From the November 2010 issue of Treasury & Risk magazine

Layoffs Spur Lawsuits

Discrimination charges rise with high unemployment, making this a good time to review employment practices liability coverage.

Discrimination claims and lawsuits have jumped over the past two years. The Equal Employment Opportunity Commission (EEOC) reports that annual complaints rose from 70,000 to 80,000 in the previous decade to about 95,000 in 2008 and 2009, with 2010 on target to set a new record. Most of the rising number of lawsuits "are brought against large companies, and tend to be class actions," says Claire Wilkinson, vice president for global issues at the Insurance Information Institute (III).

"Losses can be significant, and reputational risk can be an important issue," she says.

"In a downturn like this, people who are let go look for some other way to get a financial benefit," says Evan Rosenberg, senior vice president and global specialty lines manager for Chubb.

Claims are more common in some regions, such as the Rust Belt states, and awards have run as high as $5 million to $10 million in damages and back pay, says David Kohl, a principal with Dallas-based insurance broker Roach Howard Smith & Barton.

Meanwhile, the cost of employment practices liability coverage has been falling. "EPLI rates are flat to slightly down by 1% to 10%," says III's Wilkinson.

That could indicate that companies have trimmed their coverage, or even dropped it altogether to cut costs. If so, risk managers might want to reconsider, because rehiring people opens the door to a new round of possible discrimination claims from those who aren't recalled.

Companies can avoid discrimination suits by making sure layoffs do not adversely affect a protected group, such as older or minority workers, says Mark Cheskin, a partner at Hogan Lovells in Miami who specializes in such suits. "For example, if you have a warehouse with 50 mostly white workers and you are laying off 10, all of whom are Hispanic, you have a problem."

Laying people off on Fridays means employers can close out the books at week's end, and clear their minds for the weekend, but that's a mistake, Cheskin says. "If you lay people off on a Monday, they can file for unemployment the next day, and they have all week to call the company about things like what's happening to their benefits. If you lay them off on a Friday, they have all weekend to stew."

"Offer a severance payment and require everyone to sign a release in order to get it," says Cheskin. "They have waived their right to sue you later." Other mistakes include having a stranger do the firing or having workers led from the building. "Being laid off, especially when someone has worked at a company for years, is a huge humiliation, and it can make people want to strike back," Cheskin warns.

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