The Do's and Don'ts of Hiring and Firing Brokers
January 4, 2000
by Richard A. Levan

Every business today has employees, and with employees comes a spate of considerations, issues and liabilities that were unimaginable a scant decade ago. Employees are an essential part of any business, but they also represent a minefield even for the wary. This article examines the do's and don'ts of hiring and firing brokers and other staff with the goal of minimizing the problems and expense which accompany such undertakings. The best advice of all, of course, is to tend properly to the brokers you currently employ. Some turnover, however, is inevitable. When you need to hire or fire a broker, here are some important considerations to keep in mind.

I. Forming the Employment Relationship

Every firm should have clearly established, written procedures that deal with every aspect of the employment relationship, from hiring to firing to performance while on the job. Once established, it is critical that such pro cedures be followed rigorously.Nothing makes a plaintiff's lawyer happier than to learn in the course of litigation that the brokerage firm failed to follow its own procedures in terminating her client. Such a lapse can cost a firm dearly. The written procedures should be distributed to every employee, and a signed form acknowledging receipt should be kept in each employee's file.

Do the diligence which is due. Every broker is required to provide her employment history for the past ten years and every firm must confirm in writing on the applicant's U-4 that the firm has contacted all of the applicant's employers for the previous three years. Presumably,the hiring firm is to confirm not only the fact of employment but also the applicant's performance at the prior firm.

The failure to do so may impose liability on the hiring firm if it later comes to light that the broker had a history of misconduct and the new firm failed to discover these problems and impose adequate supervisory procedures.

Try to g et as much information as you can from the applicant's prior employer. People are frequently guarded about what they will disclose about a former employee, including the reasons for the departure. Nonetheless, you owe it to your firm to ask the hard ques tions.You can't be blamed for failing to be omniscient, but failing to even ask the pertinent questions can be fatal.

If the prior employer will talk with you, resist the natural temptation to hear only the things you want to hear.The applicant's bulgi ng book of business may look tantalizing now, but the failure to uncover a propensity for bending industry rules to close a sale could cost you dearly down the road.

At the very least,you must obtain a copy of the applicant's U -5 termination notice which requires the former firm to state the reasons for the termination. If the form raises questions about the applicant's performance or character,you must pursue the matter.Depending upon the severity of the conduct alleged, a simple conference with the applicant may be enough. Other times, you will have to go further, asking for complaints, investigative reports or other materials which will enable you to determine whether the candidate is fit for employment or requires special supervision. Always document your efforts and maintain the information you uncover in your files.

A word of caution about U-5 termination notices. The broker you are courting may still be employed by another firm, and that firm has up to thirty days after the broker leaves to complete the U-5 and submit it to the NASD. The broker may already have been working for you for weeks before the form is filed,and you're not provided a copy unless you ask.Be sure to ask for a U -5 for every broker you hire and review it carefully even if the broker has already come on board. Your hiring and supervisory procedures may be deemed deficient if it later comes to light that your new hire was terminated for serious misdeeds which she inadvertently forgot to disclose to you, and you failed to establish satisfactory safeguards.The fact that the broker's U -4 looked clean on the date you hired her may be cold comfort if problems with her previous employer later surface on the U-5.

Don't promise more than you plan to deliver.The interviewer must be extremely careful about what is said or promised during the interview with the prospective hire.Statements such as You should be able to double your income here, or With your experience you'll go far, may sound innocent at the time they're ma de, but they can come back to haunt you when an ex-employee sues to enforce promises you're sure you never made.Keep your promises and intimations to a minimum. You may be contracting for more than you thought.

To write, or not to write a contract; that is the question. Assuming your prospect checks out, you must now consider whether to reduce the employment relationship to writing. The existence of a written agreement is neither a good nor bad thing in itself. The considerations that go into written, as opposed to oral, contracts are too numerous to explore in detail here, but a few points should be considered.

Chief among the reasons for a written contract is the desire to define and limit the nature of the employment relationship and the duties and liabilities of each party to the agreement. Firms typically prefer for brokers to serve at will which means either side can terminate the relationship for any reason at any time. At will relationships can be established orally or in writing. Term employment contracts provide greater structure than an at -will relationship but at a cost. It is infinitely more difficult to terminate someone with a contract of employment because, among other things,the employee's performance and your justificat ion for terminating the contract can become major issues.

One clear advantage to written agreements is their use in limiting the damage that can befall a firm if a broker later leaves and a scramble for clients ensues. There is good authority that client accounts belong to the firm, not the individual broker. By requiring your new hires to sign non-competition or non-solicitation agreements, you will markedly improve your chances of retaining those clients if the broker later leaves, regardless of whether she is an at-will or term employee. Such agreements typically must be supported by separate consideration,so it's best to have counsel do the drafting,or at least review your contracts.?

II. Maintaining the Employment Relationship

Once your new hire is aboard, you must properly supervise her, which may, depending on the broker's disciplinary and customer -complaint history, obligate you to impose special supervisory procedures that are reasonably designed to detect malfeasance on the part of your new hire. Keeping tabs on the performance and general habits of your brokers is not just good management; the failure to do so has landed more than one firm in hot water with regulators. Every brokerage firm today must be sensitive to the signs of financial or emotional turmoil on the part of its brokers, and the failure to heed such warnings may subject the firm to liability for failure to supervise. Other things to consider during the life of the employment relationship are the following: Treat your employees fairly. This precept may sound simple enough, but the case books are filled with employers large and small who ignored this basic advice. As someone who has tried dozens of cases, I can tell you from personal experience that juries are extremely adept at deciding what is fair; they will often ignore a judge's instructions and sometimes even the law to reach a result they believe is equitable. The same goes for arbitrators.

Employees are also much more likely to sue if they feel they've been t reated unfairly. An ounce of prevention in this regard is worth more than a pound of cure.Don't mistreat employees under your charge,and don't ignore reports of mistreatment at the hands of lower -level managers. Follow your own procedures. This maxi m can't be stressed enough.Once you've established a set of policies and procedures, you must follow them for all your employees in all situations. If your manual says every broker must be placed on suspension before a termination can occur, you have to place that broker on suspension before you can fire her. The need for uniformity is essential and underscores the importance of crafting employment policies that are meaningful yet flexible. Give honest and accurate evaluations. There is nothing more frustrating than trying to establish good cause for firing an employee who received consistently high marks during her employment with the firm. The natural reluctance to speak directly and honestly with an employee during the life of the employment relationship can lead to disaster when the relationship has soured and the firm is obligated to demonstrate that it terminated the employee for reasons other than the ones given at the time of termination. Do the hard work now.

III. Terminating the Employment Relationship

When the time has come to end a professional relationship whether one that is weeks old or one that has lasted years a manager cannot be too careful in going about her task. No matter how many times you have terminated an employee, it is never fun, and the danger for mishaps is so great that the need to proceed with caution cannot be overstated. Some things to keep in mind when going about the difficult task of terminating an employee are the following:

It's the little things that count. There is no requirement that you pander to an employee you are about to dismiss,particularly when the employee's own conduct has prompted the termination. Nonetheless, the terms upon which an employee departs can make all the difference between a distant memory and an expensive lawsuit. Because of this, firms should consider offering the departing employee out-placement services, job training or similar assistance in finding a new position. People with jobs are generally less motivated to sue a former employer, and the cost of out-placement services pales in comparison to what a law firm will charge to defend you if the ex-employee decides to sue.

Also remember that being right does little to shield you from the costs and general distraction of litigation. It is rare that a successful litigant recovers her costs of defending a case (particularly in arbitration), and the loss of your time and energy will never be recouped. The best defense to any lawsuit is to prevent it before it is filed.

Another extremely effective technique for protecting the firm, particularly where the risk of litigation is real, is to offer the departing employee a legally binding release. By offering the outgoing employee an attractive severance package, you can insulate the firm from future liability. Such arrangements should be in writing, must be supported by consideration, and are not legal in every jurisdiction. Accordingly, one should consult a lawyer before executing a release to ensure the release's efficacy and its conformity with applicable law. If done properly, a release can be a powerful shield against future lawsuits.

Watch out for employees in protected classes. The law is replete with statutes, rules and regulations designed to prohibit improper motivations in the making of employment decisions. These laws, which cover discrimination based on such factors such as age, race, sex and religion, can wreak havoc on a firm that fails to properly consider them. Such laws do not prohibit a firm from lawful ly terminating employees. They do require, however, a knowledge and sensitivity on behalf of the employer in taking the action necessary to terminate the employee.

No one is immune from missteps. A major national law firm (with a sizable employment-law practice) recently settled an action brought by a group of former receptionists and secretaries who claimed they were casualties in the firm's effort to make itself over as a younger,more dynamic player in the high-tech law field.Don't fall prey to such a trap.

Consult with counsel before implementing your decision. If there ever was a case for the maxim, An ounce of prevention is worth a pound of cure,it is to be found here.The legalities of terminating an employee are complex and often contradictory. They vary from state to state, and sometimes from industry to industry.A few minutes of an attorney's time before terminating a worker can save a firm tens of thousands of dollars in legal fees down the road.

Consultations with counsel before terminating an employee provide another benefit: they allow you to voice the reasons for your decision before committing the firm to a position from which it cannot later retreat. At worst, your conversation with counsel will do nothing more than confirm the reasons for your decision to terminate the employee. At best, however, the experience of speaking with someone who is mindful of the firm's best interests,yet objective enough to identify potential problems, will force you to closely examine both the rationale for the decision and the manner in which it should be implemented. Such a practice reduces the chances for making an emotional decision under circumstances when anyone's judgment would be impaired.

Have a second person present during the notification meeting. Two heads are not always better than one,but in the war of he -said-she said, corroboration is an effective form of ammunition. Another decision is whether to provide the departing employee with a written summary of the factors underscoring her termination. The advantage to a writing is obvious: it eliminates much of the question as to the reasons provided for the employment decision. The disadvantages are equally obvious: a writing, to be complete, must be laboriously detailed and judicious in its wording. Many a litigant has wished she hadn't committed pen to paper when trying to justify such a complicated decision. One is always doomed to say too much, or too little. Moreover, even a perfectly crafted document does nothing to rebut a claim that the written explanation was merely a pretext for a decision that was prompted by unlawful considerations such as discrimination. When in doubt, leave it out.

Be honest but don't dwell on the employee's poor performance.Few of us like to deliver bad news, even to a difficult co-worker. It is critical, however, for an employee to know why she is being terminated; she should not be left to guess. Lying about the reasons may seem kind on the day of termination, but the firm will pay dearly later if the ex-employee decides to sue, and the firm has to start digging for the real reasons it fired the employee.

No amount of explaining may ever make a departing employee to like your decision. Telling the truth, however, is essential. Restrict your remarks to the facts, and try to be as non-judgmental as possible. Candor and brevity should be your guideposts.

Avoid the long farewell. Allow the terminated employee reasonable time to pack her belongings, but supervise her carefully so that she doesn't take firm property.If you must choose,err on the side of vacating the employee out of the building sooner rather than later. There is nothing worse for firm security or morale than to allow a terminated employee to linger in an agitated or spiteful state.

If the departure cannot be accomplished promptly, consider inviting the employee back at another time, such as after hours, but only when appropriate personnel will be on hand. Avoid an altercation at all cost; rely on security or the police if a situation starts to turn ugly. Some firms have a policy of using security officers to escort all terminated employees from the building. Remember to obtain all keys, security passes and other corporate property when possible.

Watch your tongue. The surest way to expose yourself and your firm to the prospect of money damages is to publicly denounce an ex-employee, whether orally or in writing. This means controlling who is authorized to speak for the firm and what is to be said about the departing employee, whether to co-workers, clients or regulators.

The defamation trap is particularly dangerous for brokerage firms which must, under current NASD rules,file a written statement summarizing the reasons for the employee's departure.Gone are the days when a see -no-evil, speak-no-evil approach could be used to successfully shield a firm from retaliatory law suits. Regulators today demand candor in completing the U-5. This leaves the firm and the individual signing the U-5 with a daunting task. Tell the truth and risk a suit for defamation, or prevaricate and suffer a trip to the woodshed with an angry regulator. The choice is grim.

Largely in response to this Hobbesian choice, the NASD has proposed a rule providing its members with limited protection in the event they are sued on the basis of statements made in the U-5 notice. The proposed rule provides qualified immunity for statements made in good faith and with a reasonable belief that they were true at the time they were made.

A couple of caveats are in order, however. First, the rule is only a proposal. The comment period to the rule ended on June 17,1998,and it is anyone's guess as to what,if anything,will actually be implemented by the SEC. Second, the rule is limited to statements made in U-5s and other required reports, not to statements made orally to clients, fellow employees or the general public. Don't fire for protected acts.Public policy concerns have prompted Congress and many state legislatures to enact laws protecting employees from retaliation for reporting misdeeds on behalf of co-workers. These statutes typically referred to as whistle-blower laws impose liability on employers if the terminated employee was engaged in protected activity such as reporting to authorities a violation of law or a threat to public safety. Suspend an employee suspected of breaching firm confidences if you must,but do not fire the employee until you've had an opportunity to confer with counsel.

Conclusion

The care and feeding of employees has never been dicier, and the prospect for litigation arising out of an employment relationship has never loomed greater. As the possession of a job in our society today approaches the status of a right, employers must use wisdom and caution in their hiring and firing decisions. It is essential for every firm to design intelligent, workable policies and procedures, follow them consistently, and consult with an experienced attorney when the situation requires. No business can insulate itself completely from the prospect of employment-related lawsuits. To have employees today is to live under the specter of litigation. The deck can be stacked in your favor, however, if certain precepts of law and common sense are followed. Hire and fire at will, but do it well.

Copyright 2006. Richard A. Levan. All rights reserved