A new report conducted by insurance company Hiscox shows that small businesses have an almost 12 percent chance of facing an employment lawsuit. In some states, that chance is higher (e.g., New Mexico businesses are 66 percent more likely to face these suits).
But beware: employment claims, such as lawsuits alleging discrimination or wrongful termination, aren’t covered by Workers’ Compensation Insurance. That's a job for Employment Practices Liability Insurance. Let's pin down the difference between the two policies so you can adequately protect your IT business.
Workers’ Compensation Insurance vs. Employment Practices Liability Insurance
First, let’s take a look at what Workers’ Comp actually does. This coverage can pay for medical expenses and lost wages when an employee is injured or becomes sick because of their job. In almost every state, businesses with employees are legally required to carry some form of Workers’ Comp, which may cover…
- Medical bills for employees hurt at work.
- Ongoing medical care expenses.
- Wages an employee misses while recovering.
- Lawsuits over employee injuries (through Employer’s Liability Insurance).
- Funeral expenses if an employee is killed on the job.
- Death benefits to support the deceased’s family.
But notice that Workers’ Comp doesn’t cover any lawsuits related to employment practices. It can only address lawsuits stemming from employee injuries and illnesses that occur on the job.
Employment lawsuits are another ballgame entirely. These lawsuits stem from your business’s hiring and firing practices and the rights of your employees. They might allege that you or your business committed…
- Sexual harassment.
- Wrongful termination.
- Wrongful demotion or discipline.
- Invasion of privacy.
- Discrimination based on gender, race, religion, age, ability status, or other protected class.
Employment Practices Liability Insurance (EPLI) is the only insurance that can provide coverage for these kinds of lawsuits. If an employee sues you over discrimination, your EPLI policy may cover your legal defense costs and settlements or judgments.
But is the threat of an employment lawsuit really serious enough to be a concern? Even though a 12 percent chance may not seem that high, these lawsuits can be a bigger risk than you think.
The $125,000 an Employee Might Cost You
Hiscox’s report finds that the average cost to defend against an employment lawsuit is $125,000, which includes attorney fees and settlement costs. Without an EPLI policy, that cost comes straight out of your pocket.
If you’re banking on just being extra careful not to discriminate against your employees (which should be the case anyway), you could still get hit with a lawsuit. The report found that the vast majority of employment claims against businesses were without merit.
The good news? That means many employment lawsuits won’t go to court and may be less expensive to resolve. The bad news is you’ll still have to resolve them, which means paying an attorney. Luckily, EPLI can help with that.
Reduce the Risk of Employment Claims
The only surefire way to eliminate the risk of an employment lawsuit is to not have any employees. It can be tempting to think your employees would never sue you, but the reality is you can’t control their actions.
Still, there are ways to reduce the risk of a lawsuit. Small IT businesses should take care to:
- Look up an employee’s legal rights before making any rash decisions.
- Stay on top of state and federal laws concerning employees. Know what’s legally considered discrimination and who can be affected by it.
- Document disciplinary interactions with employees and anything related to their promotion, demotion, or firing. A written record is invaluable for quickly resolving a lawsuit.
To read more about Hiscox’s report, check out Insurance Journal’s article on the findings.