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When a Small Business Owner Gets Sued by a Former Employee

January 29, 2013

Many small business owners have struggled in the past couple of years and have had to make the painful decision to layoff employees. An unfortunate side effect has been an increase in the number of employment-related legal claims.

It’s no surprise that a depressed jobs picture is prompting more people to file employment claims with federal, state, and local government agencies, and commence lawsuits against their former employers. The number of people who were laid off from steady jobs (those that the worker had held for more than three years) doubled between January 2009 and December 2011 compared to January 2005-December 2007, according to data from the Bureau of Labor Statistics. Those displaced workers found it harder to find new jobs and of those who did in January 2012 only 46% had salaries that equaled or were higher than their previous jobs, the BLS reported.

A wrongful termination case offers the laid off worker hope of some additional money – and often a way to vent his or her anger – even though many entrepreneurs say that letting people go is the most difficult dilemma they face. Often trimming their labor force is the only option to keep their businesses afloat. But if trying to make the numbers stack up was not stressful enough, being hit with a lawsuit by a former employee is even more traumatic.

If you know you may have to make layoffs it is worth thinking about adding some features to your existing small business insurance to prevent disgruntled former employees from wreaking havoc on your small business. They can steal equipment from you or one of your clients or even introduce a virus into your IT systems, which could result in the loss of vital information. It’s possible to upgrade your business owner insurance to protect your business from fall-out because of any of these threats .

The first thing to do if you receive an attorney’s letter is not panic. It’s understandable you might be tempted to ignore it, but that isn’t helpful. The problem is unlikely to go away; doing nothing about it usually makes it worse.

The second thing to do is to not get mad. It might make your blood boil, because being hit with a potentially costly lawsuit is absolutely the last thing you need when your business is already struggling to keep its head above water.

You need to stay calm and objective – the future of your business might depend on your actions. Don’t handle a claim yourself if you have the right insurance to protect you. Instead, call your insurance company, and let them or an attorney call your former employee or their lawyer to argue or try to settle the claim. Leave it to the experts.