The Enemy Within

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

If it looks like the firm has made mistakes that cannot be fixed short of litigation, then a quick settlement might not be a bad idea. Oberman says that, in addition to incurring legal exposure and expenses, protracted litigation of cases with weak defenses undermines workplace morale and productivity. When a company has ignored a problem, failed to properly document, or treated an employee in a patently unfair manner, that is not the strongest position in which to enter a courtroom. Settlements don’t just involve cash, though. Be aware that plaintiffs may seek substantive changes to company policies, procedures, and maybe operations, and that courts have been very aggressive about upholding all the terms of out-of-court settlements, which themselves are legally binding.

Some companies, even if they know a case is weak, will use the legal system and their resources to stall the process as long as possible in the hopes of outspending or waiting out the plaintiffs until they abandon the case. This strategy may occasionally work for smaller individual cases, but it can also backfire, especially when established, well-funded plaintiff’s attorneys are involved, as is the case with the Wal-Mart class-action suit. In such cases, there’s little chance the plaintiffs will abandon their case unless a large settlement offer is made before going to court.

Arbitration agreements have had a mixed history as a litigation-avoidance tool. State law varies widely on the conditions under which they are binding and whether an employee may concurrently file a lawsuit while arbitration proceeds. Some courts have thrown out arbitration agreements signed by employees if they are found to be unfair, imposed a financial burden for arbitration on the employee, limited the number of awards, or were signed under duress. It was for this last reason that, in 2003, the 9th U.S. Circuit Court of Appeals in San Francisco invalidated an arbitration agreement used by Circuit City.

Whatever route a firm takes, experts say the best way to protect yourself is to document, document, document. At NRG, for example, CFO Roger Blomquist notes that careful documentation couldn’t help the company avoid a lawsuit but did help it win. “We felt that we had all the necessary documents signed by both the company and the employee” in the matter, he says.

That’s why it is vital to have processes in place to handle employee complaints, discipline, and termination. And documentation should cover actions taken after a problem arises, too. If a case does make it to trial, the first thing a jury will look at is what the company did when it found out about the problem. Often the answer spells the difference between winning and losing — or, in the case of a loss, the difference between paying back wages and reinstatement or paying compensatory or punitive awards. “The court wants to know what the company’s procedures were, and did the company follow them once the problem was made known,” says Fulbright & Jaworski’s Dawson.

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