Employee Lawsuits: The Top 3 Risks Faced by VC’s

This is the fourth installment of Founder Shield’s VC-Focused series. Last week, we reviewed some examples of lawsuits from your investors and how you can protect yourself. Be sure to also check out our introductory post as well as our discussion of the impact of regulatory investigations and the insurance policies that will help you stay afloat when the SEC takes a particular interest in your operation.

Not even the most prestigious and successful VC’s are immune from angry workers. Regardless of your employees’ salaries, tenures, titles, or levels of education, it appears to be a fact of life that disputes — and occasionally criminal behavior — will occur in the workplace. Oftentimes, these disputes have the very real potential to evolve into bitter employee lawsuits.

Employment law is tricky, so we advise you to review your company’s procedures and exposures with a lawyer who is familiar with your jurisdiction. Hopefully this can at the very least serve as an introduction to some of the things you should be mindful of as an employer. Among the various forms of employee lawsuits, three of the big ones stand out from the rest:

1) Discrimination

This is far and away the most common claim made against an employer, due in no small part to the number of ways in which an employee can be discriminated against. Common allegations include discrimination based on gender, race, national origin, religion, age, weight, sexual orientation, pregnancy, or medical history. One relatively new form is discrimination based on employee’s genetic information. The thread tying all of these offenses together is the common principal that one of your employees felt at some point that their rights had been infringed upon. Especially in situations that end with the employee leaving the company — whether voluntarily or involuntarily — this sentiment can drive an employee to turn to the courts for restitution.

Ellen Pao’s employee lawsuit against multi-billion dollar VC Kleiner Perkins Caufield & Byers (KPCB) serves as a good example of what can go wrong in a workplace and how expensive that can be. Ms. Pao filed a lawsuit alleging gender discrimination in her treatment at the firm and in her subsequent termination. KPCB responded that Ms. Pao was unqualified and was fired based on merits. At the end of the very contentious and very public trial that followed, KPCB revealed the amount they claimed to have spent on legal fees leading up to and including the twenty-four day trial: $970,000. Another number to note is the amount that Ms. Pao demanded KPCB settle for in order to prevent her from appealing: $2,700,000.

A common trend with discrimination claims is copycat lawsuits. Let’s say for instance that one person is legitimately discriminated against and is thereafter terminated from employment. His or her supervisor has committed a wrong that, for the purposes of illustration, is clearly and undeniably a case of discriminatory behavior and everyone in the group knows it. The victim takes the supervisor and the company to court, the company’s Employment Practices Liability Insurance carrier pays for the defense costs and settles out of court for the employee’s salary plus damages.

It isn’t long before the entire company hears that one of their former coworkers just walked away with a $150,000 settlement as restitution. A month later, another employee from a different group within the company is fired. While perusing LinkedIn for some life-lines, this employee suddenly has a thought: “If he/she was discriminated against, then maybe…” and you can guess how the rest of the story goes. It is not rare for one or even two separate ex-employees to try to fraudulently ride the coattails of another persons misery (and subsequent monetary settlement) in hopes of mitigating some of the damage from their termination.

2) Harassment

Harassment is generally defined by insurers as inappropriate behavior that leads to a threatening, objectionable, abusive, or hostile workplace for an employee. Sometimes harassment is clear-cut and sometimes it is more subjective, but all harassment claims hinge on the experience and opinion of the alleged victim — the key is how the behavior made them feel, not how it was intended or how it was perceived by others. Whether this is sexual in nature or otherwise, employees who experience harassment by another employee or supervisor are liable to launch an employee lawsuit, and oftentimes rightfully so.

The suit filed against a since-resigned executive at CMEA Capital makes allegations that serve as an extreme and disturbing example of what can happen in theory when the wrong person is put in a position of power, but there are several cases throughout history and across industries that have exemplify the prevalence and severity of these offenses.

People in positions of power are predisposed to abusing that power. Not to say that all people in positions of power abuse it; far from it. There is just something ingrained in the human psyche that can drive certain people to do bad things when they have too much power and too little accountability. No doubt you are aware of the infamous and influential Stanford Prison Experiment conducted by Dr. Philip Zimbardo. A mock prison setting is, of course, at the extreme far end of the authority spectrum, with the office of a VC (hopefully) far off into the distance, deep in the middle-ground and beyond.

That said, the lessons learned by Dr. Zimbardo apply in varying degrees to nearly every aspect of life involving one person being able to tell another person what to do. Accountability is important, as are established reporting processes, a culture of mutual respect, written guidelines, regular training, effective oversight, open-door policies, anonymous reporting, and careful vetting of prospective employees. None of these are fool-proof preventatives, but they will certainly help to lessen the likelihood of an employee suffering harassment and injustice in the workplace.

3) Breach of Contract and Wrongful Termination

These types of claims are less common but by no means less severe. If you ask your employees to sign a contract, you are certainly ensuring several protections for yourself as an employer (non-compete, performance standards, minimum tenures, etc.) but two parties are bound by that contract: you and them. You may very well be providing yourself as much liability as you are protecting yourself with an employment contract. Bear in mind also that a verbal contract can be enough to justify litigation from an employee, or at the very least force you to hire an attorney. Many companies use an “at-will” statement in their offer letters and employment agreements rather than demanding a contract, but even these are not iron-clad defenses against an employee lawsuit alleging wrongful termination. If you find yourself facing such a lawsuit, it’s crucial to know what to do if an employee sues you.

Laws regarding these claims vary from jurisdiction to jurisdiction, so it is important to check with your lawyer to see exactly what you can/can’t and should/shouldn’t do in terms of making agreements with employees and severing these agreements.

The more you pay…the more you pay

The double-edged sword of recruiting the most talented professionals available and compensating them accordingly is that the generous salary you offered the employee will be used as a baseline for deciding damages during an employee lawsuit. And if you happen to be one of the many VC’s to call California or New York your home, your chances of an expensive judgment against you are elevated due to the plaintiff-friendly nature of the states’ legal systems. In the event of a wrongful termination judgment against your firm, you could be on the hook for the plaintiff’s back-pay, remaining salary, legal expenses, benefits, bonuses, commissions, potential raises, as well as other awards such as punitive damages.

One way to protect yourself is with an EPLI policy. With one of these in place, the insurance company will step in to pay defense costs, judgments, and settlements stemming from an employee lawsuit. Due to the potential severity of these suits, this protection can quite literally mean the difference between the success and failure of a firm.

To sum up…

As a leader, you can take every preventative step imaginable — making careful hiring decisions, encouraging a culture of acceptance, punishing bad actors, issuing counsel-reviewed policies, procedures, and agreements, conducting regular training sessions (the list goes on…) — and the possibility of an employee lawsuit is still out there. It is impossible to micromanage in such a way that prevents every discriminatory or hostile behavior from taking place. What you can do is continue a best-practices mentality from the top down and talk to an insurance professional who can set you up with a policy that protects you and your firm in the event of costly litigation.

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