There’s a longstanding belief in the U.S. that the employee/employer relationship is not contractual – that those employed are employed at-will and can be terminated at any time, for any reason. Over time, the at-will concept has been significantly eroded to the point that businesses can no longer simply terminate an employee without repercussions. This is in part because it’s relatively easy for a terminated employee to file a claim against their previous employer.

The Equal Employment Opportunity Commission (EEOC) receives an average of 89,000 employee grievances annually. Since 2012, the monetary recoveries that the EEOC has advocated on behalf of employees increased from $44 million annually to $65 million.1

Businesses looking to steer clear of finger pointing and avoid the costs associated with defending employment claims may turn to employee severance agreements. Whether it’s a minimal amount or a substantial sum, severance can be a vehicle for employers and employees to part ways without ill will. Yet, employers may not be aware that despite an employee severance agreement, the terminated employee still retains the ability to file a discrimination claim with the EEOC.

Typically, severance benefits are commensurate with an employee’s prior salary. The employer’s exposure increases significantly when a high-ranking executive is terminated and a person’s likelihood of finding a comparable position and pay is compromised due to age, race, national origin or disability. For these reasons, when employers engage in high dollar severance package negotiations with a terminated employee, the negotiations may break down, as the employee may be advised by legal counsel to make a larger claim. At this point, businesses turn to their Employment Practices Liability (EPL) insurance.

Common employment exposures drive EPL claims and employee retaliation lawsuits

Today’s organizations are on high alert for a retaliation lawsuit. And rightfully so. According to the EEOC, retaliation lawsuits and charges have increased more than 75 percent in the last decade.2 The most common employment exposures – age and disability - are directly related to the employee’s status as a member of a protected class under Title VII, the federal civil rights law.

Recently, high-level executives at organizations across industries are being terminated in greater numbers. Older and more experienced, these individuals usually fall under the age-related protected class - a strong 45 million baby boomers remain in the workforce today.3 For this reason, this group may have a harder time finding subsequent employment and, therefore, are more likely to file an employment claim, driving up the exposure to your organization - whether the evidence of any wrongdoing is conclusive or not.

What can you do? To protect your organization, business should update performance processes and compensation should to be consistent with different levels of responsibility across the board. When considering an employee claim, the EEOC may go as far as seeking out testimony from current and past employees. Being able to show consistent practices and documentation regardless of employee age, gender, race, national origin or disability, including a process for handling employee complaints, will go a long way to address any employment claim should it arise.

Before making a claim: READ THIS!

While severance may be considered part and parcel of routine business operations, an EPL insurance policy requires that the insurance carrier consent to any settlements (aka, severance packages) offered to an employee. Where they haven’t, an insurance carrier is likely to take the position that the severance discussions were a form of settlement negotiations and could deny coverage.

But, notifying your employment practices liability (EPL) insurance carrier is a fine line. On one hand, you don’t want to have multiple claims showing up on your loss history (which would impact your future premium), but you also can’t leave your organization exposed to large claims for which coverage is not available due to late reporting.

Here are some tips to consider:

  1. When engaging in severance negotiations, notify your broker or the EPL carrier BEFORE you extend an offer to an employee, especially if the employee is a member of a protected class or was highly compensated to ensure full cooperation from the carrier.
  2. Educate your staff. Remind managers on a regular basis that they need to elevate employee issues to HR and Legal immediately. Provide HR and Legal with clear parameters as to the types of situations that need to be reported to your EPL carrier, including employee monetary demands, administrative charges filed with the EEOC/state agency or a potential lawsuit.
  3. Be careful about adding arbitration clauses into employment contracts. Even if an employee has a dispute, arbitration may not trigger the definition of a claim under your EPL policy.

Consider this real claims scenario:

EPL Claim Denial Arrives Just Before Trial

During a public court case involving a terminated female executive, with defense expenses (including e-discovery) amounting to over $1M dollars, it came to light that the company had engaged in early severance negotiations with the executive when they decided to terminate her. Negotiations had broken down due to a technicality involving a clause in the severance agreement. On learning this, the EPL carrier withdrew coverage because it concluded that the company did not comply with the standard clause in the policy that gives the carrier the right to consent to any settlement offer.

In several similar cases when notice of a claim is late, the carrier will cite the standard language in the insurance policy, giving them the right to discount any defense fees incurred prior to the time of notice.

When in doubt, ask your HUB broker and work with a claims advocate to discuss available options, considering all relevant insurance policy provisions so you can make an informed decision.