The cost of employment lawsuits and how to avoid them

Employment lawsuits have risen more than 400 percent in the past 20 years, according to Bloomberg Law reports.

The publication also found that if an employment lawsuit is filed against the employer in federal court, statistically there is a 16 percent chance that the employee will win more than $1 million and an almost 70 percent chance the employee will win at least $165,000. The average lawsuit award is in the area of $500,000.

“It is essential that employers have good policies in place that protect the company against lawsuits,” says Kellee Perez, an Account Executive at Benefit Innovations Group. “Ownership and management needs  a clear understanding of how to apply these HR policies so that the company can make informed decisions when a situation arises. The impact of a single lawsuit on a business can be devastating.”

Smart Business spoke with Perez about best practices to avoid being hit with an employment lawsuit.

What has driven this dramatic increase in the number of employment lawsuits?
Wrongful terminations or employees who feel they have been treated unfairly are a huge factor, in addition to the lack of a properly updated employee manual. As HR policies change within a company or at the state and federal level, it’s critical that there be a mechanism in place to revise manuals accordingly.

When that doesn’t happen, it leaves both employees and management uninformed about the proper response for a particular circumstance. A growing number of changes in employment law has also led to more lawsuits. In addition to the Affordable Care Act, other pieces of legislation that affect labor laws have been recently tweaked and/or adjusted. This results in changes that need to be accounted for in a company’s employee handbook.

Where do companies go wrong in adhering to employment law?
Unlawful pre-employment practices, or practices that are not formally documented, can create problems for employers.

Without a concrete process in place, a company could easily fail to get authorization for background checks, drug testing and other screening processes that are typically undertaken. The lack of documentation, either before or after the process, could also lead to unlawful pre-employment questions that leave a company vulnerable to a lawsuit.

Misclassification of employees is another area of concern. An individual who is classified as an independent contractor is restricted in terms of what duties he or she can perform on behalf of the business. But in many instances, an employer will have this person doing more than what is listed in the signed agreement.

Individuals who work under a 1099 are exempt from taxes and other items that apply to someone who works under a W-2. The company may not be doing this maliciously, but it’s still illegal and puts the company at risk of a lawsuit.

What can companies do to avoid employment lawsuits?
First and foremost, employers need to establish clearly understood HR policies and procedures in a handbook that everyone has access to. The next step is to set up a system by which this handbook will be updated whenever policies change.

In the meantime, employers should conduct an audit of their HR practices to identify areas of need or items that need to be enhanced or updated. This may differ from items of legal compliance. Perhaps there is a policy that doesn’t apply to the company anymore. The handbook should represent the company’s current function as closely as possible.

Another strong recommendation, even for companies that feel they are well-equipped to manage their HR functions, is to hire an expert consultant. This person would specialize in administrative HR duties and provide high-level support to the administration of an HR department.

By outsourcing this responsibility, it frees up personnel to handle other important tasks. At the same time, it places a person whose job it is to monitor changes in policy in position to do just that. That significantly reduces a company’s risk of an employment lawsuit.

Employment lawsuits are very expensive, but they are also avoidable. Employers who take the proper steps and work with trusted partners to oversee their HR functions will reduce the risk of a lawsuit.

Insights HR & Consulting is brought to you by Benefit Innovations Group