Employment Litigation: When Should Companies Consider Choosing Early Resolution Over Litigation?

For most businesses, claims filed by current or former employees are inevitable. Companies, especially those with particularly large workforces, must balance various interests when deciding what to do when faced with litigation, or the threat of litigation. Should they settle early and avoid potentially unnecessary legal costs, or should they litigate for at least some period of time to dissuade other employees from believing they too might be able to get a quick payout? Striking the right balance is a constant challenge for companies.

So, when might early resolution be preferable to litigation?

Reasons Companies Choose Litigation Over Early Resolution

When a dispute involving an employee arises, there are various reasons not to consider early resolution and to choose litigation (or arbitration). First, a company may believe it has not done anything wrong; therefore, it does not want to consider settling purely based on principle. The immediate reaction is to hire a lawyer and defend against the claims.    

Many big companies believe that if they settle filed or threatened employee claims early, they may be incentivizing additional employee litigation. Companies do not want to get a reputation for settling, especially quickly, because it may increase the volume of litigation threats and encourage meritless claims. Instead, many companies believe that if they are willing to aggressively litigate employee claims, they will discourage other employees from suing.

Similarly, where an employee’s legal claim is based on an aspect of the business that could impact a large number of employees and create copycat suits (i.e., interpretation of the company’s bonus policy), companies might need to go to court to obtain a favorable decision to serve as a legal precedent to discourage other employees from bringing similar suits.

There is also one additional yet harsh practicality that can drive a company’s decision to litigate. In most circumstances, the employee has more to lose reputationally than the company, and the company has deeper pockets and the stamina to outlast the employee in a legal battle. Therefore, companies refuse to engage in early resolution believing that the threat of years of litigation will dissuade employees from suing.

The Downside of Choosing Litigation Over Early Resolution

However, choosing to litigate an individual employee’s claims has downside.

First, litigation lasts for years and can cost hundreds of thousands of dollars in legal expenses. Many employment litigations survive summary judgment; therefore, the only path to resolution is a trial and jury verdict or settlement. On the flip side, it may be possible to resolve a case early at a fraction of the potential legal spend.

Attempting to engage in some early negotiated dialogue with the employee may provide meaningful benefits to the company.

There are instances where an employee’s complaints might be easily addressed, but if ignored, they become more expensive problems to resolve.  As a mediator, I have seen many cases where had the company given a current employee an opportunity to be heard, the complaints could have been resolved relatively easily. But the company did not engage in any meaningful attempt to address the complaints, the employee felt ignored and hired lawyers, and the conflict quickly escalated. Once an employee retains a lawyer, there is often no going back. Their continued employment with the company becomes untenable because their lawyer often makes an economic demand in excess of what they originally needed to remedy the alleged wrong, their claims evolve to include retaliation and a company simply will not both settle the claims and risk future legal exposure by retaining them. The amount needed to resolve the dispute has now increased to compensate for the plaintiff’s attorneys’ fees and exiting the employee, and the company faces additional, incalculable costs due to the loss of personnel (and its own legal fees).

Early resolution, however, has the added benefit that it may allow the company and the employee to fashion more creative, individually-tailored solutions than what a court or jury verdict would award. For example, a terminated employee concerned about finding a new job may place meaningful value on receiving a positive, rather than neutral, employment reference, or a few extra months of company-subsidized health benefits. 

Aside from external litigation costs, litigation can put a significant strain on internal resources, including human resources, in-house counsel and other personnel who may be fact witnesses. In valuing a potential early resolution, many companies do not—but should—attach value to the time spent by those managing the litigation internally for the company. Most in-house counsel and employees within human resources have a never-ending to-do list. Eliminating one potential litigation provides meaningful value that should not be discounted. Moreover, for in-house counsel, exploring early resolution avoids having to justify the hefty legal fees that may appear on the balance sheet for years. Exploring early resolution—even if it’s ultimately unsuccessful—eliminates any doubt regarding whether the company could have avoided these legal costs and resolved the matter for less. 

Moreover, contentious litigation with a former or current employee may impact company morale and/or the overall culture, especially within that particular employee’s department. Similarly, a company that is embroiled in multiple litigations with current or former employees may develop a negative reputation, which can affect potential candidates’ desire to work at the company and the company’s competitive edge in the marketplace.

Furthermore, no litigation is without risk. Juries (and judges) are undeniably unpredictable. A company that chooses litigation must consider the downside of a potential negative verdict.

Finally, does refusing to engage in early resolution of employee disputes actually prevent or discourage additional employee litigation or threats of litigation? The reality is that the nature of litigation alone already discourages many employees from suing their current or former employers. Any responsible plaintiff’s attorney would caution a potential client that suing a current or former employer will likely impact their current and/or future employment prospects. For those employees who believe the company has wronged them, knowing that the company will litigate for some period of time does not usually dissuade employees who believe they have no other avenue for redress if the company refuses to consider early resolution.

Accordingly, early resolution may be a better option than litigation if there is a way to less expensively resolve the dispute.

Three Circumstances Where Companies May Particularly Benefit From Exploring Early Resolution

1. Before an employee commences litigation

Settling before an employee begins litigation provides the optimal opportunity to minimize costs, risk and disruption. The period of time before a lawsuit is filed—and particularly before an employee retains a lawyer—may be the most critical instance where cost savings should outweigh principle. Exploring early resolution options, such as mediation, offers meaningful benefits to the company. There is no dismissal of a public litigation that needs explanation, the settlement will be conditioned on confidentiality and the company’s balance sheet will likely not take as big of a hit as it would after years of litigation. This is true even where a company may view the legal claim as meritless; however, settling those types of cases require putting aside principle and striking the right balance between minimizing legal costs and not overpaying. In situations where the employee is a valued current employee, early resolution (before the situation escalates) also preserves the possibility of continued employment. Moreover, the earlier the parties engage, the greater the possibility that there may be a creative resolution tailored to address the employee’s particular interests that does not financially impact the company in the same way as a purely monetary resolution. 

2. Where the employee’s claims are individualized and personal in nature

There may not be as much upside to litigation when the dispute is individualized and personal in nature. If there is no novel legal issue and the outcome of the litigation depends on individualized fact-specific questions, obtaining a favorable verdict may not be as beneficial to the company because it would have little to no precedential value. While not settling demonstrates a company’s commitment to litigation over nuisance-value settlements, a favorable fact-specific verdict will unlikely dissuade another employee with different facts from bringing a similar suit.

Moreover, all litigation carries some risk of a negative verdict. Thus, settling rather than litigating may be more efficient, as the earlier a resolution is reached, the more money the company saves.

3. When the allegations create risk to a company’s reputation or ongoing business

There is a downside to protracted litigation in a public forum when the allegations could create risk to a company’s reputation or ongoing business. Where the allegations in the complaint are sensational or alarming in nature, litigating them for years could have negative consequences. Regardless of the outcome of the case, a company may suffer reputational harm or unwanted scrutiny by regulators, competitors, customers and current employees due to the public nature of the suit. There are circumstances where litigating to conclusion is imperative to clear the cloud of suspicion, but the company must balance the need for exoneration against the impact to ongoing or future business from protracted litigation and repeatedly being in the headlines. Moreover, the company will likely end up settling the case before trial to avoid the possibility of a negative verdict; it will just be more expensive at that time, and the company’s reputation will likely have already taken a hit.

Similarly, where early investigation indicates some flaw or mistake in the company’s processes, early resolution can provide a company with an opportunity to fix the issue internally before there is public scrutiny or the filing of additional suits. There is a small window of opportunity to turn a negative into a positive and create goodwill among employees.

In these three situations, finding opportunities to explore early resolution may save companies money in the long run; retain internal resources, including potentially valuable employee relationships; and minimize negative reputational and market harm. 

Disclaimer: The content is intended for general informational purposes only and should not be construed as legal advice.  If you require legal or professional advice, please contact an attorney.