It’s a Legal System, not a Justice System: When to Settle a Small Business Lawsuit

Some 15 million lawsuits were filed in the U.S. during 2011, which works out to a new lawsuit every two seconds, or one for every 12 adults.

Americans are fairly litigious people, but that’s still a lot of legal activity.

And unfortunately, small business owners are among the most vulnerable to these actions, paying about $20 billion each year in legal liability costs, according to the U.S. Chamber of Commerce’s Institute for Legal Reform.

But enough with the scary stats. How does a small business owner cope with the reality of operating in a lawsuit-happy economy?

An Ounce of Prevention

It’s probably obvious that you should take great pains to acquire quality legal advice, both when and before you need it. And that covers every facet of your business. But it’s worth noting that many, if not most, small business lawsuits filed involve some sort of personnel matter, so confer with your lawyer to make sure you have compliant human resource policies in place.

Employee-generated lawsuits tend to come from one of these areas:

  • Injuries at Work

According to the Occupational Safety and Health Administration (OSHA), nearly 3 million non-fatal work-related injuries and illnesses were reported in 2011. That’s almost four incidents for every hundred employed individuals in the U.S. More injuries are reported in higher-risk industries (construction, mining, agriculture, etc.), but accidents and injuries can happen in nearly any work environment.

You should have liability insurance to cover the expenses related to workers getting hurt on the job. But you might be vulnerable to a business lawsuit if it can be shown that your negligence caused the injury.

  • Discrimination

Discrimination involves unfair treatment of an individual – usually an employee or job applicant – relating to distinguishing characteristics like race, age, gender, religion, sexual orientation or disability.

The Equal Employment Opportunity Commission (EEOC) investigates discrimination cases.

  • Harassment

Workplace harassment includes not only incidents of a sexual nature (inappropriate comments or touching), but also other actions like bullying and threats of violence. Harassment complaints can be filed against a manager, supervisor, co-worker, or even a client or customer.

You could be held liable if you were aware of the situation and failed to stop it.

  • Wrongful Termination

Wrongful termination refers to when an employee is fired unlawfully. For example, if you fire an employee for taking time off under the Family and Medical Leave Act, or for work missed due to military service obligations, those actions would probably be considered wrongful terminations.

If found guilty of wrongful termination, your company could potentially be held responsible for the ex-employee’s lost wages and, in some cases, punitive damages.

When to Settle Business Lawsuits

If, in spite of all your efforts to prevent it, you find yourself named as a defendant in a business lawsuit, here’s what you need to remember:

It’s a legal system…not a justice system.

Ouch.

Sorry, but it’s true. You knew it anyway, although maybe you’ve never heard it put quite that bluntly before.

It’s a legal system. If justice happens to happen, that’s great, but the legal system is there to employ lawyers and judges and case workers and bailiffs and paralegals and administrative assistants and clerks and parking lot attendants and hundreds of other hangers-on that you’ll probably never see.

So view the process – and the system – for what it is. Many times, that means cutting your losses before they get out of control, and often that means settling the suit out of court. Settling doesn’t mean you were wrong, or that you lost, it just means that it’s worth a certain amount of money to get the matter behind you. (Besides, most suits – around 90% by some estimates –are settled, and never go to trial.)

Hopefully, your lawyer will talk to you early in the process about the pluses and minuses of settling a suit and putting your full attention back to running your company, but here are a few things to consider.

  • The cost of attorney’s fees – and rates of $450 to $500 an hour are not uncommon – can have significant impact on your cash flow. And most small companies don’t have a legal defense category in their budgets.
  •  Protracted business lawsuits can take a negative toll on your energy and can hurt morale at the office.
  •  Negative publicity from a business lawsuit, no matter what industry you’re in, can hurt your company and its brands.

Tip: Resolving a matter, especially an employee-related issue, before a suit is even filed can be highly effective. Alert your lawyer at the first sign of trouble and discuss this option.

In determining when to settle and for how much, make sure you account for not only what you didn’t have to pay in terms of legal fees, court costs, and a potentially larger payout to the plaintiff, but also for the indirect costs of distractions related to the case and time spent away from more productive tasks, the drain on your emotions, and the uncertainty of not knowing how the matter will be resolved.

The bottom line: You’re often better off finding a lawyer you trust and having him cut a deal that might not be perfect, but is at least one you can live with.

Image courtesy Cochise County Courthouse

Let MP Star Financial explain how factoring can help you get a better handle on your company’s cash flow management. Call for more information. (800) 833-3765, extension 150.

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