Managing the Risk of Wrongful Discharge Litigation: The Small Business Firm and the Model Employment Termination Act

Small business managers will soon be presented with the greatest opportunity since the introduction of worker's compensation laws to manage a potentially disastrous risk: the increasingly common and escalating costs lurking in wrongful discharge litigation. Seizing it will require an understanding of the Model Employment Termination Act (1991) and the complex problems it attempts to resolve, followed by concerted political action. This problem is only now emerging in its multifaceted forms because for more than 100 years employers were protected from wrongful discharge damages by the doctrine of employment-at-will (Feinman 1976). The employment-at-will doctrine permitted the termination of an employee, in the absence of a fixed term contract, for cause or no cause at all. This doctrine is now rapidly eroding. And this trend, if unchecked by newly proposed legislation, could inflict its harshest consequences on small business. First consider the cost for a small business, and the impractical nature of the current alternatives. The National Conference of Commissioners on Uniform State Laws estimates the expense for defending a single "typical" wrongful discharge case at $80,000. This cost is not contingent on the resources of the defendant nor is it diminished if the defendant is successful. This alone threatens small business more ominously than larger business firms, and the potential loss is devastating if the plaintiff wins. And, plaintiffs do win. In California, using a large state with diverse business activity as an example, plaintiffs won 70 percent or more of all wrongful discharge cases that reached a jury. The verdicts in these cases averaged $300,000 to $500,000 (Model Employment Termination Act 1991). Nationwide plaintiffs have received judgments as high as $20 million, $4.7 million, $3.25 million, $2.57 million, and $2 million. "Jury awards exceeding $1 million have been common," and the increase of wrongful termination cases over the past dozen years has been described as "a virtual landslide" (Model Employment Termination Act 1991). While large concerns may find the means to simply absorb such losses, the drain of resources will devastate small business. Large concerns also differ from small firms in their ability to avoid the risk of litigation. These organizations are more likely to have the option of relocating an inefficient employee to another or less significant position and hiring another in his or her place. The option is greatly restricted by the nature of a small business with fewer positions and limited ability to "carry" inefficient employees. Even when this option is possible it is an unreliable alternative when, in the end, the employee must be terminated. In a case involving the Southwest Gas Corporation in Nevada, as an example, supervisors warned and repeatedly relocated an employee prior to her termination, yet the company was found to have violated her rights created by the court's interpretation of a company handbook when she was eventually terminated (Southwest Gas Corporation 1983). Following rules and procedures created by stated personnel policies could probably have protected Southwest Gas but, here again, a small business finds itself at a disadvantage when compared to a larger organization. SmaLl businesses are less likely to have elaborate, enumerated personnel policies and grievance procedures, and less likely to have the internal bureaucracy necessary to create and implement them. Also, to create such an organization would generate an additional and excessive expense. Restructuring of the American workplace is becoming an ever increasing fact of life. Many large companies sometimes lay off thousands of workers at a time, encompassing whole departments and units. Because these units contain employees of mixed abilities and characteristics, the implication that one particular employee was unjustly discharged simply cannot be proved. Smaller firms, on the other hand, often discharge a single employee at a time who in turn may attempt to prove that his or her discharge was done wrongfully. …