The Most Common Way Businesses Get Sued (Part 1 of 3)

In the first post of this series, we discuss the most common ways businesses get sued. The answer? Your own employees. What are businesses getting sued for?

Employees sue their employers. It happens . . . a lot. If you’re a business owner, it’s likely the most common type of lawsuit you’ll see. Here are the typical types of claims employees file:

Discrimination/Sexual harassment

Wage and hour


Federal, state, and local laws prohibit discrimination based on sex, race, religion, color, national origin, pregnancy, age, and an employee’s disability (among other things). Employers must remember that basically all adverse actions against an employee in a protected class can be the basis for a lawsuit. Often times, this “adverse action” is a termination, demotion, or office relocation. Essentially, anything that affects the terms and conditions of employment – such as a hostile work environment or sexual harassment – is a potential “adverse action” and thus possible grounds for a lawsuit. If it can be perceived as an adverse action, and the recipient is in a protected class, you’re at risk of being sued. What is a simple business decision for you might be interpreted by an employee as discriminatory.

Certain laws govern how much your employees must earn, when they earn it, and what type of information must be provided to them about their earnings and deductions. Certain employees are entitled to overtime for any hours worked in a given week over 40 hours. Others are not. Certain employees must be paid weekly. Others can be paid less frequently. And, certain workers are actually employees, even though they’re paid, treated, and contracted as independent contractors.

Finally, there are “retaliation” claims. Under various laws, employees who engage in “protected activity” are generally protected from retaliation. These claims are especially problematic considering the claim is separate and apart from the protected activity itself. For example, an employee files a complaint of sexual harassment (protected activity) and an investigation finds that no sexual harassment occurred. If the employee is then treated unfavorably after making that complaint, the employee could have a retaliation claim even though the investigation found that there was no underlying sexual harassment.

Think It Won’t Happen To You?

Should you worry that your company will be sued? Unfortunately, yes. And for good reason. Several recent reports found that almost 50% of small businesses are currently involved in at least one litigation, and approximately 90% of all businesses will at some point be sued! It’s not “if” but “when”.

Lawsuits can cost businesses money in different ways. Besides the obvious legal expenses, lawsuits often harm a business’s reputation, distract management from successfully operating the business and, most alarmingly, inform other potential plaintiffs that you’re a target (and perhaps one that pays to settle claims). Fueled by an increasing number of employee-friendly laws and more stringent requirements for employers – especially in New York and New Jersey – the uptick in employment litigation isn’t slowing down anytime soon. What You Can Do About It Despite our obvious bias, we think that hiring a lawyer helps. Hopefully, if your business is up and running, you’ve already properly incorporated that business and established liability protections (such as obtaining insurance that deals specifically with employment and commercial liability). Incorporation is an important first step to protecting your personal assets from these business-related suits. In addition, businesses can protect themselves by doing the following: First, speak with your attorney to understand the relevant laws, how they impact your business, and what you can (and cannot) lawfully do. Lawyers can advise you on how to properly track and compensate for the number of hours certain employees work to avoid failing to pay overtime. Nothing helps defend a lawsuit for failing to pay overtime like proof that the employee never worked overtime – or did and was properly paid for it! Or, if you want to fire someone for legitimate reasons but the employee is in a protected class, an attorney can discuss your options and help you navigate the risks inherent in making such a decision. Learn the rules, and your options, before you act. Second, have formal agreements, handbooks, and policies in place to protect your interests and keep you and your business in legal compliance. These documents can lay out the nature of the employment relationship, including the parties’ rights and obligations, rules of the workplace, and proper procedure in the event of a dispute (along with various other terms that could help establish a solid defense if needed).

Third, document performance issues. It’s hard to justify firing someone for bad performance if you don’t have documentation in support. Record everything. Maintain a detailed log of all employee-related issues in a personnel file. It could be the key to your defense. Otherwise, it might look like you fired someone for the wrong reasons – for example, because of their gender, age, or race. Fourth, you may be able to protect yourself by offering a terminated employee a severance agreement. This isn’t the right move for everyone. Severance agreements are typically used to obtain the terminated employee’s release of claims against the company, often in exchange for a payment, and can create a bulletproof defense to a lawsuit. While this is not an exhaustive list of ways you can protect yourself, it’s a good start. We hope you found this helpful. Stay tuned for the next part of our series.

If you have any questions, please do not hesitate to reach out to the attorneys at Weinstein + Klein P.C.

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