The legal and regulatory landscape in the United States can shift dramatically and quickly. This dynamic creates challenges for employers, especially those that operate or hire workers in multiple states. Adhering to laws around hiring and firing practices, complying with new regulations, and keeping up with advances (and risks) of new technology all expose employers to EPL. Adding to the pressure are ambitious plaintiffs’ attorneys looking to capitalize on any and all potential missteps.

Here’s how EPL risks are evolving today, and what employers can do to minimize their exposure:

1. Complying with Patchwork Employment Regulations

Joseph Kelly, SVP, Fidelity, EPL, & Fiduciary National Practice Leader, Sompo North America Insurance

The rules around fair hiring practices are always in flux and can vary from state to state. For example, the state of Washington has enacted a pay transparency law requiring employers to notify potential applicants of the pay range and description of all benefits provided for any posted position. Failure to do so can result in a $5,000 penalty per applicant and since the statute was enacted in January 2023, close to 250 lawsuits have been filed.

Further south in California, however, employers who are “first-time” violators are given the opportunity to correct the issue before any fine is imposed. That stipulation significantly changes the risk exposure.

Similar scenarios arise around “ban the box” regulations, which prohibit employers from asking about applicant’s criminal background, or around the gathering and use of biometric data, such as when employers’ collect employees’ fingerprints to scan for security or timekeeping purposes.

Rules can vary not just from state to state, but from city to city.

“There is such a layered patchwork of legislation that you have to be aware of as an employer. You need to constantly stay up to date on the changes, and if you’re an employer in multiple jurisdictions, it’s a lot to keep track of,” said Joseph Kelly, SVP, Fidelity, EPL, & Fiduciary National Practice Leader for Sompo’s North America Insurance business.

2. Utilizing Artificial Intelligence

Rachel Freedman, VP, Head of EPL Claims, Sompo North America Insurance

Every industry is adopting or looking to adopt AI in some way to boost efficiency. Many employers use AI to scan resumes and compare them to job criteria to help identify qualified applicants. There is, however, the possibility of bias creeping into the algorithm.

“Let’s say you have a requirement for experience, and you only want to look at applicants that have had continuous employment for ten years. Well, what if you have an individual who left the workforce to raise their children, and then returns to the workforce? Suddenly, you are discriminating against a group of people right out of the gate,” Kelly said.

Because AI can scan thousands more applications than a human recruiter, any implicit bias becomes compounded very quickly.

“Depending on what your search criteria are, you run the risk of creating a very homogenous workforce and inadvertently discriminating against whole categories of people, and that can certainly attract lawsuits,” Kelly said.

“And it’s not just at the hiring phase, AI is being used during the recruitment phase, the interview process and in performance reviews to analyze productivity which can also lead to unintended discriminatory outcomes.” added Rachel Freedman, VP, Head of EPL Claims, Sompo North America Insurance. “And as Joe mentioned, employers already need to comply with varying state and city laws governing the use of AI in employment,”

3. The Effects of Social Inflation

Compounding these risks is the ongoing challenge of social inflation. Fueled by a desire to hold corporations accountable, juries are awarding ever higher verdicts in favor of plaintiff employees. Attorneys are taking advantage of this sentiment to drive up both the frequency and severity of claims.

“The plaintiff’s bar is now very emboldened. They believe that if they can secure an audience with a judge or jury, they will extract a substantial judgment or decision,” Freedman said.

Significant increases in punitive damages are driving those decisions.

From 2015 to 2019, single-year damages from employment litigation peaked at $229 million, with punitive and other exemplary damages making up 30% of the total. Fast forward to 2020 to 2023, when single-year damages peaked at $598 million, of which a whopping 62% was punitive and other exemplary. (Source: Sompo Social Inflation Infographic)

“These are very discretionary awards. Judges and juries seem to be focusing on corporate accountability, irrespective of the justification for the award,” Freedman said.

Why the Right Insurance Partner Matters

Employers face a significant challenge in tracking the changing risk environment and juggling risk mitigation along with their day-to-day operations. Companies benefit from an insurance partner that has expertise in EPL exposures and resources to help identify and minimize them.

Sompo has developed the Sompo Employment Risk Center for clients to help them navigate federal, state, and local laws in the jurisdictions where they operate.

“You can specify the states where you operate, and the system will generate a handbook that will account for not only all the federal requirements, but also the different state laws with regards to attendance reporting, disability practices, leave policies, etc. It will create a very comprehensive handbook with those procedures in it,” Kelly said.

Companies can also easily research any new regulations they will encounter when moving into a new territory.

“A multi-state law comparison tool is also available to help analyze employment laws across the states in which companies operate,” Kelly said. “So, it eases the risk management burden of reviewing all of these regulations.”

The Sompo Employment Risk Center also houses roughly 12,000 pieces of content on employment law changes and compliance. Employers can access posters that can be displayed in the workplace to notify employees of their rights, for example, as well as checklists to follow when terminating an employee. It will push out content to notify insureds of any regulatory changes, including EEOC bulletins. Learning modules, including videos, are also included to help employers develop employee training for topics like harassment and discrimination in the workplace.

Sompo is also distinguished in that it assigns one EPL specialized claims handler to each Insured to handle all claims, regardless of the complexity or what jurisdiction they arise in. This allows a claims handler to gain a deeper knowledge of an employer’s policies and procedures, understand their business and the way they handle employment matters, and facilitates faster and clearer communication.

“If an insured gets a new claims adjuster for each claim or at different phases in the claim process, they will need to establish new relationships and repeatedly answer many of the same questions. It makes the process slow and messy, and there is no holistic view of the account,” Freedman said.

“We strive to create and maintain a high-level of consistency and communication with our clients to help them stay on top of their exposures and feel secure that despite the challenging EPL environment, they are protected,” said Kelly.

To learn more, visit: https://www.sompo-intl.com/insurance/us-commercial-management-liability/

The views and opinions of the Sompo employees expressed in this article are solely those of the employees; shall not be construed as legal advice; and do not reflect any corporate position, opinion, endorsement, or view of Sompo or any of its member companies.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Sompo. The editorial staff of Risk & Insurance had no role in its preparation.