A mass layoff may help cut costs in an economic downturn, but these days it's more likely than ever to result in an employee lawsuit. Suits are on the rise because it's cheap to file a charge against an employer, and several states have loosened up laws making it easier to sue and recover damages on discrimination charges. "In a recession employers need to be real conscientious," notes Robin Harvey, a partner at the Cincinnati office of Benesch, Friedlander, Coplan & Aronoff.

A misstep can be costly. More and more so-called wrongful termination cases are being tried by juries, which tend to favor employees. Out of 120 such suits surveyed by The Rand Corp. in 1988, 66% were won by employees. The average award: $650,000 per suit. Employee lawsuits are even more expensive for California employers. Peter N. Hillman, a partner at Chadbourne & Parke, in New York City, cites a recent California study that found that plaintiffs were victorious 75% to 80% of the time, winning an average of more than $300,000. "It's become analogous in people's minds to playing the lottery," says Hillman.

Business owners can do much to avert such lawsuits by adopting fair employee policies and by documenting their own compliance. In such a litigious environment, even small companies should set up systems that prove fair treatment. Here are some tips and strategies:

* Set up an information hub. Someone should be designated to take charge of personnel issues and keep up with changes in state and federal laws that could affect the company -- even if those duties are not his or her primary job responsibility. Hillman suggests subscribing to the Bureau of National Affairs weekly Bulletin to Management and biweekly newsletter "Fair Employment Practices" (together, $200 a year; write 9435 Key West Ave., Rockville, MD 20850, or call 800-372-1033).

* Establish guidelines. All of your company's practices, for hiring and promoting as well as firing, should be codified. You don't need a fancy employee handbook, but it's best to write everything down and make sure everyone gets the message. (See "The Best Little Handbook in Texas," February 1989, [Article link].) Explain the criteria used to evaluate employees, how frequently employees will be reviewed, and how your company will "discipline" poor job performance. Most important: be frank in performance evaluations.

Also, watch your language when writing an employee handbook or making a job offer by letter. The courts in some states have held that certain statements are contractual in nature. Many companies now add boldface disclaimers.

* Document business conditions. If you see a downturn -- and potential layoffs -- ahead, you'll have your hands full just keeping your business going. But it will pay to pull together a file that shows relevant events:

The decline. Include objective material such as your financial statements, bank statements, and letters from major customers who are reducing or stopping their orders. In your own brief summary, describe conditions affecting your company and which parts of your company have more employees than are really needed.

The intermediate plan. Before making layoffs, write a plan of action that addresses the slowdown. This might include reducing hours, freezing salaries, and eliminating new hires.

Layoff blueprint. Decide how you'll implement layoffs and which jobs will be eliminated in which order. You're safest using the most objective criteria: job skills, performance, attendance records, and length of service. Older workers typically cost companies more, so in a cost-driven layoff companies are more vulnerable to age-discrimination suits. Make sure managers will apply your criteria consistently.

The outcome record. Record steps taken in a brief diary entry. Collect records that show your goals were reached.

* Ease the pain. It sounds trite, but try to help laid-off employees. You might offer outplacement counseling, give severance pay, or let former employees use your offices to conduct job searches.

All in all, lawsuit protection amounts to being fair -- which is what you want to do anyway. But you must be able to demonstrate your equitability. "That's the acid test that courts apply," says Albert Zakarian, a partner at Day, Berry & Howard, in Hartford. "If your job elimination smacks of shabby treatment, then it's headed for trouble, because it's easier for jurors to latch on to discrimination."

-- Ellyn E. Spragins