When Good Employees Go Bad

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