Employee lawsuits are a drain on company resources, they can add stress to a business environment, and if a lawsuit makes it to trial, the business may be hit with a big settlement by a sympathetic ear for the “little guy” – the employee claiming they were wrongfully terminated.

Rather than take on the cost and negative impact these lawsuits create, many businesses settle out of court simply to make the problem go away. It may be simpler and more business-efficient to pay off the ex-employee and get back to work.

However, your company doesn’t have to settle if you document your business’s employment policies and provide notes on the steps taken by your company to resolve the issue before the case went to trial.

Protecting the company from an employee lawsuit should start as soon as a new hire is added to the payroll. Make sure each new employee is given a copy of the employee manual, and signs a form stating that they understand the terms of their employment.

Your company can be prepared to fight back if you can provide a court with hard evidence that you followed the rules and laws to the letter. Here are some other tips to help you defend yourself:

1. Add liability coverage to your general business insurance coverage. With the insurance company paying some or all of your legal expenses, you may be in a better position to fight a litigious claim you know is false, saving the business a great deal of money in the long run. One negative judgment, with pain and suffering built into a settlement, can put a small company out of business.

Liability coverage can be expensive because of the risk involved. Insurers know that a vindictive wrongful termination claim will cost a great deal in legal fees – fees built into your policy premiums. However, insurance will probably cost a lot less than settling unfounded lawsuits out of court.

2. Create written job statements.  A job statement defines the duties of the employee, standards of job success, a clear description of the work evaluation process, a tiered policy of workplace remediation, clear directions in how to perform work tasks according to work policy, and virtually everything a new hire requires to be successful on the job.

It’s not enough to define employee objectives or goals. Employees must also receive training and tools to achieve company-defined goals. A well written job description defines job success, and the company’s position on achieving job success.

3. Employ the services of the company attorney. Whether legal counsel is on staff or on call, before terminating an employee, consult with a legal expert who understands Nevada’s labor laws and understands how your company works. Describe what steps have already been taken and what steps will be taken in the future. The best way to prepare for an employee lawsuit is to consult legal counsel before you terminate an employee. Make sure your company is within the letter of the law before showing up in court.

4. Follow and document standard termination procedures. Your employee manual should lay out the steps that are taken for each employee who is not performing up to company standards. To stand up against unjust claims of unjustified termination, demonstrate in writing the steps your company took to help the employee before termination occurred. Your attorney may suggest a process that includes regular job evaluations by managers, attempts made to improve performance, disciplinary procedures, and other actions taken prior to termination. Make sure that each step in this process is documented with a solid paper trail of evidence.

5. Make sure procedures are applied equally to everyone. Whether the employee is the CEO’s nephew, a 20-year company veteran, or a new hire who’s a total stranger, the same work standards, disciplinary procedures, and termination processes should apply. Otherwise, you’re likely to face charges of unequal treatment or discrimination.    

6. Create a position within HR to handle terminations. Include the HR specialist in all evaluations and discussions involving an employee who may be terminated. This expert in labor practices can serve as a back-up to make sure the employee’s rights are protected, and your company is protected from potentially expensive lawsuits by disgruntled ex-employees who know many businesses prefer to settle out of court.


7. Settle at termination. Your company can avoid an expensive lawsuit if the terminated employee is treated with respect and fairness. Offer a generous termination package – severance pay, job-hunting counseling, and other benefits available to employees if they sign an agreement not to sue your company. An indemnification waiver, in return for a fair severance package, can work for both parties.

8. It’s not personal. You may know it’s a frivolous lawsuit, the ex-employee knows, your company lawyer can prove it’s an unfounded claim, but you can’t take it personally.

You may want to fight it out in court, but if it’s going to cost a lot more to prove a point, simply settle for the least amount and move on. A lawsuit can drag on and cost your company a lot in legal expenses with no guarantee that your company will win the case.

“Know when to hold ‘em, know when to fold ‘em” and spend the least you can in settling an employee lawsuit. It’s not about you, it’s about what’s best for the business.

Employee lawsuits may be inevitable as your company grows, so update job descriptions and termination policies on a regular basis with the help of your company’s legal counsel.

Protect yourself now to help prevent being forced to pay on a frivolous lawsuit later. Prepare your documentation, obtain liability insurance, and make sure your business follows federal and state labor laws to the letter.

If your company is prepared, you don’t have to settle.       



The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.