Employee of the month programs are used in a lot of large chain restaurants and hotels but you can also find them in small businesses. In those situations, they're probably hurting your bottom line.
It's not that rewarding employees for good work is a bad idea. People that feel appreciated are likely to work harder and be loyal which are important qualities for any employee. The problem is that the program creates a competitive environment which can lead to hostility towards the winners.
It can also easily lead to frustration with the company and trouble managing your workers. From there it could be the basis for a lawsuit.