In the worst-case scenario, a personnel file may turn into evidence in a lawsuit brought by a disgruntled former employee. Make sure that you include all periodic evaluations, raises, commendations, and disciplinary actions in your personnel files to protect yourself in case of a lawsuit.

In addition, indiscreet entries that do not directly relate to an employee's job performance and qualifications -- like references to an employee's private life or political beliefs, or unsubstantiated criticisms or comments about an employee's race, sex, or religion -- will come back to haunt you. A good rule of thumb: Don't put anything in a personnel file that you would not want a jury to see.

In order to keep your personnel files from becoming fodder for a lawsuit, learn what should and shouldn't be in a personnel file, and be vigilant about what goes in and what stays out.

Include All Performance Material in Personnel Files

You should establish a time to periodically review each employee's personnel file, perhaps when you conduct the employee's annual evaluation. During this review, consider whether the documents in the file are accurate, up to date, and complete. Some questions to consider:

• Does the file contain every written evaluation of the employee?
• Does the file reflect all of the employee's raises, promotions, and commendations?
• Does the file show every warning or other disciplinary action taken against the employee?
• If your policies provide that written warnings or other records of discipline will be removed from an employee's file after a certain period, have they been removed?
• If the employee was on a performance improvement plan, a probationary or training period, or other temporary status, has it ended? Has the file been updated to reflect the employee's current status?
• If the employee handbook has been updated since the employee started working for you, does the file contain a receipt or acknowledgment for the most recent version?
• Does the file contain current versions of every contract or other agreement between you and the employee?

What Else to Keep in a Personnel File

Most, but not all, important job-related documents should go in the file, including:

• job description for the position
• job application and/or resume
• offer of employment
• IRS Form W-4 (the Employee's Withholding Allowance Certificate)
• receipt or signed acknowledgment of employee handbook
• performance evaluations
• forms relating to employee benefits
• forms providing next of kin and emergency contacts
• complaints from customers and/or coworkers
• awards or citations for excellent performance
• records of attendance or completion of training programs
• warnings and/or other disciplinary actions
• notes on attendance or tardiness
• any contract, written agreement, receipt, or acknowledgment between the employee and the employer (such as a noncompete agreement, an employment contract, or an agreement relating to a company-provided car), and
• documents relating to the worker's departure from the company (such as reasons why the worker left or was fired, unemployment documents, insurance continuation forms, and so on).

You should begin a personnel file for each of your employees on the date of hire.

What Not to Keep in a Personnel File

Your personnel files should not be a receptacle for every document, note, or thought about the employee. Here are some areas to be careful about:

Medical records. Do not put medical records into a personnel file. If your worker has a disability, you are legally required to keep all of the worker's medical records in a separate file -- and limit access to only a few people. Even for workers who are not disabled, you may have a legal obligation to keep medical records private (and it's a good idea to do so, in any case). For more information on storing medical records, read Nolo's article  Keeping Personnel Files and Medical Records Confidential.

Form I-9s. Do not put Form I-9s into your employees' personnel files. (Form I-9 is a form from U.S. Citizenship and Immigration Services (USCIS), formerly the INS. You must complete an I-9 for all employees, verifying that you have checked to be sure that the employees are legally authorized to work in the United States.)

You should put all Form I-9s into one folder for USCIS. The government is entitled to inspect these forms, and if it does, you don't want the agents viewing the rest of the employee's personnel -- and personal -- information at the same time. Not only would this compromise your workers' privacy, but it might also open your business up to additional questions and investigation.

Unnecessary material. Although an employee's personnel file may contain any other job-related documents, don't go overboard. Remember that, in many states, employees have the right to view their personnel files. (For more information, read Nolo's article Employee Access to Personnel Files: Is It Required?)

For more tips on establishing good personnel policies in order to avoid lawsuits from troublesome employees, get Dealing With Problem Employees: A Legal Guide , by Amy DelPo and Lisa Guerin (Nolo).