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From the Editors..................................................................2What Are You Doing To Protect Your Company

Against Wage and Hour Lawsuits?..............................14Corralling the Workplace Bully........................................... 17EPLI Policy Exclusions: It’s Not What They Exclude,

It’s What They “Except” .................................................. 19

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• Preemployment Testing and the Ford Motor Company Discrimination Lawsuit

• Employer Exposures from Workplace Smoking Bans• An In-Depth Look at Wage and Hour Defense Coverage• Verifying an Employee’s Legal Status: An Employer’s

Dilemma

Continued on page 3

Employment Practices Liability Consultant

“Your quarterly guide to exposures, coverage,

and loss control”

Winter 2008

Avoiding a Litany of Compliance Exposures in the Hiring Process

By Don Phin, Esq.

The greatest risk an employer faces is hiringthe wrong employee or, conversely, not hiringthe right one. This article will argue that thesmall risks inherent in an “active,” comprehen-sive hiring approach pale in comparison to therisks that are created when an employer fails tothoroughly evaluate potential employees beforemaking the decision to hire them.

As the chart below indicates, there will bevastly different outcomes between hiring theright employee and hiring the wrong one.

What Can Go Wrong?

A lot can go wrong when you hire the wrongemployee.

The Wrong Employee Is: The Wrong Employee Will:

Underqualified Create negative energies

Close-minded Harass or discriminate against coemployees

Prone to error Turn off customers or vendors

Habitually absent, late, or lazy

Quit at the drop of a hat

Untrustworthy Sue your company

Addicted Cause your company to be sued by a third party

Violent Create bad press

Unethical Use up every available day of sick leave

Steal company trade secrets or other confidential information

Take business opportunities for his or her own

Unhealthy File for unemployment or workers compensation

The Wrong Employee Is: The Wrong Employee Will:

2 EPLiC

EOK iBÅDchsnqr

Donald A. Phin, Esq., CPCMwww.hrthatworks.com

Employer Advisors Network, Inc., West Palm Beach, FL

Robert Bregman, CPCU, ARM, RPLUInternational Risk Management Institute, Inc., Dallas, TX

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Jack P. Gibson, CPCU, CRIS, ARMInternational Risk Management Institute, Inc., Dallas, TX

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Richard Clarke, CPCU, CIC, RPLU—Senior Vice President J. Smith Lanier & Co., Atlanta, GA

Thomas Ingrassia, Esq. —PartnerKlinedinst, Fliehman & McKillop, San Diego, CA

Rachel McKinney—PresidentRachel McKinney Insurance Services, Palm Desert, CA

Michael Rossi, Esq.—PresidentInsurance Law Group, Inc., Los Angeles, CA

Peter R. Taffae —President and CEOExecutive Perils, Los Angeles, CA

Copyright 2008 by International Risk Management Institute,Inc., 12222 Merit Dr., Suite 1450, Dallas, Texas 75251–2276,972–960–7693, www.IRMI.com. All rights reserved. This ma-terial may be quoted or reproduced only with written permis-sion from the publisher. The opinions expressed in EPLiC arethose of the individual authors. Nothing published in EPLiCis to be construed as legal, accounting, or professional advice.If such advice is required, the services of a competent profes-sional should be sought. Subscription price: $175 per year.ISSN #1529–840X

EQNLÅSGDÅDCHSNQR …Welcome to the Winter 2008 edition of EPLiC.

In each issue, we strive to supply our readerswith practical and effective strategies and toolsaimed at lowering your company’s or your cli-ents’ exposures to employment-related claims.We also provide insights and ideas on how to buythe most expansive, cost-effective employmentpractices liability insurance coverage possible.

According to many attorneys, the more a com-pany engages in preemployment testing, fit-for-duty physical exams, and background screening,the more vulnerable it is to allegations of dis-crimination, privacy violation, and potentialworkers compensation retaliation claims. In thisquarter’s lead article, “Avoiding a Litany of Com-pliance Exposures in the Hiring Process,” EPLiCcoeditor Don Phin debunks the myth that em-ployers face substantial exposure from such ac-tivities. Don explains how a number of key hir-ing tools can be used legally and effectively inways that further minimize these already-minorcompliance exposures.

In “What Are You Doing To Protect Your Com-pany Against Wage and Hour Lawsuits?” SanFrancisco attorney Katherine Catlos points outthat from a financial standpoint, wage and hourclaims have become the most costly employment-related exposure to businesses—far exceedingthe pure dollar cost of discrimination claims. Shedescribes new programs that have recently be-come available that provide coverage—up to$250,000—for defending such claims. Her articleconcludes by providing a checklist of steps thatemployers can take to minimize the threat posedby wage and hour litigation.

Next, an article by Mark Lies II shows thatworkplace harassment is not always of a sexualnature. In “Corralling the Workplace Bully,” heexplains the characteristics of this exposure,analyzes the liabilities to which it can subjectemployers, and provides remedies for minimiz-ing its effects.

In “EPLI Policy Exclusions: It’s Not WhatThey Exclude, It’s What They Except,” EPLiCcoeditor Bob Bregman examines 10 standardexclusions and shows why the exact wording ofemployment practices liability insurance poli-cy exclusions makes a significant difference in

the degree of substantive coverage the policiesactually provide.

Please let us know what you think about thesearticles, as well as advising us of additional topicsyou would like to see addressed in future issues.Your comments are welcomed and we are anx-ious to publish them in the next issue of EPLiC.

May all of your risksbe profitable,

Donald A. Phin, Esq.

Robert Bregman, CPCU, ARM, RPLU

EPLiC 3

Continued from page 1

What Can Go Right?

In contrast, a lot can go right when you hirethe right employee.

The bottom line: hire the right employees!They are well worth the time, effort, and ex-pense. This article will demonstrate how tominimize the hazards that are sometimes creat-ed during the employee evaluation process.

Hiring and Compliance: The Great Paradox

Ironically, the greater the effort an employermakes to hire the right employees, the greaterits compliance exposure. For example, one of thethings I preach is prehire physicals (otherwiseknown as “fit-for-duty exams”). The potential ex-posures created by such exams, as we’ll discuss

below, are allegations of privacy invasion, possi-ble workers compensation retaliation, and Amer-icans with Disabilities Act (ADA) violations. So,if a company requires these exams, it may prop-erly avoid “hiring” a workers comp claim but, inthe process, exposes itself to this litany of otherclaims. Figure 1 outlines the types of risks asso-ciated with the hiring process.

Choosing Your Risks

Optimal risk management is about choosingyour risks. As Walter Olson, author of TheExcuse Factory (published by The Free Press,New York, NY, copyright 1997), stated, “There isno such thing as the Golden Shores of legal com-pliance.” The legal risks associated with these

The Right Employee Is: The Right Employee Will:

Highly qualified Create positive energies

Anxious to learn Empower coemployees

Responsible, punctual, and attentive

Work to add value and attempt to advance within the company

Trustworthy Create profitability

Focused Work as a team member

Healthy Act respectfully and responsibly

Ethical Keep company trade secrets confidential

Loyal Create new business opportunities for the company

Innovative Work in a safe and healthful manner, lowering your insur-ance costs

Figure 1Risks Associated with the Hiring Process

Hiring Activity

Potential Claim Allegation/Potential

Outcome

Online recruitment Discrimination, privacy breach

Interviewing Discrimination, breach of contract, misrepre-sentation, privacy, ADA, workers comp

Skill testing Discrimination, ADA

Character assessment

Discrimination, privacy, ADA

Background checks

Discrimination, priva-cy, Fair Credit Report-ing Act (FCRA), immi-gration law violations

Fit-for-duty exams Discrimination, privacy, ADA, workers comp

Not doing the above Hiring thieves, frauds, illegal drug-users, whiners, losers, and claimants

4 EPLiC

hiring activities, while they do exist, are mini-mal, compared to the risk of hiring the wrongemployee. Indeed, the most successful employershave consciously chosen to assume a handful ofrelatively small compliance risks, in return foravoiding the much greater downside associatedwith hiring the wrong employee.

Unfortunately, I find too many lawyers tellingtheir employer-clients to do just the opposite. In-stead of assuming small compliance risks, theyadvise their clients not to engage in an “active”hiring process—but only because they heard ofan aberrant, once-in-a-blue-moon case in whichan employer was sued and the claimant receiveda significant settlement or jury award.

Providing References: How So-Called Risk Avoidance Can Prove Costly

A classic example of this syndrome involves thegiving of references. Because of a relatively fewunscrupulous employers who have been sued forslandering competent former employees whenproviding references, lawyers now advise busi-nesses to not give references at all. But let me askyou this: which disserves the business communitymore, the 1-in-10,000 slander claim by a formeremployee or the fact that employers simply don’tcommunicate with each other any longer? In ex-change for avoiding the rare slander claim, com-panies have abdicated their right to exchange thekind of honest, first-hand evaluations of formeremployees, the kind that can truly assist in mak-ing optimal hiring decisions, or even more impor-tant, avoiding the employee who creates havoc.

Consider the situation several years ago when anurse at a New Jersey hospital was found to haveadministered fatal overdoses of medication tomore than 30 patients. Previous employers haddismissed the nurse under suspicion of seriousmisconduct. But they were reluctant to elaborateon the numerous complaints and problems sur-rounding his tenure when the New Jersey hospitalattempted to obtain references. In this case, thecost of so-called risk avoidance was staggering.

Skill Testing

As I often remind employers in workshops,“Half the employees out there are above average

and half are below average. Which half do youhave?” I will preach to anyone who will listenabout the importance of skill testing.

The Risks of Not Doing Skill Testing

Let me provide you with the same example Igive my workshop participants. It illustratesthe importance of skill testing.

Just prior to ending my litigation practice, awoman walked into my office wanting to sue thelaw firm that had fired her. To make a long storyshort, she was an experienced litigation secre-tary who had worked for a partner at a compet-ing firm for 15 years and no longer wished tostay there. She put it out to the grapevine thatshe was looking for greener pastures. At thesame time, a litigation partner at another lawfirm had recently lost his legal secretary on shortnotice. He too, put word out to the grapevine andthat was how they met. He interviewed her. Shewas likeable, obviously knew what she was do-ing, and was hired on the spot. Unfortunately forboth parties, within 3 months, the relationshipwas over. She was let go for not being as produc-tive as the previous litigation secretary.

The Importance of Defining the Critical Skill Set

I started off my interview by asking her thisquestion: “What level of skill was required foryou to be successful at your job?” Her answerwas, “I know my job.” But she wasn’t getting mypoint. Legal secretaries have three fundamentalfunctions. They type, probably as much as 60percent to 80 percent of their day. The rest oftheir time is spent dealing with procedural mat-ters and client management. So, she could havebeen skill tested on her: (1) typing speed, (2) sub-stantive knowledge of litigation procedures, and(3) client administrative protocols. When I askedwhat her typing speed was, she indicated that itwas 80 words per minute. Unfortunately, typingspeed was never discussed during the hiring pro-cess. As it turns out, I contacted her predecessorin the job, who typed roughly 100 words perminute—but her boss didn’t know that.

The lesson is this: That legal secretary was lit-erally set up for failure on day one because the at-torney wasn’t crystal clear about the specific skillset that was required to be successful. From his

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perspective, he was trying to duplicate the skillset of his previous legal secretary. Yet because hehadn’t defined it, nobody knew about it!

Over the long haul, there is a big difference inproductivity between someone who types 100words per minute and one who types 80 wordsper minute—and we haven’t even begun dis-cussing the substantive knowledge or clientmanagement requirements of the job. So, con-sistent with the theme of this article, there is ahuge risk exposure for firms that do not engagein skill testing of prospective employees. Andthe risk is usually not from the hiring side; it’sfrom the termination side, where the dollarsand emotions are far greater.

Skill Testing and Compliance Risks

The risk with any testing approach is that itmay create a disparate impact on one group ofapplicants. For example, an IQ requirementmay have a disparate impact on blacks. A com-pany would then have to identify a legitimatebusiness reason for allowing that disparate im-pact to continue. Unfortunately, in most in-stances, a common-sense argument won’t work.As a result, many employers will unnecessarilyshy away from skill testing to avoid having tomake a business justification case. But all I cansay is that in 25 years of representing both em-ployees and employers, I have never once had tohandle such a case. In reality, the reportednumber of claims asserting disparate impactdiscrimination is small, and even when suchclaims are successful, the resulting damagesare certainly not severe. Again, I believe thegreater risk is not doing skill testing, especiallywhen weighed against the minute potential of adisparate impact claim.

Character Assessments

These tools are not called “personalitytests”—because you can’t fail your personali-ty! According to the book, Blink, by MalcolmGladwell (published by Little, Brown andCompany, New York, NY, copyright 2005),there are approximately 2,500 different char-acter assessment tools in the marketplace,such as DISC, Profiles International, Kolbe,

McQuaig, Caliper, and so on. This means that,of course, the best one is the one you use. It isappropriate for me to mention that for manyyears I have recommended IRMI’s characterassessment program, ZERORISK HR, to myclients. It is an excellent tool.

The Importance of Personality Testing

Let me give you an example of how impor-tant these tools are. Customer service repre-sentative, also known as account manager, isone of the most common positions in the insur-ance world. The key challenge inherent in thisjob is that it requires what I consider a “splitpersonality.” Half the day, customer servicereps work on data management, a “left brain”activity. The other half of the day, they buildcustomer relationships, which is primarily a“right brain” activity. The problem is peopleare either dominant on their left or their rightside of their brain. If it were my insuranceagency, I would assess all of the CSRs andhave those folks who are very good at datamanagement perform that aspect of the job 80percent of the day and those who excel at cus-tomer service management would work in thatarea for at least 80 percent of the day. Usingthis approach would increase both their pas-sion for the work as well as their productivity.To do otherwise is an attempt to jam roundpegs into square holes—simply because that iswhat the CSR’s job description calls for. Mar-cus Buckingham wrote about how ridiculousthis mindset is in First Break All the Rules (co-authored by Curt Coffman, published by Si-mon & Schuster, New York, NY, copyright1999 by The Gallup Organization).

Another example: if you are hiring a chief fi-nancial officer for your company, you wouldwant somebody who enjoys paying a great dealof attention to detail. But unless you assess forthis character trait, how could you be certain ifa candidate possessed it? I don’t know aboutyou, but I don’t want a CFO with a low atten-tion to detail managing my books! But of course,there is the risk side, which again, is relativelyminor. The risk side associated with a characterassessment tool is that it, too, can have a dis-parate impact on job applicants.

6 EPLiC

Uniform Guidelines for Employee Selection Procedures

Both skill testing and personality assess-ment tools are subject to uniform guidelines.Specifically, the Equal Employment Opportuni-ty Commission’s Uniform Guidelines on Em-ployee Selection Procedures, 29 CFR Part1607[1], provide a framework to help ensurethat a test used as part of the hiring, evalua-tion, or promotion process will be employed in anondiscriminatory manner.

It is important to note that the UniformGuidelines address all parts of a selectionprocedure, including resume reviews, inter-views, and assessments. The goal of the guide-lines is to prevent unnecessary discriminationagainst protected groups.

The Four-Fifths Rule

Adverse or disparate impact occurs when aselection process results in a substantial differ-ence in the selection rates for different racial,gender, or age groups. The EEOC’s UniformGuidelines on Employee Selection Procedures(designed in 1978) require the use of the “four-fifths rule.” It provides that a “selection rate forany race … which is less than four-fifths (or 80percent) of the rate for the group with the high-est rate will generally be regarded by the[EEOC] as evidence of adverse impact.…”

When adverse impact is present, the UniformGuidelines require employers to validate theuse of each component of their selection pro-cess, including interviews, assessments, and allother methods, and to verify that each compo-nent is job-related and cannot reasonably be re-placed by another procedure that produces lessadverse impact.

The Upside—and Downside—of Skill Testing and Personality Assessments

When skill tests and personality assessmentsare applied properly, they actually reduce yourlegal risk, since they add objectivity to the selec-tion process. This is because the results of skilltests and personality assessments are normallyexpressed in a precise, quantified manner bymeans of a specific score or percentile ranking.

Conversely, careless use of assessment tools isjust as risky as are untrained interviewers. Thekey is to implement any assessment tool or skilltest in a thoughtful manner and to verify thatall aspects of these tests/assessments bear a di-rect relationship to the actual skill set requiredfor the job in question.

Evaluating and Monitoring the Assessment/Skill Testing Process

If a test or assessment has adverse impact,you should validate that the assessment is job-related, using a job analysis, evaluation ofalternate methods of measuring the samething that have less adverse impact, and verifi-cation that the assessment is applied in a waythat minimizes the amount of adverse impact.This might, for example, involve reducing oreven eliminating a specific cutoff score for acertain job. The best way to ensure that youare not violating the Uniform Guidelines is toconduct a proper job analysis and use it tochoose each component of your selection pro-cess. Then, monitor the process for adverse im-pact and make adjustments as required.

“Hard” vs. “Soft” Job Requirements

As stated by what, in my opinion, is the bestskill testing Web site on the market, Brain-Bench.com, “no matter what method you use totest someone, the key question that must be an-swered is: ‘What key attributes are required forhigh performance and are difficult to teach oncethe person is on the job?’” For instance, the job of“New Business Sales Representative” obviouslyrequires an extroverted, outgoing personality. Buteven after taking all of the best available courses,those imparting the latest, most effective “tech-niques” of the sales process, an introvert is stillnot likely to succeed in such a position. In manyjobs, certain individuals can simply never “learn”their way to successful job performance.

As BrainBench.com further states, “For somejobs, the critical attributes are obvious. Forexample, a medical doctor must have a degreeand a license to practice medicine. A lawyer mustbe licensed to practice law. A data entry clerkshould be able to type at a certain number ofwords per minute. For other jobs, however, the

EPLiC 7

key elements are less obvious. For example, whatare the most important attributes to look forwhen hiring a security guard or a sales person?”

The EEOC Fact Sheet

The EEOC recently issued a new fact sheeton the application of federal antidiscriminationlaws to employment tests and selection proce-dures for workers and applicants. The factsheet describes commonly used tests in themodern workplace, including cognitive tests,personality tests, medical examinations, creditchecks, and criminal background checks. It fur-ther sets forth “best practices” for employers tofollow when using employment tests and otherscreening procedures, including the following.

♦ Determining the selection procedure withthe least adverse impact on a protectedgroup of employees;

♦ Updating test specifications or selectionprocedures to conform to changes in job re-quirements; and

♦ Ensuring that managers understand the testprocedure’s effectiveness and limitations, ap-propriate administration, and scoring.

The new fact sheet may be found at theEEOC’s Web site, http://www.eeoc.gov/policy/docs/factemployment_procedures.html.

Trends in Testing-Related Discrimination EEOC Charges

The percentage of discrimination chargesraising allegations of disparate impact employ-ment testing and exclusions based on criminalbackground checks, credit reports, and otherselection procedures has been increasing sincefiscal year 2003. However, according to aDecember 2007 EEOC press release, the abso-lute number of such charges is still small. In fis-cal year 2003 there were 26 such charges, andin fiscal year 2006 the number had risen to 141.(http://eeoc.gov/press/12-3-07.html)

Testing and Privacy Issues

I have also seen some people argue that assess-ments violate their rights to privacy. The most

well known case in this area is Soroka v. DaytonHudson Corp., 235 Cal. F. App. 3d 654 (1991), inwhich a California appellate court found that thecompelling interest test determines whether apsychological test violates an applicant’s right toprivacy. In this case, Target department storeswere using a blend of tests to help in hiring secu-rity officers. Among other things, the tests con-tained questions concerning the applicant’s sexu-al, religious, and moral preferences. BecauseDayton Hudson was unable to show that the testsdirectly measured the specific characteristics re-quired by a qualified security officer, the court de-termined that these intrusions invaded the appli-cants’ privacy. If a company is foolish enough totake such an approach, it shouldn’t be surprisedwhen it gets sued. But that is the only privacycase I have seen successfully litigated in my 25years of practice. Again, the problem was not thatTarget used testing, but that the test it used boreno relationship to the skill set required for the job.

Privacy Expectations Vary

A number of privacy cases decided across thecountry over the last several years have made itvery clear that the “expectation of privacy” is atits lowest during the application stage. Con-versely, courts appear to place a higher burdenon employers who use assessment tools whenmaking promotion or downsizing decisions, con-ditions under which the affected worker is al-ready employed. It is also evident that the man-ner in which a test is presented and how itsresults are communicated go a long way in creat-ing the perception of whether it was fair orwhether the test invaded a person’s privacy.

Criminal and Credit Background Checks

The Fair Credit Reporting Act (FCRA) gov-erns the use of third-party agencies that con-duct criminal and credit background checks.

Criminal Background Checks: Reporting Limitations

Both federal and state laws limit the scope ofinquiry into an applicant’s criminal background.For example, an employment application mightask if you have “ever” been arrested. On the

8 EPLiC

other hand, the FCRA prohibits a consumer re-porting agency from reporting an arrest thattook place more than 7 years ago. But it does notsay that the employer cannot ask the question.

According to a Federal Trade Commission(FTC) attorney, in a letter dated December 10,1998, in response to an inquiry regarding thelength of time a consumer reporting agencymay report “adverse” items of information un-der Section 605(a) of the FCRA:

Except for records of criminal convictions,which may now be reported without anytime limitation, Section 605 of the FCRAprohibits consumer reporting agencies fromproviding adverse information that is morethan seven years old (ten years in the case ofbankruptcies) for employment purposeswhere the annual salary is less than$75,000. There are no restrictions upon re-porting adverse information for jobs involv-ing salaries of more than $75,000.

State employment laws may limit the ques-tions an employer includes on a job application.For example, in California an application mayask “job related questions about convictions,except those convictions which have beensealed, or expunged, or statutorily eradicated,”but applications cannot ask “general questionsregarding an arrest.” (http://www.dfeh.ca.gov/Publications/publications.aspx?showPub=9)

When Applicant Authorization and Notification Are Required

Under the FCRA, the employer must obtainthe applicant’s written authorization beforethe background check is conducted. The autho-rization must be on a document separate fromall other documents, such as an employmentapplication. In California, at the time an em-ployer obtains permission for a backgroundcheck, the applicant or employee should alsobe told that he or she may request a copy of thereport. The FCRA, in contrast, says the appli-cant is entitled to a copy of the report if a pre-adverse notice is given (i.e., if the report indi-cates an arrest or conviction).

Under federal law, if the employer uses infor-mation from the consumer report for an “ad-verse action,” that is, denying the applicant a

job, terminating the employee, rescinding a joboffer, or denying a promotion, it must take thefollowing steps, which are explained further inthe Federal Trade Commission’s Web site,http://www.ftc.gov/bcp/conline/pubs/buspubs/credempl.htm, and give the applicant a “pre-adverse action disclosure.” This includes a copyof the report and an explanation of the consum-er’s rights under the FCRA.

After the adverse action is taken, the individu-al must be given an “adverse action notice.” Thisdocument must contain the name, address, andphone number of the employment screening com-pany, a statement that this company did notmake the adverse decision, rather that the em-ployer did, and a notice that the individual hasthe right to dispute the accuracy or completenessof any of the information in the report.

Credit Background Checks

The EEOC has been urging companies to pro-ceed cautiously when utilizing credit checks intheir employment screening decisions. Creditchecks have a potential for discrimination un-der Title VII, unless, of course, there is a legiti-mate business necessity.

Research done in 2004 by the Texas De-partment of Insurance has been cited exten-sively in this area. The research focused on 2million individuals and found that “… Blackshave an average credit score roughly 10% to35% worse than the credit scores for Whites;Hispanics have an average credit score that is5% to 25% worse than those for Whites.”(http://www.tdi.state.tx.us/reports/documents/creditrpt04.pdf) Given these discrepancies, thepotential for adverse impact discrimination issubstantial. The message: employers shouldproceed cautiously when using credit scores inmaking hiring decisions.

Be Sure You Can Justify any Disparate Impact

The business justification case gets really in-teresting. In researching this article, I found noempirical studies linking credit scores to jobperformance or other risk factors. As stated ear-lier, common sense is not enough to defeat a dis-parate impact argument. Only data can do so.

EPLiC 9

Once the plaintiff “demonstrates that a re-spondent uses a particular employment practicethat causes a disparate impact on the basis ofrace,” the burden of proof shifts to the defendantto “demonstrate that the challenged practice isjob-related for the position in question and con-sistent with business necessity.” This standardwas codified into Title VII but originated fromGriggs v. Duke Power Co., 401 U.S. 424 (1971),which rejected two job requirements because“neither … is shown to bear a demonstrable rela-tionship to successful performance of the jobs forwhich it was used. Both were adopted … withoutmeaningful study of their relationship to job-per-formance ability.”

As part of a May 16, 2007, EEOC meeting onEmployment Testing and Screening, plaintiffattorney Adam T. Klein provided a well-researched 10-page statement that outlined theargument for severely restricting credit and crimi-nal background checks. That statement can be(and should be) read in full at http://www.eeoc.gov/abouteeoc/meetings/5-16-07/klein.html.

All I can say after reading Mr. Klein’s state-ment is that his opinions would probably bevery different if he had operated a business andwas forced to pay a large out-of-pocket settle-ment or judgment to an employee who he wouldnever have hired had a criminal background orcredit check been conducted.

Preemployment Physicals and Job Accommodation Issues

Wouldn’t it be great if employers could obtainany information they want about a job appli-cant’s medical background, workers compensa-tion claims history, drug use, sick leave use, dis-abilities, and any other possible “challenges”that could warn us of a poor hire or potentialclaim? In a well-publicized case, one employerwho was hyper-concerned about risky hires sur-reptitiously took DNA hair samples, to assess apropensity for health problems (or worse). Ofcourse, when the applicants found out, the com-pany was quickly hit with a lawsuit and agencysanctions. Whether business owners and man-agers like it or not, the EEOC has made it veryclear that employers are limited in the scope ofallowable inquiries before making a conditional

job offer. Even then, privacy and myriad otherlaws come into play.

The General Rule Regarding Prehire Health Inquiries

The general rule is this: the Americans withDisabilities Act (ADA) allows on an applicationprehire inquiries into the ability to perform aparticular job (e.g., can you lift this 30-poundmail sack with or without an accommodation?).On the other hand, it prohibits any preoffer in-quiries about a generalized disability (e.g., haveyou ever been injured while lifting?). However,after making a conditional job offer, an employ-er can ask almost anything. You can ask aboutthe employee’s workers compensation history,sick leave usage, medical challenges, addic-tions, you name it.

Focus on the Ability To Perform a Specific Job, Not on a Specific Disability

Information that may be requested on appli-cation forms or in interviews includes questionsto determine whether an applicant can performspecific job functions. But the questions shouldfocus on the applicant’s ability to perform thespecific job in question, not on a disability. Forexample: an employer could attach a job de-scription to the application form, with informa-tion about specific job functions. Or, the em-ployer may describe the functions of the job.This will make it possible to ask whether theapplicant can perform these functions. It alsowill give an applicant with a disability requisiteinformation to request an accommodation re-quired to perform a specific task. The applicantcould also be asked:

♦ Are you able to perform these tasks with orwithout an accommodation?

If the applicant indicates that he or she canperform the tasks with an accommodation, heor she may be asked:

♦ How would you perform the tasks, andwith what accommodation(s)?

The interviewer may describe or demon-strate the specific functions and tasks requiredby the job and ask whether an applicant can

10 EPLiC

perform these functions with or without a rea-sonable accommodation.

Questions Regarding Attendance

Questions regarding attendance must also behandled properly. Information concerning pre-vious work attendance records may be obtainedon the application form, during the interview,or in reference checks. But the questions shouldnot refer to “illness” or “disability.”

The interviewer may provide information onthe employer’s regular work hours, leave of ab-sence policies, and any special attendanceneeds of the job, and ask if the applicant canmeet these requirements (provided that the re-quirements actually do apply to employees in aparticular job).

For example: “Our regular work hours are 9a.m. to 5 p.m., 5 days weekly, but we expectemployees in this job to work overtime, eve-nings, and weekends for 6 weeks during theChristmas season and on certain other holi-days. New employees get 1 week of vacation,7 sick leave days, and may take no more than5 days of unpaid leave per year. Can you meetthese requirements?”

When Can a Fit-for-Duty Exam Be Administered?

After making a conditional job offer and be-fore an individual starts work, an employermay conduct a medical examination or askhealth-related questions, provided that all can-didates who receive a conditional job offer in thesame job category are required to take the sameexamination and/or respond to the same inquir-ies. For example:

♦ An employer may condition a job offer onthe satisfactory result of a postoffer medi-cal examination or medical inquiry if thisis required of all entering employees inthe same job category. A postoffer exami-nation or inquiry does not have to be “job-related” and “consistent with business ne-cessity.” Questions may also be askedabout previous injuries and workers com-pensation claims.

♦ If an individual is not hired because apostoffer medical examination or inquiryreveals a disability, the reason(s) for nothiring must be job-related and necessaryfor the business. An employer with morethan 15 employees also must show that noreasonable accommodation was availablethat would enable this individual to per-form the essential job functions, or thatthe accommodation would impose an un-due financial hardship on the business.

♦ A postoffer medical examination may dis-qualify an individual who would pose a“direct threat” to his or her own health orsafety, or to the health/safety of others.Such a disqualification must be job-relatedand consistent with business necessity.

♦ A postoffer medical examination may notdisqualify an individual with a disabilitywho is currently able to perform essentialjob functions because of speculation thatthe disability may increase the risk offuture injury (e.g., a recovering alcoholic).

If you choose not to hire someone based on hisor her medical history, the decision must be di-rectly related to his or her inability to performthe job up to a certain standard or because in do-ing so, he or she may harm himself, herself, orsomeone else. Employers with more than 15 em-ployees are required to consider job accommoda-tions. Lastly, you would be wise to have medicalinquiries done by a physician and have the phy-sician maintain the underlying medical records.

I recommend that if anyone ever has an accom-modation issue he or she contact the Job Accom-modation Network at http: www.jan.wvu.edu.

Interviewing

The more questions you ask in an interview,the better the chance of making a great hire.But the more questions you ask, the more yourisk asking the wrong question and getting hitwith a discrimination or privacy claim. Here areexamples of questions that can get an employerin trouble.

♦ Have you ever filed a workers comp claim?

EPLiC 11

♦ I’m curious, what is your age, race, nation-ality, etc.?

♦ Do you and your family stay healthy?

♦ Do you have any kids in school to worryabout?

♦ Do you plan on getting pregnant anytimesoon?

♦ And many, many more.

One way to reduce the chances of asking thewrong question: develop a uniform set of inter-view questions that will be asked in all inter-views. Then, have the questions reviewed byoutside employment counsel.

Racial Discrimination

Today’s employment laws have their genesisin challenges faced by blacks prior to the early1960s. The main reason the Civil Rights Act of1964 was passed was so that blacks could haveequal access to employment opportunities. Re-grettably, in many places, this challenge re-mains. I remember giving a workshop to a groupof executives in Texas and one attendee statedunapologetically that he consistently favoredwhite applicants over black applicants in makinghiring decisions. Although such attitudes are un-usual, regrettably, they do still exist.

In addition to blatant racial discrimination, agreat deal of unconscious bias exists. Such biasis based on stereotypes and prejudices, oftenhidden from the conscious mind of the personmaking a hiring decision. Malcolm Gladwelltalked about this phenomenon in his bookBlink, referred to earlier.

An Inherent Problem for Large Companies

The larger the size of the employer, the great-er the company’s exposure to racial discrimina-tion claims. In the Coca-Cola class action claim,a case discussed in the Winter 2001 issue ofEPLiC, the plaintiffs argued that the company’shiring practices had disparate impact on blacks.Once the impact is statistically significant—which in a large company is much easier toprove, compared to a smaller organization—

the burden shifts to the employer to disprovethat discrimination is the cause of the racialdisparity.

Fighting this leap in logic is difficult for anyemployer but is especially so for a huge multi-national corporation like Coca-Cola. This diffi-culty has resulted in significant settlementssuch as that paid by Coke ($192.5 million),Texaco ($176 million), and Sodexho Marriott($80 million). Ironically, at the time of the set-tlement, most observers considered Coke to beone of the most progressive employers in thecountry! Of course, the plaintiffs’ attorneys re-ceived about $40 million of the settlement, afar cry from any individual claimant, whowould have been lucky to receive a six-figurepayment. But that is the state of today’s civiljustice system.

Sex Discrimination

As with racial discrimination, many of theseclaims are being driven “underground.” Aswith race discrimination, compared to 20 or 30years ago, sex discrimination claims now re-sult from less overt, more subtle, and less con-scious actions on the part of employers. Suchdecisions are often based on veiled stereotypes.For example, there is the notion a woman can’tmake a good forklift operator or that a mancan’t function effectively as a nurse, and so on.I remember counseling three female attorneys,on separate occasions, each of whom felt shehad hit the glass ceiling at her law firm.Substantial pay differentials also remain be-tween males and females who perform compa-rable jobs.

Of course, employers are very concerned abouteveryone’s productivity. This concern is height-ened when one of the employees is a primarycaregiver. Since this burden falls largely on wom-en, it too can result in sex discrimination claims.

The larger the size of the employer, the greater the company’s exposure

to racial discrimination claims.

12 EPLiC

Moreover, since only females can get pregnant,which necessitates absence from the workplace,pregnancy discrimination represents yet anoth-er gender-related exposure to claims.

Age Discrimination

There is a wider generation gap in today’sworkplace than ever before. This is due to acombination of demographics and technologicalchanges. It’s hard to believe today that anyoneover the age of 40 is still considered to be an“older worker.” I wouldn’t be surprised if statis-tics reveal that we have more “older” workersthan younger ones. Having made that observa-tion, a judge in California recently allowed alawsuit to proceed against Google becausesomebody was fired for allegedly not fitting inwith the company’s “youth culture.” The sameargument can be made in the hiring process.You can expect to see more of these claims.

Reducing Stereotyping Based on Race, Sex, and Age

The fact is, racial, sex, and age discrimina-tion claims can be reduced by using sound hir-ing practices. For example, many orchestrasnow do “blind” auditions, in which musiciansplay behind a screen during the evaluationprocess. This approach has dramatically in-creased the percentage of women hired—in thesame way that a character assessment toolhelps display a person’s personality traits—without identifying somebody’s age, sex, orskin color. The same goes for skill testing andprehire fit-for-duty exams. Rather than mak-ing decisions based on race, sex, age, or anyother characteristic unrelated to job perfor-mance, employers should strive to incorporateevaluation procedures into their hiring proto-cols that produce objective and quantifiablemeasures of a job candidate’s abilities and per-sonality traits.

Online Recruiting

The main issue associated with online re-cruiting is the question of who is an “appli-cant” for discrimination purposes. The EEOC

guidelines make it clear that simply submit-ting a resume—in the absence of an actual,advertised job opening—is not enough to reachsuch a level.

In addition, corporate human resources per-sonnel must keep track of all persons thatproperly submit an online application for anopen job.

While there was once a lot of “noise” gener-ated by real or imagined compliance exposuresassociated with the online recruiting process, Iam not yet aware of any claims that have re-sulted from it.

Concluding Thoughts

There is no substitute for getting the rightperson on every seat of the bus. But, ironically,the more active and focused the effort to accom-plish this critical goal during the hiring process,the greater a company’s compliance exposure.Hopefully, this article has demonstrated thatnot only are these compliance risks vastly over-blown, but that the relatively minor risks thatdo exist can be largely avoided by following theguidelines I have provided. EPLiC

Donald A. Phin, Esq., has been an employmentlaw attorney since 1983. He developed theHRThatWorks.com program used by agencies andtheir clients nationwide. Don is a highly ratedspeaker and author of Building Powerful Employ-ment Relationships; LAWSUIT FREE! How to Pre-vent Employee Lawsuits; and Victims, Villains andHeroes: Managing Emotions in the Workplace. Hisarticles have appeared in The Risk Report, Busi-ness Insurance, CFG Update, HR.com, EPLiC, andother industry publications. He can be reached at(800) 234–3304 or by e-mail at don@donphin.com.

The EEOC guidelines make it clear that simply submitting a resume—

in the absence of an actual, advertised job opening—is not enough to reach such a level.

EPLiC 13

Sources of Additional Helpful Information

The following online sources provide useful information to help you hire more effectively, while avoid-ing the compliance minefields discussed in this article.

• EEOC Policy Guidance on the Consideration of Arrest Records http://www.eeoc.gov/policy/docs/arrest_records.html

• FTC: Using Consumer Reports: What Employers Need To Know http://www.ftc.gov/bcp/conline/pubs/buspubs/credempl.shtm

• EEOC Informal Discussion Letter Regarding Credit Checks http://www.eeoc.gov/foia/letters/2005/titlevii_credit_reports.html

• EEOC Testimony of Adam T. Klein, Esq., Regarding Credit Checks and Criminal Background Checks http://www.eeoc.gov/abouteeoc/meetings/5-16-07/klein.html

• Privacy Rights Clearinghouse Employment Background Checks: A Job Seeker’s Guide http://www.privacyrights.org/fs/fs16-bck.htm

• EEOC Informal Discussion Letter Regarding Validity of Testing http://www.eeoc.gov/foia/letters/2005/titlevii_ugesp.html

• Nondiscrimination in the Hiring Process: Recruitment; Applications; Preemployment Inquiries; Testing http://www.jan.wvu.edu/links/ADAtam1.html#V

• EEOC Uniform Guidelines on Employee Selection Procedures http://www.access.gpo.gov/nara/cfr/waisidx_02/29cfr1607_02.html

• Promoting Diversity Means Testing Employment Tests Published by the AFL-CIO http://www.workingforamerica.org/documents/PDF/EmploymentTestsFinal8.pdf

• The Association of Test Publishers http://www.testpublishers.org/

• DOJ Disability Rights Section Home Page http://www.usdoj.gov/crt/drs/drshome.htm

• EEOC Getting Medical Information from Employees http://www.eeoc.gov/ada/adahandbook.html#medical

• EEOC Americans with Disabilities Act http://www.eeoc.gov/ada/index.html

• EEOC Enforcement Guidance: Preemployment Disability—Related Questions and Medical Examinationshttp://www.eeoc.gov/policy/docs/preemp.html

• Questions and Answers: Enforcement Guidance on Disability-Related Inquiries and Medical Examinations of Employees under the ADA http://www.eeoc.gov/policy/docs/qanda-inquiries.html

• Enforcement Guidance: Disability-Related Inquiries and Medical Examinations of Employees under the ADA http://www.eeoc.gov/policy/docs/guidance-inquiries.html

• Job Accommodation Network Job Descriptions http://www.jan.wvu.edu/media/JobDescriptions.html

14 EPLiC

What Are You Doing To Protect Your Company Against Wage and Hour Lawsuits?

By Katherine S. Catlos, Esq.

Employers throughout the United States arebeing bombarded with lawsuits alleging wageand hour violations and the employees arecertainly coming out as winners. Recently,Staples paid $38 million—more than $22,000to each “assistant manager” who allegedly wasmisclassified as an exempt employee underovertime laws. Starbucks is also in “hotwater,” having just lost a class certificationruling to 900 “managers” who claim to havebeen improperly classified as “executives.”

But wage and hour lawsuits are not limitedto large employers or even to class actions.Their impact upon smaller companies may befar greater. One employee recovered a six-figure settlement because he meticulously doc-umented the time he spent “on call,” as a re-sult of his employer’s failure to properly utilizetime cards. There can be no doubt that wageand hour violations are the single largest expo-sure for employers today, far exceeding thatfrom discrimination claims.

The Fair Labor Standards Act

The operative law known as the Fair LaborStandards Act was enacted by Congress in 1938.The FLSA requires most employers in the Unit-ed States to comply with minimum wage andhour standards. Oftentimes, comparable statelaws, such as those in California, apply evenmore stringent requirements. The FLSA’s basicrequirements govern the payment of overtime

wages, overtime wages for employees workingmore than 40 hours per workweek, and employ-ment limitations for children, and mandaterecord keeping by employers.

The issue of who is an “exempt” employeecontinues to cause employers huge headaches.Basically, there is an overtime exemption forexecutive, administrative, professional, andoutside sales employees under the FLSA andunder most state labor codes. To be exemptfrom eligibility for overtime pay, these employ-ees must meet certain tests regarding job du-ties and responsibilities and be compensated“on a salary basis” at not less than statedamounts. Such tests, however, are highly con-fusing and even those paid on a salary basiscan sometimes be eligible for overtime pay.

Litigating wage and hour claims is extremelyexpensive. Oftentimes, the prevailing plaintiffs(both current and former employees) can recov-er double the actual damages plus attorneys’fees. If an employer is found to have willfully vi-olated FLSA, a 3-year statute of limitations ap-plies, compared to the longer 4-year statute oflimitations applicable under California’s Busi-ness and Professions Code 17200 et seq.

Sources of Wage and Hour Litigation

Perhaps the most pervasive—and costly—myth associated with wage and hour claims isthat they result only because employers fail topay overtime to “nonexempt employees.” In fact,there are numerous additional sources of wageand hour claims. These include the following.

♦ Misconceptions that if an employer payssomeone a salary, he or she is automatical-ly classified as “exempt.” Generally speak-ing, in California, employees are exemptfrom receiving overtime wages only if theyspend more than 50 percent of their timeworking in “administrative, executive, orprofessional” capacities, which is primarily

There can be no doubt that wage and hour violations are the single

largest exposure for employers today, far exceeding that from

discrimination claims.

EPLiC 15

“intellectual, managerial, or creative whichrequires the exercise of discretion andindependent judgment.” 8 Cal Code Regs§§ 11070.

♦ Misclassifying employees as independentcontractors and not paying them overtime.

♦ Not properly paying employees for over-time; i.e., compensation for hours workedin excess of 8 hours in a given day or morethan 40 hours in a week.

♦ Miscalculating the amount of wages owed(i.e., applying the wrong rate, creditingtips, etc.).

♦ Not paying qualified employees for timethey are “on call.”

♦ Allowing employees to work “off the clock”(i.e., not paying for time spent for openingtasks or closing duties, before and afterthe official workday, or for time spent don-ning uniforms, attending seminars, etc.).

♦ Not allowing employees to take meal orrest breaks; notably, state law requiresan unpaid 30-minute, uninterrupted mealperiod whenever the employee works 5 ormore hours (with a second meal period forworkdays of 10 hours or longer) and apaid 10-minute rest period for each 4hours of work. This often occurs with thediligent employee who works through hisor her lunch period.

♦ Not paying qualified employees for “oncall” time or travel time.

♦ Not paying employees on a timely basis.♦ Not paying all wages due and owing at the

time of termination; such delays could re-sult in “waiting time” penalties in that theemployee’s wages continue to accrue eachday he or she is paid late—up to 30 addi-tional days.

♦ Docking exempt employees’ salaries forabsences; among many other relatedclaims such as retaliation, etc.

Among other allegations, it is very easy foremployees to allege that they were not allowed to

take meal or rest breaks. Conversely, it is verydifficult for employers to defend against theseclaims unless they have compiled proper docu-mentation. Unfortunately, employers often havelittle or no evidence documenting how their em-ployees spend their days. But by the same token,the last thing an employer needs is a costly ex-pert who shadows its employees, only to testifybefore a worker-friendly jury about how manyhours an employee is truly engaged in exempttasks. Talk about a classic “catch-22” situation!

Insurance Coverage to the Rescue

Given the risks caused by this onerous expo-sure, employers have been looking to their bro-kers and insurers to obtain coverage for FSLA /wage and hour claims. In response to this need,creative underwriting professionals, such as So-cius Insurance Services, Inc., in San Francisco,California, have developed markets for placingappropriate coverage.

More specifically, they now offer employmentpractices liability insurance (EPLI) policies thatprovide defense coverage for wage and hourclaims. Coverage is available as a sublimit tothe policy’s aggregate limit, in increments of ei-ther $100,000 or $250,000. The new product is aboon to employers—especially smaller ones—previously left to defend against this costly liti-gation without the benefit of insurance.

Additional Benefits

Another advantage afforded by this approachis that the defense coverage for wage and hourclaims is written on a first-dollar basis. Thismeans it is not subject to the policy’s regulardeductible/retention, which is often substantial.

The new product is a boon to employers—especially smaller ones—previously left to defend against this costly litigation

without the benefit of insurance.

16 EPLiC

Nor do payments for defending wage and hourclaims reduce the policy’s annual aggregate thatis available for other types of employment-related claims; rather, the policy’s wage andhour defense sublimit is a wholly separateamount of coverage.

Lastly, under these policies, there is typicallyno requirement that the insured undergo anaudit to evaluate the extent of its wage and hourexposure. Rather, insurers will agree to providethe coverage solely on the basis of the insured’sanswers to questions on the application thatpertain to its wage and hour complianceprogram. (Despite the absence of an insurer re-quirement, it is still a good idea for an employerto have experienced counsel periodically exam-ine its exposure.)

Steps To Reduce the Exposure to Wage and Hour Claims

Although insurance coverage can reducemuch of the risk posed by wage and hourclaims, it is not a panacea. Accordingly, em-ployers should also take the following steps tominimize their liability exposure under federaland state wage and hour laws.

♦ Audit internal wage and hour practiceswith the assistance of experienced employ-ment law counsel to ensure wage and hourlaws are being followed.

♦ Create accurate job descriptions for allpersonnel, ensuring that the duties de-scribed for nonexempt and exempt staffare correct.

♦ Classify independent contractors, nonex-empt, and exempt employees properly.

♦ Keep accurate and written time records fornonexempt employees’ hours worked, in-cluding documentation regarding meal pe-riods taken, signed off on by both the em-ployer and employee.

♦ Require nonexempt staff to clock in andout at the beginning and at the end of theday, as well as for meal periods.

♦ Prohibit nonexempt employees from eatinglunch at their desks or at their designatedwork areas; doing so could result in theemployee arguing that they were requiredto be “on duty” during their lunch break.

♦ Pay for all “hours worked.”

♦ Pay terminated employees all wages dueand owing at the time of termination; orwithin 72 hours, to an employee who hasresigned.

♦ Periodically review wage and hour policiesto ensure compliance with constantlychanging laws.

♦ Train supervisors and managers on FLSAand state wage and hour laws.

♦ And of course purchase EPL insurancethat includes coverage for defending wageand hour claims.

Concluding Thoughts

By taking these steps, employers can shiftthe tide in the wage and hour litigation bonan-za. In fact, implementing these precautionarymeasures could very well result in lower premi-ums for EPL coverage and hopefully preventwage and hour lawsuits altogether. EPLiC

Katherine S. Catlos is the managing partner of theSan Francisco office of Kaufman Dolowich & Voluck,LLP, a firm that specializes in defending EPL andother professional liability claims. Ms. Catlos receivedher B.A. degree with honors from the University ofCalifornia, Berkeley, and her J.D. degree from theUniversity of San Francisco. She can be reached at(415) 402–0059 or by e-mail at kcatlos@kdvlaw.com.

Despite the absence of an insurer requirement, it is still a good idea

for an employer to have experienced counsel periodically

examine its exposure.

EPLiC 17

Corralling the Workplace Bully

By Mark A. Lies II

As most employers are aware, the employerhas a duty to protect its employees against allforms of harassment at the workplace (includ-ing harassment based upon sex, race, age,religion, national origin, disability, etc.) underexisting federal and state employment laws.Moreover, such harassment is frequently abreeding ground for workplace violence. Andwhen the victim (or a relative) finally reacts tothe conduct (which often results in physical actsor threatening conduct toward the harasser),the employer must have a policy that prohibitssuch forms of conduct.

Fortunately, many employers have respond-ed to these challenges by adopting and enforc-ing antiharassment and workplace violence pre-vention policies. Such policies are required toprohibit the kind of egregious conduct that thelaw defines as “severe or pervasive” and thatcreates a “hostile work environment” for the vic-tim and for other employees who may witnesssuch conduct.

What Is “Bullying”?

Unfortunately, while the employer’s policiesmay help to identify and eradicate the high-profile forms of sexual and other harassmentfor which there is clearly recognized legal liabil-ity, there is also a vast undercurrent of slightlyless but still objectionable conduct that per-vades the workplace and can have a cripplingeffect on employee morale, productivity, and theoverall workplace culture of mutual respect.This phenomenon is known as “bullying.”

While growing up, nearly all of us either ex-perienced directly or witnessed bullying byfellow students and sometimes by teachers,conduct that can have lifetime impact on stu-dents. In fact, state law requires many schooldistricts to conduct training and to protect stu-dents against all forms of bullying in the aca-demic setting.

As we all complete our formal education andmigrate into a job, this unfortunate aspect of

human conduct continues, only this time, theconsequences can be far more severe, particu-larly the loss of a job if the bully is thesupervisor or if a coemployee’s bullying re-sults in poor attendance due to fear or anxiety,sabotage of the employee’s work by the bully,and barrages of insults that may cause depres-sion or lack of confidence in completing re-quired work tasks.

Particular Behaviors

Many commentators have focused on at-tempting to define “bullying,” which is general-ly considered to involve one person harassinganother and is characterized by a pattern of de-liberate, hurtful, and menacing behaviors. Itcan have two aspects:

Physical—making intimidating physicalthreats, pushing, shoving, invading an indi-vidual’s personal space, or

Psychological—psychological violence thatis mostly covert, including joking or initia-tion rites that may mask sadistic behavior.

Other commentators have attempted to de-fine the “bullying” conduct in terms of certainintentional behaviors, including the following.

♦ Staring or glaring in a hostile manner

♦ Treating another in a rude, demeaning, ordisrespectful manner

♦ Interfering or sabotaging work activities

♦ Shunning or otherwise giving someone the“silent treatment”

♦ Failing to give, or giving little, professionalfeedback on performance

♦ Failure to provide praise when warranted

♦ Withholding of critical information neces-sary for work performance

18 EPLiC

♦ Lying or misrepresentation regarding work-place assignments, events, or opportunities

♦ Preventing or impeding an individual fromexpressing himself or herself.

While this list of behaviors is not all-inclusive, what is known is that bullying is atype of behavior that intimidates, humiliates,or undermines a person and that is repeatedover time. And, importantly, the bully can be asupervisor or coemployee.

Legal Liability

Thus far, the employment-related anti-harassment laws have focused on conduct that ismore high-profile, typically characterized as “se-vere or pervasive.” Unfortunately, this has theeffect of allowing conduct characterized as bully-ing to go undetected or unpunished. Nonethe-less, the consequences to the victim may be justas devastating, including mental or emotional in-jury, which may result in workers compensationliability if there is competent evidence to supportthe claim, as well as lost work time and Familyand Medical Leave Act (FMLA) absence if theemployee requires treatment for a “serioushealth condition” such as depression, severeemotional distress, or panic disorder.

As stated above, an employee who is repeat-edly subject to such conduct may also have civilremedies against the coemployee responsible forthe conduct. In Raess, M.D. v. Doescher, 858N.E.2d 119 (Ind. App. 2006, Court of Appeals), amedical professional (perfusionist) brought acivil action against a heart surgeon, claimingthat his conduct in yelling at the plaintiff,verbally threatening him, and engaging inthreatening physical behavior constituted“bullying” under the legal theories of intentional

infliction of emotional distress and assault. Theplaintiff obtained a jury verdict of $325,000. Theappeals court reversed the judgment onDecember 8, 2006, and remanded the case onevidentiary issues.

The decision in the Raess case may be a har-binger of claims to come, as numerous stateshave now proposed “antibullying” statutes forthe workplace, including:

Recommendations

Employers may believe that they alreadyhave enough to worry about, given the man-dates imposed by existing antiharassment leg-islation. Nevertheless, it is suggested that em-ployers consider taking additional action, whichis not onerous; namely, revising their existingantiharassment and workplace violence preven-tion policies to specifically include the term“bullying,” providing examples of the conductand prohibiting this behavior.

In addition, employers should consider incor-porating the topic of “bullying” into their em-ployee antiharassment and sensitivity training.In this fashion, the employer may be able toeliminate such conduct, before it elevates intobehavior that will constitute actionable harass-ment or workplace violence for which there isstatutory liability. This approach will also helpto foster a culture of common respect thatshould ultimately reduce the potential for allforms of employment law liability. EPLiC

Mark A. Lies II is a Labor and Employment Law at-torney and partner with Seyfarth Shaw LLP, 131 S.Dearborn Street, Suite 2400, Chicago, IL 60603;mlies@seyfarth.com; (312) 460–5877. He specializesin occupational safety and health law and relatedemployment and personal injury law.

The decision in the Raess case may be a harbinger of claims to come, as numerous states have now proposed

“antibullying” statutes for the workplace.

♦ Connecticut♦ Washington♦ New York♦ New Jersey♦ Oklahoma♦ Montana

♦ Hawaii♦ Kansas♦ Missouri♦ Oregon♦ Massachusetts♦ California

EPLiC 19

EPLI Policy Exclusions: It’s Not What They Exclude, It’s What They “Except”

By Bob Bregman, CPCU, RPLU, ARM

Just about every employment practices liabili-ty insurance (EPLI) policy contains the samestandard set of exclusions. But what really mat-ters for the insured is the exact wording of theexclusions. More specifically, the extent towhich these standard exclusions “except” andtherefore cover certain types of claims and dam-ages varies considerably from insurer to insurer.This article analyzes 10 exclusions found in vir-tually all EPLI policies and presents favorableversions of these exclusions, which insuredsshould always seek to have within their form.

Bodily Injury

Liability for claims involving bodily injury isexcluded by EPLI policies because such cover-age is typically afforded under commercial gen-eral liability (CGL) policy forms. Although CGLpolicies do cover bodily injury, the forms ex-clude claims caused by employment-related actsand, for this reason, do not cover claims for (1)emotional distress, (2) loss of reputation,(3) mental anguish, or (4) humiliation, all ofwhich are commonly alleged in employmentpractices liability (EPL) claims.

Exception for “Special” Employment-Related BI Claims

Under most, but not all, versions of this ex-clusion, there is an exception and thus coverage

for claims alleging these special employment-related perils. Representative wording provid-ing such coverage appears in Figure 1.

Liability under Workers Compensation and Similar Laws

Virtually all of the forms exclude coveragefor the insured’s obligations under workerscompensation and similar laws, such as dis-ability and unemployment compensation. Thisis appropriate since separate coverage is avail-able to cover workers compensation benefits.But what if an employee is injured on the job,files a workers compensation claim, and then,in retaliation for doing so, the company de-motes the employee? Then, the employee filesa discrimination claim against the employer.Under this scenario, an EPL policy that ex-cluded claims “… arising from or in any wayrelated to claims for workers compensationbenefits …” would not cover the employee’sdiscrimination suit.

Exception for Retaliation Claims

Fortunately, most, but not all, of the formscontain exception language that covers claimsalleging employer retaliation for filing a work-ers compensation claim, as in the above scenar-io. Representative wording of this exclusion ap-pears in Figure 2.

Figure 1Bodily Injury/Property Damage Exclusion

This insurance shall not apply to, and the Company shall have no duty to defend or pay Defense Ex-penses for any Claim … for or arising out of bodily injury, sickness, loss of consortium, disease or deathof any person; provided, that this exclusion shall not apply to that portion of a Claim seeking damagesfor emotional distress, loss of reputation, mental anguish or humiliation. (Emphasis added.)

Source: Travelers Insurance Company, Employment Practices Liability PLUS+ Policy, EPL-3001 (07/01)

20 EPLiC

Figure 2Workers Compensation Law Exclusion

This Policy does not cover any “loss” arising out of any obligation under any workers’ compensation,disability benefits or unemployment compensation law, or any similar law.

This exclusion does not, however, apply to any “claim” for “retaliation” or “discrimination” or “inappro-priate employment conduct” on account of the filing of a workers’ compensation claim or a claim for dis-ability benefits. (Emphasis added.)

Source: Houston Casualty Insurance Company, Employment Practices Liability Insurance Claims-Made Policy Form, EP 0001 (12/01)

Breach of Employment Contracts

Most EPL forms exclude coverage for damag-es accruing when the insured organizationbreaches an employment contract. Such exclu-sions also preclude payment of the severanceamounts provided by such contracts. The ratio-nale for the exclusion is that the insured was incontrol of this exposure when it entered into theemployment contract, as well as when it termi-nated the contract.

Exception for Defense Costs

Favorable versions of this exclusion providefor coverage of defense costs associated with alle-gations that the insured organization breachedan employment contract. Defense coverage for

claims alleging breach of an employment con-tract is important, especially when such con-tracts involve executives whose contracts call forsubstantial sums. Representative wording of thisexclusion appears in Figure 3.

Americans with Disabilities Act

Loss arising from an insured’s failure tocomply with any accommodations or buildingmodifications for the disabled, as required bythe Americans with Disabilities Act, is exclud-ed by most EPLI forms. The effect of this ex-clusion is to preclude coverage if, for example,an insured is required to install handicappedaccess ramps within its building. Insurers con-sider this exposure a business risk and there-fore exclude it.

Exception for Defense Costs

Suppose, for example, that a disabled em-ployee sued an employer, alleging that the em-ployer failed to make a reasonable accommoda-tion, requiring a building modification (asrequired by the ADA), so that he could performhis job. Under this scenario, the employer couldbe liable for making such modifications andwould also have to defend the claim. Some, butnot all, versions of this exclusion contain excep-tion wording that affirmatively provides cover-age for the costs of defending claims alleging vi-olation of the Americans with Disabilities Act,which is, of course, favorable for the insured.Such wording is illustrated in Figure 4.

Figure 3Breach of Employment Contracts

Exclusion

The Company shall have no duty to pay Dam-ages, but will pay Defense Expenses (emphasisadded), resulting from any Claim seeking …severance pay, damages or penalties under anexpress written Employment Agreement, orunder any policy or procedure providing forpayment in the event of separation from em-ployment; or sums sought solely on the basisof a claim for unpaid services.

Source: Travelers Insurance Company, Employment Practices Liability PLUS+ Policy, EPL-3001 (07/01)

EPLiC 21

WARN Act Liability

Under the federal Worker Adjustment and Re-training Notification (WARN) Act, employers of100 or more persons are required to give theirworkers specific notice periods prior to varioustypes of mass layoffs or plant closings. The ma-jority of policies preclude coverage for claims al-leging failure to provide such notice as requiredby law. The rationale for the exclusion is that ifclaims result from failure to comply with the re-quirements of the WARN Act, they are withinthe control of the insured organization and couldpresumably have been avoided.

Favorable WARN Act Language

However, a favorable variation of this exclu-sion is one in which there is an exception andtherefore coverage for claims that result—whenthe insured organization consulted with attor-neys and acted in good faith—yet was sued nev-ertheless, under an allegation of having violatedthe WARN Act. Such wording is illustrated in

Figure 5. Note that such wording not only coversdefense expenses but damages, as well.

Nonpecuniary/Injunctive Relief

Most of the policies exclude coverage for non-monetary damages. Coverage of injunctive re-lief such as reinstatement of a terminated em-ployee is beyond the intended scope of EPLIforms because insurance policies are contractsto pay money rather than to perform or enforcethe performance of services.

Exception for Defense Costs

However, favorable versions of this exclusion,except, and therefore cover, the costs requiredto defend claims seeking nonpecuniary relief,which can be considerable. Wording of this ex-clusion is illustrated in Figure 6.

Figure 4Americans with Disabilities Act Exclusion

The Company shall have no duty to pay Dam-ages, but will pay Defense Expenses, resultingfrom any Claim seeking:

1. costs and expenses incurred or to be in-curred to comply with an order, judg-ment or award of injunctive or other eq-uitable relief of any kind, or that portionof a settlement encompassing injunctiveor other equitable relief, including butnot limited to actual or anticipated costsand expenses associated with or arisingfrom an Insured’s obligation to providereasonable accommodation under, orotherwise comply with, the AmericansWith Disabilities Act or the Rehabilita-tion Act of 1973, including amendmentsthereto and regulations thereunder, orany related or similar law or regulation.(Emphasis added.)

Source: Travelers Insurance Company, Employment Practices Liability PLUS+ Policy, EPL-3001 (07/01)

Figure 5WARN Act Exclusion

This policy does not cover any Loss arising out ofthe Workers’ Adjustment and Retraining Notifi-cation Act, or any amendment thereto, or anysimilar federal, state or local law. This exclusionshall not apply if the Named Insured consultedwith legal counsel and made a good faith at-tempt to comply with the law. (Emphasis added.)

Source: Lloyd’s of London (EPL-Exclusive Advantage), Employ-ment Practices Liability Insurance Policy, EPLX-022S (2/1/02)

Figure 6Nonpecuniary Relief Exclusion

The Insurer shall not be liable to make anypayment for Loss in connection with anyClaim made against the Insureds … basedupon, arising from, or in any way related toany request for injunctive relief, declaratoryrelief, disgorgement, job reinstatement, orany other equitable remedy; provided thatthis exclusion shall not apply to Claims Ex-penses. (Emphasis added.)

Source: Hartford Insurance Company, Employment Practices Lia-bility Policy, GL 00 R424 00 0498

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Insurance Benefits

Nearly all EPLI forms contain exclusions pre-cluding coverage for insurance benefits. The ra-tionale underlying this approach is that obliga-tions to provide employee benefits are businessrisks and therefore do not fall within the scope ofcoverage intended by EPL policies. The intent ofthis exclusion is to also preclude coverage for arisk that could also possibly be covered by fidu-ciary/employee benefit liability insurance poli-cies. For example, assume that an employee wastold by the benefits administrator at a companythat his retirement pension would be $2,000 permonth. In reality, when he retires, his monthlybenefit is only $1,200. If he sues the company forthe difference between the promised and the ac-tual benefit amount, this exclusion will precludecoverage, which is appropriate since this type ofclaim would be covered by a fiduciary liabilitypolicy form. On the other hand, this exclusioncould also preclude coverage if, as part of awrongful termination claim, a former employeeclaims a loss of health insurance resulting fromhis termination. Absent an exception in this ex-clusion for loss of benefits as a result of wrongfultermination, no coverage would apply.

Exception for Coverage of Benefits as a Part of Claim Settlements

Fortunately, favorable versions of this exclu-sion, such as the one appearing in Figure 7,

“except” from their definitions of “benefits” andtherefore cover benefits when they are part ofclaim settlements or judgments associated withwrongful termination claims.

ERISA Claims

The policies exclude coverage for claimsmade under the Employee Retirement IncomeSecurity Act (ERISA) of 1974 or under anysimilar benefit laws. The rationale for this ex-clusion is that coverage of such claims fallswithin the purview of fiduciary liability insur-ance policies. But what if an employee makes aclaim under his employer’s health care benefitplan, and in retaliation, the company termi-nates him? In turn, the employee files a wrong-ful termination lawsuit. Under this scenario,an EPL policy that excluded claims “… arisingfrom or in any way related to claims for bene-fits falling within the purview of ERISA …”would not cover the employee’s wrongful ter-mination claim.

Exception for Retaliation Claims

A favorable version of this exclusion thatwould cover the wrongful termination claim inthe above scenario is that some insurers’ formsexcept, and therefore cover, claims broughtthat allege retaliation as a result of bringing aclaim involving benefits subject to ERISA. Thisfavorable version is illustrated in Figure 8.

Figure 7Benefits Exclusion

No coverage will be available under this Coverage Section for Loss, other than Defense Costs …which constitutes Benefits due or to become due or the equivalent value of such benefits; providedthat this Exclusion (B)(1) shall not apply to any Employment Claim for actual or alleged wrongfultermination, dismissal or discharge of employment. (Emphasis added.)

“Benefits” means perquisites, fringe benefits, deferred compensation or payments (including insur-ance premiums) in connection with an employee benefit plan and any other payment. Benefits shallnot include salary or wages, Stock Benefits or nondeferred cash incentive compensation.

Source: Chubb Group of Insurance Companies, ForeFront Portfolio, Employment Practices Liability Coverage Section, 14-02-3797 (04/01)

EPLiC 23

Prior Knowledge of Potential Claims

Nearly all EPLI policies exclude coverage forclaims produced by circumstances or incidentsthat the insured knew, prior to policy inception,had the potential to result in claims. This is ap-propriate because the purpose of EPLI policiesis to cover only fortuitous circumstances aboutwhich the insured had no knowledge prior tothe inception of the policy, as opposed to inci-dents for which claim potential was recognized,despite the fact that a formal claim had not yetbeen made. However, the prior knowledge ex-clusion, if worded in a manner that is unfavor-able for the insured, can be a frequent source ofclaim denials. Specifically, if a prior knowledgeexclusion states that knowledge by an “insured”or “employee” bars coverage, coverage would,for example, be precluded in scenarios whereemployees, but not management personnel, hadknowledge of circumstances that could give riseto a claim. For example, after being terminated,an employee tells a coworker, “I’m going to seemy lawyer about this.” Following the incident,the coworker does not advise his supervisor. Ifan investigation by the insurer receiving theclaim revealed that an employee was aware ofsuch circumstances, a claim denial could result.

Only Knowledge by Officers, Managers, or HR Department Supervisors Should Be Considered “Prior Knowledge”

Accordingly, a prior knowledge exclusion thatprecludes coverage only if a supervisory employ-ee, officer, department manager, or HR depart-ment manager had knowledge of the circum-stances is preferable to one where knowledge ofan “employee” would bar coverage. Many, butnot all, insurers offer such wording, which isillustrated in Figure 9.

Contractual Liability

The vast majority of EPLI forms exclude cov-erage for contractually assumed liability (i.e.,an agreement to indemnify or hold a third partyharmless). But what about the common situa-tion in which, for example, an insured organiza-tion agrees to indemnify an employment agency(that leases workers to the insured organiza-tion) for the wrongful acts of the insured’s em-ployees committed against the employmentagency’s employees? Under these circumstanc-es, the insured organization would be liable,even in the absence of the contract, to indemnifythe employment agency. However, unless the

Figure 8ERISA Claims Exclusion

This Policy does not apply to any Claim or por-tion thereof made against the Insured … forinsurance benefits that the claimant mayhave been entitled to receive pursuant to anystate, federal or local law or regulation regard-ing the continuation of insurance after termi-nation of employment, including but not limit-ed to the Employee Retirement IncomeSecurity Act (ERISA) (29 U.S.C. § 1001 etseq.), except as such benefits are prayed foronly as items of damage for a Wrongful Em-ployment Practice, and this exclusion shall notapply to an alleged retaliatory discharge forhaving asserted a claim under ERISA.(Emphasis added.)

Source: Evanston Insurance Company, Employment Practices Liability Insurance Policy, EP-A-2000 (5/00)

Figure 9 Prior Knowledge of Potential Claims

Exclusion

Prior Knowledge. This policy does not coverany Loss arising out of Insured Events or, ifpurchased, Third Party Insured Events ofwhich any Insured who is a principal, part-ner, officer, director, trustee, in-house coun-sel, Employee(s) within the HR or Risk Man-agement department or Employee(s) withpersonnel and risk management responsibili-ties was aware by actual knowledge of thefacts or circumstances of such InsuredEvents or, if purchased, a Third Party In-sured Event prior to the Prior KnowledgeDate, as shown in the Declarations.(Emphasis added.)

Source: Beazley Insurance Company, Employment Practices Lia-bility Insurance Policy, BICEP00020405

24 EPLiC

wording of a contractual liability exclusion ex-cepts, and therefore covers, contracts where lia-bility would attach even in the absence of a con-tract, the insured would be without coverage.

Exception for Liability in the Absence of Contract

Fortunately, nearly all EPLI policies containan exception that provides coverage for liabilitythat would have attached in the absence of a con-tract. Such wording is illustrated in Figure 10.

Concluding Thoughts

Although virtually all EPLI policies containthe same set of exclusions, the exact wording ofthese exclusions is far from identical. For exam-ple, although virtually all forms contain favor-able exception wording as respects the contrac-tual liability exclusion, at the other end of thespectrum, few policies contain the kind of favor-able WARN Act exclusionary wording noted inFigure 5. Accordingly, insureds and their repre-sentatives would be wise to review the exclu-sions in their EPLI policy forms, compare themto the checklist in Figure 11, and verify thattheir form contains the preferred exceptionwording, as noted below.

Figure 10Contractual Liability Exclusion

Liability Assumed by Contract. This policydoes not cover any Loss Amount which the In-sured is obligated to pay by reason of the as-sumption of another’s liability for an InsuredEvent in a contract or agreement.

This exclusion shall not apply to liability fordamages because of an Insured Event that theInsured would have had even in the absence ofsuch contract or agreement. (Emphasis added.)

Source: Lexington Insurance Company, Employment Practices Liability Insurance Policy Claims-Made, LEX EPL 03/02

Figure 11 EPLI Exclusion Checklist

Exclusion Preferred Exception Wording

Bodily Injury Exception for coverage of claims alleging “emotional distress,” “loss of reputation,” “mental anguish,” and “humiliation”

Workers Compensation

Exception for coverage of retaliation claims

Employment Contracts

Exception for defending claims for breach of employment contracts

Americans with Disabili-ties Act

Exception for defending ADA claims

WARN Act Exception providing coverage (defense and damages) if insured consulted an attorney and acted in good faith

Nonpecuniary Relief

Exception for defense costs involving claims for nonpecuniary relief

Insurance Benefits

Exception for coverage when benefits are part of wrongful termination settlements

ERISA Exception for coverage of retaliation claims

Prior Knowledge

Exception for knowledge by “management,” “supervisors,” or “HR managers”

Contractual Liability

Exception for liability in the absence of a contract