Reducing Employment Practices Risks

By Lori Widmer, American Express: Inside Edge

The recession didn’t just hurt mid-size companies’ sales, profits and cash flow. For some, the economic downturn also resulted in more employee lawsuits claiming everything from discrimination to sexual harassment.

As companies reduced their headcounts to reduce costs during the downturn, the number of what’s widely known as employment practices liability claims grew.

According to the Equal Employment Opportunity Commission, more than 93,000 workplace discrimination cases were filed in 2009 and 95,402, were filed in 2008, the highest numbers since 1992.

Regardless of the outcome, claims are expensive, and not just to a company’s reputation. In 2009, the average cost of an EEOC lawsuit topped $235,000, according to the agency.

Despite the expense, it’s the rare small or mid-size company that carries employment practices liability insurance. Even though more than 50 percent of claims are filed against small companies each year, only 1.2 percent of businesses that size purchase EPL insurance, according to business insurer Munich RE.

Avoiding employment liabilities isn’t rocket science. It takes common sense, detailed policies and clear communications so managers and employees know what is and isn’t allowed.

Prudent management practices are the foundation of any employment practices liability risk reduction plan, says Richard McGrath, president of McGrath Insurance Group, an independent insurance agent in Sturbridge, Massachusetts. “Good management skills, implementing the right policies and procedures, and treating people fairly is the best common sense approach to avoiding a claim,” McGrath says.

Here are what McGrath and other experts identify as the three most common employment liabilities along with their suggestions for how to avoid them.
Avoiding employment liabilities isn’t rocket science. It takes common sense, detailed policies and clear communications so managers and employees know what is and isn’t allowed.

Discrimination and harassment

According to the EEOC, racial and age discrimination claims and sexual harassment claims filed by men all rose during the recession. Of all employment practices claims filed in 2009, racial discrimination accounted for 36 percent and age discrimination claims account for 24 percent, according to the agency.

Sexual harassment claims by men rose slightly over the last decade to 16 percent of all sexual harassment claims filed in 2009, according to the EEOC. Experts believe the increase is related to the fact that more men lost jobs during the recession than women, 4.4 million from 2008 to 2010 compared with 2.3 million women, according to the Bureau of Labor Statistics.

The most effective way to prevent any type of discrimination claim is to maintain an updated employee handbook. David Parker, partner and head of executive and professional liability practice at McQueary Henry Bowles Troy LLP, a Dallas insurance and risk management firm, says employee handbooks should outline a company’s policies against harassment. Handbooks should also include EEOC designation details, language informing employees that the company follows EEOC policies. Done correctly, a handbook should serve as a written reference for companies to follow on what policies they should be following, Parker says. “As employment laws change, it’s necessary to modify the employee handbook to make sure it’s updated to the changes in employment law.”

Wrongful termination

According to the experts, an employee is more likely to sue in a weak economy, when finding a new job could be extremely difficult, leaving them angry and resenting a former employer. Under such circumstances, companies could end up facing wrongful termination suits if they don’t have strong hiring and firing processes in place or don’t stick to policies they do have.

McGrath, of McGrath Insurance Group, has witnessed an upsurge in employment practices liability claims among his clients, mostly related to layoffs and workplace disputes between employees. He’s also seen increases in discrimination and harassment claims and charges that employers violated the Family and Medical Leave Act and the Americans with Disabilities Act. McGrath also reports seeing increased activity in claims involving contracts defining employer-employee relationships.

To reduce wrongful termination claims, companies need to use sound risk management practices from the first time they invite a prospective employee in for a job interview. Managers should be trained on what they can and cannot ask when interviewing prospective employees, says Thomas Hams, managing director and national EPL practice leader of Aon Risk Services Central’s financial services group in Chicago. In addition, managers need to understand the proper way to handle performance reviews, requests for time off and employee complaints, Hams says. Companies could avoid many claims simply by developing better employee communication, he says.

When McGrath reviews a company’s employment practices as a precursor for EPL insurance coverage, he looks to see if a company has an updated employee handbook and whether it meets both state and federal requirements. In his review, McGrath also checks to see how companies enforce their employee handbooks. He says employees should be required to read the handbook and sign receipts acknowledging they understand what they’ve read. Other experts say it’s a good idea to have employees acknowledge in writing that they understand the at-will nature of the employer-employee relationship.
In McGrath’s review, he also goes over a company’s process for terminating an employee. As part of his review he looks at whether the company has fired anyone in the last two years, how they handle terminations and whether they review the termination process with HR and legal counsel ahead of time.

Wage and hour claims

Wage and hour claims settlements have surpassed employee discrimination suits as a source of exposure for mid-size companies, according to a recent report from Advisen Ltd., an insurance industry researcher.

Whether because of layoffs or having to get by with fewer employees, companies could be setting themselves up for lawsuits if workers are putting in longer hours and not being properly compensated. Employees who are working longer hours than they’re paid for, with or without a company’s consent, pose a significant risk, says Hams, the Aon executive. “The employer either is or can be made to look like they’re aware the employees are doing so,” he says.

Even so, the U.S. Department of Labor reports an estimated 80 percent of employers don’t follow wage and hour laws. But they do so at substantial risk. Little, if any, insurance coverage exists for wage and hour claims. That’s because insurance companies categorize such claims as moral hazards, meaning that if coverage existed, more businesses could exploit workers knowing that the practice would be covered. What little coverage there is covers defense costs, but not damages, Hams says.

Experts agree the best way to prevent wage claims is to pay workers wages that fall within the same pay range regardless of gender, race, ethnicity or disability. To reduce claims of unpaid overtime, companies should have strict overtime policies and discourage voluntary overtime work. If employees are working off the clock, tell them to stop and document the incident in personnel files, says Parker.

Parker also recommends that companies require nonexempt employees to clock out and back in during their designated break times. Requiring employees to take break times, even if they choose to spend the time working, can reduce unpaid overtime claims and creates evidence that the company follows wage and hour laws, he says.