In the US, very few employees have employment contracts and employment technically is “at will”. With limited exceptions, employers are entitled under state law to terminate an employee without cause and pay the employee only for the services performed to date, with no notice period or statutory redundancy.
Not so fast. Terminated employees can, and regularly do, assert a variety of claims against employers. These include federal and state law discrimination claims (e.g., race, age, sex, religion, and sexual orientation, among others), sexual and other harassment claims, hostile work environment claims, whistleblower claims, and others. Some of these claims may seem particularly unexpected to non-US companies, such as claims by white heterosexual males that they have been discriminated against, sexually harassed, or subject to a hostile work environment.
Additionally, because the US does not have the “English rule” where the loser in litigation pays a significant portion of winner’s legal expenses, there may be an incentive for an employee to assert even weak claims because they have settlement value.
Thus, an employer facing litigation expense of, say, $100,000 to defend such a claim may find it cheaper to settle than incur that expense, even if the employer thinks the claim is without merit. Conversely, employees and their contingent fee lawyers know that the claims may be settled by the employer to avoid litigation expense and distraction of management time and attention. Indeed, in some cases the employer may face external pressures to settle the case, such as potential investors in an early stage business who will only invest once the dispute has been resolved.
What should an employer do to manage this risk?
- Ensure your initial hiring procedures are robust. The processes you use must be non-discriminatory, and you cannot ask inappropriate questions, but within the scope of what is permissible you need to carry out appropriate background checks and other due diligence on candidates and do your best at the front end not to hire the wrong people. Employer beware – HR advice is recommended.
- Be clear with candidates and new employees about your performance expectations, and provide appropriate and constructive feedback on a regular basis. Where you reasonably can, provide an opportunity for employees to adjust their performance to respond to the feedback.
- Make sure your local management personnel are appropriately trained and are sensitive to concerns about discrimination, harassment and hostile work environment. Establish mechanisms where employees can reach up to a higher level if the local management itself is the source of the problem. Beware of personal relationships between managers and employees, and where they develop take steps to ensure disclosure to senior management and avoid adverse effects to the junior employees or others in the office.
- Once it becomes apparent that you are going to need to manage someone out, obtain HR advice. Many times, it is possible to handle these matters on an amicable basis if the employee is shown appropriate respect. Depending on the circumstances, it is likely that you will need to provide termination benefits of some kind, including a termination payment. In exchange, you should obtain a release that protects you against post-termination claims. Note that in the case of employees aged forty or over, the Age Discrimination in Employment Act of 1967 (ADEA) requires that a signed release be revocable for a period of seven days before it becomes effective and sets certain other requirements – payment should not be made until that period of time has run.
- Consider whether to obtain employment practices liability (EPL) insurance to protect against the risk of claims. While such coverage may be subject to hefty deductibles, it may still be worthwhile to protect against substantial claims.
It is never easy to fire people. However, every business needs to do it, and making the right hires poses greater challenges when operating on a cross-cultural basis. Some of the more painful aspects of terminating a non-performing employee can be mitigated with careful management of the process.
Want to learn more about how best to pursue US expansion or US investment? Feel free to get in touch with Daniel Glazer or Robert Mollen.
Post produced in partnership with Daniel Glazer and Robert Mollen at Fried Frank Technology.