Employee Performance and Discipline: What Can I Do to Prevent “Negligent Retention” Lawsuits?

We recently got hit with a “negligent retention” suit and want to revamp our policies. We now know that we can be liable if we find out something bad about an employee but keep him or her on anyway, and then the employee does something to a client. Just how bad does that something have to be for us to take action? Should we fire the person even if they have been doing good work? — Roberto, Corporate Manager in Daly City

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You have asked about an employer’s negligent retention risks after learning about an employee’s wrongdoing. This truly is an important subject. If an employee harms another person and the employer knew of, and disregarded, the risk of harm, the employer can be liable for certain damages known as torts (such as wage loss and pain and suffering) and also suffer the embarrassment of negative press reports. Punitive damages are also possible.

You ask when an employer must take action after it learns that an employee has engaged in wrongdoing. There is no definitive test. Claims for negligent retention are inherently situational. The employer’s response will depend on the particular circumstances, including:

1. The employee’s job duties and responsibilities (e.g., whether the employee supervises others; works with children, the elderly, or the disabled; or enters customers’ homes)
2. The nature of the information disclosed to the employer (e.g., whether the employee was violent or engaged in inappropriate behavior)
3. The timing of the reported wrongdoing (e.g., whether the wrongdoing was recent or in the distant past)
4. Whether the source of the information is credible and can be confirmed or corroborated (through, for example, a background check, witness accounts, or police reports)
5. Whether any other pertinent information exists (e.g., performance reviews, customer feedback, or co-worker complaints)

Ultimately, the employer must carefully and thoroughly assess whether the facts raise a reasonable possibility that the employee is unfit for continued employment because of the risk to others or to property. The decision should be made after due consideration of all of the facts. Do not rush to judgment. Although not taking action against the employee may trigger negligence liability, firing the employee may lead to costly employment claims, especially if the employer acts on insubstantial or less than credible information or has not fired other employees in similar circumstances.

Here are a few important points concerning negligent retention:

• An employer can be liable for firing an employee based on an arrest that did not result in a conviction (Cal. Lab. Code sec. 432.7).
• An employer cannot necessarily rely on the individual’s name being on the state sex offender registry—the Megan’s Law website—to discipline or fire that individual (Cal. Pen. Code sec. 294).
• Specific laws regulate employer investigations when the employer uses an outside vendor, such as a background check company (Cal. Civ. Code sec. 1786 et seq.).

The bottom line in these negligent retention situations is that the employer should make a fully informed decision once learning of information that raises questions about whether an employee poses a risk to others or to property.

Finally, pre-employment screening is the first line of defense against negligent retention claims. At the time of hiring, do background checks, reference checks, and drug tests. It’s always best to avoid the threat of negligent retention by not hiring troublemakers in the first place.

Rod Fliegel is a shareholder at the San Francisco office of law firm Littler Mendelson.