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Putting Humanity into HR Compliance: Manage Risk, Don't Avoid It

Three business people looking at a laptop screen.

​Many HR professionals view their responsibility toward legal risks as being to identify and then avoid them. In my experience, this is a mistake.

Rather, HR's job should be to identify, assess and manage legal risks.

Many years ago, I defended an age-discrimination claim. My client had for a long time employed an underperforming and misbehaving salesman. The company tolerated his employment out of fear of an age-discrimination claim. Eventually, it could no longer put up with the situation and fired him.

The salesman brought an age-discrimination claim. We settled the claim in agency mediation for $15,000. The company spent about $5,000 in legal fees.

The woman who replaced the salesman was given the identical territory and client list. Although new to the company, in her first year of employment and for every year thereafter, she out-sold her predecessor's best year by more than $100,000.

Until the salesman was gone, the company did not know just how much its risk aversion had cost it.

After Identifying the Risk, Assess It

Once you identify a legal risk, your job is not done; it's just beginning. The risk needs to be assessed. What is its scope? What are the probabilities? If risk becomes reality, what are the probable outcomes?

A simple equation can be helpful: L x M = V. The L stands for "likelihood," or the probability the risk will happen. M stands for "magnitude," or the likely cost or loss if the risk happens. L multiplied by M equals V, the present value of the risk.

Here's an example of how the equation works. First, choose one of the following:

  1. Incurring a 50 percent risk of losing $100.
  2. Incurring a 10 percent risk of losing $1,000.

Which risk would you choose? The answer should be A: .50 x 100 = 50. This indicates a loss of $50. If you chose B (.10 x 1,000 = 100), the value of your risk—$100—would be higher.  

However, a risk-averse person might choose B, thinking, "A 10 percent chance is a long shot and probably won't happen, but with A there's an excellent chance I'll lose $100, and I really don't want to." Yet in the long run, when people evaluate risks this way, they hurt their long-term, overall economic interests. And when HR professionals behave this way, they hurt their employer's long-term, overall economic interests.

A former HR director and now company president told me, "If HR truly wants to add value, it can't be risk-averse. As company president, I can't afford to be risk-averse. Risk is part of business. It should be assessed and managed but not simply avoided."

After Assessing Risk, Manage It

After performing the equation to determine the monetary value of the risk, HR's real work begins. Let's look at another example: Your company currently employs a highly problematic person. Although evidence of his problematic behavior is abundant, management hasn't done the best job documenting it. He has multiple protected characteristics that he could claim motivated any criticism. In addition, he engages in a legally protected activity: claim a work injury and ask for FMLA leave or assert retaliation for some legally protected reason, even though the assertion may be bogus.

In managing such a risk, ask these questions:

  • What are the costs of continuing his employment? Costs include more than the compensation and benefits given to him. They include the impact on productivity, quality, safety, efficiency and morale, as well as opportunity cost. What might the company experience if an engaged employee replaced the problem employee? Consider the first case. The numbers don't lie: Had the company replaced the salesman sooner, it could have enjoyed additional revenue well over $1,000,000. 

"One of the biggest mistakes both management and HR make," according to the company president, "is to ignore opportunity costs. They don't ask the question 'What would happen if this … disengaged employee was replaced by someone who genuinely wants the company to succeed?' "

  • What steps can be taken to minimize termination risk? HR often overlooks the fact that legal risks that can't be eliminated can nevertheless be reduced substantially. This is a great time to use legal counsel cost-effectively. Employment attorney Paul Buchanan in Portland, Ore., noted, "If an employer directly and honestly communicates legitimate performance criticisms to an employee, including in written form, over a period of months, and if the employee has not been subjected to truly inappropriate comments or behavior, it's rare that the employer is going to face substantial liability risk in terminating employment. That risk is even more manageable if the employer is willing to resolve any legal challenge the employee may bring quickly, before the employee's lawyer invests substantial time in the case that they then are motivated to recoup in a larger settlement."
  • On the risk/reward spectrum, what are the options? Typically, I like to list at least three. I start with the outer edges of the spectrum, high risk/high reward at one end and low risk/low reward at the other. In a termination assessment, that's typically comparing immediate termination to long-term continued employment. I then like to look for options in between. Inside the spectrum, what other risk/reward options exist?
  • Once an option is selected, identify next steps. Who is going to do what and by when? What are conceivable obstacles, and if they arise, what's your plan for dealing with them? How will you measure success?

When HR professionals address legal risks with an eye toward balancing and accurately evaluating the competing risks and costs, they act the way CEOs do when making business decisions with uncertain outcomes. The more HR goes about its business in this way, the greater the positive impact and appreciation of the HR function.


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