Business Politics Impacts – Cost of Litigation, Fines, and Payouts

Harassment litigation represents a catastrophic leadership failure. In these instances, exhibited aberrant behavior may be non-compliant with applicable laws. Such occurrences represent large one-time costs associated with court mandated payouts as well as reduced productivity, heightened distraction, and elevated attrition.

Litigation events are acute occurrences unlike the more typically chronic workplace conditions resulting in diminished productivity, increased distraction, and elevated attrition. Consequently, all organizations can be subject to this type of litigation – it only takes one ill-fated event.[wcm_restrict plans=”49923, 25542, 25653″]

Cost of Litigation

Unlike productivity and attrition costs, litigation expenses are difficult to calculate and are far more subjective. Categorically, litigation costs can be divided into direct (quantitative) and indirect (qualitative) groupings that include such costs as:

Direct

• Attorneys’ fees and court costs
• Executive, manager, and employee litigation related time costs
• Settlement payouts
• Fines and fees assessed
• Media and public relations costs
• Internal training costs (training courses and employee time)
• Internal communications costs (development, delivery, and reception)

Indirect

• Reputational costs (diminished sales)
• Executive, manager, and employee litigation related distraction costs (productivity loss)
• Employee productivity reduction
• Employee attrition

Litigation costs related to sexual harassment have been found to be:

• $6.7 million is spent by the average large corporation for each sexual harassment lawsuit (Texas Bar Journal, November 1997)
• $350,000 is the average court verdict for a sexual harassment plaintiff; not including defense costs or intangible costs the employer incurs as a result of bad publicity and diminished productivity
• $150,000 per plaintiff is the average cost an employer faces to defend against a sexual harassment lawsuit¹

Some high profile harassment litigation settlements include:

• Coca-Cola: $192 million
• Texaco: $176 million
• State Farm Insurance: $157 million
• Shoney’s: $105 million
• Home Depot: $104 million
• Publix Markets: $81 million²

Calculating the Cost of Litigation, Fines, and Payouts

Workplace harassment litigation can have a material financial impact. The calculation of this cost focuses on the frequency or probability of event occurrence.

1. Estimate the per incident cost of a harassment-based lawsuit. The total per incident cost is determined by summing the estimated itemized direct and indirect costs (listed above). Note that if multiple plaintiffs are likely to be involved, higher settlement payouts will result. In this case, multiply the estimated settlement payout by the assumed number of plaintiffs when determining this portion of the per incident cost.
2. Determine the organization’s estimated annual harassment litigation event occurrence rate (events per year if more than one event per year is expected) or probability (percent likelihood and event will occur if less than one event per year is expected). Factors to consider are those indicating the existence of stress points within the organization such as:
   • Frequent organizational change (people, processes, and/or technology) especially if concentrated within one part of the organization
   • Significantly negative feedback on a particular executive, manager, or employee from culture surveys, 360 degree feedback instruments, etcetera
   • Frequent employee concerns/complaints filed against a particular executive, manager, or employee
   • Introduction of a new hire executive, manager, or employee from a company with known harassment issues
   • An organization’s propensity to the excessive use/exertion of political power
   • The larger the organization (by number of people) the higher the risk of a harassment incident
   • The organization’s historical pattern of harassment cases
3. Project the annual cost of harassment litigation by multiplying the per event cost identified in Step 1 by the event occurrence rate or probability estimated in Step 2.

Example Return On Investment Calculation for Employee Turnover Reduction

Background

Harassment Litigation Events per Year: 1 / year

Calculation (Illustrative)

1. Per Incident Cost of Harassment Litigation: $6.70 million
2. Harassment Litigation Events per Year: 1 / year
3. Current Annual Cost of Harassment Litigation: $6.70 million / year

Final Thought…

StrategyDriven’s Diversity and Inclusion – Return on Investment, part 4: Litigation, Fine, and Payout Reduction reveals the available return on investment from improved workplace civility. It assumes, however, that leaders capable of making such improvements desire to do so.
Improvement initiatives reducing the prevalence of business politics within an organization are rarely pursued because those empowered to do so enable the political environment through complacency/indifference or benefit from its existence. Consequently, improvements are most likely achieved by newly appointed, strong leaders.

Sources

1. “One Sexual Harassment Lawsuit Can Devastate Even the Largest Employer,” Momkus McCluskey LLC, March 2011
2. “The Price of Discrimination: The Nature of Class Action Employment Discrimination Litigation and its Effects,” Michael Selmi, Texas Law Review, 2003

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