When starting a business, entrepreneurs take on a great deal of stress and risk, and high on this list of risks is litigation – whether deserved or frivolous. Though lawsuits are a growing problem for many people and companies, small businesses are at the greatest risk, and statics show that over 75% of small business owners in America fear they may be the target of a frivolous lawsuit. While the Klemm Analysis Group estimates that up to 52% of civil lawsuits each year target small businesses, in 2013, 43% of small business owners reported having been threatened with or involved in civil litigation.
In previous years, it was estimated that small businesses paid as much as $20 million in tort liability costs per year, out of their own pockets, and that small businesses earning an average of $1 million per year spent up to $20,000 on lawsuits.
Though small businesses may face litigation from disgruntled customers or vendors, the most common source of litigation is from employees – typically for discrimination, wrongful termination or claims of wage and hour violations. If an employee feels that any action taken against them – whether they were fired, demoted or even passed over for a promotion – was motivated in any way by their religion, sexual orientation, race, gender, or any other protected classification, it might give them the impetus required to file a lawsuit.
In fact, according to statistics released by Bolt Insurance Agency, lawsuits claiming workplace harassment related to protected classifications rose by 25% between 2006 and 2012.
A 2015 study by Hiscox Inc. analyzed 446 closed employment related lawsuits reported by small-to-medium-sized enterprises with less than 500 employees in the United States. Their statistics showed that:
- 19% of claims resulted in a monetary settlement
- Defending a case from discovery through to a ruling on a motion for summary judgment can cost employers an average of between $75,000 and $125,000
- The average cost of taking a case to a jury verdict at trial can be $175,000 to $250,000
According to Bolt Insurance, out-of-pocket expenses incurred as a result of lawsuits cost small businesses up to $35.6 billion per year. Another statistic in the 2015 Hiscox Guide to Employee Lawsuits states that businesses with fewer than 500 employees have an 11.7% chance of having an employee file a suit or claim of discrimination.
Even if a business is not found liable, the costs of litigation can still add up. Even if a case is dropped, or a verdict is reached in your favor, you are still liable for lawyers’ fees. In the more likely event that a settlement is reached, which will cost less in legal fees, damages, and lost productivity, attorneys fees can still be between $2,000 and $5,000.
Of course, the cost of defending against litigation aren’t just monetary, and being named in a lawsuit, whether you are guilty or not, can do serious harm to your business’ reputation. It can also harm your ability to attain new customers or retain current ones, and can even lead to problems in getting credit. Aside from these reputational costs, 74% of small businesses that have faced litigation say they’ve had to compensate for rising legal costs by increasing the price of their products and services, while 71% say they’ve had to decrease hiring.