Her tactics don't include sweet-talking former employees or promising them hush money and Caribbean vacations if they agree not to sue. Instead, she works diligently to make sure her company's management practices are downright lawyer-proof.
Far from paranoid, Dell has good reason to be concerned. Over the last several years, record numbers of workers have lost their jobs due to economic restructuring. According to the latest American Management Association (AMA) survey, approximately 7.7 percent of the workforce was affected in 1995 by layoffs conducted by 51 percent of American corporations. Out of work, scared and uncertain about the prospects of future employment, some terminated employees are lashing out at their former employers by slapping expensive lawsuits on them. Even after finding a new job, some former employees may still go after their former employers. While some of the cases have merit, many are thinly veiled attempts by vengeful employees to get even with the companies that hurt them. Moreover, with laws allowing for large damage awards, there now are plenty of plaintiffs' attorneys willing to take these cases to court.
"Ninety percent of the 600 claims, charges and cases we have open were filed following a termination," Dell says. "These days, the word termination is synonymous with the word lawsuit."
What all this means is that any company involved in a downsizing, layoff, restructuring—or any other move in which employees might be terminated or mistreated—better be mindful of the way they treat those employees. Even lawsuits that employers win can cost a lot of money and damage the corporate reputation.
A survey of 450 top HR executives and in-house lawyers conducted by Jackson, Lewis, Schnitzler & Krupman, one of the nation's leading employment law firms, confirms the increase in lawsuits. Three out of five human resources people responding to the firm's 1995 survey said their companies are being sued by an employee, an increase of 10 percent over the last two years. "Our practice has grown by 35 percent in the past year because of the increase in litigation," says management lawyer Martin Payson of the firm's White Plains, New York office.
"It's highly unusual to have a reduction in force that involves more than 50 employees that doesn't involve at least one lawsuit," adds Elizabeth du Fresne, a management lawyer with Steel, Hector & Davis located in Miami. All together, one out of every five lawsuits nationwide is filed by a current or former employee, making employment law one of the fastest growing areas of litigation.
Employees bent on suing their employers strike out—often successfully—at companies of all shapes and sizes. Consider these examples: A former manager of a securities brokerage firm, who alleged he was demoted because of his age and fired when he complained, was awarded $765,000 in damages by arbitrators. A female executive was awarded more than $105,000 for breach of contract after she was terminated by the drug manufacturer for which she had worked for only nine months. And a former employee who was fired from a worldwide health and beauty aid manufacturer is using four paragraphs in the company handbook as grounds for a $3.2 million wrongful termination suit. The only characteristics shared by defendants in these cases is that they fired someone.
Are all post-termination lawsuits bogus? Of course not. "Out of every 10 claims brought, I believe four are legitimate and two are in the gray area," says du Fresne. "Four of them, however, are filed by outright opportunists—those people who are looking to make a buck."
Robert Fitzpatrick, a Washington D.C.-based lawyer with Fitzpatrick & Verstegen who has practiced employment law on both sides of the fence for more than 28 years, agrees. "There's always a small percentage of cases in which the person was blatantly and egregiously wronged; discriminated against on the basis of race, age, sex, disability; whatever. Those are the cases a judge and jury ought to hear. But that's not how the system works now. It's just everybody trying to rip off some money whenever he or she gets offended. The situation is significantly worse now than it was even two years ago."
Mistreating employees can make your company vulnerable.
With increasing litigiousness in the country in general, it's not surprising the biggest increase in litigation comes in the area of employment law, according to du Fresne. After all, the workplace is where people spend the majority of their time. But the increase in litigation also can be directly tied to increased layoffs.
Furthermore, many of these people lose their prime earning years, including specialized skills that don't transfer easily to new jobs. In a climate in which the guarantee of finding other work no longer exists, the willingness to explore whether or not something unfair happened is greater because of economic necessity.
The breakdown in loyalty between employers and employees only adds fuel to the fire. "Employees are more willing to [take action] because they think they have nothing to lose," says Joseph Ortego, senior partner with Rivkin, Radler & Kremer in Uniondale, New York. "In a sense, suing after discharge is an attempt to increase the severance package."
Another factor contributing to the increase in lawsuits is the fact that employees have become much more educated about their rights, ironically through management training courses provided by their employers. Many companies, for example, see an increase in sexual harassment cases after conducting sexual harassment awareness courses.
Workers bent on revenge now know more than ever about the laws available to assist them. These include: Title VII of the Civil Rights Act of 1964, which prohibits discrimination on the basis of race, religion, sex and national origin; the Age Discrimination in Employment Act (ADEA) of 1967, which protects workers who are at least 40 years old; the Americans with Disabilities Act of 1990, which outlaws discrimination against people who are disabled; and the Civil Rights Act of 1991 which provides for financial damages in employment-discrimination cases. "These days, almost everybody falls under some protected class," says Ortego. The only people without a statute are white men under the age of 40, and even they can sue on basis of discrimination due to national origin.
Clearly, employees have plenty of legislative protection behind them. But in reviewing the arsenal of federal laws, legal experts agree nothing has fueled the onslaught of workplace litigation more than the Civil Rights Act of 1991 (CRA '91). Before 1991, a plaintiff in an employment-discrimination case appeared before a judge, not a jury. If the plaintiff won, he or she was entitled to reinstatement with back pay and perhaps front pay, plus attorney's fees and costs. It was basically a make-whole remedy. With no provision for damages, there was little potential to recover serious money. Because of this, the odds of a plaintiff bringing a lawsuit were diminished by the unavailability of lawyers willing to take the cases.
Thanks to CRA '91, plaintiffs in employment-discrimination cases now are given the right to a jury trial, and juries are notoriously sympathetic to people who've lost their jobs. "Jurors look at the plaintiff and think, 'That could be me,'" Ortego says. Because juries feel sorry for the person, plaintiffs typically prevail more often than the companies they sue.
But even more importantly, the act entitles plaintiffs to compensatory and punitive damages, as well as back pay and legal fees. Although the awards are capped at $300,000 for companies with more than 500 employees, by adding tort claims such as slander and negligence, plaintiffs' lawyers can override the caps. Suddenly, there's a financial incentive not only for former employees to sue, but also for plaintiffs' attorneys to take on these cases.
"That economic incentive goes to the plaintiff, but much more so to the bar," says du Fresne, who practiced as a plaintiff's lawyer until she switched to the management side 10 years ago. "It has changed the whole field of labor law. When I graduated from law school in 1966, labor lawyers who worked for plaintiffs were do-gooders who did this work because they felt it was right, just and the American way. They made very little money from it. But today, every personal injury lawyer has a couple of labor cases because it's one more way that, on a contingency basis, they can take a bite out of good-sized award. This is now much less a field that lawyers go into to do good and much more of a field that people get into to make money."
To thrive, lawyers representing discrimination claimants need not hit a punitive damages jackpot, however. The mere threat of a lawsuit, even just a letter on legal stationery, can be enough to persuade companies to settle. "I get a lot of demand letters from attorneys," says Dell of ABM Industries Inc. "I respond by laying out the facts of the case. If it's not a good case, they'll go away because they can't afford to lose. But if they file suit, it will end up costing us something."
As easy as lawyer-bashing may be, however, plaintiffs share at least part of the blame for slapping employers with cases that have no merit. You see, instituting an action is so easy, a matter of filling out a form, that vengeful employees can get the courts to put muscle in their grudges by acting as their own attorneys.
"Almost 50 percent of all civil cases filed in federal court here in Washington, D.C. are filed by pro se plaintiffs—in other words, people filing without an attorney's representation," says Fitzpatrick, who serves on the federal court's pro se committee. "A significant number of these are employment cases and almost 100 percent of those have absolutely no merit whatsoever. Not only are judges extremely angry at being overloaded with so much junk, but the junk cases hurt the meritorious ones."
Older employees are the most threatening.
So what plan of attack do most plaintiffs take? In what areas are companies that are laying off employees vulnerable? Under what statute are claims most likely to be filed? According to the EEOC, over half of all cases filed with the agency are based on claims of wrongful termination. Although this doesn't violate a statute in and of itself, it's an issue for which employees can receive damages. According to George Rutherglen, a law professor at the University of Virginia School of Law, based in Charlottesville, Virginia, "The increase in claims of discriminatory discharge to about 86 percent of all charges filed with the EEOC has made all of employment-discrimination law look more like the law of wrongful discharge."
While the EEOC doesn't track the type and number of lawsuits that are eventually filed, attorneys believe the biggest increase is coming in the area of age discrimination. Why? Because companies are laying off a disproportionate number of workers who are over age 40. According to the AMA downsizing survey, over half of all layoffs are among supervisory, middle management and professional/technical workers. The survey states, "Although middle managers make up between five and eight percent of the American workforce, they typically constitute between 15 and 20 percent of those who lose their jobs."
A major multinational company in Florida, for example, recently experienced a significant business setback. Losses in one division were expected to exceed $4 million. The executives decided they could either: a) spin off the division and lay off half of the employees; or b) rightsize the company and hopefully save more jobs in the process. Upon deciding to rightsize, they laid off 1,800 employees out of a 4,500-person workforce. Today, the company is facing a class-action suit on the basis of age discrimination because 1,000 of the terminated employees were over the age of 40. The cost of defense to date has been $680,000, and the company still is a long way from trial.
This example isn't an isolated incident. Age discrimination has proven to be a successful and profitable plan of attack. According to the Journal of Legal Studies, claims under the ADEA primarily are brought by white males who hold relatively high-status and high-paying jobs. By alleging discriminatory discharge, these plaintiffs recover money judgments 2 1/2 times higher than plaintiffs in Title VII cases, and over four times higher than plaintiffs suing under the Equal Pay Act.
Furthermore, plaintiffs who bring claims only under the ADEA and whose recovery is reported in court records receive more than seven times as much as plaintiffs who do not bring ADEA claims—$83,600 vs. $11,500. This is because salaries of the typical plaintiffs are almost twice as high as the salaries of plaintiffs in other cases. Because back pay is the principal component of monetary awards in employment-discrimination cases, salaries are correlated with recoveries.
"In the case of one active, physically fit 58-year old, I requested and was awarded future damages through age 70," writes the plaintiff's attorney Ellen Simon Sacks in Trial Magazine.
Get out your checkbooks.
As you've probably gathered by now, lawsuits are a very expensive HR issue—so expensive, in fact, that they've given rise to a whole new form of business insurance called employment practices liability coverage. (Please see "Employment Practices Liability" on this page.) What makes these cases so expensive?
First, there's the cost of defense. According to Nick Conca, vice president and claims counsel for Reliance National, an insurance company based in New York City, the cost of defending an employee lawsuit through trial, including attorneys' fees and expenses, typically ranges from $100,000 to $250,000. These costs, along with the fact that plaintiffs tend to prevail in jury trials, make many companies eager to settle lawsuits as soon as possible. But even settlement can be an expensive road to hoe.
Respondents to the Jackson, Lewis, Schnitzler & Krupman survey claimed that in one out of every five resolved cases, the fired employees each collected more than $100,000 from his or her former employer. Data from Reliance National supports this figure. "It isn't unusual for the average cost of settlement in a wrongful-termination/age-discrimination case to be in the mid-six-figure range," Conca says.
Still, the cost of defense and any potential judgments, as well as all the potential for negative publicity, makes settlement an attractive option. "I hate to say this because I don't want to encourage the plaintiff's bar," says Dell of ABM Industries Inc., "but we're often compelled to settle because the cost of litigation is so high. For us, the average cost to take a case to the eve of trial is $70,000. Once in trial, that amount reaches six figures."
Is your company vulnerable?
These days, the only companies that aren't vulnerable to lawsuits filed by terminated employees are companies that haven't terminated anybody. In today's climate, anybody who has handed out a pink slip for any reason may in turn be handed a summons.
Are you breathing a sigh of relief because you conducted a downsizing 10 months ago and haven't heard from the lawyers? Don't be too hasty. Employees who file discrimination charges must exhaust their administrative remedies at the state and federal levels and this takes time. Employees have up to within 300 days of termination to file charges with the EEOC, for example. Then, after waiting for the EEOC to issue a charge, the employee has 90 days to file suit. This means companies can fire someone and be hit with a lawsuit well over a year later.
Although companies of all sizes from all industries are vulnerable to suits, there are patterns among companies that are sued from which HR people can learn. Despite what you might think, smaller companies are sued more frequently than larger companies. This is because smaller companies don't have the same financial or legal resources to prevent or fight a suit as bigger companies. Moreover, larger companies typically are better at risk management, troubleshooting and thorough reduction-in-force (RIF) planning.
Many companies also are sued simply because they fail to treat departing employees with respect. "Employees are more likely to sue if they're treated poorly on the way out," says Stuart Bompey, a partner with Orrick, Herrington and Sutcliffe in New York City. "If they're humiliated in front of co-workers, for example, or treated like they aren't trustworthy, [they may go to court]."
Companies that make layoff decisions solely for economic reasons also find themselves in hot water, especially if they fail to look at the demographics of the workers who've been laid off. "This gets a lot of companies into trouble," explains Adrienne Fechter, a plaintiff's lawyer with Fechter & Dickson P.A., in Tampa, Florida. "RIFs are usually done for economic reasons, and the costliest parts of overhead are salaries and benefits. The most expensive workers, therefore, tend to be older workers who've been with the company a long time, and women and men with children. When companies allow these costs to determine who goes, they leave themselves open for discrimination suits."
Not only that, but by using these criteria, companies usually end up getting rid of the most experienced and valuable employees. "My advice to employers is this: Don't believe the short-term economic solution is in your long-term best interest," says Fechter.
What should HR managers do to minimize the possibility of lawsuits? Get advice from management lawyers—and plaintiff's attorneys, if they'll talk to you—on how to protect the company. Make sure the people who are being laid off, for example, aren't disproportionately part of a protected class. Provide training to managers on how to handle terminations and other sensitive situations appropriately. Document your actions and the reasons for them. "It's difficult to get past what looks like a well-designed RIF," Fechter says. "If only one person out of 500 workers comes forward and the company has documented the downsizing, it's unlikely the jury will return a plaintiff's verdict."
Last, but certainly not least, remember your employees are human beings. No matter what the circumstances—terminations or otherwise—everyone wants to be treated with dignity and respect. "My daddy killed himself at age 56 after losing a job," says du Fresne. "Although I represent management, I don't take any of these cases casually. Companies can't treat their workers as numbers. They must have empathy for the human condition."
Personnel Journal, December 1996, Vol. 75, No. 12, pp. 32-37.