Profits Down? Your Risk Aversion May Be High


Profits Down? Your Risk Aversion May Be High.

by Jonathan Segal on October 5, 2011

There has been an astronomic increase in employment litigation. The result is that there is almost an apoplectic fear of litigation. Indeed, because the cost of litigation can be so high, sometimes we try to avoid risk at all cost.

But we cannot avoid risk. It is not a question of risk avoidance, but rather risk selection.

In my experience, here are the top three mistakes that are sometimes made in managing risk and can result in buying one risk to avoid another.

  1. Failure to distinguish between what is illegal and what has legal implications. Terminating an employee because she complained about harassment is illegal. Terminating an employee solely for poor performance but who also complained about harassment is not illegal but has legal implications.

    Of course, you can avoid the legal risk (i.e., retaliation) by not terminating the employee, even if her behavior clearly warrants it. But what is the message that you send your workforce? Complain about harassment and insure your job?

    Where something is unlawful, we cannot do it. But where the motivation is clearly lawful but there is risk even so, we need to consider the business and employee relations risks in calibrating how much legal risk to take.

  2. Failure to recognize when it is only a question of timing relative to inevitable risk takingThere are times when it is clear that an employee is not going to cut it. But we know that the employee hangs out in plaintiffs’ bars.  So we keep giving employees warning in the hope that the employee will leave on his own.

    Deferring the inevitable does not always reduce the risk. Often it increases the risk by giving an employee time to make a protected complaint or disclosure so that the inevitable appears retaliatory.

    Plus, again, what are the financial costs of hanging on too long? How much money are you losing by keeping the substandard employee? Wouldn’t you be better off with a severance package and a stellar replacement than retaining mediocrity?

  3. Failure to consider the legal risks in avoiding legal risksIn some cases, avoiding one legal risk buys another legal risk. In this regard, we cannot consider only employment risks in managing legal risks.

    For example, you are a health care provider and have an employee who falls asleep on the job. You know she is litigious. You don’t fire her to avoid an employment claim. She falls asleep again and a patient dies. Wrongful discharge or wrongful death? That is the question.

    Or, you have an employee who is posting information that the NLRB may consider protected. The employee also is posting information that the SEC may consider insider information. Want to tango with the NLRB or the SEC? The dance is inevitable; pick your partner.

Bottom line: we cannot avoid risk; we can only manage it. Sometimes the biggest risk of all is to think we are taking no risk at all.