What will you do if an employee sues you for discrimination?

If your answer is “I’m not worried, that won’t happen here,” or “we won’t get sued - we have good relations with our employees,” then you need to pull your head out of the sand. Because employees are suing their employers in record numbers, and that trend isn’t likely to change anytime soon.

Over the past five years, the number of charges filed with the EEOC has grown year over year. According to the EEOC’s most recent report, a record 99,947complaints were filed with the agency in 2011, resulting in a record $455.6 million in relief granted to alleged victims of discrimination and retaliation. These figures include claims filed under all the laws enforced by the EEOC, including Title VII of the Civil Rights Act of 1964 (Title VII), the Age Discrimination in Employment Act (ADEA), the Equal Pay Act, the Americans with Disabilities Act (ADA), and the Genetic Information Nondiscrimination Act (GINA).

What are employees suing about? The most common complaints received by the EEOC last year were retaliation claims, which can be asserted under any of the statutes enforced by the EEOC. In fiscal year 2011, retaliation claims comprised 37.4% of all charges filed with the EEOC. Race discrimination under Title VII was close behind at 35.4%, with gender, disability, and age discrimination following at 28.5%, 25.8%, and 23.5%, respectively.

Defending against discrimination and retaliation claims can be very costly, not to mention time consuming and disruptive to your business. But the risk can be effectively managed with the right Employment Practices Liability Insurance (EPLI) policy.

What is Employment Practices Liability Insurance?

EPLI is a type of insurance policy that provides employers with coverage for a variety of employment practices claims that might be made by employees or job applicants, including discrimination, harassment, and retaliation claims – claims that are usually excluded under standard general liability policies taken out by businesses. Some EPLI policies also cover other types of claims, such as civil claims (like wrongful termination or defamation), or certain wage and hour claims.

Typically, EPLI provides coverage for the costs associated with defending against employment practices claims. These costs include legal fees, as well as judgment or settlement costs up to the policy limit.

EPLI coverage can be obtained by taking out a policy directly with an insurer. Alternately, an employer may be able to obtain EPLI coverage through a Professional Employer Organization.

Who needs EPLI?

All businesses with employees should seriously consider obtaining EPLI coverage. Every time an employer recruits, interviews, hires, disciplines, or terminates an employee, the employer runs a risk that one of those interviewees, new hires, or recently fired employees may sue down the road.

Small businesses are the least likely have taken out an EPLI policy, but are also the most vulnerable if hit with a claim. Large employers can typically absorb the financial hit associated with defending an employment claim, but many smaller employers cannot -- especially when considering that attorneys fees alone can run into the hundreds of thousands of dollars to defend a claim filed by an employee in federal court. And that’s not counting the amount of any settlement or judgment, or any other non-monetary restitution that may be ordered.

Smaller employers are also less likely to have dedicated human resources departments and in-house legal counsel than large companies. Similarly, they are less likely to have implemented formal training programs to educate supervisors and employees on the various laws and regulations that protect employee rights in the workplace, and on workplace behaviors that are inappropriate or otherwise unlawful. Smaller employers also may not have implemented workplace policies and procedures that are updated to reflect recent changes in the law.

The reality is that many smaller employers simply do not have the resources to develop, implement, and maintain all of the human resources policies, procedures, and records that are necessary to properly protect their businesses and to mount a successful defense if the company ever gets sued by an employee.

Does Your Business Need an EPLI Policy?

Although the decision whether to obtain EPLI coverage depends on a given employer’s circumstances, for most the answer is a resounding “yes.”

Most of the federal laws enforced by the EEOC apply to even small businesses. The Equal Pay Act, for example, applies to employers who are covered by the Fair Labor Standards Act (FLSA). The ADA, Title VII, and GINA apply to employers with 15 or more employees.

Remember, too, that employers of all sizes may be subject to local anti-discrimination laws that provide even more expansive employee protections than federal law. For example, a number of states have passed laws protecting employees from discrimination based on sexual orientation or gender identity – categories that are not protected under federal anti-discrimination laws.

Additionally, employers of all sizes are susceptible to civil lawsuits filed by employees, such as for wrongful termination, defamation, or breach of contract.

Here are a couple of other things to keep in mind when you are deciding whether you need EPLI coverage.

  1. It doesn’t matter if you didn’t do anything wrong.

This bears repeating: It doesn’t matter if you didn’t do anything wrong.

You may have done absolutely everything you were supposed to do. You conducted training for managers and employees. You treated all employees the same when it came to hiring, promotion, discipline, and termination. You have an up-to-date employee handbook and you follow appropriate policies and procedures. You keep great records. You have a diverse workforce, good morale, and happy employees.

But it only takes one job applicant who thinks he didn’t get the job because of his age, or one employee who thinks a promotion didn’t go to her because of her race, to wreak havoc on your business by filing a claim with the EEOC.

Like it or not, it is relatively easy for that one employee to make your life very difficult: to file a claim, all the employee needs to do is fill in a few blanks on a one-page form (called a “Charge of Discrimination”), sign it, and mail it to the EEOC. It costs nothing to file a Charge of Discrimination (other than the cost of postage to mail the form), and at the time of filing, the employee does not need to produce any evidence whatsoever (other than their word) to back up their claims.

Once the EEOC receives a Charge of Discrimination, the agency is bound by law to investigate, even if the claim has no merit. These investigations are increasingly comprehensive and time consuming, with EEOC issuing multiple requests for information and often demanding on-site inspections and witness interviews.

Even if the EEOC completes its investigation and determines that an employee’s Charge of Discrimination isn’t supported by the facts (e.g., the EEOC finds no evidence that the employer did anything wrong), the employee can still file a lawsuit in federal court. Anyone who files a Charge of Discrimination with the EEOC automatically receives a “Right to Sue” letter when the EEOC is finished investigating, permitting them to proceed with a lawsuit, regardless of the outcome of the EEOC’s investigation.

  1. It’s Expensive.

Defending against an EEOC charge of discrimination will be more costly than you think. First, there are the attorney’s fees, which can range from a few thousand dollars to file a formal written response to a Charge of Discrimination, to hundreds of thousands of dollars to defend a claim that ends up in federal court. Then there are court costs, settlement costs, and judgment costs.

There may also be costs associated with improving your human resources policies and procedures, or with providing training to supervisors and employees – remediation measures that may be required by the EEOC as part of any negotiated settlement.

Then there are the costs of finding and producing documents requested by the EEOC, or by the plaintiff in a federal lawsuit. Not to mention the lost productivity when employees and supervisors are interviewed during an investigation, deposed as part of a lawsuit, or assigned to perform additional tasks necessary to defend a claim, such as implementing a litigation hold, or conducting document searches. Employee morale can suffer, particularly if the complaining employee is still working at your company. Employers also face significant reputational damage that may occur if a claim becomes a matter of public knowledge.

In sum, defending against an employment practices lawsuit is expensive and disruptive to the employer’s business, regardless of the outcome of the litigation. An EPLI policy can significantly reduce the cost and impact of a claim on your business by covering the bulk of the monetary costs involved.

Other EPLI Issues to Consider

There are many issues to consider when taking out an EPLI policy. Here is a short list of questions to ask. While by no means exhaustive, it should help get you started down the right track.

  • Can you choose your lawyer? Some policies require that you use a lawyer selected by the insurance company, while others allow you to pick an attorney. 
  • What is covered and what is not? Some policies are much more extensive than others. For example, some policies cover claims under the Family Medical Leave Act (FMLA), but many don’t. Additionally, there are some claims that EPLI almost never covers, including personal injury claims, workers’ compensation claims, property damage claims, and claims made under the Occupational Safety and Health Act (OSHA), National Labor Relations Act (NLRA), Employee Retirement Income Security Act (ERISA), or Worker Adjustment and Retraining Notification Act (WARN). Criminal conduct is also typically excluded.
  • Who does the policy cover? Usually, EPLI policies cover employees, managers, directors, and officers. Independent contractors are usually excluded from coverage.
  • What are the policy limits and deductibles?
  • Do you need prior acts coverage? 
  • Do you want punitive damages coverage? 
  • Does the policy cover third party claims (e.g., discrimination claims made by customers)?
  • What is the definition of a “covered claim” under the terms of the policy? For example, are “covered claims” only those filed by an employee directly, or are you also covered if the EEOC files a lawsuit against you on behalf of an employee?

Practically speaking, at some point in the lifecycle of your business you will probably be sued by an employee or job applicant. Now is a particularly risky time for employers, because employees tend to be more litigious in a weak economy where job security is non existent and opportunities for promotion and increased compensation are limited --a fact borne out by the EEOC’s recent enforcement statistics. Employees want someone to blame when they lose their job, or when they don’t get hired, and that someone might be you.

All it takes is one nuisance lawsuit from a disgruntled employee to cause significant financial and operational upheaval, and potentially even put your entire business at risk. An EPLI policy is something that all employers should consider as a part of a comprehensive business insurance and risk management strategy.