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So You Hired a Dud. Here’s What’s Next.

So You Hired a Dud. Here’s What’s Next.

When it's time to fire an employee or contractor, make sure you follow protocol to avoid an employment practices liability lawsuit.

Tuesday, January 21, 2014/Categories: errors-and-omissions

One of the hardest things many small-business owners have to do is fire one of their employees. Emotionally taxing and fraught with liabilities, firing can be a minefield for potential lawsuits and charges of discrimination in addition to being just plain hard.

For these reasons, knowing the best practices for terminating employment is an important part of risk management. In this post, we'll go over…

  • Why employment lawsuits are more dangerous than you'd think.
  • When you should fire an employee.
  • How to fire an employee.
  • What to do about shoddy work performed by contractors or subcontractors.

More Common than You'd Think: the Dangers of Discrimination Lawsuits

Many small-business owners assume they won't be sued in an employment practices lawsuit, but it is actually one of the most common kinds of lawsuits. 75 percent of all commercial lawsuits are over employment disputes. And 40 percent of these lawsuits occur at small and medium-sized businesses.

Why are employment lawsuits so common? To understand this, it's important to remember that discrimination encompasses more than just discriminating against employees on the basis of race, religion, age, and gender (though that is a large part).

Employment practices lawsuits are often about whether an employee was unfairly punished, disciplined, or fired – and whenever “fairness” is involved, we’re talking about some serious gray area. If an employer doesn't adequately document an employee's shortcomings, the verdict might come down to a game of he said / she said.

Coverage note: Employment lawsuits are not covered by standard Errors and Omissions or General Liability Insurance. Only Employment Practices Liability Insurance, which is a special subtype of E&O, protects you from these lawsuits.

When Should You Fire an Employee?

With all the emotions surrounding firing, it's easy to lose track of the big picture: you need to protect your business and remember that a bad employee puts you at risk for an Errors & Omissions lawsuit.

A bad employee may do subpar work, weaken relationships with customers, and negatively affect the working environment. Any of these things can potentially cause your business to miss a deadline, mishandle a software bug, or make another error that could lead to a lawsuit.

It’s time to let go of an employee when they put your business at risk or create an unsafe or uncomfortable work environment and fail to modify their behavior after you address the problems.

How to Fire an Employee (and Avoid an Employment Practices Liability Lawsuit)

Firing an employee isn't easy, but there is a way to do it that can protect IT firms from an employment practices liability lawsuit. Here's how:

  • Use employment contracts to protect your liabilities. It’s vital to use contracts that specifically list the expectations you have for employees. In a lawsuit, you'll want to be able to show how the employee failed to fulfill their contract and job description.
  • Be upfront with employees about their struggles. If you've never warned an employee that they need to improve their work, they'll be shocked at their termination. This shock can cause them to look for explanations outside of their poor performance. Ultimately, this leads to lawsuits claiming they've been unjustly fired. To avoid this situation, long before you decide to fire someone, explain that they need to improve their performance. Document these meetings, give them a memo, and ask them to sign off that they've read, discussed, and understood its contents.
  • Have a standard protocol for evaluating employees. In your employee handbook (and yes, if you’ve gotten to the point of hiring employees, it may be time to draft a handbook), explain your expectations for employee behavior and performance. Refer to these guidelines in your consultations with the employee and during the final meeting if they are fired. 
  • Know your liabilities and legal responsibilities. The Equal Opportunity Employment Commission posts this employment practices guide for employers, explaining when they are liable for discrimination.
  • Know what you're going to say. Many HR experts recommend that you have a "script" before firing an employee. Write out exactly what you're going to say. Be clear about how the employee failed to perform, what benefits (if any) they will receive and for how long, and wish them well in the future. Have someone else in the room and ask them to take notes.

Important reminder: document everything. If you're sued, you'll have to provide evidence of the employee's errors and poor performance. You'll also have to provide documents outlining your company policy, evidence showing you enforce it, and documentation of any prior meetings you had about their performance.

For more on this subject, read the Small Business Administration's guidelines to firing an employee.

Hiring & Firing Concerns for IT Staffing Agencies

In our next blog post we'll discuss in detail what happens when a temporary employee or contractor hired from an IT staffing agency screws up on a project. Mistakes by a temp can end up costing both the employer who hired them and the IT staffing agency that recommended them.

Luckily, in most cases where a contractor or temporary worker messes up, Professional Liability Insurance (also called E&O coverage) can cover your legal expenses if the client sues you. But you might also consider suing the IT staffing firm that recommended the independent contractor.

The liabilities of using workers you haven't trained and don't have an ongoing relationship with are significant. For that reason, working with staffing firms that have good reputations and insurance coverage of their own is a good way to protect your business.


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