This is a trickier question because mishandling the situation poses greater risk of job loss. This is the kind of issue that most Senior Management folks loathe even knowing about, never mind addressing. The outcome is going to be depend greatly upon your approach and the kind of people running the business.
First, ask yourself how you really feel about your job. If you don't absolutely love it, it's a good time to consider planning a move. I'm not suggesting anything rash, but the simple process of beginning to explore your options.
If you work for a larger company, chances are greater that you may be able to get the issue resolved with help from HR.
In a small business, it's likely going to largely depend upon the role your manager has, and the value that management places upon each of you.
What you do not want to do is getting into a battle with your manager. Most of the time, no matter what that person is doing wrong, the manager is going to come out on top. That's because they were probably hired and/or promoted by the powers that be. It's kind of like a person's favorite ball team - no matter how much they stink, the fans that choose them are going to keep supporting them.
Whatever you do, your best bet is to focus solely on your work, rather than on your feelings. If anyone brings it to your attention by repeating things that have been said, tell them "I'm just so busy I don't have time to think about that." Repeat this each time, or change the subject to something work related. People bringing you this sort of news are just as guilty (and perhaps more so) than the person talking about you.
Here's a refresher on my suggestions for handling rumors at work with a modification:
- Do not gossip at work. If you do, you have no right to be offended when it comes around to discussion about you.
- Choose your battles. Don't bother defending yourself against gossip that is unbelievable or unlikely to harm your job.
- Take gossip that will harm your position seriously
- Address serious gossip perpetuated by your manager first with the manager directly above your own (if you can trust them). Do so as quickly and briefly as possible without whining; state unequivocally what occurred, but only the facts. Ask how you should handle the situation.
- In any discussion, focus on how it harms your work related goals. Management doesn't always care if your feelings are hurt, they do care if someone is making it difficult to do your job.
- HR is a last resort, ie; if the gossip is serious enough to harm you and you do not feel comfortable discussing with your own chain of command.