Unbeknownst to many entrepreneurs, there are some special risks associated with adding employees. Not because of any special problems associated with the hiring, but because of the dangers that lurk if your growth unexpectedly stalls, and you have to lay people off.
HELPFUL BUREAUCRATS. It turns out that people who lose their jobs in tough economic times react somewhat differently than people who lose their jobs in good economic times. In good times, people typically go off and find a new job. In bad times, ex-employees are more inclined to seek redress by filing complaints of discrimination and/or unlawful termination against their former employers because, in our current recessionary climate, such an action may well generate significant income more quickly than trying to find another job.
At both the federal and state level, discrimination complaints are easier than ever to file. Employees don't need to hire a lawyer, and the federal or state agency will help in filling out the paperwork. The U.S. Equal Employment Opportunity Commission reports that during fiscal 2002, complaints of age discrimination were up 14.5% from the prior year, with discrimination complaints overall up 4.5%. Organizations on the receiving end of those complaints coughed up "a record total of $310.5 million in monetary benefits for charging parties through settlements, conciliation, mediation, and litigation," reports the EEOC.
And if they don't have a discrimination complaint, there may be other legal action they can take. One hot area cited by labor lawyers is "retaliation" claims whereby employees who unsuccessfully file discrimination complaints argue in court they were fired for having complained about discrimination. There are many other options for creative lawyers. One lawyer quoted in a city business journal article on the boom in employee legal complaints observed: "There's a joke among employment lawyers that you can find a legal claim in any termination."
WEAK CASE, BIG RISK. While the complaints may be easy for terminated employees to launch, they are difficult for smaller companies to defend. Owners struggling in a tough economy can ill afford the hassle or the costs associated with an employee suit alleging discrimination or wrongful termination.
One minor case illustrates the problem. When a small Massachusetts advertising agency recently lost a major account and terminated a female employee as a consequence, she filed a complaint with the Massachusetts Commission Against Discrimination alleging sexual discrimination. The agency owner learned from an employment lawyer that while he wasn't required to hire a lawyer, and the case appeared to be a weak one, he would be well advised to retain legal assistance, since the commission tends to be more sympathetic to terminated employees than to business owners.
The projected costs of defending the case? Uncertain -- but if the case dragged on, legal costs alone could approach $50,000. If the commission sided with the employee, it could demand compensation and penalties. A modest penalty might be a year's salary, which, in this case, amounted to about $85,000. And if the owner was unhappy with the commission's decision and decided to appeal in court, the legal costs would continue mounting, and the penalty could be worse as well.
BAD -- OR WORSE? Faced with a possible $125,000 hit, not to mention time required for interviews, this owner did what you might expect: He tried to settle with the employee. To his surprise, she was willing to settle for two months of salary, $14,000. The legal costs associated with answering the complaint and drawing up settlement papers were another $10,000. While $24,000 looked a lot better than $125,000, it was still $24,000 the company could ill afford. What can smaller growing companies do to head off such situations? Here are a few suggestions:
Try to test an employee candidate as a contractor before hiring the individual as an employee. This allows you to determine how well the individual performs and get a read on his or her overall attitude.
When background checking any prospective employee, try to determine if the person has been a party to any legal actions. The Internet is a great way to track such things down. Obviously an individual who has been involved in several cases is someone to assess more carefully.
If you must terminate an individual, consult with a lawyer in advance. Sometimes it makes sense to provide a more generous severance package than you might, in exchange for the employee signing a "release" form that forsakes any subsequent legal action.
While there's definitely a buyer's market in today's hiring arena, it's still important to look very carefully before you leap. David E. Gumpert is author of Burn Your Business Plan! What Investors Really Want from Entrepreneurs and How to Really Start Your Own Business (Lauson Publishing).