is particularly effective," Ortego notes. "The first thing the plaintiff does is depose the other employees. They're nervous and distracted. Then they start to relate to the employee who's been discharged, thinking the same thing could happen to them."
And it needn't be just a civil complaint. In a recent instance, the management of a $5-million equipment-repair service outside Philadelphia was criminally served by a piqued employee. The company had been patiently tolerating that worker's taking unannounced absences beyond the company's specified annual allotment. The worker's grounds were that his bursitis flared up unpredictably and rendered him useless. One day the company's operating officer happened by the worker's home and was astounded to see the absentee vigorously polishing his car with the supposedly incapacitated arm.
On the worker's return, the operating officer and a supervisor beckoned him into an office to discuss the inconsistency. So as not to disturb the clerks outside, they shut the door, whereupon the worker turned on his heels and departed. The next day a sheriff served each manager with criminal complaints. Among them were (as they were actually stated) interference with the exercise of civil rights, assault and battery, stalking, and kidnapping. "I was held in a locked room against my will," the worker told the court. "Each time I tried to leave, the defendant threatened me. . . . The defendant pulled my arm so hard that he injured my shoulder permanently." A criminal trial was scheduled. While the plaintiff spent nothing, the defendants were obliged to pay for lawyers because directors' and officers' liability insurance doesn't cover criminal charges.
Until the late 1980s virtually all states allowed that a business owner had the right to fire an employee of that business without having to give a reason. Now in more than 30 states those "at will' powers have been severely limited by the courts. "A small-business owner expects that the at-will assumption is stronger than it really is and that he can fire someone for looking at him cross-eyed," says James Walsh, author of Rightful Termination and other books on employment principles. "Although there might be a kernel of that left in a given state's laws, increasingly that presumption is undermined by other kinds of laws."
Where it's still allowed, at-will termination remains a viable defense. "But," asks Ortego, "do you as a small company want to write that motion to dismiss? You go to a law firm and they tell you it'll cost $5,000, and even then there's no guarantee that a judge might not decide the plaintiff has a point, so let's do a little discovery. Wouldn't you rather pay $5,000 for the employee to go away?" Besides, savvy plaintiffs already know how to steer around an at-will situation via a tactic lawyers call "fraud theory." In one example, an employee charged that a company had hired him under false pretenses to get him away from a competitor. Once he was safely away, the employer dumped him as planned. As a result of the villainous scheme, he charged, his career was destroyed.
If the at-will doctrine is shaky at best, and if an unexpected effect of federal and state statutes is to enable vindictive employees to extort employers virtually at their will, are owners at the mercy of vipers from within? The facts, as gathered from dozens of interviews that Inc. recently held with small-business founders and executives, aren't reassuring. Here are some of the stories they told:* * *
Jay Estes, owner of newly founded Interior Motives, an office-furniture distributorship in New Jersey, followed good-employee-relations recipes to the letter: before any dismissal, perform an oral review and a written review; repeat twice. Thus Estes felt he was on solid ground when, after warning an unproductive regional manager three times in a year, he let the fellow go. The terminated employee turned in his company credit card and departed.
" That's the way to do it," Estes congratulated himself -- four weeks prematurely. The next month, Interior Motives got an invoice from American Express for a good $3,000 more than the company had budgeted for. Sensing his days were numbered, the about-to-be-fired employee had rented a Corvette, booked fancy hotel suites, downed hundred-dollar dinners, toured nightclubs, and charged it all to Interior Motives. Estes took the spendthrift to court, where he stipulated that the employee had misappropriated funds by essentially taking a vacation courtesy of Interior Motives' strained treasury -- which, the defendant was well aware, was backed by Estes's personal credit. The defendant argued that any travel application of a business charge card was an implied perk; why else would he have been granted one carte blanche? The suit remains unsettled.* * *
A shingler for a siding chain on the East Coast fell from a scaffold owing to, according to witnesses, his own carelessness in not following prescribed safety procedures. Inasmuch as workers' compensation laws provide benefits to anyone injured on the job no matter who's at fault, the incapacitated employee was eligible for wages and medical payments for up to 160 months, a 13.3-year period during which the employer would have to keep him on the payroll at two-thirds of his pay, even as he stayed home. Facing a future of shelling out $28,000 a year, the employer protested the case, holding that the worker was malingering and was really physically fit. "But," the company president complains, "he'd hobble into the Industrial Accidents Board with some doctor's statement in hand, and the judge found for him every time." To add insult to back injury (the most popular workers' comp plaint nationwide), when the siding company advertised an opening in management, the idled worker applied for the position. The job went to a person with executive experience. The employee sued, charging discrimination against the handicapped.* * *
Daily Keep, a southern office-park-maintenance service, hired a woman manager and put her in charge of overseeing a subcontracted construction crew doing a rehab. She visited the site every Friday. In a few weeks the crew's foreman phoned in a complaint: the woman was sexually harassing his workers. "Wouldn't it be great to be in a Jacuzzi right now with a bottle of chardonnay and no clothes on and see what happens?" she was reported to be speculating among the tradesmen. The guys in Daily Keep's back room had a "good giggle," admits the company's founder, Balsa Woods. "If a man had been doing it, I'd have been all over it," he admits. "But the reverse we handled like a joke!"
The laugh was on Woods. The construction workers filed a suit against Daily Keep for sexual harassment. Woods went to investigate and determined that indeed they were serious. "She was hitting on 10 at a time," he discovered. Declaring her job performance "not very good," he fired the woman, who immediately sued him for $25,000 for wrongful termination. The grounds: sex discrimination.
Woods had the case adjudicated. At the hearing the woman whipped out a bundle of original Daily Keep invoices that, Woods claims, she had illicitly sneaked out of the office. The papers, she purported, demonstrated that Woods was a nogoodnik from way back, unconscionably overcharging the county, the city, and the state for services. In the end Woods won, but Daily Keep never got back its purloined paperwork, because the arbitration referee didn't have the authority to order it. However, he did award Woods $30,000 in repayment of legal fees. But the vindication was Pyrrhic: the woman never paid. When Woods garnished her wages at her new job, she declared personal bankruptcy, wiping out the obligation. The score: Daily Keep was out $30,000, with the suit filed by the construction company still yet to hit.* * *
When Ben Alexander, founder of Oregon's Scintilla Systems, asked salesperson William Budd to submit weekly reports, Budd refused. When Alexander wanted to know which accounts Budd was calling on, Budd wouldn't say. Alexander warned him to shape up or risk dismissal, and Budd retorted, "You're not the kind of manager people respond to. Salesmen need to be able to go off and do their own thing." "Jeez," Alexander realized, "I don't have any of this stuff documented, so I can't just fire him." Instead, Alexander again urged Budd to improve his performance.
Budd did -- on paper. He ran up his dollar volume by writing deals at below cost. "Not only didn't your performance improve," Alexander announced, "it got more insolent. It's reckless, and it endangers the company, so I'm letting you go." "Screw you," Budd shot back. "I'll drive you into the mud. I'll dog you out of town." With that, the former employee invited Alexander into the parking lot for a parting "discussion." Alexander declined, but offered severance of three weeks' pay for each year served, a formula generously calculated to encourage Budd to go away.
He did -- but not far enough. He sent Alexander a letter demanding $25,000 as an award for wrongful termination, alleging a dozen iniquities perpetrated against him and threatening to take further action unless the sum was forthcoming. "It doesn't seem like much," Alexander says, "but for a small company, 25 grand is not a check you blink an eye at." Neither is 100 grand -- what it cost to stare Budd down in court. "Writing the check would have saved time and aggravation, in addition to $75,000," Alexander says, "but people who own businesses don't view this kind of thing as business; they see it as principle."* * *
Whistle-blowing as harassment, once the bête noire only of big companies, also has trickled down to small businesses. Lickety Split, a chain of ice-cream stores around Chicago, dismissed one of its managers. Unless he got better severance pay, the man threatened, he'd turn Lickety Split in to the health department. "For what?" its fastidious owner challenged, and rejected the threat. Sure enough, the health department came to inspect all 20 stores.
"It's a terrible expense," declares one similarly harried small-company founder. "Usually it's a nonperformer who, when you try to lay him off, will call up a hot line -- OSHA, the EPA, the IRS -- and soon you've got some 'badge' in there checking everything out. The government can always find something wrong, and you spend tens of thousands of dollars dealing with it, or if it thinks it's really onto something, you spend hundreds of thousands."
For the employee, it's a win/possible-win maneuver. Faced with feds who "have a bigger budget than we do and more time to spend it," as one cynical CEO notes, employers would rather surrender than fight; and if they don't, the employee still stands to share a substantial percentage of whatever penalties the government agency collects. "Some of these guys have hit several companies," the CEO mentioned above contends. "They work at one and turn it in, and then they work at another. They make a living off it." The quandary for a wronged employer is that responding to charges keeps unsavory issues alive in public, creating a courtroom forum for employees who enjoy the limelight. "Some of these people like to go to court," Ortego finds. "For once in their lives they get to torture their employer."
In a similar if less remunerative vein, a worker who resented being laid off by a small manufacturer in Tennessee launched a campaign of phoning each of the company's 2,000-plus retailers, claiming alternately that the products were of inferior material, that the owner was immoral, that the customer was being billed more than its competitors were for the same goods, or that the customer should "watch your invoices." The company sought an injunction to get the employee to shut up, but since the employee had no assets, he was judgment-proof and kept dialing. In desperation the owner sent a letter to the customers, dismissing the onslaught as the unfounded ravings of a fanatic. The customers identified with the owner: "The same thing could happen to us. We could let someone go and have no protection, either."
In another instance, a rep for a medical-equipment maker near Houston was told he was dismissed. "It'll cost you $25,000," the salesman snapped. "Why?" the employer asked. "You haven't earned us that in two years." "Because there are things the FDA should know if you don't," the salesman said. The employer granted the parting package. Explains the CEO, "You do everything you're supposed to, but you can't dot every i. Then an agency does a full audit, and even if it doesn't cost you money, it costs you a significant amount of time."* * *
One problem a small business faces in paying off a troublesome employee is that everyone then knows the market value of stirring things up. When you terminate the next employee, that employee views the 20 weeks' pay his predecessor got as a vested right. So should the business consider keeping that employee on, merely to avoid the danger of firing him? Bite the bullet, Ortego counsels. "You can't run a business out of fear of being sued. Once that employee realizes the employer won't take action, he appropriates more -- shorter work hours, longer absences -- and the others see it, and the employer loses their respect."
The solution for EdVidCo, a 12-employee producer of instructional videotapes in North Dakota, was that the best offense is a good defense. Paying for a bad employee's good riddance is a cost of doing business, believes founder Joel Nardo, who hired a woman as national sales manager on the basis that she was "a self-starter and energetic." Once she was on the job, the other employees defined those attributes as "combativeness and pushiness." Explains Nardo, "She didn't grasp that we were a flat organization. No one was below her -- they were support people for her." Morale dropped, productivity plummeted, and employees threatened to quit. "I had to let her go," Nardo says.
How? Nardo drafted a performance review that made all his grievances abundantly clear. Before the woman could react, he offered two months' pay and a favorable reference, in exchange for her resignation and an agreement not to sue or bad-mouth the company. "The strategy was fraught with risk," he admits, "but I had to take it. I figured I could always find another sales manager, but it wouldn't have been easy to replace the rest of the staff. In losing one, I gained 10."
The strategy worked, and it makes a broader, and critical, point to all employers. As Lonny Dolin puts it, "I've won awards of a million dollars, when the only amount the defendants had to pay initially was for the employees to be heard out, to be treated reasonably, and to be given back respect."
Modest compensation that the system has lost sight of.* * *
Fighting a disgruntled-employee suit until a verdict is reached can cost the defending employer more than $100,000 in legal fees, says commercial litigator Joseph Ortego. Here are some of his recommendations for keeping out of difficulty.
Hire smart. Every time you take someone on, you also take on the potential of spending time and money getting rid of him. Spell out the job's duties and your expectations at the start.
Document trouble. Prepare for a legal problem by putting events in writing. Be sure more than one person contributes to the file. Keep your notes clear, factual, and formal, as if they were going to be submitted for evidence.
Define expectations. Send a note to the employee detailing the standards he's violating. "You were late on May 1, 12, 16, and 23. Getting to work on time is a critical part of your job." Have the employee acknowledge receiving the note. It will insulate you from my-word-against-your-word confrontations.
Keep current. Maintaining a personnel file for each employee is essential, but don't let evaluations accumulate year after year (unless they're going to be an issue). Imagine what might befall your company when you've written, "Tom is among the best employees we have" one year and you send Tom packing the next.
Don't waver. Mixed signals get a company in hot water. In a recent case, an older employee who wasn't performing was let go. A vice-president felt sorry for him and fabricated a positive reference for him to show to potential employers. Instead, the resentful employee showed the reference to the judge in a wrongful-termination suit he filed against the company.
Seek advice. Before taking a decisive step such as termination, have a lawyer look over the documentation.
Source: Joseph J. Ortego, a senior partner at Rivkin, Radler & Kremer, in Uniondale, N.Y.
10 Tips to Trouble-Free Termination
1. Find a neutral location. Using a supervisor's office attaches a stigma.
2. Have two people present, one a neutral witness with whom the employee doesn't have a work relationship; that person is present only to listen.
3. Have a written termination notice to give the employee. It should review the disciplinary history and events leading to the termination and list procedures the employee should follow after the meeting.
4. Deliver the news and answer questions without engaging in an argument. Say what you need to say and nothing more.
5. No matter what the employee's response is, remain calm and in control of the conversation. Listen to what the employee has to say, but never get angry.
6. Make sure you've applied rules, policies, and penalties consistently and accurately. If you're firing for cause, have the relevant facts and explain how they violate company policy. Review your own practices to make sure this termination matches past practices for similar conduct.
7. Don't give career advice to someone you've just fired, but do offer assistance in finding a new job. That reduces the chance the employee will sue and mitigates claims of bad faith.
8. Avoid euphemisms like layoff, which could be taken to imply that the employee might be brought back later. Better: termination.
9. Write up an accurate record of the interview and give a copy to the terminated employee.
10. Avoid giving notice at the end of the workday, before a holiday, or just after the employee has returned from a business trip.
Source: Rightful Termination, by James Walsh (Merritt Publishing, Santa Monica, Calif., 1994)
Telltales That a Suer's Lawyer Likes to Find
A personnel file in which performance reviews are consistently good -- but the person has been terminated anyway.
A personnel file in which the reasons given for taking action are subjective and suggest that age, race, or disability is involved: "Mary was sick so frequently we couldn't give her a raise." "Tom needs to get 'fresher' ideas."
Personnel files that, after the fact of termination, are "papered." Suddenly, they're filled with memos written from memory and offered by management in defense of a discrimination suit. Juries see right through them.
Indications that a company is spending money to train new or younger workers but is seldom spending on older employees. Signs that a company is giving new or younger workers time off to attend seminars but is not providing a similar benefit for older workers.
Different working terms and conditions among employees possessing comparable skills.
Conflicting records of performance. A subordinate is told his project isn't good, is given a warning, and ultimately is terminated. The plaintiff looks at the superior's performance review and finds that the superior has been lauded for the project. Many businesses aren't aware that in federal court, any source of information that will in turn lead to relevant information can be used in discovery.
Source: Lonny H. Dolin of Dolin & Modica, in Rochester, N.Y.
Because of the legally sensitive nature of the real-life episodes related to Inc. by small-company owners and officers, the identities of businesses, persons, and locales and other particulars have been altered unless otherwise noted; the situations themselves and the quoted material remain authentic.