Economic downtown=job losses=EPL claims

Companies must work to avoid EPL claims

By Phil Zinkewicz

In the 1977 movie (and 2005 remake) “Fun With Dick and Jane,” the main character (played by George Segal then Jim Carrey) loses his job and is unable to find other gainful employment. With no income and a heavy debt, he and his wife (played by Jane Fonda then Téa Leoni), start to rob banks. In 1997, a British film titled “The Full Monty” tells the true story of unemployed Sheffield steel mill workers who, out of desperation, the need for money and an equal need to have something to do, decide to become male strippers.

Those films are comedies, of course, but people out of work in today’s economy would probably fail to see the humor. In March 2009, unemployment in the United States had risen to 8.5%, reaching its highest level since 1983. Employers slashed a net total of 663,000 jobs, according to the Department of Labor. The Department showed that workers in construction companies, factories, retail, professional and business services, and leisure and hospitality services were all out of jobs. Labor said that, when part-time workers and “discouraged” workers (workers who have not been able to find new jobs) are factored in, the unemployment rate would have been 15.6% in March.

A month earlier, the Department of Labor reported equally dismal unem­ployment results on a regional and state basis, with regional and state rates nearly all higher. Forty-nine states and the District of Columbia recorded over-the-month unemploy­ment rate increases. The national unemployment rate rose from 7.6% in January 2009 to 8.1% in February 2009 (the national unemployment rate was 5.1% in February 2008). The largest over-the-month decreases in the level of employment were recorded in California (-116,000), Florida (-­49,500), Texas (-46,100) and Pennsylvania (-41,000).

In February 2009, the West and Midwest posted the highest regional jobless rates, 9.2% and 8.6%, respectively. The Northeast recorded the lowest rate, 7.7%. All regions registered statistically significant unemployment rate increases from January 2008, the largest of which was recorded in the West (+3.9 percentage points).

Among the nine geographic divisions, the Pacific and East North Central recorded the highest unemployment rates in February 2009, 10.1% and 9.5% respectively. The West South Central registered the lowest jobless rates, 6.3%. Seven of the nine divisions reported statistically significant over-the-month unemployment rate changes, all of which were increases: the Middle Atlantic and South Atlantic (+0.7 percentage points each); East North Central (+0.6 points); East South Central, Mountain, and Pacific (+0.5 percentage points each); and New England (+0.3 percentage points). All nine divisions had significant over-the-year increases, with the Pacific and South Atlantic recording the largest changes (+4.3 percentage points and +4.1 percentage points, respectively).

Unprecedented numbers of layoffs

During times of economic down­turn, when people are losing their jobs, the frequency of employment practices liability claims always rises, and it appears to be happening today.

Catherine Padalino, the worldwide employment practices liability manager for the Chubb Group of Insurance Companies, says that the number of layoffs in today’s economic environment is unprecedented. “Those firms that have not had layoffs in the past are experiencing them for the first time,” she says. “For small firms and mid-sized firms in particular, this is a first-time exposure, and employees are beginning to seek higher damage awards. Demographically, there is a heightened exposure among certain classes of professional firms. EPLI claims are at record levels. One in five smaller firms will have an EPLI lawsuit this year.”

Padalino points out that her department focuses on EPLI as underwriters. “We are not attorneys. We offer Best Practices advice to these smaller firms.”

In that capacity, Padalino recommends that smaller and mid-sized firms consider some critical steps when planning staff reductions:

• Evaluate the overall anticipated impact of the layoff, including the potential for litigation as well as public scrutiny.

• Use quantitative criteria, such as tenure and performance, rather than “soft” criteria such as social situations and financial hardship, to determine which employees will be let go. Be consistent in applying the criteria, which should be communicated to all employees.

• Review the demographics of the staff that will be laid off to eliminate any appearance of discrimination. Consider the status of each employee, including whether or not he or she recently requested a leave under the Family Medical Leave Act or filed a workers compensation claim.

• Use outside counsel to evaluate employment practices and severance policies. Refrain from self-diagnosis.

“Most important,” says Padalino, “remember to treat all employees—those who will be laid off and those who will stay—with dignity. Laying off employees is unpleasant, but firms that try to do the right thing can help mitigate the potential for an even more unpleasant EPL lawsuit.”

Padalino says that proper documentation is becoming more critical than ever before. “Firms must keep accurate records of all employees’ histories—who received promotions, demotions and who got raises in salary. News of a layoff should be given in person, so that management can answer the laid-off worker’s questions about what are the options for health insurance or unemployment insurance. Employers must take a kind and gentle approach, thus managing the EPL exposure rather than just reacting once the claim is filed.”

Retaliation claims are on the rise, says Padalino. “If you lay off a person who has filed for family medical leave or for workers compensation, that decision could be interpreted as the company retaliating against that worker,” she says. “Proper notification is also important. There are cases where employees are filing claims because they were not properly notified of potential layoffs.”

Padalino says that even law firms are not immune to employment practices liability lawsuits, especially as they are now forced to lay off employees to cope with the economic downturn. Chubb has insured law firms for nearly 30 years and currently insures 95% of the law firms listed in The American Lawyer magazine’s Am Law 200, according to Padalino. “The growing trend toward more single-plaintiff EPL lawsuits will hit small to mid-sized law firms the hardest,” she says. “These firms may find it difficult to bear the financial burden of a lawsuit without insurance protection and the risk management approaches already mentioned.”