Q: We may need to lay off a few employees due to the negative impact of the economic downturn on our organization. Is there anything specific our HR department should be doing?

A: Be very clear about your organization’s employment practices, document your decisions, treat your employees fairly and with respect – and – seriously consider purchasing Employment Practices Liability Insurance (EPLI).

In the last 10 years employers have seen a dramatic increase in the number of lawsuits based on harassment, discrimination, retaliation and wrongful termination. The potential for a lawsuit is always lurking, even for employers who are careful to comply with all legal requirements. Organizations are vulnerable from the prehiring process through the exit interview, even if the employee was never hired or only with the company a short time. Employment Practices Liability Insurance offers protection against these types of lawsuits and can be obtained adjunct to your directors and officers (D&O) policy. Lawsuits can happen to any nonprofit. No organization is immune. Employees could sue if they believe they have experienced one or more violations. EPLI provides protection against many kinds of employee lawsuits including those alleging:

• Sexual harassment,
• Discrimination,
• Wrongful termination,
• Breach of employment contract,
• Negligent evaluation,
• Failure to employ or promote,
• Wrongful discipline,
• Deprivation of career opportunity, and
• Wrongful infliction of emotional distress

Even if the claim is fraudulent, the defense of a suit can be expensive, not only in terms of finances, but also in time and resources. Reputations are damaged and everyday operations are disrupted. The expense of even one lawsuit can bankrupt an organization. The cost of an average EPL claim is approximately $450,000. Frivolous claims rarely settle for less than $10,000 including legal fees. Even if your organization can withstand the financial impact of a lawsuit, it could force your organization out of business or seriously impact your profitability and future growth plans. Consider that the minimum premium for a D&O/EPLI policy is only around $1,000 annually. This is money well spent to protect your organization from costly litigation. Premiums will vary depending on the total assets, number of employees and activities of your nonprofit. How does an organization mitigate the risk of experiencing a lawsuit? By practicing strong risk management techniques. In addition to legal and defensible personnel practices, all of the following management strategies should be considered.

• Keep your employee handbook updated in compliance with current law and verify that all employees have read and understood the content.
• Ban the word “permanent” from your employee handbook.
• Follow your employee handbook to the letter.
• Do not include termination as one of the actions covered by any grievance policy.
• Make “at will” the standard of employment.
• Conduct candid, thorough annual reviews.
• Make a prompt, thorough investigation of allegations of harassment or discrimination.
• Clearly and promptly document each employment action.
• Seek legal advice before taking an adverse employment action.

As most claims against a D&O policy are about employee issues, you should make sure that your D&O policy includes EPLI coverage. Also make certain that your D&O/EPLI policy has defense costs covered outside the limit. The limit on a typical D&O/EPLI policy is $1,000,000, but higher coverages can be written if the organization’s revenues warrant higher limits. Most D&O/EPLI policies are written on a “claims made” basis, meaning that the claim must be reported to the insurance carrier when the claim is presented to the organization regardless of the occurrence date. “Tail coverage” should be purchased in the event a policy is cancelled and an earlier employment issue turns into a claim. A qualified D&O/EPLI carrier will offer access to advice by qualified staff regarding employment practices so that you can consult with an expert when the occasion arises. Your carrier should also have an A.M. Best Company “A” (excellent) or higher rating.

Nonprofit Resources, your expert in nonprofit insurance, offers D&O/EPLI and many other types of policies in property/casualty and benefits that can be tailored to your organization’s unique requirements. Our policies will give you peace of mind so that you can do the work you do best in furthering your mission. We can be reached through our web site's contact form or by calling (303) 894-0298 / (866) 537-1142.