Employment lawsuits continue to rise and along with them, the costs associated with these actions. What can a company do to reduce its employment litigation expenses?

“The consequences of not understanding employment laws can be severe,” said Laura Fleming, a Southern California attorney and mediator. In addition to the obvious monetary costs of litigation, “being embroiled in a lawsuit can be distracting and can negatively impact employee morale,” she said. “It makes good business sense to prevent employment litigation to the extent possible.”

One key is to “be very proactive before litigation starts,” advised Brian McDermott, a shareholder in the Indianapolis office of Ogletree Deakins. He explained that there are many ways to do that.

HR is an essential participant in these proactive steps, Fleming said. “It is very important to invest in your human resources department. HR functions can be technical and even counterintuitive. The executive team should be free to focus on the business goals of the company; they should not have to personally handle HR issues on a day-to-day basis.”

Review Policies and Procedures
“First, know what makes your company tick,” McDermott said. “Talk to employees and find out whether they are happy and what they may be concerned about. Learn where the weak spots are and address them.”

Once you know where the problems are, look at your policies and procedures, he said. “Are they created to meet the company’s obligations under the law? If they do meet legal obligations, are they what is really happening?”

One way to find out if your practices follow your policies is through an HR audit. Many employers are using these to prevent litigation before an action is filed, McDermott noted.

An HR audit should examine whether an employer is complying with all applicable employment laws.

Pay Attention to FLSA Requirements
Audits often turn up practices that may violate the Fair Labor Standards Act (FLSA). “Misclassifying employees and not paying for off-the-clock work are not uncommon,” McDermott said.

And “whether employees should be hourly and nonexempt or salaried and exempt is a tricky issue with huge litigation potential,” Fleming said. There are a limited number of categories of employees who may be paid on a salary basis, she observed. “Employers who are not familiar with these should review them with an HR professional or counsel. At the same time, employers can pay anyone by the hour, so when in doubt, classify employees as hourly nonexempt.”

Incorrectly classifying an employee as salaried can bring penalties, including back overtime pay, meal and rest period premiums, and penalties for paperwork violations, Fleming cautioned. “Some employees may want to be paid on salary for flexibility, but if the position does not meet the legal criteria for exemption, don’t take the risk.”

Provide Anti-Harassment Training
Some states require employee training on recognizing and preventing harassment. The requirements differ by state as to which employees must receive this training, McDermott said.

If a state imposes no legal requirement, “some employers, especially in a down economy, don’t want to train,” he said. But “that might be foolish. It may save money in the short term but result in expensive litigation later on.”

And even if a sexual harassment case goes to trial, if employees have received anti-harassment training, the costs of the lawsuit might be reduced. The likelihood that plaintiffs will receive punitive damages is much greater if the staff has not been trained, McDermott said. “There have been numerous courts that have mentioned the lack of anti-harassment training in support of an award of punitive damages.”

Further, your training should focus on all types of harassment, not just sexual harassment. “Harassment on the basis of any protected characteristic—age, disability or national origin—can give rise to claims,” McDermott said.

Terminate Carefully
“Termination can be a trigger for litigation,” Fleming warned. “If you’re going to fire somebody, it should not be done rashly.” She recommends that managers never fire an employee on the spot but, rather, send the employee home or place the employee on administrative leave pending an investigation.

Also, a manager who is thinking about terminating an employee should always consult with HR—and sometimes with employment counsel. Make sure every step of the decision is well documented before you terminate. “It could take weeks or months to get all of the pieces into place, but patience generally pays off in lowering the risk of litigation,” Fleming said.

Use Severance Agreements Properly
“Severance pay is an insurance policy against litigation,” Fleming noted. “In exchange for it, the employee should be required to sign a release waiving all claims against the company. Being a little more generous with severance pay can encourage employees to take the deal. It can also help them think kindly of you when they leave.”

“Using severance agreements can be a touchy subject,” McDermott said. “If I offer a settlement, does this mean that I am trying to hide something?” Many times, this is not the case. Employers should make solid business judgments about their risks and how to minimize them, he said: “If you believe the employee might sue down the road, this might block that. You can put in the agreements that this is not an admission of liability.”

Courts recognize that offering a severance agreement does not mean an employer has engaged in illegal conduct, he added.

Reduce Costs Once Lawsuit Is Filed
“If you can keep litigation from happening in the first place, you are better off,” McDermott said. But “if you are in litigation, there are ways to reduce those costs.”
If an employer has engaged outside counsel, the company and attorney must communicate about what the company’s goals are in the litigation, he said. “Are we going to fight? Is there a principle involved? Or do we want to resolve this as quickly as possible?”

Employers and counsel should examine the strength of the evidence early on in the litigation to determine whether they have the documents and the witnesses to support their assertions.

And turning to mediation may be invaluable, Fleming concluded. “As employment litigation lingers, attorney’s fees on both sides can escalate quickly. This means the employer spends more on its counsel, while the employee feels pressure to increase any settlement to cover his or her fees. For this reason, early mediation can be helpful” both to reduce the cost of defense attorneys and to achieve a reasonable settlement with the employee.

Source: SHRM, Joanne Deschenaux, J.D., and SHRM’s senior legal editor.