Protect Your Business From Employment Practices Litigation

Any small business owner will agree, those two words are difficult to say. But many don’t realize they’re also potentially treacherous because they may well incite disgruntled employees to file lawsuits. Of course, if the people you terminate are “at will” workers — who presumably can be handed a pink slip at any time for any reason — there’s no need to worry, right?

Wrong.

“Employment litigation has increased dramatically over the last 10 to 15 years,” says attorney Robert Gilmore, a partner with the Kohrman Jackson & Krantz labor and employment law group in Cleveland, OH. The “sue-your-terminator” trend is no longer relegated to Fortune 500 corporations, and has trickled down to smaller businesses. “No company is immune, no matter what the size,” says Gilmore.

The at will doctrine, used by the majority of small businesses nationwide, is intended to help bosses sack that slacker who downloads tunes all day or that salesman in a three-year slump. The concept presumably means a boss can say sayonara to an employee at any moment, for any reason that is within the law.
However, a number of worker protection laws that have been enacted in recent decades give employees more grounds to sue their bosses. It’s illegal to terminate someone because they’ve contacted a union, filed for workers’ compensation, taken a leave under the Family and Medical Leave Act, or engaged in other protected employee activities. It’s also unlawful to dismiss people because of their race, color, religion, age, gender, sexual orientation, national origin, disability, marital status, medical condition, or for any other reason that violates a variety of federal, state and local laws.

Violating any of these legal provisions essentially transforms at will workers into for cause employees. In the eyes of the law, for cause means that a person can’t legally be fired without a legitimate documented reason. For cause workers typically include union laborers, government workers, and employees under contract.

Issuing pink slips to employees can be costly
Unfortunately, even if you are lawful and act within your rights to terminate an employee, you can still get sued.

In 2006 alone, 75,768 employment discrimination charges were filed with the Equal Employment Opportunity Commission, the first stop for workers planning to take employers to federal court. Another 30,000 small businesses are sued in federal court each year for wrongful termination and other matters, according to a study conducted for the Small Business Administration by Washington, D.C.-based Klemm Analysis Group.

By most estimates, the median settlement payout in an employment practice liability lawsuit is nearly $90,000. And that doesn’t include exorbitant attorney fees.

However erroneous the charges may be, litigation can easily drive any small business into bankruptcy. Fighting lawsuits “gets to the soul of the small business owner,” says Rebecca Klemm, president of Klemm Analysis. “And the emotional damage can exceed the financial damage.”

Protect your business with employment practices liability coverage
Be on alert. “Just because a lawsuit hasn’t occurred yet, doesn’t mean it won’t happen tomorrow,” warns Paul Sullivan, a vice president with Hartford Financial Products. If you want protection from disgruntled employees, you may well want to consider purchasing employment practices liability (EPL) coverage.

EPL insurance provides coverage for various charges or allegations, including claims of racial or age discrimination, sexual harassment, wrongful termination or noncompliance with the Americans with Disabilities Act. Coverage typically includes defense costs and payment of settlement or judgment up to the policy’s limit.

EPL coverage for small businesses typically runs from $2,500 to $5,000 a year, according to Michael Henthorne, special counsel and employment litigator with the McNair Law Firm. Insurers base rates on several risk factors, including the number of employees, the turnover ratio, and any past harassment or bias suits against the company.

Nicholas Koutrakos, CFO of Boca Raton, Florida-based Call 4 Health, a provider of answering services for medical and health care concerns, has never been sued, but he recognizes the threat. With 55 employees, Koutrakos sees EPL as a necessary expense. “I’ve heard horror stories that some of these cases can cost $500,000,” he says. “You can get wiped out.” Now, he plans to quadruple his coverage from $250,000 to $1 million. This will double his annual EPL insurance bill to $5,000. But, “It’s absolutely worth it,” he says. “It’ll let me sleep at night.”

 

Protect Your Business From Employment Practices Litigation So how can you protect yourself and your business from time-consuming and costly litigation? Employment attorneys offer these tips: Maintain fair, compassionate and scrupulous human resource practices. Hire the best people and keep them happy. “You need good employees who feel privileged to participate fully and who are valued, respected and trusted,” says Barrie Gross, a San Francisco, CA-based human resources expert and employment law attorney. Provide employee handbooks and/or offer letters. If you assert at will employment status, be sure it is prominently stated and clearly explained in your handbooks and other pertinent employee communications. Some firms ask workers to sign an at will agreement, so they can’t ever deny knowledge of it. Rely on an employment lawyer. Having a lawyer review your handbook is additional assurance that your policies are legal. Give workers the tools they need to succeed. “Provide honest feedback, and access to mentors, managers, information and training,” says Gross. Document performance. Hold regular performance reviews and document people’s failures painstakingly. Giving workers raises and glowing performance reviews, only to fire them, will not stand up well in court. Don’t make promises you might not keep. Don’t let supervisors or managers promise eternal employment for a job well done. Such statements may constitute a verbal contract, nullify people’s at will status, and give them more protection from termination. Offer employees second chances. Give people time to improve performance, set deadlines for positive behavior changes, and don’t “sucker punch.” Surprise firings are inhumane and tempt legal battles. Be careful about dismissing people during economic downturns. If it’s difficult for dismissed workers to find new employment, making a claim becomes even more attractive. Treat people as if they’re “for cause,” but hire them “at will.” That way, if you’ve followed all of the appropriate measures, and you still have a bad apple, you have more flexibility to terminate an at will employee, says Gross. Consider offering employees a generous severance package when they are fired. Short-changing people only leaves them more aggrieved.

Resources:
To learn more about employment practices and liability, visit the following websites:
U.S. Department of Labor
Equal Employment Opportunity Commission
Chubb Insurance Corporation’s “Employment Practices Loss Prevention Guidelines” pamphlet.
The Society of Human Resource Management’s Workplace Law department.

There are several dozen companies offering EPL insurance, so before purchasing coverage for your business, you’ll want to get quotes. There is no standard policy, so confirm the types of claims, fees and damages covered.
AIG
Chubb
Hartford
Insure Pro
Tennant Risk Services
Travelers