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Between a struggling economy and pro-worker administrations in Washington and Madison, businesses are in a “perfect storm” when it comes to their risk of being sued. Therefore, it should come as no surprise that lawsuits against businesses are at their highest levels in history. Worst of all, no one is immune, not even small, privately held companies. Here’s some of what you should know and what you should do.

The risk of lawsuits is always lurking in the back of most business owners’ minds. It is something of an open-ended black hole that we trust to luck won’t happen. That’s because one lawsuit can destroy a business and drive the owners to distraction. Even winning is no consolation, because of the time, expense and emotional trauma of mounting a defense. Fortunately, in the past, the risk of being sued tended to be minor. Unfortunately, those days are gone.

“When it comes to liability management, we are seeing more changes in the last several years than in at least the last 25,” said Tom Hams, managing director and national EPL practice leader at Aon Financial Services Group, to attendees at a management liability seminar in Green Bay in May. “Worst of all, it’s across the board. We’re seeing suits involving employment practices, harassment, wrongful termination — they’re all up.”


Five factors
If you’re thinking it can’t be that bad, you’re right. It’s worse! There are five key factors driving the litigation boom.

Factor No. 1: Workforce reductions due to the weak economy generate wrongful termination suits. “Almost every business is facing reductions in workforce,” says John Haase, managing partner, Labor & Employment Litigation Leader for the law firm of Godfrey & Kahn. “This is one of the riskiest things a business can do. Even when nothing wrong has been done, employees are often more desperate when the economy is weak. So, they’re more likely to seek counsel.”

Factor No. 2: Add to this the torrent of changes in employment law, with new pro-labor legislation at the national, state and local levels. “We have seen more changes in employment law than ever in the past 12 months,” says Haase. Each change has increased the probability of being sued and increased the risk of losing in court.

Examples include the Ledbetter Fair Pay Act, which extends the statute of limitations for pay discrimination claims, and the Paycheck Fairness Act, which, though still pending at the time of publication, would limit a business’s range of legal defenses and make it easier for employees to bring lawsuits.

Plus, there are proposed changes to the Americans with Disabilities Act (ADA) that would broaden the definition of who is disabled. “Congress is attempting to undo the Supreme Court’s narrow view of what constitutes an ADA disability,” explains Haase. One example includes several narcolepsy cases, where the plaintiff had difficulty coming to work on time. Under the pending legislation, this person could be labeled as disabled.

Each of these changes makes it more difficult to defend against such suits. This not only broadens the range of potential suits, but also emboldens would-be plaintiffs to pursue legal recourses.

Additionally, there is the problem of local rules, according to Greg Grobe, an attorney with Liebmann, Conway, Olejniczak & Jerry, S.C., Green Bay. “Madison and Milwaukee, for example, have special business rules, such as the Milwaukee paid sick leave law, which was recently struck down and is expected to be appealed,” he says. “However, special situations such as these are driving employers crazy, especially businesses such as contractors that may not be based in a municipality, but must nonetheless comply with the laws when they have jobs there.”

Factor No. 3: This ties in with a groundswell of pressure from anti-business, government regulatory groups, especially from the Equal Employment Opportunity Commission, with businesses seeing the highest frequency of EEOC allegations in history.

“I am seeing more situations in which the EEOC is bludgeoning larger employers with threats of lawsuits to get them to go along with what they want,” said Aon’s Hams. “With the EEOC receiving more staffing and funding, we can expect to see a more aggressive enforcement pattern. And this is all happening at the same time that training and human resources budgets for businesses are being cut across the board.”

Factor No. 4: There is emerging a “new plaintiff’s bar,” reports Grobe, representing employees in group and class action suits. These attorney groups are a fairly new phenomenon in that they actively seek out vulnerable companies and target them.

Factor No. 5: Finally, we are seeing growth in personal liability suits for directors and officers over investment losses, a trend that logically follows the economic downturn. “Because of a growing number of bankruptcies, we will see a growing number of suits against officers,” says Dick Stackpool, vice president, Aon Financial Services, Minneapolis.

The greatest example of this, of course, is the case involving Bernie Madoff, who recently admitted to pulling off a $50 billion Ponzi scheme, destroying the financial lives of thousands of people, charitable trusts and other organizations. At risk are all the above, starting with investment firms — and their directors and officers — that channeled money into Madoff’s company.

Problems can result even when no criminal activity was involved. Massive amounts of litigation have come from the plunge in stock values over the last two years. Plaintiffs are attempting to hold the officers responsible for losses.

It makes sense, explains Gordon Davenport III, Partner & Chair of Insurance & Reinsurance Litigation with the firm of Foley & Lardner, Madison.

“When the money is gone, people look for others to go after,” he says.

“We’re even seeing an increase in suits against officers in privately-held companies,” says Stackpool. “Shareholders are liable to others.”

In one case, a bank sued the chairman of a company who used business assets to co-sign for his daughter’s business that failed. In another example, if a business gets into trouble and retired shareholders (including ex-partners and founding parents) are no longer receiving checks, there is the potential for liability, even when family members are involved.

What’s a business to do?
With hundreds of thousands of jobs being lost monthly, workforce reductions today offer the greatest liability, reported Hams with Aon Financial Services. “Regardless of how it’s done, there is exposure to liability. However, how it is done can still reduce liability.”

Godfrey & Kahn’s Haase offers five specific steps to follow to reduce the risk when making workforce reductions:
• Have a plan that goes beyond reducing workforce size to cut expenses. Businesses often do not think about where they want to be or specifically how much money they want to save by the workforce reduction. “Have a story that makes sense,” Haase explains. Be able to explain what you are trying to do and why.

Make sure everyone knows the plan, that it is well-communicated to HR and other departments. In other words, make sure everyone is on the same page.  

• Consider alternatives to permanent reductions. “Surveys show that employees would prefer to take a wage cut or a reduction in hours to a reduction in force,” says Haase.

Establish clear and written criteria for any reduction. Seniority provides the lowest risk of liability, says Haase. “It is more objective than other criteria. If you use another criterion, however, such as performance, be sure to include the criteria of how you measure that performance. Have the factors prepared in advance. Also, be aware that there are factors that cannot be used, such as sex or age.” Additionally, explains Hams, if you already have had a reduction in force, “make sure you communicate the reasons and be consistent with the criteria for future reductions.”

• Review the potential outcome before acting. Look at the entire pool of potential layoffs and ask, “Did our selection result in a protected group being selected?” Haase cautions. For example, are you selecting more people from an older group, or more women than men, or primarily minorities? If so, you must be able to defend your choices based on your criteria.

• If possible, consider severance. In a climate like this, says Haase, most employees are more likely to take the money in exchange for releasing the company from liability. Severance can dramatically reduce the risk of being sued.

Talk to your risk management insurance carrier and legal counsel for how to carry out the reduction with the least risk of creating a lawsuit.

• Most of all, avoid selective terminations. It is not all that uncommon for a small business to use the concept of “selection in force, but it is actually attempting to get rid of a problem employee,” warns Hams. This creates high risk for wrongful termination lawsuit.

The bottom line: The risk of being sued is higher than at any other time in history. The best way to reduce those odds is to be aware of the risks and engage in sound, risk management practices.

By John Ingrisano

John Ingrisano is a small business owner and the author of The Back to Basics Book of Selling: A Guide to A Successful Sales Career. Contact John at john@ TheFreestyleEntrepreneur.com.

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