Risk Management: Protecting companies from employment practices claims
Robert Mahl is vice president of Sander A. Kessler & Associates Inc., a Santa Monica, Calif.–based full-service insurance brokerage catering to an apparel-industry clientele. Mahl will be speaking to members of the Fashion Industries Human Resource Association and other apparel-industry executives at 10 a.m. on Oct. 29 at the Fashion Institute of Design & Merchandising in downtown Los Angeles. The seminar, titled “Summary of Latest HR Issues for Manufacturers & Retailers,” will also feature panelists Laura Worsinger of Dykema Gossett LLP and Tammy Chatkin-Newman of 24/Seven.
What are the issues that keep the owner or a corporate executive of an apparel manufacturing company awake at night? The things that do irreparable harm to a company, its revenue or its reputation?
It could be a catastrophic corporate failure, business decision or loss—something like a four-alarm fire that decimates inventory that had been sold-to-order, the bankruptcy of the company’s largest buyer or the mass departure of key personnel.
While there may not be a fail-safe method to prevent such events from happening, safety and backup mechanisms can be implemented in advance to minimize damage to the company. Fire prevention dictates clear aisle and pathways in the warehouse, installation of fire-safety equipment, sprinklers, and central-station alarms.
Protecting accounts receivables by factoring or trade credit insurance is a measure a company can take to guard against buyer bankruptcies. Enhancing corporate employee benefits such as health plans, 401(k) programs and vacation pay is important to employee recruitment and retention, and, certainly, benchmarking your corporate programs against those of your competitors is sure to help mitigate key employee loss.
These are basic concerns that all have fairly common, known solutions, at least in general terms. But there are other risks a company faces that occur, often without forethought, that could either severely damage a business or force it to expend precious resources.
Over the past decade, employment practices claims—such as sexual harassment, racial discrimination and wrongful termination—have become a hotbed of litigation for many companies. Many apparel manufacturers who do well at addressing the obvious issues mentioned in the preceding paragraphs have taken the path of least resistance—and least upfront cost—by ignoring these very sensitive topics. Many take the approach of “It won’t happen to us.” Although some do implement the best employment practices policies and procedures to prevent these types of claims, the question remains: “What will happen to a company that does not take seriously the potential exposures from its employees?”
A recent employee survey reported by The New York Times found 30 percent of those responding said they overheard racial slurs in the workplace last year. Thirty-two percent reported overhearing sexually inappropriate remarks over the last 12 months. A still-significant 20 percent of those polled reported ridicule of sexual orientation and evidence of age bias. And if those percentages don’t scare you, maybe a number like 16,500 does. That’s the estimated number of employment-related lawsuits filed in the United States each month.
During the past seven years, the U.S. Equal Employment Opportunity Commission has aggressively pursued small and mid-sized companies that have allegedly engaged in discriminatory practices. Many of the settlements have been in excess of $1 million.
However, it is not just about settlements. To drive the point home further, here are a few more relevant statistics: Employees filed 75,768 charges in 2006 and 82,792 in 2007—a 9 percent increase—according to the EEOC. While most of these were merely allegations, even a groundless or frivolous lawsuit must be defended, and that defense can be costly. According to one national employment practices law firm, the average cost of defense of an employment-related lawsuit is close to $250,000. Plaintiffs can also recover their attorney’s fees if they are awarded any amount—even $1. Public allegations can also impact employee morale and productivity. And they can damage a company’s reputation with its clients and customers.
The picture is somewhat grim, particularly for companies that have not stepped up and put preventative measures in place against sexual harassment and other employment-related issues and for companies that choose not to protect financially the effectiveness of those procedures.
The potential threat to business should be looked at proactively from a risk-management perspective. By securing the broadest employment practices liability (EPL) insurance policy, a company can prevent a claim from seriously damaging its financial position and reputation. Having the best human-resources policies and procedures goes hand in hand with securing the EPL policy. In fact, many corporate policies, such as written job descriptions and adoption of antidiscrimination and sexual-harassment policies, must be in place before employment practices liability insurance can even be procured. Almost every insurance company that offers EPL insurance includes additional risk-management support such as hotlines and online information featuring sample policies and procedures. Some even go so far as to help companies rewrite their employee handbooks, keeping them up to date with changes in employment law. Even the process of applying for EPL insurance can be an audit of sorts because issues identified in the application can be brought to light and addressed in order to secure the insurance.
Larger companies may know about EPL policies, but for a smaller company, here are some minimums: A small company with 20 employees could expect to pay around $2,500 per year for a policy with a limit of $500,000 and a $5,000 deductible. Of course, there are also details such as whether “defense costs” would fall inside or outside of the policy limits, and that would affect the annual premium. And while a larger employer would pay less on a “per employee basis,” a small manufacturer could use $125 per employee per year as a rule of thumb to extrapolate the budget for employment practice liability insurance.
