What Small Business Should Know About Employment Practices Liability

What if an employee sues your business for an employment-related matter? Would you have protection? Do you know which coverage provides business protection from things like wrongful termination, discrimination, or sexual harassment? Most small business owners don’t know what insurance coverage protects them from employment-related claims, and they don’t have a policy. As a small business owner, you should know about employment practices liability insurance (“EPLI”).

Employment practices liability insurance is a frequently overlooked business insurance protection. Most businesses are sure to purchase general liability insurance, that coverage is almost synonymous with business insurance. If a business has employees, it’s a near certainty they have workers’ compensation insurance. Heck, that coverage is required by law.

Unfortunately, many small business owners don’t buy EPLI coverage. In fact, if you ask most business owners if they have coverage for employment-related claims, they’ll mistakenly say it’s covered by worker’s compensation insurance. Worse yet, some will say it’s too expensive.

It’s easy to get employment practices liability coverage

Let’s set the record straight. If you have employees, not having EPLI coverage may end up being a costly choice.

Buying employment practices liability insurance neither has to be costly nor difficult. In fact, in some cases, it can be added as an endorsement of your worker’s compensation or business owner’s policy. For larger companies, with more employees, you can also purchase it as stand-alone coverage.  It really depends on your unique business and budget.

Let’s break down some of the myths about EPLI and help you better understand the things you should know about employment practices and liability insurance.

Worker’s comp does NOT cover employment-related claims

You’ve purchased worker’s compensation, so all your employee matters are covered, right? That would be incorrect. This is a common misunderstanding for many small business owners. 

This misunderstanding stems from the fact worker’s compensation is thought of as coverage for employees. In fact, the work comp policy actually does state that it will pay for employer liability. However, if that’s all you understand of the coverage, then your agent didn’t do their job.

It’s true, the worker’s compensation policy does use the term employer liability. However, that doesn’t mean it applies to all employee-related claims.

Worker’s Compensation is for employee medical bills and lost wages related to a work injury or illness. Any reference to employer liability is related to defending claims where the injuries sustained by the employee are due to the employer’s negligence. Alternatively, EPLI is for liabilities that may result due to your employment practices.

Worker’s Comp vs. Employment Practices Liability:

Think of it this way, worker’s compensation helps covers physical injuries and illnesses for employees related to their employment. EPLI helps pay for claims that you violated an employee’s rights as part of your organization’s practices.

EPLI fills a gap in your business protection that falls between worker’s compensation and general liability. The combination of these three coverages forms a strong protection for your business.

Don’t think it won’t happen to your business

Small business owners frequently fall into one of two traps when it comes to employee-related matters. The first is thinking they have control, and are careful, so employment-related claims won’t occur. The other is thinking you’re are friends, so they wouldn’t sue you.

Both of these beliefs may be true. You can be careful and have good control, and have a great relationship with your employees, but still stumble into an employment-related claim.

If you’re relying on the control or the friend myth, neither of these are ways to properly manage the financial risk associated with your business. It’s always best to assume a risk is real and work to mitigate or transfer the exposure. That’s why you buy insurance, and EPLI is no different.

Have a plan for unpredictable extremes

Remember, life is unpredictable and very much out of your control. The translation for employment-related matters is simple, a discrimination, harassment, or mismanagement claim can happen, not because you weren’t careful, but because it’s not predictable. In fact, claims occur all the time from unintentional acts. It doesn’t matter how you feel, if the employee considered an act to be a liability or negligence, they you may have a claim.

Additionally, friend behavior is very much different than employee-employer behavior. Mixing both is risky.

Moreover, this is the most important lesson. You don’t have to be negligent to be accused. The simple act of being accused and having to defend a claim will be expensive. Frankly, it will cost much more than an EPLI premium.

Mitigate your employment practices liability risk

Simply buying a policy will not prevent employment-related claims, you need to create policies that protect your business. This starts with your employee and hiring manuals.

Policies when hiring new employees

When you set up the employment manual for your business, you want to address any bad practices in your hiring or management practices. The goal of the small business is to avoid employment practices claims. Start with reviewing the following to make sure you have fair, equitable practices, and that they are communicated, and acknowledged by all your employees:

• New hires: what is the process for posting, interviewing, and making the position available?
• Employee management: do they have a clear set of objectives to determine if they are doing well in their job and is it equitably applied to all in similar positions? 
• Employee promotions: are they provided fairly and equitably, without bias?
• Terminations: are they conducted pursuant to your published manual, following state-prescribed regulations, and without ambiguity or emotion?

Policies for existing employees

Employment practices that don’t conform with applicable employment or civil rights laws are areas of concern for a small business. You need to develop an employment policy that protects your business. Here are a few recommendations:

• Create an employee handbook or manual that ensures your policies and procedures comply with applicable federal, state, and local laws
• Make sure your job descriptions and advertised job postings only list job-relevant requirements
• Your hiring, promotion, and salary policies must be equitable. When evaluating candidates for a new hire, or promoting or compensating current employees, your policy must utilize a consistent and standardized methodology that emphasizes job performance
• Treat all your employees professionally
• Be consistent in the application of your company’s policies and procedures.

If you do all these things you should mitigate your risk. It can’t be fully eliminated, but this is a great way to contain its risk.

The bottom line

As an employer, you want to be friends with your staff. Well, it’s fine to be friendly. But you always need to be aware that you are engaged in an employer-employee relationship. Employment practices liability can erupt anytime, for reasons you don’t understand for the behavior you may not be guilty of. Don’t take unnecessary risks with your business, create equitable and legally compliant employment policies and procedures, and apply them consistently.

If you don’t have EPLI, consider buying it. Contact your insurance agent and discuss the merits and get a quote. If you don’t have an agent, you can call us at (877) 334-7646 and we’ll be happy to help.