Are you mitigating your risk of employment practices violations? If not, your business could be open to an employee lawsuit that your commercial general liability (CGL) policy won’t cover.
CGL insurance excludes employment practices claims. And if you think your commercial umbrella policy will extend coverage for an employment practices lawsuit, it won’t. Umbrella policies only extend coverage to the underlying policies you already have. You’d need employment practices liability insurance (EPLI) for that.
What does EPLI cover?
General liability only covers bodily injury, property damage, defamation and other liabilities involving nonemployees, like customers and vendors. Workers’ compensation covers employees for workplace injuries but not for improper handling of employee rights.
EPLI protects businesses and nonprofits against employment practices claims. It covers unintentional improper acts, such as wrongful terminations, retaliation, harassment, discrimination and other violations of employees' legal rights. However, EPLI doesn’t cover work-related injuries; you’d need workers' compensation insurance for that.
You can add EPLI to your business owners policy (BOP) or get a stand-alone policy. Intentional wrongdoing is generally excluded, and state laws may restrict insurance for such acts if a court determines they were intentional. EPLI helps cover legal fees and settlements, which can be a costly endeavor for businesses of any size.
What are some employment practices liability risks?
Here are examples of employment practices violations:
- Retaliation by management against employees
- Wage and hour disputes over minimum wage, overtime, child labor, and meal-and-rest-break laws
- Wrongful terminations
- Discrimination based on race, religion, age, sex, disability, genetic information, national origin, pregnancy and other protected characteristics
- Sexual harassment
- Breaches of contract
- Mental or emotional harm
- Defamation and slander
- Invasions of privacy, including biometric information and surveillance
- Failure to hire or promote
- Deprivation of career opportunities
- Negligent evaluations
- Negligence
- Mismanagement of employee benefits or pensions
- Genetic discrimination
Even if it is a mistake, it’s still illegal, and you can be sued.
Are smaller businesses at risk for employment lawsuits?
Yes. Being a small business doesn’t exempt you from compliance requirements. Many small to midsize businesses lack a full-time legal or human resources department, which exposes them to greater liability. A midsize business may not have the resources to withstand an employee lawsuit. That’s why all businesses should take a proactive approach to their employment practices.
Beyond legal compliance, maintaining a respectful and safe work environment is vital for hiring and retaining skilled employees. Happy, well-respected employees reflect positively on their employers and the customers they do business with.
Who oversees employment practices?
The United States has rigorous federal and state laws for most businesses. Many standards apply regardless of whether the entity is a private business, a government entity, a nonprofit organization or a religious institution. Here are the main ones:
- The U.S. Small Business Administration (SBA) notes that an employer must protect workers’ rights by following labor laws and other regulations.
- The U.S. Department of Labor (DOL) administers and enforces more than 180 federal laws. Companies must know and comply with laws for hiring veterans, foreign workers, minors, people with disabilities, and other groups. Businesses must also comply with state and federal laws when terminating employees, disciplining staff, conducting layoffs or downsizing operations.
- Regulations under the Fair Labor Standards Act govern minimum wage, overtime pay, recordkeeping, and youth employment standards for private and federal, state, and local government employees. Therefore, DOL also has a role in oversight, investigations and prosecution.
- The Occupational Safety and Health Administration (OSHA), which oversees workplace safety, enforces safety standards and investigates complaints. OSHA regulations apply to employers of all sizes, with very few exceptions. Most workplace-related injuries are covered by workers' compensation, not EPLI. But if the injury is related to an employment liability, it could be part of a larger claim involving EPLI. An example might be a supervisor retaliating against an employee for reporting an injury.
- The Equal Employment Opportunity Commission (EEOC) enforces federal laws like Title VII of the Civil Rights Act of 1964, which makes it illegal to discriminate against an employee or job applicant due to their race, color, religion, national origin, age (40 or older), disability, genetic information, or sex. (Sex includes pregnancy, childbirth or related conditions, transgender status, and sexual orientation.) Most employers with 15 or more employees are covered by EEOC laws.
There’s a great deal of complexity in the law. As a result, employers are at risk for a wide array of mistakes. That’s why it’s essential to consult with lawyers and HR professionals who are knowledgeable in employment law and liability.
Should you use an attorney or HR professionals?
You need both. An attorney specializing in employment law is invaluable, since they understand and stay current with legal updates and their application to businesses. They can help you stay in compliance with state and federal laws, as well as review and draft employment contracts.
Consult with your HR specialist, too. They stay current with laws and can help with
- Drafting employee manuals
- Sourcing training
- Advising on appropriate hiring, disciplining and firing practices
- Providing a range of other valuable services
If you don’t have the budget for a full-time HR professional, consider hiring a freelance one. Most freelance marketplace job platforms feature listings for HR specialists.
Always vet your candidates thoroughly before retaining their services.
What’s the most common cause of employment practices lawsuits?
Retaliation is the leading cause of employment practices liability claims. It often accompanies other allegations of employment-related wrongdoing, such as harassment or wrongful termination.
Equal employment opportunity (EEO) laws prohibit retaliation against job applicants or employees for asserting their rights to be free from employment discrimination.
What are some risk scenarios?
Your business can face employment practices liability for issues ranging from payroll errors to a hostile work environment. These acts are especially problematic if they occur frequently or if management fails to respond when the issue is brought to their attention.
Here are some examples:
- An employee reports fending off sexual advances from a manager. Before investigating or taking witness statements, the company owner asks the manager and the employee to sit down together and resolve the issue like adults. Asking the employee to directly confront the manager (the accused) without conducting a formal investigation or assessing evidence can exacerbate the situation. It risks retraumatizing the employee and creates an opportunity for further intimidation or retaliation.
- A supervisor retaliates against a worker who reported a safety issue on the job by reducing the worker’s hours and issuing a negative evaluation. Under OSHA and other whistleblower protection laws, employers can’t retaliate against employees for raising safety, compliance, or ethical concerns. Retaliation exposes the employer to legal action and fines.
- Employees post derogatory statements about a coworker on a company bulletin board. Management doesn’t remove them in a timely manner or investigate the occurrence. Situations like these can create a hostile work environment for the worker and their colleagues.
- An employee claims they were denied appropriate overtime pay. Management does not investigate in a timely manner. Failing to promptly investigate claims can result in legal exposure, including back pay, fines and penalties. Damages could be awarded if the employer is found to be in willful violation of wage laws.
- A supervisor ignores sexually and racially offensive jokes, dismissing them as team members blowing off steam. Persistent racism, sexism or harassment can create a hostile work environment as defined by Title VII. Ignoring the conduct signals tolerance for inappropriate behavior that could spiral into legal claims. Employers can be held liable for a hostile work environment created or perpetuated by their supervisors.
- A company is accused of misallocating delivery workers’ tips. After failed attempts to rectify the situation with their employer, the workers filed a complaint with the state. The state opened an investigation, which resulted in significant fines and settlements after the company was found to be noncompliant with regulations.
In cases like these, the business will incur costs to mount a defense, regardless of whether the claims are merited. Legal expenses, reputational damage and internal investigations will still occur, even if the complaint is unsubstantiated.
What steps can you take to reduce your risk of employment practices claims?
Don’t ignore employee issues. Problems may seem small, but disputes can escalate quickly.
Train your employees on their workplace rights when they’re hired and annually thereafter.
Display all legally required posters in employee break rooms or other highly visible areas. Posters like OSHA’s Job Safety and Health: It’s the Law and the EEOC’s Know Your Rights: Workplace Discrimination is Illegal are required in every workplace. Both government websites have posters in different languages. If your employees are fluent in languages other than English, display posters in the languages that they’re most comfortable speaking and reading. If you’re investigated by a government agency, they will look for these posters.
Don’t hide internal or external reporting protocols from your employees. It’s illegal to keep your employees uninformed about how to file complaints with government agencies. One of the first things a regulator or lawyer will ask a complainant is whether they reported the situation or misconduct to their employer and, if so, what the response was.
Having a clearly articulated reporting protocol with excellent recordkeeping and follow-up can go a long way in showing your company’s good faith. It can also help resolve matters before they reach regulators and courts.
Conduct a thorough and objective investigation as soon as you become aware of any employee complaints. Involve HR for advice and next steps as soon as possible.
Can employers mitigate employment liability?
Yes. Prevention is key. Given the broad range of risks, there’s no one guideline for a company to follow for all employment matters. Educate yourself on state and federal laws.
Correctly calculate wages and hours
Learn and follow the distinctions between exempt and nonexempt employees. Review the duties of positions in the business to determine whether an overtime exemption applies.
If an exemption doesn’t apply, the employee must be treated as a nonexempt employee entitled to overtime pay. Set up and maintain good timekeeping practices for nonexempt workers. Pay employees appropriately, based on their status. Likewise, comply with sick leave, parental leave, and other wage-and-hour standards.
Know when to classify workers as employees instead of independent contractors
If a business controls how and where work is performed and provides the tools to perform it, this can indicate that a worker is an employee and not an independent contractor. See the IRS’s guidelines on independent contractors.
Potential liabilities for misclassification include unpaid payroll taxes, unemployment benefits, disability insurance, workers' compensation, claims and wage-and-hour claims. Consult an employment lawyer for clarity on employee classifications.
Use artificial intelligence and technology wisely
As technology advances, so do risks. Technology can be a help or become a liability, depending on how it's managed.
Using or collecting genetic and biometric information can inadvertently infringe upon employee rights. For example, using surveillance video in protected areas or retaining biometric information from scanners without employees' consent can violate their rights.
Relying on AI for hiring decisions, crafting communications or giving advice can become a liability without oversight. For example, if an AI gives incorrect information to your employees about benefits selection or career path advice, you might be held responsible.
AI-powered tools can assist with emails, reports and other content to ensure they set the proper tone, reading level and message before distribution. Always review writing, whether it's AI-generated or not, before sending it out. Using the read-aloud function on your browser or word processing software can help you catch unintended errors before they’re sent.
When using AI tools to screen applicants or make other employment decisions, ensure they’re free from bias. Only use reputable AI tools that are transparent and have provability built into their recommendations. Blaming the AI tool will not make a good defense in court.
When used properly and with human oversight, AI tools can help supplement employee training in a way that engages employees and boosts their learning, awareness, and empathy.
Call your agent to review your liability exposure
EPLI is a crucial tool in every company’s portfolio. Combined with a top-down culture of respect, clearly communicated and documented protocols for employee treatment, swift and balanced policy enforcement, and adherence to employment law, EPLI can help as a last line of defense against employment practices claims.