Your consulting business likely aims to treat employees fairly and provide them with a positive, productive working environment, but it’s impossible to prevent every negative situation that could occur. Your company controls hiring, firing, compensation, and other aspects of employment that have a major effect on employees’ lives. If employees feel they were treated unfairly, they could sue you with claims of wrongful treatment. Whether the claims are legitimate or your company is innocent and has documentation to prove it, the associated lawsuits can be costly, and settlements for this type of case can be very expensive if your company is found to be at fault. If employees sue with allegations related to your employment practices, Employment Practices Liability Insurance can step in to pay for legal fees and settlements, providing valuable financial protection.

What is Employment Practices Liability Insurance for consultants?

Employment Practices Liability Insurance (EPLI) protects your company if current, past, or prospective employees sue with claims of wrongful treatment. EPLI typically covers your company, directors, officers, managers, and current and former employees. In the event of a lawsuit, your insurer will provide funds to cover your legal fees and any settlements or judgments against your company. EPLI policies will cover legal costs regardless of whether you win or lose the lawsuit, but they do not cover punitive damages or fines.

Example:

• Your marketing consultancy employs a team of consultants with varying experience levels. Your most senior consultant has been in the field for over 30 years. He has performed well since joining your firm, but in the last few years, his performance has declined. Additionally, he has become increasingly difficult to work with, often lashing out at colleagues and clients. After several poor performance reviews, you let the consultant go. The consultant is furious and files a wrongful dismissal suit against your firm, claiming he was discriminated against because of his age. Your EPL coverage would cover the legal fees involved in this case.

Employment Practices Liability Insurance is available on a standalone basis but is commonly bundled within a management liability insurance package or as an added endorsement on directors and officers liability insurance. Depending on the insurer, EPL coverage can also often include additional benefits and add-ons like HR assistance and risk management consultation services, third-party liability coverage, and coverage for volunteer or unpaid workers.

Why do consultants need Employment Practices Liability Insurance?

Employee claims of discrimination, retaliation, harassment, and other types of wrongful treatment are common across many industries and can be highly damaging. Not only do these lawsuits consume your financial resources as you defend the case, but they can have negative effects on your company’s reputation and the morale of your employees. EPL coverage can protect your company from the many consequences of employment-related lawsuits. In addition to providing funds for lawsuits and settlements, your EPLI insurer may make risk management services available to you. Human resources training or consultations can help companies reduce the likelihood of employees suing.

Smaller consulting firms with fewer employees may feel that they are less at risk for this type of lawsuit, but they can actually be more vulnerable to employment practices claims. Small companies often lack a dedicated HR or legal department and may not have clear procedures for hiring, performance reviews, firing, and disciplinary action. Without comprehensive guidelines in place, there is a higher chance for employees to feel mistreated or for a company to mishandle employee concerns.

Moreover, recent studies have shown that more than half of all employment liability claims are against employers with fewer than 50 employees, with average employment liability suits costing upwards of $270,000. Without the proper coverage in place, a small consulting firm could easily find itself in a deep financial hole when facing an employment-related lawsuit.

What does Employment Practices Liability Insurance cover?

Employment Practices Liability Insurance provides protection for wrongful employment practices claims brought on by prospective, current, and former employees.
Common claims that are covered by EPLI include:

Wrongful demotion, discipline, failure to promote, negligent evaluation, or wrongful refusal to employ

• Example: An employee at your management consulting firm receives a demotion. The employee overhears her supervisor telling a colleague that clients will not want to work with a pregnant woman. The employee sues, alleging that she was demoted because of her pregnancy, which is in violation of the Pregnancy Discrimination Act.

Wrongful dismissal, discharge, or termination

• Example: An employee at your financial consulting firm is fired. Before he was fired, the employee, who is in his 50s, noticed a pattern of jokes and comments about his age from managers and colleagues. The employee sues, alleging he was fired because of age discrimination.

Wrongful denial of training, deprivation of career opportunities, or breach of employment contract

• Example: An employee at your educational consulting firm alleges that she was not given ownership of major accounts because she was unwilling to work on Sundays, which is prohibited by her religion. She attests that she was passed over even though she was more familiar with those accounts than her coworkers. This reduced her earning potential. She sues for religious discrimination because she has been deprived of career opportunities.

Retaliation

• Example: An employee at your IT consulting company files a workers’ compensation claim after developing a repetitive strain injury. Soon after filing the claim, the employee is moved to a less desirable division of the company. She sues the company for retaliating against her for making the complaint.

Harassment

• Example: An employee who is a member of a racial minority experiences repeated racial jokes, comments, and stereotyping from coworkers, both verbally and in emails. He sues the company for damages.

Libel, slander, invasion of privacy, defamation, or humiliation

• Example: One of your former employees is being considered for a new job, and his prospective employer calls for a reference. His former manager says that the employee’s resume contains false information, but this is not true. Your former employee does not get the job and sues for slander.

Verbal, physical, mental, or emotional abuse arising from discrimination

• Example: The majority of the consultants at your financial consultancy are men, and over the years your firm has been criticized by past employees for cultivating a chauvinistic environment. A recently fired female consultant abruptly resigns and files suit against your company. She claims that she was verbally abused by coworkers because of her sexual orientation, causing her to suffer deep emotional distress.

Coercing an employee to commit an unlawful act or omission in the course of their employment

• Example: The administrative assistant to your vice president claims that she was pressured to falsify expense reports from his business trips in order to hide spending on lavish dinners, recreational drugs, and adult entertainment.

What is excluded from Employment Practices Liability Insurance?

Common exclusions from EPL coverage include:

• Criminal, fraudulent, or malicious acts.
• Contractual liability. If a company has signed a contract or agreement that requires it to pay damages, the insurer will not pay for it.
• Workers’ compensation, disability, or unemployment claims.
• Punitive damages or fines.
• Wage and hour law violations. EPLI will not pay for claims that your business has underpaid employees or failed to pay overtime.
• Violations of laws regulating employers. There are a number of laws that set standards and responsibilities for employers, such as ERISA, COBRA, or the WARN Act. Violations of these laws are not covered by EPLI.
• Strikes and lockouts. EPLI does not cover wrongful acts that occur against employees who are striking, locked-out, or have been replaced due to labor disputes.
• Prior litigation and claims. EPLI won’t cover lawsuits that were already in progress or pending before the prior or pending litigation date given in the declarations section of your policy. It also won’t cover claims of wrongful acts that have already been reported in the past to an insurer providing similar coverage.

Is Employment Practices Liability Insurance a claims-made policy?

Employment Practices Liability policies are available both on an occurrence and claims-made basis. However, EPL coverage is typically written on a claims-made basis, which means your policy must be active both when an incident occurs and when a suit is filed in order for your insurer to provide coverage. It’s essential to be aware of this because employment practices lawsuits may be filed long after an alleged incident occurs. If your policy has lapsed when a claim is made, the insurer will not cover it, even if your insurance was active at the time of the incident.

Are legal fees part of the limits of insurance for Employment Practices Liability Insurance?

EPLI policies have “shrinking limits,” which means that legal fees count against your overall limit of liability. If your company is sued, the costs to defend the lawsuit will be subtracted from your limit of liability, which is the total amount of money your insurer has available for you. Because legal costs are a large percentage of the costs associated with EPLI claims, it’s important to keep this in mind when selecting your coverage.

Does Employment Practices Liability Insurance have a deductible?

EPLI policies typically include a deductible. This is a portion of each claim that your company must pay before insurance coverage begins. Policies with lower deductibles will have higher premiums.

How to reduce the risk of Employment Practices Liability claims

EPLI can provide crucial financial protection if you are sued, but it’s also vital to take steps to prevent lawsuits from occurring. Many EPLI insurers will provide resources to help companies reduce their risk of employment practices-related claims. Common strategies include:

• Create an employee handbook detailing all company procedures and policies. Make corporate policies easily available and perform orientations with all new hires to explain policies.
• Include statements that employment is at-will and employees can be fired for any legal reason at any time.
• Include an equal opportunity employment statement as part of your employee handbook and job applications.
• Provide a written job description for each position, clearly defining required skills and expected performance.
• Perform regular, objective employee performance evaluations and keep records of evaluations in employee files.
• Establish a zero-tolerance policy for harassment and discrimination. Have clear procedures for reporting violations. Thoroughly investigate and document any complaints and what steps were taken to address complaints.
• Train employees and managers on sexual harassment and other common issues. Teach anyone who will interview job applicants what questions are inappropriate to ask.
• Standardize procedures for promotions, demotions, disciplinary action, and termination.

Final Word

With employment-related lawsuits on the rise, it’s important for every consulting firm to take a good look at their risk management strategies as it relates to employment practices. Defending against employment practices-related lawsuits can be lengthy and expensive, and these cases can also harm your consulting firm’s morale and reputation. It’s crucial to create a work environment where these claims are unlikely to occur, but it’s impossible to avoid every potential claim of unfair treatment, and it’s possible your firm could be falsely accused as well. Employment Practices Liability Insurance could be a good tool in your firm’s risk management portfolio to financially protect your company in the event that current, former, or prospective employees make a claim that they experienced wrongful treatment.