Average Cost to Settle a Wrongful Termination Lawsuit

Has your company ever faced a wrongful termination lawsuit from a former employee? How much do you actually know about employment-related claims? Let’s hope your answers to these questions are “No” and “Not much because I didn’t face any employment-related lawsuits.”

If that is the case, you are one lucky employer. The U.S. Equal Employment Opportunity Commission (EEOC) received 67,448 charges of workplace discrimination in 2020 and obtained $439.2 million for victims through settlements and litigations.

However, if you answered “Yes” to the first question, you are well aware of how tiring, expensive, and delicate these cases could be. Even if you are not the one making the staffing decisions – if one of your managers does something wrong, your employee can and will sue the entire company.

Here’s an example of how costly a wrongful termination lawsuit can be for an employer. Los Angeles County Superior Court jury awarded $6 million damages to an employee back in 2018 for being fired after returning to work upon a medical leave caused by a workplace incident. The employer later appealed and received a $140,000 reduction because of the employee’s earnings at another job after she was fired.

You can never know how an employee would react if you fired them. The best you can do is ensure that all your employment practices and procedures are legal and fair and that you and your managers treat all your employees equally.

If you are unsure what wrongful termination is and how to handle those cases, you should get all the help you can when dealing with one. Let’s have a closer look into these situations and explain how they usually work.

What Counts as Wrongful Termination?

According to U.S. labor law, most employment contracts are considered “at-will.” This gives the employer the right to terminate an employee at any point, without warning, and for any reason that is not illegal.

So what classifies as wrongful termination? Firing an employee based on one of the protected characteristics is considered discriminatory and gives ground for a lawsuit. There are nine protected characteristics, some of which are age, race, gender, religion, to list a few.

The same goes for firing someone for taking parental or medical leave granted by their employment contract. In fact, any breach of contract when terminating an employee is cause for a wrongful termination claim.

It is also illegal to fire an employee for whistleblowing. Let’s assume an employee notices illicit activities in the company’s operations, such as safety violations, harassment, or other unlawful business practices, and reports that to authorities. You would be breaching employment laws if you fired them.

Whether it’s you who makes these decisions for your company or somebody from your executive or management team, the best way to avoid wrongful termination lawsuits is to consult the labor law and ensure you respect it. Provide adequate training for your staff on the legal and other consequences of terminating an employee.

Should You Settle the Wrongful Termination Lawsuit or Take It to Trial?

Let’s face it – we live in a litigious world, and the business environment is as good ground for lawsuits as any. No matter how experienced you are in leading people, it’s always uncomfortable when you face a lawsuit from one of your employees. The first thing you should do when a claim happens is notify your legal team and your insurer.

Employment practices liability insurance (EPLI) comes in handy when you are supposed to defend a wrongful termination case. If you have this policy, your insurer can provide you with some advice on how to handle the situation, and they can find a litigation lawyer for you if you don’t have one.

Wrongful termination claims can inflict great damage to a company, so try not to take it lightly, even if you are sure you or your team did nothing wrong. Have your legal and H.R. team look into the viability of the claim while you plan for your next steps.

Reports indicate that most wrongful termination claims (much like others) end with settlements. Both employees and employers prefer to avoid going to court because the process can drag on for months, even years sometimes. With settling, the two sides control the process and the outcome, which is often easier on everyone.

Another reason both sides prefer settlements is the attorney and court fees can be very costly should the trial end up being complicated and lengthy. Also, both sides agree on the amount they are prepared to settle for without it being inflicted upon them by a judge.

Employers would also like to avoid public trials in cases when they wouldn’t want people to know too much about the accusations against their company. When a case settles outside of the courtroom, there is no legal requirement to release any information to the public.

The employer should consider taking the case to trial only if they can win. Court-awarded damages can be generous should the jury decide to side with the plaintiff. Considering all of the above, it’s no wonder why most cases end with a settlement.

What Affects the Settlement Amount?

Nolo indicates in their report that it is more likely an employee will receive compensation if they hire an attorney to represent them in the negotiations. Whether your former employee comes to the table with or without a lawyer can also influence the amount of payment they will negotiate with your company.

Besides having a lawyer present, a few more factors can influence the settlement amount. We will list some of them:

Lost wages: Depending on the salary your former employee was making with you, they will expect you to compensate for their lost wages. You’d need to reimburse the amount they lost since you fired them and probably also compensate them upfront until they find new employment or return to their previous position at your company.
Lost benefits: Suppose that your employee had health insurance, life insurance, and other fringe benefits while working for you. They probably had to pay their premiums and other expenses themselves after they lost their job, so you can also expect to cover those expenses.
Emotional distress: You’ll need to compensate for the pain and suffering your former employee endured for being wrongfully discharged. They might ask for more than you’re prepared to offer, so this is probably the part you’ll need to negotiate on the most.

Besides these primary factors that determine the amount of compensation for your discharged employee, there might be a couple more expenses they will try to negotiate:

The cost of finding a new job: The claimant could ask you to pay for the expenses they had when looking for a new job after they were wrongfully terminated. These include transportation, hotel accommodation if the interview was in another city, and potential association membership, for example.
Attorney fees: The fees should be significantly lower than if the case went to a trial. Still, given that you (supposedly) unlawfully fired your employee, you can expect to pay for their attorney fees.

If the case goes to trial, the judge or court can award punitive damages if they deem your company’s behavior was particularly outrageous and illegal. Those are rare and shouldn’t influence the settlement amount unless the opposition lawyer tries to use it as a bargaining chip.

The size of your business can also be the factor in determining how big a settlement you’ll be obliged to pay. It isn’t in anybody’s interest to ask for the amount they couldn’t possibly receive if the company is too small.

It is not easy to calculate the average settlement amount for wrongful termination lawsuits because settlements, unlike trials, can remain confidential. Employers can ensure that by adding a confidentiality statement to the settlement agreement.

The average wrongful termination settlement is around $40,000, but the range is between $5,000 and $100,000, depending on the individual case circumstances. In some cases, that figure can exceed $100,000, especially if the company in question is a big player out there.

How Can Insurance Help You Handle a Wrongful Termination Case?

As you know, insurance is not there to prevent claims from happening but to provide a safety net when you need it. If a wrongful termination claim against you occurs, as already mentioned, the policy that would best respond to it is the employment practices liability insurance (EPLI) policy.

EPLI would cover the costs of defending the lawsuit and the potential settlement and damages you’d have to pay to the claimant. Your insurer could also provide you with legal assistance and help you decide whether to settle the claim or take it to trial.

Wrongful termination and other employment-related lawsuits can cause immense financial and reputational damage to your company. If you still haven’t purchased the right insurance policy for your business, now may be the right time to buy one or learn more about what EPLI covers by talking to one of our experienced brokers.