Average Settlement for Wrongful Termination Cases

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What Wrongful Termination is All About

Most companies must eventually handle terminating an employee. While there are times when that termination is justified, the end result is rarely peaceful. Employees’ reactions can be unpredictable, and at times you may feel the need to be a counselor to those employees who are distraught over having to lose their job.

Not all employees will be understanding when you are forced to let them go. Some will understand if there are financial concerns, such as downsizing needs or decreasing sales and profits. However, not all employees will take kindly to getting terminated. Some, in fact, will respond by taking legal actions against a company. This may leave you wondering whether you did the right thing.

Read on to understand what Wrongful Termination is and how it can affect your business.

How is Wrongful Termination Defined?

“Wrongful termination” is a clearly defined act according to the law. One of two conditions must have been met for a wrongful termination to have occurred. First, an employer must have discharged an employee in a manner that breaches at least one of the terms of the contract. For example, if an employee’s contract stipulates that he or she cannot be terminated for failing to show up to work on time, but is later terminated for this very reason, the termination would legally be a breach of contract and classified as a wrongful termination.

The second condition involves federal and state employment laws. These laws may vary from state to state, but in general, there are three main reasons why it may be illegal to terminate an employee:

  • The employee is a whistleblower, i.e., that employee has reported your company or someone in your company for illegal practices such as harassment, illegal software sharing (copyright infringement), health and safety violations or other illegal business practices.
  • The employee has exercised his or her legal workplace rights, such as taking contracted medical leave, taking maternity leave or serving time in the military.
  • Your firing decision was discriminatory, meaning it was based on an employee's race, gender, age, disability status or religion.

At times, a business owner may leave the decision up to lower-level managers. It is not always possible to control when these managers fire employees, and some may not be properly trained on the legal consequences of firing. Even if an employee who was wrongfully terminated is hired back, your business may still be liable for a wrongful termination suit.

What factors go into a wrongful termination claim?

While several factors are considered, wrongful termination lawsuits often take into account:

  • Wage loss, which considers how much the employee lost in wages, starting from the day he or she was let go
  • Lost benefits, which consider the value of the benefits that employee lost. This can include such things as health care, vacation time and even retirement accounts
  • Emotional distress, an area with a degree of subjectivity, is often taken into account when claims of harassment or discrimination are made

When taken together, these three areas can result in settlements that can cost a company hundreds of thousands of dollars.

What is the average settlement for wrongful termination?

Most businesses hire employees with a specific employment contract, believing that they can fire employees for any reasonable cause. However, employees often disagree as to what is reasonable cause, and in some cases errors simply occur. According to XCELHR, 60% of employers have faced an employee lawsuit in the previous five years, 67% of which resulted in a judgement for the plaintiff when taken to litigation.

If your company chooses to settle the lawsuit out of court, the average settlement is around $40,000 dollars. However, for those who do choose to take the case to trial, that average amount jumps to about $45,000.

Still not sure what you need?

Head on over to CoverWallet’s Insurance Checklist. There you’ll find a list of insurance types needed for your industry.

Can insurance protect you from a wrongful termination lawsuit?

Insurance cannot stop a wrongful termination lawsuit from occurring. However, there are insurance policies that can help mitigate the costs of both defending against a lawsuit of this nature and reimbursing any payments you may have to make to a terminated employee whose lawsuit against your business is successful.

Employment Practices Liability Insurance is the best insurance policy to purchase to protect your business against a wrongful termination lawsuit. An EPLI policy has an added benefit of providing for legal defense and payouts related to improper hiring practices as well.

Other insurance policies one might consider are Business Owners Liability Insurance, Professional Liability Insurance and Directors and Officer Insurance. Each of these liability insurance policies covers business practices to some degree, although they are not specifically designed to cover potentially costly wrongful termination lawsuit payouts. Indeed, many insurance companies offer an EPLI policy separately or as an endorsement to another policy because it is both a unique situation and a potentially costly one.