By Howard Levitt
What economic issues are at play when an employer considers firing an employee? And what economic blunders are habitually made?
But, if not, consider what building up a case actually costs.
Let us take the average employee, earning $70,000 a year, 45 years of age and employed for a decade. The cost of termination will be 10 to 12 months less what they earn — or what you can prove they should have been able to earn — in those 10 to 12 months.
With the job market hotter than it has ever been throughout much of this country, that employee will likely be re-employed in less than six months at a comparable or greater remuneration. Since wrongful dismissal only compensates for an employee’s actual losses, your cost of dismissal would realistically be $35,000, likely even less.
This assumes that you do not foolishly offer 10 or 12 months’ pay in a lump sum but, instead, do what the courts do and pay the employee only until they obtain another job, up to a maximum of those 10 to 12 months. And, if they get another job before that period’s expiry, you pay the difference for the balance of the time.
But what if you decide to try to build up a case? No case is created in a fortnight.
So let us assume you provide a series of warnings and then fire the employee three months later.
That has just cost you $17,500 in additional wages as well as the time of management monitoring performance and building up the case rather than performing productive work (call that $10,000 more). On top of that are the costs of retaining an inefficient employee for those three additional months. Then there are the opportunity costs in lost profits or sales from having a weak employee for those additional months.
After the three months trying to build up a case, you then let the employee go. As those who have tried it know, it is very unlikely that you will have any greater case for cause than you had initially. Likely, knowing their job was on the line, the employee will avoid making any major new mistakes. Most employees, after all, can white-knuckle it for three months or so. But co-workers’ morale is affected as they see what is going on and hope that it does not, one day, happen to them. Those morale issues create additional costs.
Assuming you still do not have cause, you still have to pay the employee the same severance you would have paid three months earlier before you had all of those additional expenses.
But what if, instead of simply paying out, you make the mistake many companies make and call in an outside investigator to determine whether you have cause. Whatever the investigator decides will have absolutely no impact on the court’s evaluation since the investigator’s view and report is legally hearsay and the trial judge must and will make their own determination after observing the witnesses directly. The investigator is not even a proper witness at trial. The employee might also now be able to argue that the fact of the investigation caused unnecessary mental distress and embarrassment and sue for even more.
But even if the employee does not profit from the fact of an investigation, outside investigator’s bills are often close to $100,000. All this unnecessary expense for an employee who you could have dispensed with for $35,000 or less months earlier without any rancour, distraction or energy.
Let us assume that you argue that you have cause or fire without cause but offer an amount less than what a court would award and the employee sues.
If you fire for cause in bad faith, the employee can recover additional bad faith damages and, sometimes, punitive damages. But what if you abandon the idea of arguing cause, lick your wounds, make the employee an offer but the employee still sues for and obtains more?
In that event, you still have to pay the employee what his case is worth, $35,000 in my example but, on top, you also have to pay all of your lawyer’s fees, which could easily be $50,000 to $100,000 if the case proceeds very far toward trial and half of the employee’s lawyer’s fee, or, say, another $25,000 to $50,000.
You get the picture. A case that would have cost about $35,000 if you had just fired them when you realized it would not work out, ends up costing you roughly $140,000 to $215,000 plus another $100,000 if you bring in an outside investigator and even more money if you argue cause in what the court believes to be bad faith. In short, not terminating when you realized the employee was not going to make it has caused you a minimum of $145,000 in wasted dollars if there is a lawsuit that proceeds through many steps and potentially up to $400,000 — more than ten times what you could have resolved the case for when you first determined that this employee was not “a keeper.”
But not only is the employer worse off. In my example, the employee would have received $35,000 if they were fired initially. But now, they will have to pay, from that $35,000 considerable legal fees on top of the employer’s portion of their costs, which will take a large portion of their settlement. The lawyers do well, the investigators do well but the parties, well, not so much!
I am not suggesting that employers simply offer significant settlements immediately — some reasonable upfront negotiations will usually save money and not incentivize employees to sue.
But the cost of fruitlessly trying to build up a case and then taking it to litigation is the business equivalent of fool’s gold.