The Enemy Within

Companies fear employee lawsuits more than any other legal threat. To prevent them, experts advise looking in the mirror.

Emily Grothe was floored when she heard that a former partner at her energy consulting firm was suing her and the company for, among other things, violation of the Family and Medical Leave Act and the Americans with Disabilities Act. The partner had left Natural Resource Group Inc. (NRG) under what CEO Grothe believed was a mutually agreed-upon separation.

Another company might have settled rather than let the case go to court. But Grothe rejected that option. “It’s my opinion that if you haven’t done anything wrong, you need to fight so you don’t set up a culture of mediocrity and signal to your employees that you’re afraid of litigation,” says Grothe, whose company amassed $43 million in revenue last year. “There was no evidence that we had discriminated against [the former partner] in any way.”

Turns out Grothe was right. A year after the claims were filed, the case was dismissed by the judge.

NRG’s success came at a price — $250,000 in legal fees to be exact. Still, Grothe considers her company lucky. NRG has suffered through only one employee lawsuit in its 14 years. Larger companies like Wal-Mart and Coca-Cola face hundreds of employee lawsuits a year, and the cost can be staggering. Coca-Cola paid $192 million in a racial-discrimination settlement in 2000. Last year, Verizon Communications was informed by the Equal Employment Opportunity Commission that it must pay $49 million to settle pregnancy-discrimination claims filed against its predecessors, Nynex and Bell Atlantic.

Aside from the financial impact of these settlements, which must be disclosed to shareholders if they involve material amounts, the public-relations impact is significant. Witness Wal-Mart’s recent media campaigns to burnish its image in the face of the current class-action sex-discrimination suit pending against it. Little wonder that labor and employment disputes are the top litigation concern of corporate counsels at 54 percent of U.S. corporations, according to a survey conducted by law firm Fulbright & Jaworski LLP in New York.

Preventing such suits is not easy. Most companies now mandate some form of training on ways to avoid and investigate sexual harassment, workplace discrimination, and other employment quagmires. But those efforts aren’t always as effective as companies would like — and are easy to forget or misunderstand. “Employers screw up the nuances and details of the employment laws and regulations,” says Jeffrey Oberman, a partner in law firm Oberman Thompson & Segal in Minneapolis. He’s not advising that companies stop providing comprehensive rules-based training to human-resource specialists, but he has found that the best defense against employee lawsuits is to provide such instruction to executives, managers, and supervisors (who are the target of most factual allegations) while also creating a workplace geared toward avoiding lawsuits in the first place. “If the employees trust the employer, technical violations almost never lead to litigation,” says Oberman, adding that in those situations, parties almost always work things out. And in larger, more complex organizations, where it may be harder to create that environment, says Cynthia Jamison, national director of CFO Services with Tatum LLC, it is still possible in any individual case for “a boss and an employee to get to that trust.”

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