The directors’ and officers’ (D&O) liability insurance policy covers wrongful employment practice claims. This post attempts to provide a better understanding of what kind of claims can be made under the category of wrongful employment practices.
What are wrongful employment practice claims?
Past or present employees of a company can make wrongful employment claims. The majority of these claims arise due to actual or alleged misleading statements, acts of omission, negligence, or breach of duty on the part of directors or officers of the company. These malpractices pertain to employment. Such lawsuits can also come from prospective employees going through a recruitment process.
Termination of employment
For example, the director or officer of a company may dismiss, discharge, or terminate an employee on a wrongful or unlawful basis. This could be an actual or even a perceived issue and could result in a wrongful employment practice claim.
Breach of contract
A claim could also arise if there is a breach of an employment contract. The breach might be due to oral or written communication. The contract can either be an employment contract or a quasi-employment contract.
Discrimination or harassment
An employee might bring a claim if they face any one of the following:
- sexual harassment
- harassment at the workplace
- discrimination on the basis of race or national origin; sex; sexual orientation; religion; maternity; pregnancy; age; or disability
- unlawful discrimination, either intentional or unintentional.
Non-compliance or non-adherence to working hours can also be a reason for wrongful employment practice claims. Employees might make wrongful discipline claims if the organisation does not adhere to office/employment policies in case of disciplinary action.
Promotion or demotion
Employees might make claims if a director or officer wrongfully promotes or demotes an employee. Even if a director’s or officer’s action deprives an employee of a career opportunity, employees can claim wrongful employment practices.
Failure to act
A wrongful employment claim might result from a director or officer failing to do something. For instance, failure to grant tenure or failure to adhere to the policies and procedures of the workplace or employment.
Any action that is construed as revenge against whistle-blowers or any other personnel could also be characterised as a wrongful employment practice.
In addition to these, wrongful employment practice claims under D&O liability policy can arise due to:
- negligence in the evaluation of the employee
- invasion of privacy, which is employment-related
- libel, slander, humiliation, and defamation, related to employment
- failure to provide accurate job references
- Causing mental anguish or emotional distress
How a D&O policy helps
In all the cases described here, where wrongful employment practice claims can arise, D&O liability insurance will pay for costs. This covers the legal costs of your defense and also any final settlements. You must inform the insurer when litigation is anticipated, and they will then approve the claim. Sometimes, an insurer will want to be deeply involved in the legal defense. But usually, they will let you decide how to argue your case.
Case study: Cover for wrongful employment practice claim
An IT firm was going through tough times as business was down, leaving the only remaining choice cost-cutting. Thus, the directors made the tough decision to reduce the number of employees. Accordingly, they sacked 10 employees.
A female employee filed a suit against the directors of the IT firm. She claimed that a particular director had always discriminated against her on the grounds of her gender and her faith. She claimed this was the reason for her dismissal.
The directors of the IT firm approached their insurance company since they had bought a D&O liability insurance policy. The insurer identified lawyers, whom they paid for, that were familiar with such cases. They also paid an external firm to conduct an investigation. The insurer’s objective was to strengthen the company’s defense and minimize their eventual claim cost.
Investigation revealed that cost-cutting was the real reason for the dismissal of the female employee. Her gender and religion had nothing to do with the termination of her employment. Hence, the investigation cleared the director of any wrongdoing. The company then reached a settlement with the former female employee. The insurance paid for this as well.