Managing the rising tide of employment practiceslawsuits

By Salvatore Pollaro | October 9, 2006

The reality of today’s workplace is that a wide variety of employee grievances may escalate, almost without warning, into costly lawsuits. Any time an employee objects to a company employment practice that is perceived as unfair, an employment-related action may ensue.

Adopting best practices and formalized company employment policies may help to reduce employee claims. Training all employees and managers, as well as publishing and enforcing employment policies, are also important requirements.

However, none of those methods can completely insulate an organization from employment-related actions. The bottom line is that employment practices claims, like other tort exposures, are risks that may jeopardize corporate assets and therefore should be insured.

Claims keep rising
From 2000 through 2004, slightly more than 405,900 charges were filed with the Equal Employment Opportunity Commission. Not included in those complaints are claims filed with comparable state agencies or filed directly in state and federal courts. Beyond that, claims that were settled privately are not included in the statistics, making it difficult to estimate the actual number of actions brought and what their ultimate cost to employers has been. The parade of multi-million-dollar verdicts in the news headlines tells another part of the story. Once-rare judgments and settlements of more than $10 million are now more common, and the number of million-dollar settlements is rising.

Multi-faceted impact
While the impact of a multi-million-dollar claim may be severe for any company, one such claim could jeopardize the survival of a small or midsize business. Further, as devastating as the financial impact may be, those dollar amounts still do not include the soft costs of disruptions to operations, loss of employee morale and damage to a company’s reputation or brand identity.

State and federal laws such as the Americans with Disabilities Act of 1990, the Civil Rights Act of 1991 and the Family and Medical Leave Act of 1992 are aimed at protecting workers’ rights, and they also provide a cause of action for much litigation. Federal and state laws govern nearly every aspect of the workplace, including hiring, employment practices and termination. Those laws have left many companies struggling to interpret and comply with hundreds of pages of seemingly ambiguously worded provisions. That can be especially difficult for a small to midsize company that does not have legal or employment specialists on staff.

Shifting regulations and rising risk
Azel P. Smith et al. v. City of Jackson, Miss. in March 2005. In a 5-3 vote, the court ruled that, under the Age Discrimination in Employment Act (ADEA), seemingly neutral workplace practices that have a disproportionately negative impact on workers over the age of 40 may be considered discriminatory, although they were not intended to be so. Prior to that decision, claimants could recover damages only if they were able to demonstrate that an employer’s actions were designed to discriminate against older workers.

The decision underscores the necessity for employers to scrutinize workplace policies and practices for consequences that may be perceived as being discriminatory, regardless of the employer’s intention in implementing them.

For example, it may appear reasonable for an employer to institute a benchmark of required computer skills. However, such a requirement may be an easy step for younger workers but present a hurdle for older workers who have not had the same lifelong computer experience.

Would such a policy have a disparate impact on older workers? If so, it may subject the company to a lawsuit. The implications may be overwhelming for a business that simply doesn’t have the staffing depth or expertise to scrutinize every policy and procedure it implements.

No company, large or small, is immune to litigation. All employers share a common exposure — employees — and therefore they are at risk for employment practices litigation. The growing concern over this risk has caused many employers to turn to the protection of an insurance program.

Defining program differences
In the 15 years since the first employment practices liability insurance (EPLI) policies were introduced, coverage terms and conditions have become relatively standard, with most policies providing coverage for suits arising from:

  • Sexual harassment in the workplace;
  • Wrongful termination or treatment;
  • Discrimination against any protected class; and
  • Failure to hire or to promote by reason of age, sex, race or religion.

While insuring provisions may differ only slightly from policy to policy, the experience level of insurers that provide EPLI may vary considerably. Relatively few insurers have remained in the EPLI market long enough to acquire the experience needed to understand the complex nature of today’s employment practices liability exposures. As important as coverage terms are the knowledge level that an insurer brings to the customer’s exposure may make the difference between a well-structured program and inadequate coverage.

Employers seeking adequate coverage are well advised to seek an insurer with the knowledge and experience to offer informed advice about appropriate coverage and retention levels, and that can structure a program that meets the buyer’s needs. Of equal importance to a well-structured insurance program are loss prevention services available to employers. Those might include Web-based human resource tools such as employee manuals and employment forms; training bulletins; guidelines for hiring, terminations or family leave; drafts of anti-discrimination policies; and a best practices database with real-life workplace scenarios.

Once an afterthought, employment practices liabilities have grown into a major concern in today’s workplace. A single bias complaint could seriously impair a company’s assets and perhaps even jeopardize a company’s existence. A well-designed EPLI program may provide employers the protection they need to weather a claim.

Salvatore Pollaro is senior vice president with Zurich’s management solutions group, responsible for the company’s employment practices liabilities insurance business.

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Insurance Journal West October 9, 2006
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