Most companies must eventually handle terminating an employee. While there are times when that termination is justified, the 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.
“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 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 unlawful 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 adequately 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.
The following 3 factors can result in settlements costing hundreds of thousands of dollars:
This considers how much the employee lost in wages, starting from the day he or she was let go.
This considers the value of the benefits that employee lost. This can include such things as health care, vacation time and even retirement accounts.
This is an area with a degree of subjectivity, is often taken into account when claims of harassment or discrimination are made.
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 occur.
According to XCELHR, 60% of employers have faced an employee lawsuit in the previous five years, 67% of which resulted in a judgment 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. However, for those who do decide to take the case to trial, that average amount jumps to about $45,000.
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:
Each of these liability insurance policies covers business practices to some degree, although they are not explicitly 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.