From the July 2002 issue of Investment Advisor • Subscribe!

When Good Employees Go Bad

How to respond when nice employees turn nasty, plu

I'm sure you've heard employee horror stories. Maybe you even have some of your own.

Consider this one: A few years ago, one of my coaching clients hired a new employee who seemed like a dream come true. She was smart, with a master's degree in finance. She managed money like a pro, set up systems to rebalance portfolios, and generated all the quarterly reports for the firm. Over time, however, her demeanor changed, and pretty soon, to be blunt, her attitude stank. She was disrespectful and tried to bully the advisor. She pushed her responsibilities off on other people while at the same time taking more and more time off.

The advisor was a caring person and tried to find ways to improve her outlook toward work. He bought her a membership to an expensive gym, gave her Friday afternoons off, and created a very attractive bonus program for her. In many cases, he adjusted his schedule to accommodate hers.

But no matter what he did, he couldn't make her happy, and her "toxic attitude" started to spread to his other employees. Finally, one day, all three of his employees quit simultaneously; she had convinced the other employees to leave together. Needless to say, this almost destroyed the advisor's business. It took him over a year to recover financially; emotionally, he is still hurting.

The Extortion Artist

Another advisor that I know had a situation that turned out much worse. The employee she hired seemed intelligent, outgoing, and fun. While it soon became apparent that she was always late to work and had a lot of excuses for not doing her job effectively, she was friendly and seemed interested in doing a good job.

After she had been working for about a year, however, the employee started to try to dominate the office. She gossiped, told lies, and tried to drive a new employee out of the business. The advisor tried to coach her and point out areas that she could improve on, but the employee consistently denied the problems. Things continued to spiral downward as the employee became belligerent and argumentative, and spent most of her time playing on the Internet.

Just as the advisor was about to fire her, the employee announced she was pregnant. Most states have laws regarding "at-will employment," which allow you to fire an employee whenever you wish for no specific reason. However, when an employee becomes pregnant, she becomes a "protected employee." At that point, you may no longer fire her at will, but must have "good cause" for doing so. (Check with your attorney for details. This is a cautionary anecdote, not legal advice.)

Apparently, this employee had been getting coaching from a trial attorney who specialized in wrongful termination lawsuits, and the employee was trying to get fired so she would have a case against the advisor. Finally, at long last, the advisor caught the employee committing a crime, and fired her for just cause.

Much to the advisor's surprise and dismay, however, the ex-employee lied about what had happened, and sued for wrongful termination and sexual harassment. In the end, it cost the advisor hundreds of hours and almost $100,000 in legal fees and settlement costs to resolve the issue. The fact that the advisor had done nothing wrong didn't protect her. If she had taken the case to court, the legal fees alone could have been more than $75,000--and she'd still have run the risk of losing and having to pay the ex-employee's legal fees as well as a potential six-figure judgment. The advisor decided she couldn't afford that risk.

A Word on Harassment

One of the big areas of liability as an employer is sexual harassment. This is a very vague term, and since no one seems to be able to define what it is, employees and attorneys can sometimes create causes for action where no such harassment actually existed. If one of your employees feels uncomfortable with something that you or one of your other employees said, that could be considered sexual harassment. This is a very strange area of law because it's not based on your intentions or what you actually did, but rather on the subjective perceptions of an employee.

If you fire problem employees, their perceptions of what you said and how they perceived it can sometimes mysteriously change after meeting with their attorneys. The way that the laws are structured mean that you are at tremendous risk every time you hire or fire someone. If your employees have bad intentions, they can sometimes use the legal system to extort money from you, even if you do everything by the book. And the more successful you are, the more likely you will become a target of an aggressive attorney and a disgruntled ex-employee. Attorneys don't take a case on contingency because it's a good case; they take it because they have a willing plaintiff and a well-heeled defendant.

So what can you do? There are four key strategies that will help you to protect your financial security from employees with bad intentions.

Strategy #1: Create a Business Entity

The first line of defense is to operate your business as a corporation or LLC. Most employee complaints must be filed against the employer. If you have an LLC or corporation, that means your company will be sued, not you. If you operate as a sole proprietor, you will be sued personally, which exposes your entire net worth to a judgment. Thus, if you are not operating as a corporation or an LLC, I recommend it. Nevertheless, please note that you should check with your attorney and compliance officer regarding this matter, because there are some sticky issues around the whole business of a registered representative incorporating. An LLC may be the best answer.

Strategy #2: Screen Out the Bad Apples Early

Years ago, I worked with a real estate syndicator, helping him acquire properties. His mantra about property acquisition was, "Better to let a good one go by than to get stuck with a bad one." I feel exactly the same way about employees. Most employers spend more time buying a copy machine than they spend hiring a new employee. You need to develop systematic processes to screen out the bad ones and hire the good ones. There are a couple of psychological profiles that will help you screen out the turkeys and identify the diamonds in the rough. Pinkerton, a company in the Securitas Group, offers two psychological assessment tools that I have found to be both excellent and inexpensive: the Stanton Profile and the Stanton Survey. We use these two profiles as an initial screen for potential employees. Pinkerton found that there is more theft from within companies than there is from without, so it developed these surveys to help you pre-screen employees.

The Stanton Profile provides insights into four key inner motivations in potential employees: service orientation; adaptability; responsibility, and work motivation. We only consider candidates that rate in the top 50% in all categories. This system compares the person you are profiling to a database of employees that have been previously profiled. It helps you to identify people who like to work, are adaptable, are service-oriented, and are very responsible.

The other Pinkerton offering that we use is the Stanton Survey. This profile measures an applicant's honesty and compliance. Although this scale ranges from zero to one hundred, we have found it is very difficult to find people who rate over 25, our firm's cutoff point. It seems that people who are applying for bookkeeping positions do especially poorly, and obviously, these are not people that you would want in your business.

Clearly, people can work these tests to their advantage, but they are worthwhile starting points.

Each of these profiles costs $15. You can reach Pinkerton at 800-232-7465 or 888-774-9600, or find out more at www.psg-pinkerton.com. I usually buy these five or ten at a time and then keep them around so that we have the tests when we need to hire someone new. You call the company with the raw scores to find out how the prospective employee rated on a 100-point scale.

Strategy #3: Insure Thyself

The third way that you can protect yourself and your business is to buy Employee Practices Liability Insurance. My insurance agent showed me a policy with $1 million worth of coverage for only $1,000 per year. However, there is a $25,000 deductible.

This type of insurance usually allows you to fight a suit or settle, so you have a choice of how you resolve a problem and most of the money will come out of someone else's pocket. If you have employees, I highly recommend that you call your casualty agent and check out what type of Employee Practices Liability Insurance he or she offers.

We all have medical insurance, coverage on our cars and homes, and general liability for our businesses. But this is an emerging area of liability that many financial advisors are not yet aware of. If you work with business owners and professionals, you need to make sure they are not exposed in this vulnerable area as well.

Strategy #4: Outsource Your HR

Employment laws are very complex and constantly changing. An attorney I know who specializes in this area told me that it is almost impossible to be fully in compliance. One solution to this dilemma is a Professional Employers Organization, known in the trade as a PEO. This industry has evolved out of what used to be called "employee leasing" into a legal concept of "co-employment." Under this arrangement, you are the "special employer" and the PEO is the "general employer." You essentially outsource all of your payroll and human resources to an organization that is expert in this area.

The professional employers organization provides the HR functions, helps you if you have legal questions, becomes an ombudsman for your employees, acts as a neutral third party if you have disputes with employees, and conducts sexual harassment seminars and investigations, if needed. Because they employ thousands of people, they also offer group benefits like medical insurance and 401(k) plans at much better prices than you can typically get as a small business. You can purchase just the benefits you want from a menu.

We use a PEO in our company that includes Employee Practices Liability Insurance in our contract. My deductible on that plan is only $10,000 per year, so it is better than the commercially available insurance.

According to PEO.com, a referral agency for professional employers organizations, PEOs are now growing at more than 35% per year because of the complexity of being an employer today.

We changed from a payroll service to a PEO over a year ago, and my employees really enjoy the benefits. It only costs you a small amount of money per month per employee, and because the PEO often can get you discounts on workers' compensation insurance, the net cost to you can be minimal. If you have employees, I highly recommend that you consider working with a professional employers organization.

Having great employees that work together in harmony, are responsible, enjoy working, and are service-oriented is the ultimate goal for many successful financial advisors. By utilizing the techniques I've outlined, you can protect yourself from the bad apples while providing a better work environment for your good employees.

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