The payroll clerk you hired a month ago has sued your business for sexual harassment, alleging that her supervisor made unwelcome advances. The Equal Employment Opportunity Commission (EEOC) dismissed her claim as having no reasonable cause, but she sued anyway. Just defending the lawsuit could cost you $50,000 in legal fees, not to mention the time and effort required to gather evidence. If you lose, it could cost far more. The plaintiff has offered to settle for $10,000. What should you do?
Hundreds of entrepreneurs would lean toward paying the settlement just to cut their losses. And that's what a new breed of con artists is counting on. Michael D. Karpeles, an employment attorney with Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz Ltd. in Chicago, explains that professional plaintiffs change jobs frequently with the chief intent of finding a grievance and threatening to sue. "Seeking out potential litigation is a full-time job for chronic suers, who threaten legal action whenever they think there's the slightest hint of provocation that could result in a cash settlement," Karpeles says. "It doesn't matter if there's a legitimate claim; the perceived threat alone is often enough to prompt some companies to settle."
It's difficult to track these people or gauge the prevalence of their scam because many agree to a quick settlement without ever filing formal charges. Even when they do file a lawsuit, a settlement agreement would effectively hide the matter from public scrutiny. After all, one reason companies are so eager to settle is their desire to avoid negative publicity. However, some statistics from the EEOC provide a hint of the growing problem. In 1992, 33 percent of the 10,532 resolved sexual harassment claims filed with the EEOC were classified as having no reasonable cause. By 1998, the number of resolved sexual harassment claims had ballooned to 15,618, and 42 percent of them were classified as having no reasonable cause. Likewise, EEOC statistics for 1998 show that 61 percent of the 15,191 charges of age discrimination and 70 percent of the racial discrimination charges had no reasonable cause. You can see the potential for abuse.
"People sue knowing it's cheaper for the company to settle and pay $15,000 rather than spend $30,000 and win," Karpeles says. "Employers sued on meritless claims have to choose between their principles and their pocketbooks." Such scams are especially rough on small businesses, he adds, because they can't afford to defend themselves against frivolous lawsuits.
Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.