No business owner ever plans on being sued, especially by employees. Consequently, they often don't take preemptive steps to avoid the financial and organizational disaster that invariably accompanies a lawsuit.

Business liability insurance company Hiscox reports that one in five small or medium-sized businesses will face employment charges with an average cost to defend of $125,000, which includes expenses such as attorney's fees and settlement costs.

For those that did have insurance coverage, the average deductible cost was only $35,000, compared to the $90,000 balance paid out by their insurance company.

The median judgment for cases that go to trial is approximately $200,000 for employment lawsuits adjudicated by the courts, while one-in-four cases resulted in a judgment of $500,000 or more, according to the study.

Proactively Avoiding HR Disasters

Avoiding lawsuits is a lot simpler than fighting them. I consulted with Jennifer Brown, President and CEO of PeopleTactics, to learn how companies can avoid being sued. In full disclosure, Jen has been the outsourced HR Director for my first company Information Experts for almost 15 years.

The 5 Most Important Things a Business Owner Can Do

Employees that follow these guidelines will minimize their risk. Of course, it's impossible to predict the behavior of all disgruntled employees, but these actions will provide protection.

1: Create strong relationships with employees.

  • Treat employees with kindness and respect
  • Develop trusting relationships with employees in which they know that you care about them

2. Handle employee issues in a timely manner.

  • If an employee expresses a concern; discuss it with them, collaborate and brainstorm solutions with them, and implement needed actions.
  • If an employee makes a complaint, investigate it and document your notes and findings. Follow-up with the employee on the resolution.

3. Take a progressive approach to performance issues and document.

  • If an employee is having a performance issue, the key is to address it immediately, work with the employee to improve it, and document the actions taken.
  • Start with coaching and then if the performance issue continues move to written warnings and probation. Most employees will improve if they know there is an issue.
  • If you are considering terminating an employee, share your plan with your attorney to ensure that there are no red flags. If there are red flags, follow their advice on how to navigate them.

4. Ensure you comply with the Federal, state, and local employment laws applicable to your business.

5. Have written policies and/or an employee handbook to guide your decisions.

It's important employees understand your business policies, rules, and expectations and to have consistency in how you approach your employee-related decisions. Companies should update and communicate their policies and handbooks at least annually, and should require employees to acknowledge receipt of the information.

Responding to a Lawsuit to Mitigate Damage

If an employee files a suit, it's imperative that you don't discuss it. Immediately call your attorney and insurance broker (assuming you have Employment Practices Liability Insurance) to discuss the charges and their recommended next steps.

It's not recommended to try to resolve a pending lawsuit without legal representation.

Examples of High Profile Employee Lawsuits: What We Can Learn

Wrongful Termination
Bayer Corp. was liable for almost $1 million dollar in damages under the False Claims Act (FCA), after an employee sued the company for wrongful termination. This employee blew the whistle when he discovered that a a doctor was purchasing a generic version of a drug from Canada for half of what Bayer charged and then obtaining Medicaid reimbursement from the U.S. government for the full price charged by Bayer.

Pregnancy Discrimination
The Supreme Court on Wednesday ruled in favor of a worker suing UPS for putting her on unpaid leave while she was pregnant.

Peggy Young had requested job accommodations when she became unable to lift heavy packages as a result of her pregnancy. The company refused and instead put her on unpaid leave. In her lawsuit, she said that UPS violated laws stating that pregnant women should be "treated the same" in employment practices as "other persons not so affected but similar in their ability or inability to work."

As more employers grow their contingent workforce in favor of full-time employees, this class-action lawsuit focusing on overtime rules and misclassification against Uber is important to know. The lawsuit alleges that those drivers were misclassified as independent contractors rather than employees, and that Uber has thus cheated them out of things that employees get under California law, like reimbursements for gas, worker's compensation and other benefits.

These are just a few examples of the protections available to employees who believe their rights have been compromised.

The most important steps employers can take to avoid employee lawsuits are to stay informed, and to also inform their employees. Proactive, transparent communication goes a long way in preventing potentially disastrous HR situations.

Good luck!