(FORTUNE Small Business) – HOW DO YOU KNOW THAT YOU'VE HIRED THE wrong employee—or waited too long to fire him? If you find two duffel bags full of semiautomatic weapons under his desk , that's a pretty good sign. No, that's not a hypothetical example, although the small-company CEO who told us the story asked that we not use his name. (We can't say we blame him.)

Unfortunately, it's become easier than ever for problem employees to build up the kind of ammunition that makes it difficult to discipline them, thanks to recent court decisions that affect employers of all sizes.

A worker at giant Burlington Northern & Santa Fe Railway, for instance, complained to her supervisor that she'd been sexually harassed. Soon thereafter her employer transferred her to another position, from forklift operations to track duty. Her pay remained the same, but the employee argued that she had been retaliated against for filing the complaint. Last June the U.S. Supreme Court found in her favor, even though she was not fired or demoted, the previous standard for proving retaliation. (The decision can be found at supremecourtus.gov/opinions/05pdf/05-259.pdf.)

"Plaintiffs lawyers' ears pricked up," says Bill Demeza, a partner specializing in labor law at the Tampa office of the Holland & Knight law firm (hklaw.com). "Now if you complain about your employer, your whistleblower claim is easier to establish." That means that if an employee fears he may soon be fired, he can preempt the action by filing a complaint against his boss. Then he can argue that any subsequent disciplinary action is retaliatory.

The key, Demeza says, is to act quickly and resolutely. That can be tricky for employers—especially small ones—many of whom are so focused on urgent sales or financial issues that they ignore personnel warning signs. Or perhaps a problematic employee also happens to be the company's invaluable top sales rep. The problems may seem minor, but they risk growing into fire-worthy offenses, by which point the worker may be able to fight back with a lawsuit.

It's not just charges of retaliation from which employers need to protect themselves. "There are all of those protected classes, where the minute you raise competency, they raise discrimination," says Kevin Berry, a partner at the Philadelphia law firm Cozen O'Connor. Meanwhile, employment lawyers are growing increasingly savvy about the best ways to go after business owners. Roxanne Davis, who represents employees in discrimination cases as principal of Davis Gavsie in Los Angeles, is a member of an educational network through which attorneys meet to discuss the latest changes in labor law and how to use them to employees' advantage. "There is a growing group of lawyers who are learning the field better and better," she says.

So how do you recognize the red flags early? To find out, we sought egregious and instructive stories of employee malfeasance. We've noted when we've had to change names and minor identifying details, but the events are all true.

The Drunken Forklift Driver

YOU CAN'T FAULT CLARK GLAVÉ'S INTERVIEWING process. When hiring a driver for his storage facility business, Glavé, 44, grilled several candidates using a seven-page questionnaire that asked about such topics as job expectations and potential ethical dilemmas. When he pinpointed the best candidate, Glavé checked that person's references, driving record, and health record and then asked for a drug test. As an offsite employer—Glavé lived in Richmond; his warehouse was in Raleigh—he had to be careful. His new driver passed all his screens.

"The first few months everything was hunky-dory," Glavé says. He remembers working beside Jerry (not his real name) for three weeks, establishing performance expectations. After he had broken in his new worker, Glavé says, he went back home, checking in periodically with phone calls. That's when the first signs of trouble appeared.

"He started to get a little cocky," Glavé remembers, "changing his route, not working on Saturday. I started to lean on him a bit, and things got worse." During a site visit, Glavé says, he was surprised to find that Jerry still hadn't created a system for cataloging the used storage areas in the warehouse—a rudimentary step that was part of his job description. "He complained about the volume of work he had, so I said we'd get him some help." (Jerry agrees that he was overwhelmed by the workload.)

Glavé placed a want ad in the local newspaper seeking another employee. When nobody answered, Jerry suggested a friend who he claimed had great computer skills. Glavé gave it a shot, thinking, "This could be either really good or really bad."

For a few weeks "really good" seemed to be winning out. With Glavé staying in town to oversee their work, the friends appeared to have the office under control. But after Glavé returned home, he says, all hell broke loose.

Glavé remembers showing up on a Monday morning for a surprise visit and finding that his office resembled a bachelor pad: "The place was filthy, there were six cases of empty beer cans and bottles in my dumpster, and the warehouse was an absolute mess." Glavé kept a mattress in the back to sleep on when visiting; he says it had obviously seen heavy use and was strewn with women's undergarments. (Jerry says the mess was his co-worker's doing and pleads ignorance about the beer.) Neither employee had established a system for tracking the 140 storage areas in the warehouse, Glavé says, a job Jerry had shifted to his friend.

Later that day, Glavé says, he received a phone call from his landlord, alerting him to a problem in the warehouse. Glavé discovered that the wall it shared with an adjacent tenant had been bashed in. "Forty feet of wall, pushed more than a foot back," he says. "To do that, someone had to repeatedly hit it with the forklift. Repeatedly." Both employees said they hadn't hit the wall. But a neighboring tenant told Glavé that when she had come over to complain about the damaged wall, she had found Jerry's friend "staggering drunk." Glavé concluded that they had spent two days drinking beer and driving the forklift around the warehouse. (Jerry says he never drank on the job, and he attributes the damage to his friend. Despite hiring a private investigator and contacting his parents, FSB was unable to get in touch with the co-worker, who has no permanent address or telephone number.)

Glavé decided to fire Jerry's friend the next morning, but he never got the chance. The friend didn't show up for work and had disconnected his telephone. Glavé let Jerry stay for another week before firing him—but only so that he could withhold Jerry's last paycheck to cover $850 of personal calls on his work cellphone.

"There are three things I should have done differently," Glavé realizes. First, he should have paid attention when Jerry started talking about his marriage problems. "Usually when an employee's personal life goes on the skids, if they already have a tendency to party they're going to start drinking more to escape. Also, I got too comfortable with not doing the spot checks every week or every other week ," he says. "I'm an absentee owner; what these guys tell me on the phone can be quite different from what's there. Unless I'm eyeballing them, I can't tell if they're lying to me."

Last, Glavé says he made a mistake in basing a hiring decision on an employee's recommendation. "I went for it because I was in a strange town where I didn't know anyone. I wasn't getting responses to my ad, and he was a convenient body that seemed to meet the criteria. I bought it hook, line, and sinker."

It took Glavé four weeks of hard work to clean up the mess, he says, but he's not bitter. "You roll up your sleeves and make sure everyone is happy. It's all about customer service and delivering a superior product." Today Glavé has a driver he hired using the same interview process, but he pays him a salary rather than hourly wages, which allows his employee to focus on the job instead of racking up overtime. Glavé visits every two weeks to check up. So far, he has no complaints.

The Turncoat No. 2 Who Tries to Take Over the Business

WHEN IMA BOSS STARTED HER SMALL SERVICE BUSINESS in the Pacific Northwest a few years ago, she brought Benedict Arnold onboard to focus on sales and marketing. (Names and identifying details have been changed throughout this article.) Arnold went on to become Boss's second-in-command in building the company. "He was very charming," Boss says, "fun to work with, someone who did a lot of innovative stuff."

About a year into the startup, Boss started noticing that Arnold was working a little too independently. He was expensing meals and books that didn't seem to be work-related. He took frequent two- to three-hour lunches and was unapologetically late for important meetings.

"Whenever I'd get close to [disciplining him], he would do something really amazing," Boss remembers. "He would bring in new clients or stay up all night and put together a great proposal. I always said he was the best and worst employee I had. I didn't realize how prophetic that was."

Boss had begun documenting Arnold's issues in writing and finally sent him a note asking to meet and discuss the problems. Then she went on a two-day trip, and when she returned Arnold dropped his bomb.

He asked to meet with her, she remembers. "He told me that I needed to step down," she says, "and he or someone else needed to take over the company." Otherwise, Arnold said, her employees and investors would abandon the company. Unbeknown to her, Arnold had spent the past year convincing many among the firm's 17 employees that Boss had to go. "He had a well-thought-out process," she discovered later by reading depositions. "He worked on each person in a different way to undermine their trust in me."

Primarily, Arnold insinuated that Boss was crazy and that he was the only one who could keep her unpredictable temper under control. He told key managers that there were legal issues regarding the way the company had been set up and warned that they could be sued. "It was a brilliant plan," Boss admits. "We were all really busy, and nobody compared stories." Boss refused to leave, but Arnold didn't give up. He met with a financier who had made the company a million-dollar loan and hinted that the books were cooked.

When she and her attorney fired Arnold a few weeks later, he simply chuckled and quipped, "Sounds like a plan." On his computer, she found a detailed journal logging "evidence" he had gathered about how Boss was allegedly mismanaging the company and logs of his clandestine meetings and conversations.

"My attorneys said I had about a 99% chance of winning in court," Boss says. "But I decided that I really needed to heal the company, and I couldn't be in both places at once." She didn't sue.

Instead, for the next few months Boss focused on regaining the trust of her employees and investors. "The people involved were so upset—they felt so manipulated and deceived," Boss recalls. "People went into therapy." The million-dollar lender called in his loan, but the only employee who quit was Arnold's friend, the operations manager. "I had people writing me letters of apology," Boss says.

"I had to work night and day just to keep the company on a stable road and knit everyone back together," she says. "I did that, and I'm proud of it. A lot of companies would have just crumbled and blown up." Two years later the company is profitable and growing.

Today Arnold is out raising capital for a startup venture. He has written to Boss, sending congratulations on her company's success. Boss knows that Arnold still lists her on his résumé, because she has received calls for references; she simply responds that she would not rehire him. "He has no guilt whatsoever," she has concluded.

Boss knows how easy it is for fast-growth-company CEOs to let employee issues ride, but she doesn't make that mistake anymore. Now, as soon as she gets a hint that there may be a problem, she confronts her workers directly. "Just because someone brings in a lot of business or they're funny or charming, don't let that convince you that the problems are okay."

The Undercover Identity Thief

WHEN YOU RUN A SMALL BUSINESS, it's not always easy to find employees who can cover the range of skills you want at the salary available," explains Missy Rule, the owner of a small Midwestern shipping company. For example, when seeking an administrative assistant, she needed to hire someone who could also help with receptionist duties, accounting, invoicing, and filing. Late last summer Rule thought she had found a reliable hire in Abbie Normal, who was "very capable, smart, quick, and learned really well." Rule checked references, and a background check came back clean.

About a month into her new job, Normal started missing work. She seemed to have several sick relatives. Rule felt particularly sorry for her new employee when Normal said she had to take a long leave for a family funeral over the winter holidays.

Mysterious packages started arriving at the office, addressed to unknown recipients. That always seemed to happen on days that Normal was out, and Rule had them sent back. "At first, nobody made any connections," Rule says.

One day in early spring, while Normal was absent, the delivery person came to reclaim a package. He explained that it had been tagged as part of a potential fraud investigation. When Rule couldn't find it, the driver checked his records and said that the receptionist had signed for it a few days earlier. Rule asked Normal about it the next day, but she played dumb.

"We terminated her at that point," Rule says. "We knew there was something strange happening. Her manager and I interviewed her to see if she would admit to something." Normal confessed nothing. Rule consulted with her lawyer, then sent Normal a letter telling her not to return to the office. She never heard from Normal again.

The following week the office received a letter from a credit card company addressed to a former employee. "That didn't seem right," Rule says. "We contacted the ex-employee, and she said that her identity had been stolen a few months earlier." That brought in the FBI. Investigators discovered that Normal had been digging through employee records to steal identities, then using them to open credit card accounts. She was apparently buying the items that were being delivered to the office, then relaying the goods to accomplices.

Normal was arrested and charged. It wasn't her first brush with the law. The sick and bereavement days she had been requesting were to attend court arraignments for previous identity-theft charges. That hadn't shown up on Rule's background check because Normal's arrest on those charges happened after she was hired.

Rule reports that "the experience hasn't changed how we hire. We figure it was a fluke." But it has changed the information to which new hires have access. Personnel files are now kept under lock and key in a room where new employees don't work. Rule also removes key personal information, including Social Security and phone numbers, from company invoices. Employees must work at the company for several months to have access to those records. In the wake of the arrest, Rule also offered free credit-fraud alert to all current and former employees.

Rule now keeps a specialist on retainer to help her cope with personnel issues. "The lawyers tend to be very cautious," she says. "When you suspect an employee of doing something, you have to be very careful about how you treat them." The legal risks are real. Even when employees don't have duffel bags full of assault weapons, they can still take out their employers.

WHY THEY SUE

Number of EEOC charges alleging discrimination on the basis of:

Dealt with an EMPLOYEE FROM HELL? Share your horror stories—and what you've learned—with us at FSB_MAIL@TIMEINC.COM

30% of charges FILED WITH THE EEOC* CLAIM THAT AN EMPLOYER RETALIATED AGAINST A WHISTLEBLOWER.

*U.S. Equal Employment Opportunity Commission.

IN 2005, EEOC CHARGES RESULTED IN $272 million IN PAYOUTS, DOUBLE THE AMOUNT IN 1995.

AN OUNCE OF PREVENTION

BILL DEMEZA, a partner at the Holland & Knight law firm, specializes in defending companies from employee lawsuits. Roxanne Davis, principal of Davis Gavsie in Los Angeles, represents employees. Here are their suggestions for avoiding the courtroom.

KNOW THE LAWS.

The latest federal employment regulations can be found at the websites of the Department of Labor (dol.gov/compliance/audience/smallbus.html), EEOC (eeoc.gov/employers/smallbusinesses.html), and OSHA (osha.gov/dcsp/smallbusiness). Local regs are trickier to track, as each state has different regulatory agencies. Most employment lawyers offer pamphlets that describe the pertinent requirements.

HAVE A HANDBOOK.

It's probably last on your priority list, but an employee handbook establishes that you treat all employees consistently and don't single anyone out.

DON'T USE CONTRACTS.

Employment contracts can hamper your ability to fire an employee. If a contract states that you will employ someone for two years, you can't let him go after six months.

KEEP WRITTEN RECORDS.

Think "evidence." Have managers document conversations and evaluations immediately, even if it's just jotting a (professionally worded) note for the files.

DON'T MOVE THE AGGRIEVED.

Don't assume that your problems will be solved by transferring an employee to another position. He may not consider the new job to be equivalent and could charge retaliation.

HIRE WELL.

Even the lowest-level prospect—the kind who is typically hired quickly—should be thoroughly vetted by at least two interviewers. Check references.

BE PROACTIVE.

Even the smallest personnel issue should be addressed immediately. Any delay will give a potential employee from hell the time to stockpile ammunition for a lawsuit.