Are you proactively mitigating your risk of employment practices violations? Businesses that do so reduce their chances of costly employee disputes. Though you may not have the legal, human resources or other staff common in large corporations, size doesn’t exclude you from many employer requirements.

Commercial general liability insurance policies typically exclude coverage for employment practices claims, as do some commercial umbrella insurance policies. Employment practices liability insurance, known as EPLI, is a common way to insure your risk.

But you can and should take steps to prevent accusations, claims and lawsuits in the first place and handle them properly if they do arise.

How does risk arise?

Organizations in the United States are held to rigorous standards under federal and state laws and regulations. These standards apply whether they’re a business, government entity, nonprofit or religious institution.

What are the risk areas?

Businesses can face liability for actions related to:

What’s the most common cause of employment practices liability?

The leading cause of employment practices liability claims is retaliation, which often piggybacks onto other allegations of employment-related wrongdoing.

Equal employment opportunity (EEO) laws prohibit punishing job applicants or employees for asserting their rights to be free from employment discrimination. Asserting EEO rights is “protected activity” under the law. Retaliating against applicants or employees for asserting those rights violates federal law.

What are some risk scenarios?

Businesses can face employment practices liability for issues ranging from payroll errors to hostile workplaces to bad management behaviors, such as threatening the safety and well-being of workers. These acts are especially problematic if they are frequent or if management is unresponsive once attention is brought to the problem.

Here are examples of such situations:

How do employees report an incident or pattern of wrongdoing by a manager or employer?

Employees can present their claim through a:

One of the first things a regulator or lawyer will ask a complainant is if that person reported the situation or misconduct to the 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 the company’s good faith. It can also help resolve matters before they reach regulators and courts.

What steps can you take to reduce your risk of employment practices complaints?

Don’t ignore employee issues. Problems in the workplace might seem small, but disputes can evolve into a departmentwide or firmwide problem. Business owners and managers who hear about employee complaints must tackle the issues as quickly and forthrightly as possible. They must also anticipate potential problems and institute preventive measures.

While posting employment notices is a requirement for every employer, it’s nowhere near enough to deal with a business’s obligations. In fact, some business leaders view employment practices risk as an opportunity to create a culture of awareness and zero tolerance for acts of harassment, discrimination and retaliation.

Business owners can provide planned, frequent training and assessments of how the company conducts its operations. Overall, these can improve how the firm implements and complies with laws and regulations. Companies that learn the law and take steps to protect theie business can better manage their operations and costs over time.

Prevention is key. Consider the basic steps a business can take to cut employment practices liability risk:

Realize the onus is on management to protect employees’ rights. Given the broad range of potential risks, there’s no one guideline for a company to follow for all employment matters. While it might not be convenient for managers, they are obligated to follow legal standards and regulations if a worker lodges an employment practices complaint.

Do wage and hour calculations right. 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, you must 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 a worker is an employee and not an independent contractor.

The IRS published these guidelines: “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”

Independent contractors have an established business, make services available to more than one company and control the means and methods of work, according to attorneys in the human resources and taxation fields.

Potential liabilities for misclassification include unpaid payroll taxes, unemployment benefits, disability insurance, workers’ compensation claims and wage-and-hour claims.

Many states have additional layers of law, regulation and enforcement. Talk to an attorney if you have questions about worker classifications.

Look at legal strategies for employment practices risk management. Consult an employment attorney to consider arbitration agreements that limit or waive employees’ rights to class-action lawsuits (typically only for nonexempt employees).

An employer and employees with an arbitration agreement in place can resolve an issue through arbitration rather than class-action litigation. Employment practices attorneys note this arbitration can present less risk and cost to the employer. Notably, it can reduce collateral damage in the court of public opinion and help employers and employees return to business after a workplace conflict.

Let technology help. There are diversity and inclusion software programs that can help organizations avoid problems in communications and hiring. Some of these allow workers to run their emails, memos and other content through a filter before distributing. The software highlights inappropriate language and suggests a revision so the author can adjust the wording before sending it out.

Other diversity and inclusion software tweaks job descriptions so they are less likely to discourage certain classes of candidates. They also ensure “blind” evaluation of applicants until further into the hiring assessment. These programs do follow-up resume queries by online chat apps that mask gender, race and age characteristics, thereby removing much of the potential for unconscious bias.

Technology is also helping with interactive training on employment practices that fully engages employees and boosts their learning, awareness and empathy.

What insurance is available for employment practices liability?

All business entities with employees need protection against the costs of legally defending themselves in employment practices complaints. They typically also benefit from having some help with assessed damages for wrongdoing. EPLI provides financial protection for many kinds of employee claims. EPLI is built to protect a business or organization from risks related to the entity’s actions as an employer. Specifically, EPLI is liability insurance for businesses, nonprofits and other organizations. It covers wrongful acts arising from employment practices. EPLI protects a company from the cost of defending against claims of wrongful termination, sexual harassment, discrimination and other infringements of the legal rights of employees and some employment candidates. However, it doesn’t cover work-related injuries that fall under workers’ compensation insurance.

EPLI policies typically cover actions by directors and officers, management and employees. Some insurance companies provide this coverage as an endorsement (addition) to a business owners policy (BOP). Other companies offer EPLI as a stand-alone product.

Not all wrongful acts are insurable, however. Insurance typically will not cover intentional wrongdoing by an employer, and state laws may prohibit insurance coverage for intentional wrongdoing.

That said, EPLI is a crucial tool in every company’s financial portfolio. Combined with a top-down culture of respect, clearly communicated and documented protocols for employee treatment, swift and balanced enforcement of policies and obedience to employment law, EPLI can help guard against employment practices claims.

Your insurance professional can help ensure you have the right policy to meet the unique needs of your business.

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