Avoid Employment Claim Pitfalls With Employment Practice Liability Insurance Coverage
Ohio is an employment-at-will state. This means that the employer, or employee, may terminate the employment agreement for any reason that is not contrary to law or contract. In our current economic environment with relatively high unemployment, this doctrine tends to favor the employer because of the comparatively low standards required to terminate employees. The intent of this article is to detail four of the most common exceptions to the employment-at-will doctrine, and explain how employers can mitigate the risk that these exceptions create.
Common Exceptions to the Employment-At-Will Doctrine
The first two common exceptions to the employment-at-will doctrine involve explicit contracts: collective bargaining agreements and written employment agreements. The existence of either essentially nullifies the employment-at-will doctrine, assuming the relevant agreement covers the manner with which employment may be terminated. Therefore, if an employer discharges an employee in contravention of the terms of such an agreement, it will likely be liable for a breach of contract and exposed to damages such as back pay, compensatory damages, and even punitive damages in certain cases.
The third exception to the doctrine is likely the most obvious, and arises where an employer violates specific state or federal law when terminating an employment arrangement. While most policyholders understand conceptually that they may be exposed to an employment practices lawsuit, avoiding such suits is not always as simple as it might appear.
The final commonly litigated exception to the employment-at- will doctrine is one arising from an implied contract. Unlike a written agreement that has the terms of employment written and agreed to by both parties, an implied agreement has no such documentation and thus must be inferred by a court based on the circumstances surrounding employment and termination. These circumstances might include employee handbooks, company policy, custom, and oral representations. The Ohio courts have ruled that any one or a combination of several of these circumstances may create contractual obligations by implication. Since each situation is unique, it is very difficult for employers to completely insulate themselves from loss arising from implied contracts using only risk mitigation tactics.
Mitigation and Transfer of Risks Arising from Employment Claims
The best way for employers to protect themselves against the negative publicity and financial loss that may arise from an employment practices lawsuit is a combination of risk mitigation and risk transfer.
Risk mitigation is the practice of taking proactive, or preincident, measures to lower the likelihood of a defined exposure. In this case, that might involve an employment attorney or insurance broker with an employment practices expertise to advise the company on the proper procedures to align it with industry best practices. For instance, such professionals will be able to provide language in your employee handbook to lower the risk of the courts viewing it as an implied contract.
However, risk mitigation doesn’t work in all cases, and certainly doesn’t eliminate the risk of frivolous claims and associated legal defense costs. This creates the need for risk transfer, which is the most thorough way for an employer to insulate themselves from an employment practices claims. In this case, risk transfer would involve the procurement of an employment practices liability insurance policy (also referred to an “EPLI” or E.P.L. policy). “EPLI” coverage protects employers (or fellow employees) when an employee claims that their rights were violated as a result of their employment. An insurer issuing an EPLI policy should respond initially by assigning an employment attorney to the case whose duty is to protect the interests of the employer. The policy will pay for defense costs and potential settlements or judgements that result from the litigation. Additionally, insurance companies are providing more services free of charge to their customers to differentiate themselves in an increasingly competitive market, including counseling policyholders in engaging in risk mitigation tactics like those previously mentioned. Relative to other lines of insurance that business owners purchase, EPLI coverage can be inexpensive, and the price will continue to drop as you work with your insurance company to decrease your mutual exposure to claims that would be covered under the policy.
While employment-at-will tends to be an employer friendly doctrine, there are several pitfalls that require close attention, and the potential for a frivolous lawsuit is ever-present. Employers can combat employment practices pitfalls by partnering with industry experts, following best practices when creating employee-facing documents, and purchasing an EPLI policy that aligns with their specific needs.