Employment practices liability insurance: What small businesses should know

If you’re a small business owner with employees, chances are getting workers’ compensation insurance was a pretty easy call. It saves you the financial worry when work accidents waylay your staff. Plus, most state laws require employers to carry workers’ comp, so sometimes you don’t have the option.

You do, however, have an option when it comes to employment practices liability insurance (EPLI). It can cover legal expenses if you don't uphold your responsibility to be fair in your employer-employee relationships.

Unfortunately, many small business owners opt out of EPLI coverage because they mistakenly think:

• Workers’ comp can cover employment practices lawsuits
• Employees would never sue them

Both myths can end up costing your business a lot of money. Let’s dig into each to set the record straight.

What’s the difference between EPLI and workers’ comp?

Many small business owners assume workers’ compensation can cover all employee issues. But that's not the case.

The confusion probably stems from the fact that workers’ comp has two parts. The first typically pays for an employee’s medical bills and lost wages after a work injury or illness. The second can help pay for legal expenses when employees sue the business over work injuries that were either ineligible for benefits or that were caused by the employer's negligence.

It’s the name of this second part that causes confusion: employer’s liability insurance.

By contrast, employment practices liability insurance is actually a type of professional liability insurance. It can cover lawsuits over employee allegations of:

• Sexual harassment
• Discrimination
• Defamation
• Retaliation
• Wrongful termination or demotion
• Mismanagement of benefits

In general, workers’ compensation covers physical injuries and illnesses. EPLI is for claims that you violated an employee’s rights.

Why your business might face an EPLI claim

This second myth is a little tougher to dispel because so many small business owners want to see their staff members as friends or even family. Unfortunately, that attitude can get them in trouble.

Some behavior may be totally acceptable between friends but is problematic in a professional setting – especially when it comes from a manager or business owner. According to Dr. Steven Lindner, talent acquisition expert and executive partner with The WorkPlace Group, “Discrimination, whether intentional or not, is still discrimination.”

Remember that you don’t necessarily have to be guilty to face an accusation. Lindner tells the story of a recent case where he served as an expert witness for a defendant accused of negligent supervision by 29 plaintiffs. The judge dismissed every claim, finding them to be unsubstantiated, but reaching that point took years and significant resources.

According to Lindner, employment practices lawsuits can be emotionally draining and costly to resolve. EPLI helps ease the burden by covering legal fees, investigation costs, and judgments or settlements.

How to protect your business from EPLI claims

Employment practices lawsuits can spring up any time during the employer-employee relationship, including:

• Hiring
• Employment
• Promotions
• Terminations

According to Lindner, any practices that don’t align with applicable laws can spell trouble. He recommends protecting your business by:

• Ensuring current policies and procedures comply with applicable federal, state, and local laws
• Writing job descriptions and advertisements that only list job-relevant requirements
• Evaluating candidates with a consistent and standardized methodology that focuses on successful job performance
• Treating all employees professionally
• Consistently applying your company's policies and procedures

Being consistent in your treatment of employees helps minimize your risk, but it doesn’t negate the need for insurance. Consider protecting your business with EPLI, too.

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