Risk Management

How Being Nice Can Lead to a Lawsuit

`Grade inflation' can get laid-off workers riled.
David KatzMay 31, 2001

Sometimes it doesn’t pay to be nice. And sometimes it takes a CFO to say honesty is a better policy.

A case in point occurs when a shocked employee gets fired after years of stellar performance reviews. Baffled, the worker looks for a cause—and finds it in the real or imagined race, gender, or age discrimination of the employer.

Long histories of good job evaluations are, in fact, often cited in wrongful-dismissal lawsuits, employment lawyers say.

For instance, in Guz v. Bechtel National, one of last year’s most closely watched employment cases, the plaintiff, John Guz, a 22- year employee who had lost his job when his work unit was eliminated, mentioned the generally favorable performance reviews he’d gotten from Bechtel in his suit.

Ironically, Guz used Bechtel’s rigorous performance-review system, which included ample details and notice of the company’s employment actions, against the company. He argued that the review system amounted to a contract that the employer breached by letting him go without cause.

In its decision on the lawsuit, which also included charges of age bias, the California Supreme Court agreed that Guz had “implied contractual rights” under Bechtel’s personnel policies. But the court ruled that still didn’t mean he could only be fired for good cause. Experts agreed that employers had dodged a bullet in the ruling.

The Guz case shows that even an employer’s best intentions can be used against it in a bias case.

The role of the CFO in such instances, as well as in employment practices risk management overall, can be crucial, experts say. To be sure, the CFO tends to be most involved in decisions about buying employment practices liability insurance.

But CFOs can also be honest brokers—with special stress on the word “honest”—on the HR side of employment-bias risk management.

Jeff Tanenbaum, a senior law partner with Littler Mendelsohn in San Francisco, says CFOs can, for instance, make sure supervisors are honest in their performance evaluations from the beginning.

He advises employers to avoid “grade inflation,” in which a supervisor gives every employee high marks, “because you want to be nice.”

That may make for fewer conflicts in a full-employment situation. “In a layoff setting,” however, says Tanenbaum, who represents only employers, “you are trying to determine who is going to get laid off, and that very often means a stack-ranking of employees’ performance.”

“If there has been grade inflation all along,” the lawyer says, “for the employee at the bottom of the stack, it’s a shocking event.” And one that’s ripe for a bias suit.

CFOs, with their focus on financial health as well as on employee retention, have an interest in seeing that supervisors and managers deliver an “honest, fair evaluation” of employees, says Tanenbaum.

Severance Toughness Advised

Another area where the strong hand of a CFO might be needed is severance agreements. Taking a tough stand, Paul J. Siegel, a partner with the employment practices law firm Jackson, Lewis, Schnitzler, & Krupman in Woodbury, N.Y., thinks employers too often assume they must provide hefty severance packages but get nothing in return.

“Stop feeling guilty about severance,” he lectured employers at a recent meeting of the New York City chapter of the Risk and Insurance Management Society. “There’s no legal obligation to pay a nickel.”

The lawyer thinks employers should get employees, in exchange for severance pay, to agree not to sue for discrimination.

Similarly, he advises employers to extract agreements from executives to arbitrate their bias claims in exchange for participation in company bonus plans. He admits, however, that most employers are wary of mixing such agreements into their compensation structures.

Arbitrating bias claims rather than fighting them before a jury, however, can save a company a “tremendous amount of money and heartaches,” says Tanenbaum.

A typical employment-practices case tried by a jury might cost an employer $250,000 in legal fees alone (with the employee paying about the same amount in a contingency fee if he or she wins the case), while an arbitrated case might cost 10 percent to 15 percent of that, he says.

Another advantage is that, unlike juries, arbitrators are disinterested professionals who are “less swayed by emotion,” he points out. “The end result is that you don’t have the tremendous variation in awards” that juries produce.

That makes arbitration “not only more cost-effective but more predictable” and thus easier to settle, Tanenbaum notes. “If the award is predictable, you don’t have one party or another making a lottery bet,” he adds.

For such reasons of cost, the attorney thinks, CFOs should participate in deciding when a company should use arbitration or settle a case. Senior financial managers can bring a sense of how much an adverse jury award can cost the company, while, “sometimes, managers can throw money away” on a case, he adds.

In fact, CFOs should question whether there should be layoffs at all, he suggests. Courts used to give employers “an easier ride” on layoffs than on individual firings, assuming that group dismissals were based on business decisions rather than race, gender, or age, he says. But that’s changing.

Layoffs are “now scrutinized more carefully by the courts” for evidence of discrimination than they were before, says Tanenbaum.

“You have to be careful that you don’t just assume that a layoff is the [only] appropriate way to reduce costs,” he adds. He urges employers to think about “the human costs” and consider less drastic measures, like across-the-board pay cuts, job sharing, or sabbatical programs.

In some cases, it might pay to be nice, after all.

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