When it comes to a dealership’s legal liability for employment-related problems, the basis of the liability generally falls into two categories – actions the dealership took and those it failed to take. When it comes to big dollar jury awards and settlements, a dealership’s failure to take immediate and appropriate action generally is a more significant factor than the inappropriate conduct itself.

The law recognizes that an employer cannot control the actions of its employees 24/7. By the same token, the law (and juries) understand that employers can control their responses when they know, or should know, about a problem. There is little sympathy for an employer that was aware of, but still allowed, a “rogue” employee to harm others. In many cases, the failure to act is viewed as the employer’s acceptance of the bad conduct and a disregard for employee safety and well-being.

The GM Example

To understand this basic principle, one need only consider the ongoing situation involving General Motors and the damage and harm allegedly caused by faulty ignition switches. Unfortunately, some deaths and damage are linked to these switches. Not surprisingly, the news coverage, congressional hearings, and overall criticism have not focused on the switches themselves but rather on GM’s alleged failure to fix the problem when it first learned about the problem. GM’s alleged failure to act in a timely and appropriate manner likely will have a significant financial and reputational impact on GM, especially if the evidence shows that the “fix” could have been easy and cheap.

In the employment law context, most “fixes” are easy and cheap. Two recent cases, while nowhere near as serious as the GM situation, illustrate how a proper response influences the outcome.

In one case, the EEOC sued a dealership after male employees alleged that for several years, a manager had repeatedly made sexual comments to them, invited them to have sex, and engaged in horseplay of a sexual nature. The lawsuit also alleged that management not only knew about this conduct but actually encouraged it. Discipline or discharge would have been an easy and cheap fix to this problem but the dealership allegedly did nothing. The dealership’s failure to act resulted in a $2 million settlement. (If the conduct occurred as alleged, perhaps the dealership did not find it objectionable based on a belief that it was harmless fun and nothing more than boys being boys – locker room stuff). Ask yourself, how many vehicle sales would it take to recover the $ 2 million?  

At the other end of the spectrum, a dealership prevailed in a case where the evidence established that it took immediate and decisive action upon learning of allegations from a customer that one of its employees allegedly touched her inappropriately. The alleged incident occurred when the salesperson was taking the customer home after she dropped off her car for service.

When the customer reported the incident the following day, the dealership immediately fired the salesperson. The customer later sued the dealership for “negligent hiring” and mental anguish under a theory that the dealership was responsible for the employee’s actions. The court ruled for the dealership, finding no evidence that the dealership had any reason to expect that the salesperson would engage in conduct of this nature and that the dealership had not ratified the employee’s conduct that was not within the scope of his employment.

Had the dealership not acted so decisively in response to the customer complaint, the outcome could have been different. Under the law, a theory of liability exists referred to as “ratification.”  Under this theory, employers may be held liable for their employees’ actions that fall outside the scope of their employment, if the employer knew or should have known about the conduct and took no steps to stop it. An employer’s failure to act in those situations may be seen as its ratification or approval of the inappropriate conduct. As a result of ratification, conduct that is clearly outside the scope of someone’s duties, such as trying to touch a customer’s leg, can become the employer’s responsibility if it fails to act when it learns of the inappropriate conduct.

Similarly, had the salesperson had a history of bad conduct of this nature, the outcome likely would have been different. For example, an employee hired with a history of conduct issues exposes your dealership to a claim for negligent hiring if you knew – or should have known – about the problems at the time of hire and the employee repeats the conduct after being hired.

Potential claims for negligent supervision and negligent retention exist if the dealership fails to properly address and correct problems caused by employees. The basic legal theory for each of these claims is that one cause of the harm to an employee was the employer’s action (hiring a known “bad guy”) or inaction (failing to address a bad guy’s conduct through appropriate discipline or discharge). In short, if the bad guy did not work there, the harm would not have happened.

In A Nutshell

The news is not all bad. The law offers several “carrots” to employers to encourage them to take appropriate action before and after a problem arises. Appropriate policies and enforcement of same may eliminate or lessen the availability of punitive damages. The implementation of an effective no-harassment policy, manager training on the policy, and appropriate enforcement of the policy provide a defense in many harassment cases. Effective and documented investigations by someone trained to conduct investigations of these matters also is important. Hiring procedures and disciplinary policies that screen out or remove problem employees from the workplace – even those who are high producers – also decrease the risks of negligence claims.

In almost every employment situation, the fix is relatively easy and inexpensive. Conversely, failing to take appropriate action can be expensive and disruptive and result in harm to others. For this reason, smart employers recognize that failing to respond is not an option.