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Protect Your Small Business From Employee Lawsuits

By September 18, 2018Business Insurance

Over the past 20 years, there has been a dramatic rise in the number of employee lawsuits.  This increase has hit small businesses the hardest.  Statistics vary, but the average cost to defend against an employee lawsuit is between $125,000 and $235,000 depending on what state you live in.  As such, small business owners should do everything they can to protect themselves.

The reason that small businesses are disproportionately effected is that they typically do not have a legal department or a human resources department.  In a larger companies, these groups would be responsible for creating and enforcing policies and procedures.  So, if creating those departments is not feasible, how can a small business protect itself against employee lawsuits?

What Triggers Employee Lawsuits?

Before we discuss what small business can do, let’s be clear on what typically triggers a suit.  The most common claims are a result of the follow:

  • Discrimination based on race, gender, age, religion, or disability
  • Wrongful termination
  • Harassment

Now that we’ve established precisely what kind of lawsuits we are referring to, let’s examine what small businesses can do to protect themselves.

How Does Business Insurance Factor In?

One major misconception amongst small business owners is that their business owners insurance covers them against employee lawsuits.  This, however, is not the case.  A separate Employment Practices Liability Insurance (EPLI) policy or endorsement is required.  EPLI pays to defend against lawsuits and pays out if the court finds in favor of the plaintiff.  Often, small business owners are not aware of this gap in their insurance coverage.

Those who are aware of the need for EPLI often forgo it because they feel they cannot afford the added expense.  They may also believe that an employee lawsuit is unlikely.  So instead of purchasing EPLI, they chose to take a risk.  Of course, a willingness to take risks is often a small business owner’s greatest asset.  But one must learn to differentiate between good and bad risks and there is very little upside to gambling on potential employee lawsuits.  Most employment lawyers, insurance agents, and seasoned business owners would all strongly advise carrying EPLI.

How Can An Employee Handbook Reduce Employee Lawsuits?

Insurance aside, one of the best ways you can provide additional protection for your small business is by developing an employee handbook.  At the most basic level, an employee handbook sets expectations, outlines prohibited behaviors, and instructs employees on the procedure for reporting a complaint.  A handbook minimizes misunderstandings which can help prevent employee lawsuits.  Importantly, having a good employee handbook can also reduce the cost of EPLI insurance because insurers know that they help minimize costly risks.

What Should My Employee Handbook Include?

Hiring an employment lawyer or human resources consultant to help craft an effective employee handbook is best.  There are also some excellent online resources such as The Society for Human Resource Management and the U.S. Department of Labor.  Among the things that should be included in an employee handbook are the following:

  • A list of federal, state, and local employment laws
  • What is expected of employees in terms of performance and behavior
  • Company policies on paid time off, medical leave, non-discrimination, and workers compensation
  • Information on benefits, pay, and promotions
  • Procedures for reporting a complaint

In addition, an employee handbook should also include an acknowledgment form.  This is a page that employees sign saying that they have received and understood the handbook.  If an issue later arises, having this acknowledgement on file can go a long way toward avoiding a costly employee lawsuit.

To maximize the effectiveness of an employee handbook, training is a must.  It is not enough to simply draft and distribute the handbook.  All employees should attend training sessions with ample time for questions.  This is even more important for employees who are in a managerial role.

With expectations and requirements formalized, violations should be minimized.  But when there is an issue, the establishment of an internal procedure for filing a complaint will protect a small businesses even further.  Without an official procedure, employees who experience an issue will often go directly to an employment lawyer or the Equal Employment Opportunity Commission.  This increases the likelihood of an employee lawsuit.  Conversely, having an internal procedure often facilitates an in-house resolution.

Developing A Full Risk Management Strategy

Small business is the heart and soul of this country’s economy.  If you’ve put everything on the line to start up your own enterprise, make sure you protect it.  EPLI insurance, employee handbooks, and proper training are three great ways to start.  Element Risk specializes in providing a complete risk management strategy for business of all sizes, with a particular expertise in companies with less than 50 employees.  Contact us to receive a customized risk management consultation.