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Michael S. Little: Protect your business from lawsuits in tough times

It's The Law

Posted: March 27, 2009 1:46 a.m.
Updated: March 27, 2009 4:55 a.m.
The headlines are everywhere. Corporate layoffs and downsizing have become commonplace among companies of all sizes and in varying industries. From Lehman Brothers to Coca-Cola to Borders, companies are adjusting to the declining financial market by cutting jobs.

The federal government recently reported that unemployment rates are at a 25-year high as 651,000 jobs were slashed in February alone.

Layoffs are not limited to large corporations and multi-national conglomerates. Small businesses with less than 50 employees have followed the trend of their larger corporate brethren.

To account for the reduced demand for products and services, small businesses have also laid off large percentages of their workforce.

As more and more employees are let go, they are increasingly unwilling to leave the employer without a fight. Workers, perhaps driven by desperation due to the bleak financial outlook and the difficulty in finding new employment, commonly assert that their dismissal was improper or unfair.

Increasingly, small-business owners are faced with claims and lawsuits from these former employees for harassment, wrongful termination and/or discrimination.

In fact, the Equal Employment Opportunity Commission reported that in 2008, it received more than 95,000 charges and complaints related to workplace discrimination, an increase of 15.2 percent over the number of charges filed in 2007. In 2008, the EEOC also secured more than $395 million in settlements for claimants.

With this growing rise in employment claims and lawsuits related to nationwide layoffs, small businesses will inevitably be subjected to mounting costs as business owners pay legal fees, settlements and judgments to defend and resolve these employment disputes.

These costs can be staggering, ranging from hundreds to millions of dollars.

Amazingly, many small-business owners are not aware that the financial risks related to employment claims and lawsuits are insurable. Employment Practices Liability Insurance seeks to protect employers from employee claims alleging discrimination, wrongful termination and sexual harassment.

Although the terms of Employment Practices Liability policies vary, most forms provide that the insurance carrier will pay, on the company's behalf, any settlements or judgments stemming from the company's alleged wrongful employment act committed against any full-time, part-time, salaried, seasonal or temporary employee.

In addition, EPL policies typically provide coverage for a broad spectrum of employment claim types, including traditional lawsuits, administrative or regulatory proceedings (i.e. charges of discrimination) and even written demands for money.

Perhaps the greatest value EPL insurance confers to business owners is that these policies pay for legal fees and costs incurred by a company in the defense of an employment claim.

The coverage afforded by an EPL policy for defense fees and costs cannot be underemphasized. Even well-run companies face employment claims filed by disgruntled employees.

As we know, some employees can, and do, allege anything at anytime. These claims, while meritless, must still be defended.

Often, defense fees and costs greatly exceed the amount recoverable by an employee through a judgment or settlement. EPL policies absorb these defense fees and protect small business owners from mounting legal costs that can cripple the company.

For the following reasons, EPL insurance can serve as an effective tool for small businesses seeking to reduce risks and costs related to the management of their workforce:

n Most, if not all, EPL carriers now issue policies specifically tailored and priced for small businesses.

n Small businesses are vulnerable to employment claims because they often lack the human resource professionals necessary to develop and institute formal employment policies and procedures.

n In today's economy, employees of both large and small companies are on guard for company layoffs and downsizing. Employees are typically well aware of employment laws and regulations that allow them to take action against an employer should a layoff occur.

n Recent federal and state employment laws have expanded the rights of employees.

n EPL policies are written to broadly protect employers from a variety of employee claims including, but not limited to, wrongful termination, employment-related misrepresentation, discrimination (based on race, religion, age, sex, disability and sexual orientation), workplace harassment, wrongful discipline, failure to promote, negligent evaluation and retaliation.

Employment liabilities covered by an EPL policy are paid by the insurance carrier rather than the small business owner.

n Employment claims, with or without merit, typically require small businesses to retain legal counsel to defend their interests.

Defense costs associated with employment claims, even claims without merit, can be significant.

EPL policies pay mounting defense costs that could otherwise hamstring small-business owners.

Michael S. Little is an attorney with Poole & Shaffery, LLP, a full service business, corporate and employment law firm. He can be reached at (661) 290-2991. "It's The Law" appears Fridays and rotates between members of the Santa Clarita Valley Bar Association. His column represents his own views and not necessarily those of The Signal.


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