Small businesses are as vulnerable to wrongful termination lawsuits as much as large businesses. While I am not an attorney, as a small business owner who does a great deal of consulting work with HR departments, I think it’s imperative to know the risks and issues surrounding employee terminations. Wrongful terminations, also known as wrongful discharges or wrongful dismissals are legal terms that describes a situation where an employee was fired and the reason for the firing appears to be against the law. There are many causes for this but no matter the cause, it can be costly for a small business to be sued. Studies have shown that a company’s legal costs in a wrongful termination lawsuit can run up to $85,000, and that winning plaintiffs receive judgments averaging $500,000.

It’s important for small businesses to understand the causes, the issues and to take the necessary steps to avoid legal actions when terminating an employee. Wrongful termination laws clearly outline the rules for firing an employee. As an employer, it is incumbent upon you to know these rules and use them to determine whether or not you are free to fire an employee. Federal labor laws, such as the Americans with Disabilities Act and other laws, clearly state the rules. Be sure that you are adhering to the laws and not violating a contract or firing an employee for unlawful reasons. Consult with an attorney if you are unsure.

Wrongful termination claims are subject to a statute of limitations, so if a former employee decides to sue you, they have to do it within a specified period of time. While these time limits may depend upon the type of claim, most have to be filed within 2-3 years from the time of the firing. There are many types of firings that can result in lawsuits including:

  • Breach of Contract. Employees with written or verbal contracts can still file for wrongful termination. Be sure that you honor any agreement to pay them in the event of a termination. This is most common with contract workers but can apply to anyone.
  • Not Following Policies Equally. It is very important that you follow all firing guidelines that you have in place in your handbook. This should include how many warnings to be given, what the penalties are for given offenses, etc.
  • Discrimination. Federal anti-discrimination laws protect employees from being fired or disciplined with respect to employment on the basis of race, color, national origin, sex, religion, disability, pregnancy, and age. State laws also apply to these protections. If you decide to do a large layoff or firing, make sure you do not violate these laws and that your choices cross all races, religions, genders, etc.
  • Fraud. Keep any promises you make including promotions, duties, etc. Have a written job description prior to hiring them and make sure you both sign it.
  • Retaliation. The law prevents employees from being fired because they reported something to a government body. Firing them for reporting something, whether it’s true or not, is not grounds for dismissal.
  • Illegal Acts. You cannot ask an employee to perform an illegal act. If you do and they refuse, you cannot fire them for that.
  • Time Off Dismissal. The law allows employees to take time off for certain things including military service, maternity leave, etc. They cannot be fired for this.
  • Constructive Discharge. This is a tricky one because even if an employee quits, you could still find yourself subject to legal action. Some causes for this include a hostile work environment, harassment, etc. If it can be proven that the employee was provoked into quitting, you can still be sued.

There are ways to help protect yourself and your business. Begin by making sure that you have written employment agreements and a written handbook. Hold regular performance reviews. Write up any and all disciplinary actions. If a situation arises, immediately address the problem, whether it is harassment, underperformance or anything else. Use tools such as training or counseling. Be direct and make sure the employee knows you understand the situation and are working to solve it. Document everything. And lastly, you may want to consider Employment Practices Liability Insurance (EPLI).

In the unlikely event you are sued, get an attorney immediately. Gather all documents that pertain to the issue. Be cooperative and confidential.

My last recommendation on this issue is to consult professionals before a situation arises. Hire a consulting firm to help you write your handbook. Consult with an attorney to make sure all local, state and federal laws are being followed. Know what is allowed and the proper way to deal with situations that might arise. These steps will go a long way to protect you and your business from a potential lawsuit.

Article courtesy of Tim Dimoff from SACS Consulting and Investigative Services, Inc.