The problem is that both the number of employment lawsuits and the monetary awards employees are winning are escalating. But there’s hope. By adopting strategies such as alternative dispute resolution policies and employment audits, human resources managers can help lower their firms’ litigation risks and increase the chances they’ll never have to set eyes on a jury, or a courtroom, again.
What’s going on?
Corporate America seems to be faced with a virtual litigation explosion. In the 12-month period ending September 30, 1996 (the federal fiscal year and the most recent year for which statistics are available), more than 23,000 employment-discrimination claims were filed in United States federal trial courts, according to a March 1997 report by the Equal Employment Opportunity Commission. This represents more than a 100 percent increase in the number of such claims in just five years. Similarly, in the same period, more than 78,000 employment-discrimination claims were filed with the United States Equal Employment Opportunity Commission (EEOC), the federal agency charged with investigating and conciliating employment-discrimination claims. And these figures don’t even include claims brought before state courts or administrative agencies.
Not only does there appear to be significantly more claims than ever before, but the associated litigation costs are growing as well. According to at least one national jury verdict study in 1996 (the "Personal Injury Valuation Handbook," LRP Publications), the median employment-related damages award that employees walked away with was approximately $205,000, with a median punitive damages award of about $200,000. Even cases that settle before trial can be expensive. A similar settlement analysis shows that about 58 percent of cases that settled short of trial were settled for less than $50,000. Twelve percent settled for between $50,000 and $100,000; 25 percent settled for between $100,000 and $500,000; and about 5 percent settled for more than $500,000.
What accounts for the dramatic increase in employment-related litigation? To be sure, determining why there are more employment cases than in prior years is a dubious inquiry. Every case is its own story. Yet, there’s evidence to suggest that a combination of factors in the ’90s has led to this litigation explosion.
One reason is the expansion of employee rights and remedies. In the past decade, Congress and the state legislatures significantly expanded the protections afforded and the remedies available to employees. For example, between 1988 and 1994, Congress adopted the Family and Medical Leave Act (guaranteeing employees the right to 12 weeks of unpaid leave for personal or family care), the Worker Adjustment and Retraining Notification Act (requiring advance notice of plant closings and mass layoffs), the Americans With Disabilities Act (banning employment discrimination because of a person’s disability) and the Polygraph Protection Act (prohibiting most mandatory polygraph examinations). Many state legislatures adopted similar laws as well.
Before 1991, successful plaintiffs were generally entitled to recover lost wages, reinstatement to their former jobs and a reasonable attorney’s fee. And these cases were generally decided by a judge (without a jury). Then in 1991, Congress amended the 1964 Civil Rights Act to permit jury trials in employment-discrimination cases and authorized the recovery of additional emotional distress and punitive damages. In one fell swoop, Congress significantly increased the incentive for disgruntled employees to sue and HR professionals to lose many more nights’ sleep.
The publicity generated by high-profile cases has generated even more incentive and has become another factor in the tremendous increase in employment cases. Almost every day, a newspaper features a story about a high-profile case or verdict. Paula Jones’ sexual-harassment lawsuit against President Bill Clinton and his alleged affair with intern Monica Lewinsky dominate the current news. The 1994 $7.2 million sexual-harassment verdict against the Baker & MacKenzie law firm sent shock waves through the legal community and the employment bar. Recently, the news has reported on the $5 million jury verdict in favor of actress Hunter Tylo in her pregnancy discrimination lawsuit against "Melrose Place" producers Spelling Entertainment Group and Spelling Television Inc.
Some skeptics believe the true reason behind the litigation explosion lies with two distinctly American traits: the idea that one can "get rich quick" if one’s lucky number comes up and the belief that bad things simply don’t happen to good people. Many people generally believe that if something bad happens to them at work, it’s not their fault but it’s the result of some improper motive. The expansion of worker rights and remedies may make it easier to litigate employment claims, but the real reason for the increase comes from the perceived incentives and the belief, at least for some angry employees, that it’s time for the aggrieved worker to "cash in." Thus, as the argument goes, when something bad happens at work, hire a lawyer and it could be your lucky day.
Whatever the reason for the growth in litigation, employers have begun to experiment with comprehensive litigation-risk and cost-reduction strategies. While not exhaustive, the most common strategies focus on ensuring against employment litigation, avoiding the courts altogether through alternative dispute resolution procedures and re-examination of corporate policies to avoid disputes before they arise. Nevertheless, a good first step for many firms may be buying employment practices liability insurance.
Buying insurance may help reduce legal risks.
This decade has witnessed the advent of an entirely new insurance product called employment practices liability insurance (EPLI). EPLI policies help to insure companies, officers, supervisors and key employees against (and thereby spread the risk of) employment-related litigation, including claims of discrimination, wrongful discharge and sexual harassment. Evolving from traditional Directors and Officers Liability (D&O) Policies, the EPLI market has blossomed in the last five years. Although experts quote varying statistics, it’s believed that as recently as 1992, only 10 insurance companies offered EPLI. Today, more than 60 firms do so, and others are at least considering whether to offer an EPLI product.
Although EPLI policies are widely available, most corporations have been hesitant to obtain such coverage. That’s likely because many unanswered questions remain about EPLI. (For more on EPLI, see "Employment Practices Liability Insurance Has Its Advantages and Disadvantages" on Workforce Online at: www.workforceonline.com/work force/toc.html.)
However, buying insurance can’t prevent problems from occurring in the first place. Alternative dispute resolution (ADR) is one strategy that many HR managers are adopting to settle employment disputes before they become lawsuits.
ADR helps curb lawsuits.
Apart from insuring against employment-related claims, many companies are adopting policies designed to transfer employment disputes from the court system to an alternative dispute resolution process. ADR policies typically depend on either arbitration (a decision maker is appointed to make a binding determination) or mediation (an expert is hired to assist the parties in settlement). ADR policies may be either voluntary (both parties agree to submit their dispute to ADR) or mandatory (where one side or another can compel submission of the dispute to ADR). Mandatory arbitration ADR policies, clearly the most controversial form of ADR, are usually the product of a policy imposed on employees as a condition of employment.
As mandatory arbitration ADR policies have become more popular, many organizations and advocacy groups have launched a backlash against such policies. In August 1997, the American Bar Association endorsed voluntary ADR but firmly opposed mandatory arbitration. The EEOC and the National Academy of Arbitrators have also opposed mandatory arbitration in virtually all cases. Additionally, the National Association of Securities Dealers recently voted to amend its rules to prohibit mandatory arbitration of employment disputes. (For more information on ADR, see "Blow the Whistle on Employment Disputes," Workforce, May 1997.)
Other less controversial ADR policies may be equally effective in curbing the number of employment-related disputes resulting in litigation. For example, few argue against ADR policies that permit employees to decide, after a dispute has arisen, whether to arbitrate or mediate their claims instead of litigate, so long as the employee’s decision is truly voluntary. That’s why many companies draft their severance agreements to include clauses providing for binding arbitration of all employment disputes in exchange for severance packages.
ADR opponents criticize some of the very ADR advantages relied on by others. Opponents attack the motivation of ADR advocates, arguing that the primary reason for mandatory ADR is to deprive injured workers of their right to a jury trial and to override the expanded remedies provided by Congress. In this environment, employers considering adoption of a mandatory ADR arbitration procedure may end up facing two lawsuits: the discrimination lawsuit brought by the disgruntled employee and some employee’s lawsuit attacking the mandatory ADR policy.
Additionally, even ADR supporters acknowledge that ADR policies may have significant unintended consequences. An effective ADR program may actually encourage employees to bring complaints that might not otherwise have been brought, resulting in an increase in the number of employment-related disputes and the costs associated with maintaining the program. Furthermore, if the ADR program doesn’t result in a final settlement, the employee may end up getting "two bites at the apple."
Despite these problems, ADR has its strong advantages. Advocates believe ADR, especially mandatory ADR, is faster and less costly than litigation, largely because ADR procedures substantially limit pretrial discovery (depositions and document review). ADR advocates claim that decisions by trained neutral experts avoid runaway jury verdicts and significant awards for emotional distress or punitive damages. In addition, ADR advocates cite the confidential, nonpublic nature of the proceedings as more likely to promote a quicker settlement of the dispute. Says Evan J. Spelfogel, a New York management attorney and ADR advocate: "Without the pressure of publicity or public vindication, disputes are easier to resolve. Controversies become more a matter of what’s in the best interests of the company, not what ‘they’ will think if we settle." But ADR is only one litigation-prevention tactic.
There’s more you can do.
Given the problems and pitfalls of both EPLI and ADR, many employers have responded to the litigation explosion by devoting renewed (or even new) attention to corporate policies and practices. By seeking to develop proactive HR policies and practices, many corporations try to reduce the risk of litigation and the potential costs of adverse results. Corporations also have adopted several comprehensive cost-savings and litigation-avoidance policies, starting with reviewing their employee-selection procedures.
Believing that hiring good employees is the best defense against questionable lawsuits, employers are adopting comprehensive employee screening and selection procedures. Employers are more frequently relying on applicant drug testing, applicant background and criminal reviews, and on-the-job employee surveillance to screen out employees who might become problems. Of course, federal and state laws already regulate many of these areas, and ironically, if not carefully developed, some corporations’ efforts may attract the very litigation that adoption of these policies was designed to avoid.
Another tactic for avoiding litigation that’s gaining currency is the use of outside consultants or attorneys to perform comprehensive employment relations audits and surveys. Designed to identify employment policy weaknesses and deficiencies, an employment audit can give management a valuable tool to correct practices most likely to be challenged. Employers undertaking an audit for the first time should use caution. In many states, audits performed by outside consultants or in-house staff won’t be confidential. If an employee sues, the audit results could be discoverable and serve as a road map for the prosecution of related cases. In addition, if management conducts an audit, it better be willing to live with the results and address those areas identified in the audit. Carole, a corporate HR professional who requested anonymity, summed it up best. "[Employment audits] can be disastrous if the HR department doesn’t have the training, resources, budget and commitment of senior management. The message sent back to employees who have participated in this type of audit [is] the company doesn’t care enough to follow through with the proposals," she says.
For many HR professionals, however, the ultimate litigation-avoidance tactic is to treat human capital as the corporation’s most important resource. Treating employees with dignity and respect, and following the "due process of the shop," may be the best method for avoiding employment disputes in the first place. John, an HR professional for a Fortune 500 corporation who wished to remain anonymous, put it this way, "I’m convinced the best cost-effective technique is to have employee relations managers who are educated enough in the law to take risks without seeking legal opinions every day." If employees become litigants primarily because they believe they’ve been victims, then adopting policies and practices that ensure at least the appearance of fair treatment (if not actual fair treatment) might prevent significant misunderstanding and confusion. Even if they don’t, and employees become litigants, adopting corporate policies that focus on the worth of the employee and fundamental fairness may diminish the likelihood of adverse jury verdicts.
Although no single strategy will keep the lid on the rising number of employment-related legal problems and actions, some of these tactics—when used together as a complete strategy—can create a litigation-avoidance atmosphere. You owe it to your company to design a plan that works.
Workforce, March 1998, Vol. 77. No. 3, pp. 56-64.