This scenario illustrates some of the problems businesses may face when dealing with the increasingly complex issues of workplace discrimination and harassment. Allegations of unfair treatment can be expensive to defend, and their cost doesn't stop with a judgment or settlement. A company's reputation can be damaged, to say nothing of workplace morale.

Writing EPLI coverage for clients is just one part of helping protect them against employment-practices claims. In this article, we'll review the legislation and court decisions that insurance agencies should understand to write good coverage. We'll also discuss how agencies can help their clients develop procedures to reduce the likelihood of employment-practices claims and provide a sound defense when they unfortunately occur.

Legal landscape

Title VII of the Civil Rights Act of 1964 is the “landmark” legislation in employment-practices law. It prohibits discrimination that is based on any of six “protected classes”: age, race, gender, religion, disability and national origin.

The Civil Rights Act of 1991 increased the potential impact of Title VII on employers in two ways. Before the 1991 law, Title VII claims were decided by a bench trial–a judge. The 1991 act granted plaintiffs the right to a jury trial. Plaintiffs now get to present their claims to a jury of 12 ordinary people, many of whom might have a grudge against their own employer and see a plaintiff sympathetically as the “little guy.”

When a finding of discrimination is made, the 1991 law also allows juries to award up to $300,000 in damages to a plaintiff, even if they don't find the plaintiff suffered any loss as a result of the discrimination. Looking at the average guy, with a defendant's corporate attorney seated across the aisle, this may lead some juries to think, “Gee, let's just give the guy the money, even if we're not sure he suffered any loss. The business can afford it.”

Several other laws have either expanded the protection afforded to certain Title VII classes or created additional enforceable rights. In almost every case, the impact of these laws has been partially shaped by subsequent court decisions:

o Americans with Disabilities Act: This 1991 law applies to companies employing 50 or more people. It prohibits discrimination “against a qualified individual with a disability because of the disability of such individual in regard to job application procedures, the hiring, advancement or discharge of employees, employee compensation, job training, and other terms, conditions and privileges of employment” and requires “reasonable accommodations” for these qualified employees. The statute defines “disability” as a physical or mental condition that substantially limits one or more “major life activities” and states that a person has a disability if he or she has such a condition, has a medical record of having such a condition, or is regarded as having such a condition.

A series of court decisions has limited the scope of the law somewhat. Toyota Mfg., Ky., Inc. v. Williams is one of several cases in which the court–in deciding that the ability to perform required manual tasks at work was not a “major life activity”–has defined major life activities to include tasks such as performing household chores, bathing and dressing. In Sutton v. United Air Lines, the court ruled that individuals claiming a disability must be evaluated in their corrected states. In the example in this case, airline pilots could not claim that their poor vision was a disability that afforded them protection, because they could perform all major life activities with vision correction–eyeglasses. In the 2002 case of Chevron USA v. Echazabal, the court ruled that employers could refuse to hire a disabled individual if the disability would pose a direct threat to the health or safety of that individual. (This ruling expanded the interpretation of an EEOC rule that allowed refusal to hire based on a threat to other employees).

In general, the U.S. Supreme Court has repeatedly declared that claims of disability must be evaluated on an individual basis, rather than granting “disabled” status to everyone with a particular condition. The court stated an important exception to this rule in Bragdon v. Abbott, ruling that HIV infection is a physical impairment from the moment of infection, due to the disease's immediate, constant and severely detrimental impact.

o Family and Medical Leave Act: The Family and Medical Leave Act provides job-protected, unpaid leave for certain family or medical reasons to employees who have worked for an employer for at least one year and have worked at least 1,250 hours during the previous 12 months. The law applies to employers that have more than 50 employees within a 75-mile radius.

Businesses should be careful when evaluating FMLA requests, because the court's interpretation of the law can change. For instance, an employee may say he needs time off to care for his sick nephew, which some employers might not consider within the statute's definition of family. But perhaps the employee's sister is widowed, lives with the employee and is unable to take time off work herself. A court may find that such a circumstance would qualify the nephew as family under the law.

o Pregnancy Discrimination Act: Under this statute, pregnancy is considered a physical disability. Managers should never ask a job candidate if she is or plans to become pregnant. If a candidate volunteers the information, it cannot be used to make an employment decision. In such a case, it behooves the employer to have solid documentation about the legitimate criteria used to make a decision.

o Age Discrimination Act, Older Worker Benefit Protection Act: These laws prohibit discrimination against individuals 40 years of age and older. They cover employers, labor unions and employment agencies with 50 or more employees.

Sexual harassment

Sexual harassment claims technically fall under Title VII's protection from gender-based discrimination. The phrase was coined at a 1975 conference at Cornell University, and it was two more years before the courts recognized a cause of action under Title VII as a result of alleged sexual harassment.

Unfortunately, human nature is such that it's impossible for employers to guarantee such incidents will never occur. The most employers can do is take steps to make them less likely–which also serves as the foundation of a good defense when claims arise.

Sexual harassment claims take two forms: “quid-pro-quo” and “hostile work environment.” An employee making a quid-pro-quo claim alleges that sexual favors were requested, that adverse employment action was taken because such favors were denied, or both. An example of such a claim might be that an employee was told, “If you want to get ahead here, you need to raise the hem on your skirt.”

The definition of hostile work environment is “pervasive offensive behavior to a reasonable person.” Even using this standard, what is considered offensive behavior is still subjective. It could be a racy picture displayed in someone's cubicle, telling off-color jokes, or repetitive behavior such as patting someone on the back or a manager putting his arm around employees.

As our opening scenario hints, the legal definition of “workplace” is important. The courts have defined the workplace as “where you conduct business.” If you're off site–such as at the local watering hole–and the discussion turns to work-related topics, that watering hole is now the workplace.

The cases of Faragher v. City of Boca Raton and Burlington Industries Inc. v. Ellerth, decided by the Supreme Court on the same day five years ago, have had two significant effects on sexual harassment claims. Both decisions firmly established that the employer itself can be held liable for sexual harassment committed by one of its employees, particularly harassment committed by a supervisor or manager. While the decisions left some questions open, they also helped articulate the steps an employer can take that would strengthen its defense against such charges when a supervisor has committed sexual harassment.

Specifically, the court declared that employers are liable for their supervisory employees' actions, regardless of whether a quid-pro-quo or hostile-environment claim is made. However, an employer may defend itself against a hostile-environment claim, if no “tangible job action” has been taken against a plaintiff employee, by asserting either that (1) the employer acted with reasonable care to prevent and correct the harassing behavior or (2) that the employee/plaintiff unreasonably failed to take advantage of any preventative or corrective opportunities provided by the employer. Since these decisions, the courts and the EEOC have continued to clarify some important issues:

o Who is a supervisor? The EEOC defines a supervisor as someone who has the authority to make “tangible employment decisions,” someone whose recommendations about such matters would be given serious weight, someone with the authority to direct another employee's daily work activities, or someone whom another employee reasonably believed possessed such powers.

The courts have consistently applied this definition, but they have rejected the plaintiff's subjective view of a harasser's role within a company. Particularly, the courts do not subject an employer to strict liability based on a plaintiff's reasonable belief that another employee is a supervisor. The critical question relates to the degree to which an individual can affect the terms and conditions of employment, including such examples as the power to hire, fire, demote, transfer, evaluate or discipline employees.

o What is “tangible employment action”? The EEOC defines tangible employment action as “a significant change in employment status,” such as hiring, firing, promotion, demotion, undesirable reassignment and a change in compensation work assignment. According to the EEOC, such a change renders an employee's claim actionable, regardless of whether it was detrimental or beneficial to the employee and even in the absence of a change in salary or benefits. Only if no such action has been taken can an employer/defendant assert the “two-pronged” defense set forth in Faragher and Ellerth.

Retaliation

The right to allege discrimination is legally protected. In some cases, employees first allege discrimination, then later charge that their employers retaliated against them for filing a claim. Sometimes employers who are charged with both offenses are eventually found not culpable for the underlying allegation of discrimination but responsible for the retaliation. Juries have an emotional response to retaliation charges, and often react by awarding significant punitive damages.

To make a charge of retaliation, an employee must demonstrate that he or she was engaged in a legally protected activity, that the employer took an adverse employment action against him or her, and that a causal connection exists between the employee's activity and the employer's action. Two protected activities have been defined: opposition and participation. Examples of opposition are threatening to file a formal charge of discrimination, making an informal complaint and protesting alleged discrimination. Participation is the filing of a charge or testifying, assisting or participating in an investigation, proceeding or hearing. Opposition is protected only if the employee believes in good faith that discrimination has occurred; participation is protected without regard to such a belief or the reasonableness of an underlying charge.

Employees must demonstrate retaliation by showing they were terminated, demoted, suspended, refused promotion or hire, given a negative evaluation or denied benefits. They must prove that such action was the result of their protected activity, which they often establish through timing and the employer's knowledge–in other words, the employer knew of the protected activity before taking action, and the action took place shortly after the activity occurred. Employers can defend against such claims by demonstrating a legitimate reason for any adverse employment action. This requires a consistent process and thorough documentation.

Avoiding problems

As your clients seek to create a harassment-free workplace, they should focus on several objectives: ensuring a fair, equitable, legal and safe work environment; ensuring that all employees know their rights, responsibilities and the company's internal complaint process; and knowing how to prevent, stop or mitigate problems.

The courts and the EEOC have made it clear that they hold management to a higher standard than other employees when it comes to fighting harassment. This begins with ownership and senior management. The Supreme Court has established some guidelines for what they call a roadmap to avoiding discrimination and harassment problems.

The guidelines start with the employer, which is equated with senior management. Senior management needs to establish and enforce policies related to non-discrimination and non-harassment. They must have a legitimate complaint procedure that is understandable and communicated to employees, so that employees know their rights and the employer's due-process procedures.

Posting basic information on the wall of a common workplace area is one way many employers address this responsibility. Not all of the information has to be posted. If your clients have an employee manual or company intranet site that contains complete information, wall posters can point them to those sources. There are two caveats, however. First, all employees must have easy access to wherever the information can be found. If your information is on an intranet, this means everyone should have access to a computer and training on how to access the intranet. If the information is in a manual, every employee should be given one–and they should be required to sign off that they have read and understand the manual, not just that they have received it. Second, some employers have a sizable population of employees for whom English is not their first language. When this is the case, anti-harassment and due-process information must be made available in their primary language.

Below senior managers, managers must “watch their words and actions”–they are responsible for acting professionally and setting the tone for other employees. They also have what is referred to as the “manager's duty to act.” When a manager gets even an inkling that harassment is going on–whether it be through a direct complaint, the manager's own observation or an off-hand comment by an uninvolved employee–the manager must investigate the situation and document steps that were taken. Managers should seek help when a situation is too complex. This might mean going to the human resources person, or an in-house or outside attorney.

It's also important to be consistent and professional. Many managers get into trouble not because they did something with malice or intent, but because they didn't treat all employees the same way–such as by asking women in interviews different questions than men. Of course, discrimination is not illegal per se–it's the manager's job, in effect, to legitimately discriminate among employees. When doing so, managers must always document their decision and their legitimate rationale.

Non-managerial employees have some of the same responsibilities as managers, such as watching their words and actions. Though not as important as management's duty to prevent unfair behavior, employees have a responsibility to speak up and seek help when they have a problem. Employees may be allowed to avoid their employers' internal complaint procedure and make claims directly to outside agencies such as the EEOC if they fear retaliation. However, in these cases there is a burden of proof on the plaintiff to show that more than just his subjective opinion leads him to fear retaliation. If an employer confronts an alleged harasser with allegations, investigates complaints and minimizes contact between a complaining employee and alleged harasser, courts generally defer to the employer's decisions.

In summary, the EEOC has identified the precautionary measures employers can take to avoid harassment in the workplace, as well as the components of an effective anti-harassment policy and complaint procedure. Employers can help prevent harassment in the workplace by:
o Periodically training managers and supervisors on anti-harassment policies.
o Screening applicants for managerial positions and monitoring behavior.
o Keeping accurate and confidential records of complaints.
o Requiring management to report any incidents of harassment and correct offending conduct, whether or not a complaint has been brought.

The elements of an effective policy include:
o A clear definition of what constitutes harassment.
o A clear description of the complaint procedure, with multiple avenues of access for the employee.
o Time frames for the formal filing of complaints with administrative agencies, including the EEOC.
o A guarantee of a prompt, thorough and impartial investigation.
o Assurance that immediate, proportional and appropriate measures will be taken to stop the offending behavior, prevent its recurrence and remedy the effects on the victim.
o Assurance that the victim or participants in the investigation will be protected from retaliation.
o Assurance that the complaints will be kept confidential to the extent possible.
o A description of interim steps to be taken during the pendency of the investigation.

It would be nice to guarantee that acts of discrimination and harassment would never occur in the workplace, and that your clients would never need to call upon their EPLI coverage. Since that's not possible, it's clear that the best defense is a good offense against offensive behavior.

Russ Rado, CPCU, is director of education for the AAMGA University, the educational arm of the American Association of Managing General Agents, located in King of Prussia, Penn. Mr. Rado was previously a director of training & development with ACE INA and CIGNA Property & Casualty Insurance Cos. He also worked as a training director at Wausau Insurance Cos, and as a training coordinator and claims representative at Government Employees Insurance Co. He has a master's of education degree from West Chester University and holds the CPCU, AIM and ARP designations.

Bernd G. Heinze, Esq., is AAMGA's executive director and president and chief executive officer of Beacon Management Group Inc. Mr. Heinze earned his J.D. from the Temple University School of Law in Philadelphia and his B.A. in international relations and economics from Canisus College in Buffalo, N.Y. Mr. Heinze is licensed by all state insurance departments to provide continuing education seminars and is admitted to practice in the U.S. Supreme Court.