Wrongful Termination and Insurance: How to Protect Your Business

Among the many issues employers are expected to deal with due to the COVID-19 pandemic is an almost certain increase in employment-related lawsuits over the coming period. Since one of the biggest challenges facing the U.S. economy right now is that many businesses have been forced to shut down or significantly reduce their work activities, many have, unfortunately, had to lay off workers to reduce costs.

Because of this, businesses are expected to see a rise in employee claims related to these layoffs. Wrongful termination insurance claims are one of the most common types of employee-filed lawsuits and are expected to remain prevalent for the foreseeable future.

Wrongful termination or dismissal claims are filed by former employees who believe they were fired for unlawful reasons.

Common Reasons for Wrongful Termination Insurance Claims

Generally speaking, wrongful termination claims are fairly hard to prove since most contracts between employers and employees are considered “at-will.”

This means that the employer can lawfully terminate a contract of employment for whatever reason and at any time.

However, there are some reasons for which employees cannot be terminated. Discrimination is one of the most obvious. If the employee’s firing is related to a type of discrimination that violates the Civil Rights Act of 1964, the employee has a valid reason to file a claim. This can include any type of discrimination based on age, race, gender, sexual orientation, disability, or other factors.

Employees can also file claims if they believe they have been fired as a form of retaliation. This is sometimes referred to as “whistleblower termination.” If an employee reports company actions related to public interest, workplace safety, employer harassment, or similar activities, and is fired because of this, they can file a wrongful termination lawsuit.

Potential Legal and Financial Ramifications

As we’ve already discussed, if an employee believes they were fired for an unlawful reason, they have the right to file a wrongful termination claim. If the employee wins the claim, they will be entitled to a variety of compensation and damages.

Employers that lose wrongful termination suits could be forced to pay back lost wages and even front pay for wages that date back to the filing date of the lawsuit. They could also have to pay employee benefits, such as health insurance, that they were obligated to pay during employment. In some cases, the employer could also be ordered to cover the fired employee’s legal fees.

But what if the employer wins the lawsuit? Even though the business would avoid paying damages to the former employee, there’s no guarantee that the financial losses related to the claim won’t be significant.

Employee claims are often very complicated and tend to take a very long time to resolve, which is why even if the employer wins the case, the court and attorney costs related to the claim could still be astronomical.

Protecting Your Business from Wrongful Termination Claims

The modern workplace environment is incredibly complex and constantly changing, so it’s important for businesses to not only understand the potential staff-related issues that could arise but also find ways to mitigate them.

While completely avoiding the risk of litigation is impossible, there are best practices that businesses can follow to mitigate these risks. Employers should ensure that their layoff processes are vetted and properly administered and that all wage and hour protocols are updated and compliant.

One of the best preventive measures for employers looking to avoid wrongful termination claims is to thoroughly and exhaustively document the reasons behind employee terminations. This is especially true for terminations that are not layoffs related to financial woes.

If your employee was fired because of poor performance or any type of wrongdoing, make sure that their employment history is well documented so that you can cite examples of when and why the employee was approached or reprimanded to address these issues.

Get your managers and supervisors involved in documenting employee conduct and quality of work. Your case is always stronger if several sources can vouch for and support the reasons behind a termination.

If you find yourself in a situation in which you need to lay off numerous employees at once, make sure that you consult with an employment attorney first to discuss possible ramifications and potential strategies.

Employment Practices Liability Insurance (EPLI)

Another way to mitigate the risk of employee lawsuits is by transferring that risk to a third party via insurance. The insurance policy that would protect your business from a wrongful termination lawsuit is called employment practices liability insurance, or EPLI for short.

EPLI doesn’t just offer wrongful termination insurance; it provides businesses with a broad range of coverage. EPLI will kick in to provide coverage for your management in the case of employee claims of sexual harassment, discrimination, failure to promote, mismanagement of benefit plans, and more.

If your business does have to face a wrongful termination claim in court, EPLI will pay for all legal costs and possible settlements and damages to the employee who filed the claim.

Employers that want to protect themselves from possible lawsuits should be investing in a proper management liability package of insurance products, with EPLI and directors & officers insurance being the two most important pieces of the puzzle. Even though all insurers don’t always write their EPLI policies in exactly the same way, there’s a very small chance that your EPLI won’t cover wrongful termination and retaliation claims. You can get a management liability insurance quote with Embroker in just a few minutes.

No matter what, it’s always going to be hard to anticipate any types of employee claims, especially wrongful termination claims. However, employment practice liability insurance will help to protect your business if they do occur. With employee claims steadily rising over the last several years, protecting your business with the right EPLI coverage has become an absolute necessity in today’s complex business climate.

To learn more about EPLI and discuss your business’s insurance needs with an expert broker, feel free to reach out to our team at any time.