As a business owner you strive to attract, develop and keep your employees. Whether your workforce is big or small, skilled or unskilled, customer-facing or back of the house, your enterprise is highly dependent on the people you choose to surround yourself with.
As such, my guess is that you would agree one of your most critical assets is your human capital. But what if that same asset was also one of your most significant liabilities?
Most costs associated with being an employer are well-known – payroll and taxes, benefits, workers’ compensation insurance, etc. Some costs are lesser known but equally significant, such as the costs associated with employment practices law suits.
Employee lawsuits are filed for a number of reasons, but commonly fall under the categories of wrongful termination, discrimination, harassment, failure to pay overtime or provide meal and rest periods and privacy violations, to name a few.
In 2015 the average cost of settling such cases out of court was $75,000 with jury awards averaging $200,000 per employee. Those costs are not dropping, especially in California where settlements and judgements have increased 400 percent in value over the last two decades.
While there is a risk management option designed to transfer this peril from employers to insurance carriers, this coverage is only purchased by 20 percent of companies with 50 or fewer employees according to a recent study of U.S employers. Of those surveyed, over 50 percent mistakenly thought that their general liability policy afforded coverage for employment related claims.
The reality is that without a standalone policy, you are left with little or no coverage in the event of an employment practices suit.
Employment Practices Liability Insurance — commonly known as EPLI — is widely available in California. EPL coverage is designed to protect employers from lawsuits brought on by employees and protect companies from losses that are not covered under any other type of insurance policy.
Typical EPLI policies cover defense against employee claims, as well as judgement or settlement amounts up to policy limits.
Most experts agree that it’s not if, but rather when your company will be sued by an employee. As a California employer, you are 40 percent more likely to experience an EPL claim than the national average. To put it in perspective, your business is more likely to have an EPL loss than a fire or a general liability loss.
As a risk manager, I strive to make sure my clients actively retain every conceivable risk. Active retention is the practice of understanding that you have a risk in the first place, then choosing a plan of action that protects you against that risk. Given the frequency of EPL losses and their potential severity, it’s critical to have a robust plan in place to mitigate the risk.
Like all good risk management plans, insurance is just one piece of the puzzle. It should also be considered a backstop, rather than a substitute, for good front end protection.
- The first line of defense against EPL claims is a solid employee handbook. This document should clearly outline policies and procedures for hiring, discipline, discrimination and harassment and code of conduct, to name a few. The employee manual should be signed by each employee and reviewed annually by a labor attorney. Ask your risk management professional to recommend a competent attorney to help draft and review the handbook. While it’s not the norm, there are a select few agencies that pay for their clients to access labor and other specialty attorneys free of charge. Be sure to ask if your insurance agency makes that investment on your behalf.
- Workplace training can also help prevent EPL suits. Since you as the business owner can’t be present for every interaction between employees, it becomes difficult to provide a workplace free of discrimination, harassment and violence. Providing employee training is one way to increase a culture of awareness at your workplace. It’s critical that employees and supervisors understand and acknowledge your organization’s zero tolerance policy for harassment, discrimination and violence. This is another area your risk management professional might be able to assist. Online modules and certifications are not always offered free of charge through your insurance agency, but this is one of the distinguishing hallmarks of select agencies who offer value added services outside the normal scope insurance coverage.
- Documenting your employment practices efforts is critical in preventing and defending against claims. Whether in training, employee evaluations or disciplinary actions, a well-documented employee file can make a world of difference. For example, it becomes increasingly difficult for an employee to claim wrongful termination if the employee file is documented with the specific instances when poor performance is both noted and communicated to that employee.
Investing in programs and policies to assist in frontend EPL prevention can be costly and time consuming. If you don’t have the infrastructure in place, remember that your risk management professional is here to help.
Since all employers are susceptible at least to some degree, don’t forget that the best risk management solutions are multi-pronged. Every organization should consider having that backstop in place for when best intentions and efforts fall short. As I like to remind my clients, you don’t forgo property insurance just because you have alarms and sprinklers in the building.
An investment in your risk management program today might very well keep your doors open tomorrow.
–Nelson Aldrich is an insurance broker with WISG Insurance, headquartered in Turlock. He can be reached at [email protected].