Employment practices lawsuits can be expensive. Here's how to help keep your business safe with employment practices liability insurance.

The average settlement for an employment practices lawsuit is $125,000, according to HR Morning. Such suits cover a range of workplace issues, from discrimination and harassment to wrongful termination. Is your business at risk?

Employment practices liability insurance (EPLI) could help keep you safe. For businesses considering this type of coverage, Insureon Chief Operating Officer Jeana Deninger has this advice.

When Are Business Owners at Risk?

Deninger put it simply: "If your business has employees, you are at risk for an employee practices lawsuit." Typical lawsuit causes include:

  • Mismanagement of employee benefits
  • Sexual harassment
  • Wrongful discipline or demotion
  • Wrongful termination
  • Slander or libel
  • Discrimination based on age, gender, religion, race or other protected classes
  • Breach of an employment contract
  • Privacy invasion
  • Emotional or mental distress
  • Negligent decisions related to hiring, promotions or compensation

Deninger notes that you could be at risk even before you hire your first employee. "People who don't work for your company can sue if they believe they were not hired due to discrimination based on age, sex or other factors."

Note that workers' compensation insurance does not cover these lawsuits, leaving business owners exposed.

What Does EPLI Cover and How Does It Help?

EPLI can cover legal expenses if your business is sued over an employment-related issue. Say, for example, that after you promote one employee to sales manager, another employee decides to sue because they believe they should have received that promotion.

An EPLI policy can pay for court costs such as attorney fees, expert witness testimony expenses and judgments against your business — up to your policy limit.

How Do You Find the Right Policy?

Deninger recommends that you start by looking for an insurance company that has a proven record of putting EPLI coverage in place for your industry. This helps ensure that they'll understand the unique legal risks your business faces.

The amount of coverage you'll want to purchase depends on a variety of factors, including your industry, the number of employees you have and the amount of risk at your organization. "Most policies at Insureon are under $500,000. It's a good idea to review with an insurance agent before signing up to make sure your policy provides enough coverage to adequately protect your business."

Deninger also warns that policies can include or limit coverage for certain events, such as major staff cuts, mergers and acquisitions. Ask your agent about any possible exclusions in your policy.

How Can You Prevent Lawsuits?

"One of the best ways to prevent an EPLI lawsuit is to have clear workplace guidelines in place. Create an employee handbook that spells out a zero-tolerance policy when it comes to harassment and discrimination and review the policies with each new hire."

Deninger also recommends setting up mandatory sexual harassment training. An Insureon poll found that nearly half of small businesses do not offer this training, which exposes them to a lawsuit.

If an employee comes to you with an incident or concern, Deninger recommends documenting everything, including all conversations with the employee. "In these situations, there is no such thing as too much documentation, especially if you wind up in court."

By providing guidance and rules upfront regarding what type of behavior is unacceptable in the workplace, you significantly reduce your chances of being sued in the first place. But since there's no way to guarantee that a lawsuit won't happen, employment practices liability insurance is a wise backup plan.

For more information on business insurance, check out ADP's Property & Casualty Insurance 101 guidebook.

Automatic Data Processing Insurance Agency, Inc. (ADPIA) is an affiliate of ADP, LLC. All insurance products will be offered and sold only through ADPIA, its licensed agents or its licensed insurance partners; 1 ADP Blvd. Roseland, NJ 07068. CA license #0D04044. Licensed in 50 states. All services may not be available in all states. This information is not intended as tax or legal advice. If you have any questions, contact a tax or legal professional.

Tags: Company Policy Company Culture Insurance Risk and Compliance Small Business HR Articles Employee Handbook Midsize Business