What Small Business Owners Should Know About Wrongful Termination Lawsuits

Employment discrimination and wrongful terminations are one of the most common types of lawsuits filed against small businesses. These violations can sometimes occur due to process mismanagement or lack of understanding of relevant laws, but it’s important for business owners to remember that intent doesn’t necessarily matter in these cases.

As for the outcome? The average claim amount received by terminated employees is $37,200, according to Lawyers.com, although in many cases, award amounts can range from $5,000 to $80,000. Many of these claims are settled by employers rather than challenged in court to avoid damage to the company’s reputation. Employment Practice Insurance can help defray financial costs but cannot shield you from public embarrassment.

Avoiding a wrongful termination claim against your company can be challenging, especially when faced with so many regulations. Regulatory compliance, internal consistency and good resources are your best defense.

Applicable laws

It’s important to know that both state and federal laws may apply in a wrongful termination claim, and there’s seldom consistency when it comes to state law. Further complicating the matter, a wrongful termination claim can be filed under several different federal laws.

Most claims are filed under the Equal Employment Opportunity Act, which expressly prohibits discrimination against employees, but other laws and acts may also apply depending on the circumstances of the employee’s dismissal. These include:

  • Title VII of the Civil Rights Act of 1964
  • Age Discrimination in Employment Act
  • Occupational Health and Safety Act
  • Equal Pay Act
  • Americans with Disabilities Act
  • Family and Medical Leave Act
  • Genetic Information Nondiscrimination Act
  • Fair Labor Standards Act

With so many laws, rules and regulations that must be addressed, it’s important for employers to have a system to manage compliance.

Types of claims

An employee can file a wrongful termination claim based on discrimination due to race, religion, disability, age, pregnancy and more.  These lawsuits can also result from:

  • Breach of Contract
  • Disparate Treatment
  • Constructive (Provoked) Discharge, i.e. a  hostile work environment
  • Inconsistent Application of Company Policies
  • Retaliation

It’s important to note that retaliation claims are on the rise. In 1997, these claims made up 22 percent of all workplace discrimination claims, but that number grew to almost 45 percent of workplace discrimination claims in 2017, according to a report by New York Public Radio. While these numbers are not tracked in terms of wrongful termination lawsuits, business owners must be aware of the risk of these claims in their dismissal process.

Preventative actions you can take

There are many things you can do to try to avoid being sued as a result of firing an employee, but it all starts with your policies and procedures. Review these documents to determine if they are consistent with your actual practices. If not, adjust either the documents or your actions to establish consistency. While you’re reviewing these documents, take time to confirm that they’re compliant with state and federal employment laws.

Create a worksheet that includes all necessary steps to be taken during the termination process, including required documentation. If your policies include a probationary period or opportunity for corrective actions, be sure that the steps on this worksheet reflect these options. If a plan for corrective action is put into place, have the employee sign a statement that he or she understands that their performance is lacking and that they’ll be dismissed if these issues are not improved.

Before terminating the employee’s employment, have an impartial person, such as a human resources executive or other knowledgeable individual, review the documentation to attest that you have a legitimate business reason for the decision.

When you inform the employee that their employment is being terminated, be clear and make a short statement that he or she is being dismissed “for cause” but do not add any specifics. It could be an emotional meeting, but remember that staying professional can be key to reducing the risk of a wrongful termination lawsuit.

Resources to improve compliance and reduce risk

As a small business owner, you may not have the time or resources to become an expert in human resources, hour and wage, OSHA and other laws. For this reason, you may wish to use a Professional Employer Organization (PEO). When you create a relationship with a PEO, you receive, among other benefits, their expertise in both state and federal HR compliance. This includes everything from the interview process to voluntary or involuntary termination of employment.

Purchasing human resource software is another option to help manage a variety of issues, including termination of employment. There are several systems designed specifically for small businesses, but not all of them include regulatory compliance. Some even come with their own apps.


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