"The Office" Is Funny

The burgeoning field of employment liability is also reflected elsewhere. In a Fall 2006 issue of For the Defense, a monthly magazine for defense attorneys, the focus was employment law and topics representing a liability minefield for employers these days. These include workplace privacy, accommodating disabled employees, civil rights of illegal aliens, managing employee blog posts, benefits for employees returning home after overseas military stints, Title VII retaliation claims, and the rights of transgender employees. No wonder that your human resources director seems to be living on ant-acids!

Getting sued or facing claims from botched employer/employee relationships is a risk that can be managed, however. The techniques may differ in some respects but the major risk management categories still apply: avoidance, retention, loss control, and transfer. Let's look at each in turn as a tactic for addressing employment practices liability.

Avoidance

Avoidance involves not engaging in an activity or operation for the conscious purpose of sidestepping the risk of loss that comes with that activity or operation. In the case of employment practices liability, avoidance is a tough strategy. The activity or operation that creates a risk of loss is the employment relationship. If you can avoid employment relationships, you can sidestep the risk of the employment practices liability.

Unfortunately, you can also sidestep the prospect of getting very much done. Your efforts are limited to the work that you can generate. Management involves getting work done through the efforts of others. The whole is greater than the sum of the parts. Businesses, organizations, and corporations execute and get things done through the work of others. They harness the work of others through employment relationships. One could consciously remain a sole proprietor, for example, in order to avoid the headaches, hassles and potential liabilities that come from having employees. This can, however, limit just how much you can achieve.

Perhaps one other way to avoid and avoid hiring employees is by leasing employees or using independent contractors. This may have its own headaches and pitfalls, but these represent workarounds to the problem of entering into employment relationships. Companies may consider using "temps" or independent contractors for jobs to avoid the potential headaches and hassles of liabilities flowing from employer/employee relationships.

Retention

Some intrepid organizations may opt to retain employment practice risk. When they do so, they make a conscious decision not to transfer the financial consequences of employment practice claims to a third party or a professional risk bearer. You can think of this as self-insuring the employment practices liability exposure. Employers may do this for a number of reasons. First, unlike workers' compensation coverage, employment practice insurance coverage is not legally mandated. Many organizations may be strapped for funds and looking for ways to lower their insurance budget. Other companies may simply be unaware of the availability of the coverage. Still others might believe that they have no chance of ever having an employment claim.

Other companies may be aware of the coverage but deem it too expensive. Ideally, retention as a risk-management rule here is a conscious decision, where the entity sets aside funds to cover the expense of defending employment practice claims and the expense of resolving such claims. Whether this happens in the real world is a separate issue.

Loss control

Loss control aims to reduce both the frequency and severity of losses. In the context of employment practice claims, loss control might manifest itself in any one or more of the following programs and initiatives:

• Meticulous regulatory compliance with all labor laws and standards
• Periodic training with regard to diversity, sexual harassment, and workplace conduct
• Clear standards in employment contracts and personnel manuals setting forth the types of behavior that are and are not tolerable
• Recurring supervisory and management training on sound employment practices
• Easily accessible grievance procedures to provide employees with a mechanism to air concerns and complaints.

None of these initiatives are "one and done" propositions. They must be part of an ongoing program to promote sound employment practices. Adopting these steps or others represents no guarantee, but may go far toward preventing missteps in employment practices or rendering more defensible any employment practice claims which arise.

Contractual Transfer

The prime example of contractual transfer in the context of employment practices is insurance. Unlike insurance coverage for, say, workers' compensation, employment practices liability insurance is not mandated by statute. It is an optional purchase at best. As a result, cash-strapped firms may view it as a frill. Questions of cost and availability enter into the risk manager's decision about whether or not to purchase employment practices liability. Certainly a company stung in an expensive employment practice claim will be more sensitized to the need for such coverage. To this extent, however, the phenomenon of adverse selection may emerge; that is, those employers most likely to seek employment practices coverage are those that are the most likely to have employment practices claims. Assessing the cost of such coverage falls to the insurance underwriter.

Sound risk management of employment practice risks involves a blend and balance of these four preceding risk management strategies. The Office may illustrate worst practices in employment risk management. Your office, by contrast, can treat employment practices as no laughing matter by implementing a blended risk management approach!

Kevin Quinley, CPCU, is an insurance claim executive in the Washington D.C. area. You can reach him at his web site at www.kevinquinley.com.