ROGER H.SCHNAPP : Ending Employment Properly : Lawyer Tells How to Avoid Wrongful-Termination Suits

Nowadays, a company must think more than twice before firing an employee for a reason such as poor performance.

Although the U.S. Supreme Court last year sharply limited the amount of damages an employee can claim for being fired without good cause, lawyers and management consultants say the issue is still one that companies large and small need to be concerned about.

Newport Beach lawyer Roger H. Schnapp has defended hundreds of companies in wrongful-termination cases during the last two decades. His clients have included national companies such as Alaska Airlines, Hunt-Wesson Foods and Marriott Corp. as well as local firms such as Pool Water Products in Irvine.

Schnapp, 43, is a graduate of Harvard Law School and has served as in-house counsel for Trans-World Airlines, American Electric Power Service Corp. and American Airlines.

He was was recently named by Labor Secretary Elizabeth Dole to a two-year term on the Labor Business Research Advisory Council. The council provides input from business leaders to the Department of Labor and evaluates some of the government’s decisions from the perspective of corporate interests.

Schnapp recently sat down with Times staff writer Gregory Crouch to discuss how companies can avoid wrongful-termination suits.

Q. Do you have any statistics on the number of wrongful-termination suits and the typical damages that juries award the employees?

A. There have been a number of studies done. One showed that an employee has an 86% chance of winning in a wrongful-termination case if the case goes to a jury. The average award in California jury trials, according to a RAND Corp. study, was $647,000. That is about 18 times the average salary of the typical plaintiff in these cases--about $36,000. The best estimates are that about 25,000 wrongful-discharge cases are currently pending in the United States.

Q. Twenty-five thousand lawsuits does not seem like a big number, considering the millions of employees in the work force.

A. It is, though, when you realize that you could be looking at a half-million-dollar verdict against an employer, many of whom are small companies. Just one of these lawsuits has the potential for an adverse impact on the company’s ability to survive. And just the existence of the lawsuit can affect the company’s ability to get financing, because they have to go to the bank and explain that there is at least a chance that they could have to pay a half-million dollars in a wrongful-termination lawsuit.

It is very unusual today to find insurance policies covering wrongful termination. The insurance companies, which have sustained rather hefty payments under these policies, are now specifically excluding wrongful termination from a lot of general liability policies. So the money has got to be paid by the employer out of his cash flow and assets.

Q. Tell us about a recent case you found disturbing.

A. Well, a male supervisory employee was fired for exposing himself to his female subordinates and then making a derogatory comment. He was reinstated and received a verdict of about $1 million. The jury’s decision was that he deserved to be disciplined but that discharge was too severe.

Now, that’s obviously an extreme case. And that’s a case where the employer lost and had to pay money. In cases where the employer wins, the employer still has to pay substantial legal fees. So victory is to some extent hollow. But here was a case where the employer lost and had to pay not only the employer’s own legal fees but a substantial verdict. And that’s an example of a truly outrageous decision.

Q. Was it always this way?

A. Some time ago, you could fire someone, and if he sued you, you simply came to court and said you had never promised to give him employment for life and the case was dismissed--not because you had a good reason but because under the law you didn’t need a reason. The law changed and created what we call a covenant of good faith, or fair dealing between the employer and the employee--sort of an implied contract. Employers could no longer get the cases dismissed. So if you fired an employee for a very clear reason--let’s take theft--you had to go to prove the employee stole. This, under our legal system, requires a full trial, because an employee is entitled to have 12 jurors make that factual determination. So the major impact in the change of the law has been that we went from relatively inexpensive litigation from the employer’s standpoint to very expensive litigation, both in terms of legal fees and in terms of the time that’s required of an employer’s executives in defending these cases.

Q. What are some of the things a company can do to protect itself from being sued?

A. The company must carefully document the reasons it is terminating someone. Remember, our legal system guarantees the plaintiff a jury of his or her peers. The defendant--when it’s an individual versus an employer--does not really have his peers. The juries are made up far more of employees than of owners of businesses. So as a result, there have been some pretty surprising verdicts on both sides.

There have been senior managers who have been fired who have sued and come away with nothing. There have also been relatively low-level employees who have sued and come away with 20 and 30 times their annual salaries.

There was one case in Orange County involving a clerical employee who sued her employer, and she probably earned between $20,000 and $30,000 a year. She spent five years not working between the time of termination and the start of the trial. But an Orange County jury awarded her over $300,000.

So no matter how low-level the employee--this was essentially a clerical employee--it’s important that the employer document why the employee is being terminated. What we have to remember: this could cover anything from what we would call cause, such as theft or insubordination, to simply poor performance, which may be a borderline decision, or a layoff due to economic conditions. So in any of those situations, it needs to be documented. And the employer needs to be sure that employees are being treated consistently. So if you are terminating an employee for poor attendance, make sure you don’t have other employees whose attendance is just as bad but whose supervisors perhaps have a higher tolerance for poor attendance.

Q. You’ve said policies, employee handbooks and even recruiting practices can be used as evidence in a wrongful-termination suit. How so?

A. When an employee files a wrongful-termination lawsuit, there are a number of arguments he or she can make. One is that the employer has a policy or procedure that wasn’t followed.

For instance, if an employer says he will give an employee two warnings before being fired and those two warnings are not issued, the employee wasn’t treated fairly even by the employer’s own standards. Employee handbooks are often cited.

Besides policy and procedure, handbooks often contain what I call health-and-happiness language: “We’re delighted you came to work here. You have a brilliant future with our company. We expect you to work here for the rest of your life. We don’t fire people without a very good reason. We give our employees performance appraisals every six months.” The employee then comes to court and cites these provisions of the handbook and says none or at least some of the things were not done.

There is a lawsuit pending by a partner in a law firm based on the fact he was promised a congenial group of partners. His new partners were not congenial, as indicated by the fact they subsequently asked him to leave the partnership. He was promised he would be able to spend the rest of his career as a partner in this law firm. Obviously, that promise was not honored.

Q. Does that mean you shouldn’t have employee handbooks or written policies?

A. Some employers have opted simply not to have handbooks or written policies. Smaller employers have said they will deal with each situation on an ad hoc basis.

For most employers, the realistic option is to have a carefully drafted handbook without all of this health-and-happiness language. It’s important rules not contain language that is potentially harmful, such as “everybody gets three warnings” or “we have progressive discipline,” and then somebody punches a supervisor in the mouth and he comes in and he says “Well, I only did it once.”

Remember the employee who exposed himself? His argument was that this was one violation of the employer’s rules of conduct and should not result in termination.

Q. Can performance appraisals be used against an employer in court?

A. Yes. Supervisors often don’t want to have unpleasant discussions with employees. So what they end up doing is telling the employee that everything is fine. So when the employee is fired a year later for poor performance, the employee comes in and says, “Nobody told me my performance was poor until they called me into fire me.” It is obviously unfair for me to appraise an employee’s performance as poor in writing and place a copy in the employee’s file and then say to the employee, “Everything’s fine” simply because I don’t want to have a confrontation with him.

Q. If the employer has documented a case and made the decision to terminate the employee, what is the next step?

A. I normally counsel employers to sit down with the employee and arrive at a severance package that the employee believes is fair, as long as the employee is reasonable. Even that does not guarantee you won’t get sued, but it diminishes the likelihood. Perhaps the most important thing that an employer can do--which is somewhat self-serving for me because I’m an employer attorney--is to vigorously defend any lawsuit that’s filed, because that discourages other lawsuits.

Q. Just how much can a company spend defending a wrongful-termination suit?

A. I would say $50,000 at the low end of the scale. At the high end of the scale, it just depends on how complicated it gets, where the witnesses are located and how aggressive plaintiff’s counsel is. It can certainly range up to $500,000 for legal fees.

Q. Wouldn’t it be cheaper to settle some cases?

A. You can look at a particular employer’s history, and if an employee has filed a lawsuit and has either prevailed for whatever reason or has gotten a substantial settlement, other employees are very likely to file lawsuits. The reverse is also true. If an employee has gone through five years of litigation and come away with nothing, an employee who is fired subsequently is far less likely to file a lawsuit. And plaintiffs’ attorneys--particularly those who work on contingency fees--are far less likely to file a lawsuit against an employer that has a reputation for aggressively defending lawsuits.

Q. When should you settle?

A. Employers should consider settling a lawsuit if the plaintiff has a case. But you cannot make a cost-benefit kind of analysis with this, figuring it’ll cost me $200,000 to defend the lawsuit and $100,000 to settle it. You have to factor in that a settlement may trigger a whole host of additional lawsuits, each of which will now cost you $100,000. So it may be a better economic decision to spend the $200,000 on defense.

Q. Is it a good idea to have fired employees sign a release promising not to sue in exchange for their severance pay?

A. It is the opinion of most defense lawyers that those releases really wouldn’t withstand a serious challenge. The reason is that the employee is usually not represented by an attorney. The employee may feel coerced or at least say that he felt coerced in a termination situation.

But the advantages of the release are threefold: First, most people are honorable. So if they sign a release, they will honor it. The second benefit is that lawyers are less likely to take a wrongful-termination case if the first thing they have to do is get a release thrown out. The third advantage is that the release is going to come out during the trial. And when you get before a jury, there’s a chance that the jury will feel that a person who took money in return for promising not to sue and then turned around and sued you but kept your money is not a nice person.

Q. Every company is vulnerable to a forced layoff. How could this result in wrongful-termination lawsuits?

A. You get the threshold question, which is, “Did you need to lay off 100, or would 99 have been enough? And if you’d only laid off 99, would I have been the one laid off?” Beyond that, there are decisions that need to be made as to who gets laid off. Under a rational economic model, the employer would keep his best employees. And that does not violate the law so long as you can defend that you’ve kept your best employees. If you have a layoff, and the majority of people laid off, or a disproportionate number of people, belong to any minority group or are women or are over 40, you could be faced with a discrimination lawsuit. So it’s important to be careful.

Q. Is a layoff done by seniority less likely to result in lawsuits?

A. That’s right. Keeping your top employees is the best thing for the employer. But it is probably the system most likely to trigger a lawsuit. However--assuming there are no rules in existence that say we will follow seniority--you run a substantial risk of being sued no matter what you do. So the sensible thing is to do what makes good business sense. And if you do that, then at least if you get sued, you will have the benefits of a good business decision. If you do it the other way, you are gonna make a business decision you’re unhappy with, and then when you get sued, you’re going to be twice as unhappy.

Q. Certainly there must be instances in which people were fired for irrational reasons and they lost their cases. Isn’t that so?

A. I don’t mean to imply that all of these lawsuits are frivolous. Some of them deal with very real problems that the employer has failed to deal with.

The genesis of any laws or any new court decisions typically comes out of a situation in which an employer has acted outrageously. I think the problem is sort of the injustice of it all. There are employees who have been treated unfairly who have been unable to collect a dime. And there are employees who have been treated very fairly--for example, given a year’s severance pay, sustained no economic harm--who have collected substantial verdicts. The results we’re getting are not consistent with what most people would agree is the way things ought to be.

Q. If you have fired an employee and another company calls for a reference, what should you say?

A. Today there are substantial risks to answering reference checks. Say the employee was fired for theft and you said nasty things about him. The employee says not only did you fire me, but you then called me a crook, and you can’t prove I was a crook. Employers are now being forced to be a lot more circumspect in the references they give and in the public statements that they make.

Q. What should an employer do in that case?

A. What I advise my clients to do is to simply say that as a matter of policy, our company only furnishes certain information. We tell you that the employee worked here from date A to date B. And we tell you what the person’s position was. And beyond that, we do not comment on whether the performance was good, bad or indifferent.

Q. Final thoughts?

A. Don’t let the fear of lawsuits destroy your ability to manage the business. Recently, I was called in by a company that was contemplating a layoff, and the chairman of the board had done a quick analysis and concluded that if a certain percentage of the laid-off employees sued and a very small percentage prevailed, it could cost the company $5 million. And the president responded by saying, “We’ll save $10 million with the layoffs.” So it was still a good business decision. It’s better to terminate someone than to live with the problem of a bad employee or of too many employees.

Next week in Q&A;, an employee rights lawyer will discuss the options available to people who believe they have been wrongfully discharged.