(August 2019)
Employment-related Practices Liability (ERPL) exposure is a complex, long-term challenge for employers and their insurers. Any employer, regardless of size, can be subject to time-consuming and expensive ERPL claims. Even a proactive, people-minded employer that has implemented stringent procedures and standards may face complaints or lawsuits from current employees, former employees and, in limited circumstances, from customers/clients. All employers face this exposure. Regardless whether a lawsuit results in an award, employers still have to deal with staggering defense costs.
Here are some current trends that are contributing to ERPL allegations and claims:
· The American workforce is increasingly diverse, bringing together more people with vastly different backgrounds, race, religion, economic levels, social standings, and cultures.
· Businesses often have management and supervisory personnel who are older and have different work ethics and disciplinary methods than the newer, younger employees. Supervisors may not have the training or communication skills to manage their younger staff members.
· Many businesses utilize internship programs and college recruiting practices to hire younger professionals as managers, human resource representatives and for talent acquisition. These younger managers and supervisors may lack the ability to effectively communicate with their older and more tenured staff.
· Certain laws encourage employers to hire untrained employees with little or no experience and few work skills in order to gain tax-incentives.
· Employers often must provide very basic interpersonal skills in the workplace training, adding a burden of having to provide such training consistently to every employee.
· Increasingly, employers must compete nationally or even internationally, dramatically changing the scope of many businesses.
· The emphasis on technology and cost-cutting practices place greater demands on remaining workers.
· Privatization results in jobs previously managed by governments being converted to the private sector. Possible changes in employee support systems may mean that employees may seek new remedies for perceived injustices.
· Career-long employment is now rare, affecting the level of employee loyalty and causing higher turnover.
· Contractors seeking federal business face higher scrutiny due to the demand to comply with all local, state, and federal employment laws.
· The quantity of federal, state, and local legislation and regulatory edicts provide employees with additional ways to allege mistreatment by their employers.
· Prolonged economic downturns create downsizings, deferred salary increases, higher business expenses, and other issues that strain employer/employee relationships.
The ERPL exposure begins when an entrepreneur hires his or her first employee. A new employer must first identify the job responsibilities of the employees she seeks. She must clearly define the job requirements and expectations, the training needed and the training the employer will provide, as well as the output expected of each type of employee. If employer expectations differ from employee perception of the job duties and compensation, ERPL claims may follow.
The employer must develop excellent recruitment and hiring practices. Its procedures should be carefully evaluated and published in a manual that every supervisor is expected to read and understand. The procedures must be monitored to make sure all are followed in every circumstance. Discrimination among employees can only be practiced when there are clear and unarguable reasons such as setting a minimum employee age to comply with child labor laws or prohibiting certain employees from certain jobs due to known health hazards associated by gender or age.
Insurers, agents, and brokers need to raise awareness concerning this exposure. As with any exposure, there are things that can and must be done to reduce the frequency of loss and control the dollar-amount of losses one cannot avoid. The employer and its insurer should cooperate in the loss control process.
Employers must have careful procedures for each step of the employment process. Job standards and qualifications must be defined for each position. Procedures must be followed for the application and hiring process, periodic employee reviews, promotions, internal reprimand procedures, and demotions. Perhaps the most critical process is termination because most ERPL claims are filed by employees who were recently terminated.
It is important for employers to make background checks when hiring and to review references. If an employer hires a known abuser or employee with past ERPL complaints, it will weaken its defense of future ERPL claims. Of course, this effort is hampered by another reality: previous employers are unlikely to share records of misconduct because of the danger of being sued by their former employee.
A written procedure for making ERPL complaints must be made available to all employees. The best defense against charges that lower level supervisors abused an employee is a sincere “open door” policy by upper level managers. Most commonly, this is done via the employee handbook. Management must be sure handbooks are carefully developed initially and reviewed periodically to keep them up to date. Posted notices regarding the policy of the employer toward harassment and discrimination are important. The notice should also provide contact information.
Early review of complaints as well as proper notification to appropriate personnel must be the rule to catch problems early and placate the claimant. The employer should attempt resolution of situations without a lawsuit where possible, while working with the insurer so as not to violate any policy provisions.
Alternate dispute resolution should be a part of the process. Employers should attempt to handle as much as possible in-house. Once attorneys or government agencies are involved, costs skyrocket. If practicable, employment contracts should bind both sides to alternative dispute resolution (ADR).
If the employer conducts human resource audits or reviews, it must also be ready to address any indicated problems. One may be better off not knowing about a problem than knowing but not acting. It is important that results be communicated to upper management and an action plan put in place to quickly implementation recommendations.
Documentation of education and training of management and supervisory personnel are critical factors in ERPL claims. So are the education and training of employees. Such training should not be one-time, but ongoing with refreshers and updates. Penalties for non-compliance with ERPL procedures should be clearly stated and properly enforced.
All internal company communication is “discoverable” in a lawsuit. That includes email and any other form of electronic communication including texting, Twitter, Facebook, and any other retrievable data.
Record keeping is important and so is record retention. Be especially careful about content, consistency, and completeness of personnel records and files. Any possible adverse situations must be well documented. Records and files that are incomplete or missing will adversely affect the employer.
Look for company practices that may hold potential for ERPL lawsuits and complaints. Examples of these include genetic testing, obtaining medical records, and obtaining credit reports. Be very careful that procedures comply with legislation and regulations for obtaining and communicating fairly with the employee or potential hire.
As with any exposure to loss, there is more than one risk-handling option at the employer’s disposal. Sometimes, combining risk management procedures brings the most effective results. The five most common methods include:
· Purchasing insurance to cover your loss
· Partial self-insurance
This may include setting aside funds to for ERPL loss control, complaint resolution, and claims handling. Alternatively, it may involve accepting large deductibles, co-payments, or self-insured retentions.
· Self-Retention
Usually the employer must be a very large firm or have considerable assets to rely on this alternative. ERPL losses have both frequency and severity.
· Transfer of risk via contracts such as employment contracts.
· Avoidance
Though drastic, it may sometimes make sense to abandon (or choose not to initiate pursuit of) some activities.
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Example:
Futuristika Inc., a software firm, has been enjoying explosive growth in
earnings. It began with nearly 60 employees ten years ago. Today, it has more
than 200. While its original employees were either single or young married
persons, many now having young families. Futuristika’s executive management
was exploring adding onto to its main office and starting up a daycare
service. After a legal consultant pointed out that this service might be
strongly resented by employees who did not have children, management decided
to abandon the idea. |
Due to the frequency and severity of ERPL claims, insurance is becoming the method of choice. However, the other alternatives should still be used to control the total cost of this, potentially volatile exposure.
While ERPL Insurance is available as a stand-alone policy, it is increasingly available as an endorsement to D&O Liability, Professional Liability, CGL, and Umbrella policies. A few considerations are in order when endorsing ERPL to another policy.
· ERPL has both a frequency and a severity potential. This may adversely affect the other lines of business and the employer may end up losing an otherwise sound D&O, professional, CGL, or other coverage due to poor ERPL loss experience.
· The ERPL coverage may affect the pricing of other lines of insurance when combined.
· It is difficult to mix claims-made provisions with occurrence provisions. Make sure the coverage or lines do not conflict.
Insurance professionals often recommend that ERPL protection be purchased as a stand-alone policy so as not to disrupt other coverages. However, adding the coverage to a D&O policy has become very popular.