Avoiding Adverse Legal Decisions

AVOIDING ADVERSE LEGAL DECISIONS

by Carol Hammes

Several months ago we addressed the potential for lawsuits associated with agency errors and omissions. Unfortunately, there are a number of other threats to the small business owner that can turn the life of even the most cautious agency principal into a real nightmare. This month we will deal with two types of legal action that can seriously drain away the valuable agency resources of time and money.

The possibility of ending up in a legal hassle with an employee or former employee has become a real concern for even smaller agents located in parts of the country where lawsuits were previously unheard of. A recent study by the ABA revealed that in the 20 years from 1969 to 1989, the volume of employment discrimination lawsuits increased by 2,200%, almost 10 times faster than all other types of federal civil lawsuits.

The researchers found that while discrimination in hiring formerly was the most common complaint, now the greatest number of cases revolve around discrimination in firing. Such litigation accounts for about half the civil injury suits handled by labor law attorneys today. And whereas executives and mangers used to be the only employees involved, many of these actions are now filed by nonmanagement personnel.

The study also showed that the number of cases filed increased during periods of unemployment and that the level of back pay awards was higher when the economy was weak. It is expected that in this current recession the number of lawsuits will continue to increase and that the awards for lost wages will go much higher. Besides winning back pay and recompense for lost benefits, dismissed employees in some states have also recently sued for and won punitive damages, dramatically increasing the potential liability for employers.

While there are no guaranteed steps to follow to prevent a lawsuit (let's face it, anybody can sue for anything today), there are some things that you can do to reduce the likelihood of litigation. Remember, the important thing is to avoid having the suit filed in the first place. Once that happens, whether you are right or wrong largely becomes immaterial. When a suit is filed, there is an almost immediate financial impact on the attorneys' fees to defend yourself. If the employee is still working in the agency, has on-going contact with current employees, is perceived as a 'hero' by others, or has visibility in the community, you also face productivity, morale and public relations problems.

Additionally, there is the emotional toll that the whole episode will take on the agency principals, managers, and their respective families. And to top it all off, there is no assurance that the judge or jury will view your innocence as you do!!! So it is very important to make a complete review of the agency's personnel policies and treatment of employee issues. What are you doing or not doing that could get you into a legal quagmire?

Most employee lawsuits start with poorly planned and executed employee relations decisions. If you have been operating with a 'seat of the pants' management style, i.e., making snap decisions about an employee's performance and acting upon those impulses, you are asking for trouble. For a number of years we have been urging agents to formalize and standardize job descriptions, performance evaluations, and salary administration. First of all, it's one of the best ways to improve overall agency productivity and profitability. But second, and perhaps more important today, this system provides the management discipline that will help you avoid legal action.

Lawsuits for wrongful termination, discrimination, defamation, intentional infliction of emotional distress, and breach of contract often arise from the real or perceived unequal treatment of employees in the areas of compensation, promotion or discharge. If you have written rules in place, and follow those rules, you stand a much better chance of averting unpleasant situations.

Employee handbooks are the best place to outline agency policies and procedures regarding employment issues. Most of these manuals will cover the following areas: Agency History and Objectives; General Business and Employee Conduct (use of telephone, attitude towards clients and fellow employees, etc.); Employment/Hiring Policies; Job Descriptions; Attendance Requirements (including rules for leaves of absence, jury duty); Salary Administration and Employee Benefits (including holidays and vacations); Performance Requirements; Working Conditions and Safety Considerations.

The law does not require a business to provide a handbook, but the existence of one is an indication that the owners want policies to be enforced fairly and consistently. It can also provide much better communication of those rules than can be accomplished via word of mouth. Attorneys caution, however, that a handbook can be a problem when management does something contrary to what is written. If you know you have never been able to adhere to written procedures in past and that you will undoubtedly continue to 'shoot from the hip,' you're probably better off without written documentation unless and until you can start acting more consistently.

An employee manual must be carefully constructed to avoid misinterpretation that could destroy even the best of intentions. The handbook should clearly state that it is not a contract of employment and that it is only a general source of information about policies, procedures, and rules as they exist on the date of publication. It is a good idea to review the manual at least every two years to see what needs to be updated and to ensure that the written policies and procedures match actual practice.

Supervisors and middle managers must be sensitized to the rationale behind each of the policies and should feel free to suggest an interim review if the rules cannot be fairly and uniformly applied. And, if it becomes apparent that even one item in the manual is unclear (e.g., vacation policy the first year of employment), meetings should be held to clear up the confusion with written clarifications used as follow-up.

In general, handbooks should avoid generalities that can be harmful, such as 'We always promote from within.' They should not include a list of particular actions that could lead to discharge unless it is specified that the list is only partial. Agency owners that wish to preserve the right to termination at will should be careful that the manual does not establish an agreement to discharge only for good cause.

When the manual is distributed, the employees should be asked to sign a paper acknowledging that they have received and read the manual and that they know what is in it. This document should be kept in the employee's personnel file. Written policies do little good if you have no proof that they were ever introduced to the employee. The following is wording recommended by one labor law attorney. Since every jurisdiction treats employee relations differently, it is important that you have a knowledgeable attorney in your state review the final wording to be included in your manual.

'I have read and understood the XYZ Employee Handbook. I agree to govern my behavior at work in accordance with the wishes of the management of XYZ as outlined in the Handbook and any additions or revisions which they may from time to time inform me of. I understand that the Handbook in no way implies a limited or unlimited term of employment and that I may resign my positions or be dismissed by the agency at any time for any or no reason. I fully acknowledge of my own free will, my responsibilities as an employee of XYZ and the agency's expectations for my performance and behavior. I promise to do my best to live up to these responsibilities and expectations while I am employed here.'

Even with written performance evaluation and discharge policies, it is important to review your options and plan your strategy carefully when terminating an employee. Attorneys suggest that, no matter what the employee has done, you should not fire him or her on the spot. Suspend the person pending further investigation-with or without pay depending, upon the severity of the perceived misconduct.

Things are not always as they seem and you must have all of the facts before you can act appropriately. For example, you may need to make sure that another employee's side of the story is accurate. The fact that someone has been with the agency a long time or is a family member does not automatically ensure that the perceptions of the situation are based on reality. And, as with any important business decision, it's a good idea to wait until emotions have cooled down in order to look at things more rationally.

After the initial investigation, give the employee an opportunity to respond. If he or she fails to reply or does not give you an adequate explanation of the conduct, then you can proceed with the termination. But if the discussion with the employee unearths some additional factors, or puts into question the 'testimony' of another employee, use caution. When there are mitigating circumstances or conflicting stories, it may be wise to seek legal assistance before taking action. At the very least, all of the agency owners should be fully informed and involved in the decision.

If courts or administrative departments are called upon to review your actions, they will look at several things. It's a good idea for you to look at them first, while you are still trying to decide what to do. Was the employee indeed guilty of poor performance or misconduct? Did the agency manager use proper procedures in investigating and documenting the situation? Were agency procedures followed in informing the employee of his or her performance shortcomings? Is firing too harsh a penalty for the violation? Are there alternative solutions to resolving the situation? Could the reason for the discharge be construed by outsiders to be discriminatory?

If, after a review of the facts, it is still necessary to terminate an employee, do so in privacy and with a witness. Offer the employee the opportunity to resign rather than to be fired. And consider negotiating a severance agreement, particularly if the person has been with the agency for a number of years. It is possible to include in that agreement a release designed to cover all potential claims. To further protect the agency from litigation, the employee should be encouraged to obtain legal counsel before signing the release.

Sometimes it becomes necessary to reduce the agency's staff due to the loss of a producer, more reductions in commission rates, assumption by insurance companies of account servicing duties, or other outside reversals in agency income. Could you be sued for wrongful termination if you have to lay people off? Yes, if employees perceive that there was discrimination involved.

You must adopt fair guidelines that will be consistently applied. Criteria generally used for layoffs are based on seniority or performance ratings or both. This is when having a formal performance evaluation/salary administration program can be invaluable. If everyone has been receiving the same percentage increases in salary regardless of differences in performance levels, the application of fair and consistent guidelines becomes much more difficult. You are almost forced to terminate the newer employees even though they are performing much better than those who have been there longer.

You should also make sure that the reasons for the terminations are clearly justified by economic conditions or other valid business considerations. Owners that purchase a new Mercedes or hire three new people several weeks after the terminations are certainly calling into question the rationale for those layoffs.

There is nothing that you can do that will absolutely protect the agency from employee lawsuits. But if the management policies are set down in writing, understood by everyone, and followed consistently, the potential for communication and perception problems will be reduced. In most cases, if you treat employees with respect and dignity, especially when terminating them, litigation can be avoided.

Owners of small businesses like insurance agencies have high divorce rates. It's one of the drawbacks of being an entrepreneur. Settlements involving business assets have become more common as divorce laws in many states recognize the contribution of both partners to marital assets. Even a non-working spouse may be seen as having contributed to the success of the business and be legally entitled to part of the value. Coming to an equitable settlement can be difficult when the agency has prospered and its value represents the largest portion of marital property.

In most cases, a lump sum or schedule of payments from the agency owner to the spouse will be imposed by the divorce settlement. If these payments are excessive, they can seriously hamper agency expansion efforts or may aggravate existing differences between several owners. Sometimes it actually results in the agency being sold to an outsider because the situation between the disagreeing owners becomes unworkable. It therefore behooves the agency owner to show as low a value as possible. The spouse, on the other hand, wants to maintain a certain standard of living and would like a much higher value. There is an unavoidably subjective aspect to the art of valuation, and both sides can usually find an expert to make their case. The resulting fighting can get ugly and make a couple of attorneys very rich.

As unromantic as it may seem, prudent agency owners will take care to provide for the eventuality of divorce. Buy-sell agreements with valuation formulas may be acceptable in some jurisdictions, but they are often struck down for being overly vague or outdated. If you intend to rely upon this agreement, have it updated often, and ask your attorney whether it might not be a good idea to include reference to divorce settlements as one of the reasons for the valuation formula.

In agencies where there is only one owner or where the husband and wife are co-owners, the best way to handle the situation may be to have a pre- or postmarital agreement stipulating how agency assets are to be divided in the event of a divorce. An agreement that is clearly equitable at the time that it is drafted and that provides for the growth of the agency and for changing roles of the partners in the organization will enhance the peace of mind of both parties. It will protect the financial assets of the agency from excessive valuation demands and/or attorneys' fees. Additionally, it will help reduce the damage that is often done to the productivity and sales activity of the agency operation when a major owner is involved in a long legal battle.