U.S.-based small and medium-sized businesses face an almost 12 percent chance that they will be hit with an employment claim, with their chances much higher in certain states.
A new study of employee charge trends by specialty insurer Hiscox found New Mexico, Washington, D.C., Nevada, Alabama and California as the top states for employee lawsuit risk in the U.S. Employers in these markets with at least 10 employees face a substantially higher risk of being sued by their employees when compared to the national average.According to the study, U.S.-based companies have at least an 11.7 percent chance of having an employment charge filed against them.
That’s actually down from a 12.5 percent chance as reported by Hiscox in its 2014 study. Hiscox said this year’s study was more comprehensive than last year’s, which meant it received more data from many states with relatively benign employee lawsuit activity, which brought the national average down slightly.
Companies based in New Mexico face the greatest risk nationwide, with a 66 percent higher chance of facing an employee charge than the national average. Other states and jurisdictions where employers are at a high risk of employee charges include Washington, D.C. (65 percent above the national average), Nevada (47 percent), Alabama (41 percent), California (40 percent), Mississippi (39 percent), Delaware (35 percent), Illinois (34 percent), Arkansas (22 percent) and Tennessee (20 percent).
“State laws can have a significant impact on the risk businesses face from employee charges and contribute to the variation in charges seen around the country,” said Bertrand Spunberg, practice leader for Executive Risks at Hiscox USA. “Many of the higher-risk states observed in the study have laws that go beyond U.S. federal guidelines, creating additional obligations and risks for employers. It is important for companies, especially those operating in these high-risk markets, to be keenly attuned to any legal developments that may affect their exposures.”
According to the study, 10 states have their own anti-discrimination and fair employment practices laws that tend to drive employee lawsuit activity. These state laws can be broader than the federal laws, as is the case with New Mexico’s fair employment practices statute, according to Spunberg.
Other state laws that influence the lawsuit environment include laws in Alabama, Georgia and Mississippi requiring all employers to use the federal e-verify system to ensure all employees are legally entitled to work in the country; laws in Delaware, Illinois and the District of Columbia requiring employers to make reasonable accommodations for pregnant employees; and laws in several states (Nevada, Illinois and the District of Columbia) prohibiting or restricting employers from taking employment actions related to credit checks or criminal background checks.
Cost of Employee Lawsuits
Hiscox claims data for small and mid-sized businesses (under 500 employees) indicate that one in five will face employment charges with an average cost to defend of $125,000, which includes expenses such as attorney’s fees and settlement costs. For those that did have insurance coverage, the average deductible cost was only $35,000, compared to the $90,000 balance paid out by their insurance company.
The median judgment for cases that go to trial is approximately $200,000 for employment lawsuits adjudicated by the courts, while one-in-four cases resulted in a judgment of $500,000 or more, according to the study.
Given recent court rulings, Hiscox urged employers to keep an eye on immigration, same-sex marriage, discrimination against transgender employees and minimum wage increases as potential areas for employee charges. Many of the states with the highest rates of employee charges have existing state statutes prohibiting discrimination against employees related to these classes and others may add these in 2016, the study notes.
“Prevention is the best defense against lawsuits,” said Spunberg. “Simple preventative and mitigation measures such as having written hiring procedures, an up-to-date employee handbook and proper training for employees on workplace discrimination and harassment are essential to minimizing risk and protecting your business.”
About the Study
The 2015 Hiscox Guide to Employee Lawsuits report uncovers the impact of employee charges and litigation on small- and medium-sized businesses and organizations with less than 500 employees, including defense costs and settlements. The report was compiled using the latest data on employment charge activity from the Equal Employment Opportunity Commission (EEOC) and its state counterparts across the U.S. The analyzed recent employment discrimination charge receipts by the state at the federal and state commission levels and focused on establishments with more than 10 employees in each state or jurisdiction. Charge frequency was determined by the number of charges divided by the number of establishments with more than 1n employees.
To compare the states, Hiscox analyzed credibility-weighted frequency relativities and compared each state to the countrywide average. The results are based on the frequency of charge receipts, but the receipt of a claim is not limited to only those claims that result in a settlement or other meritorious resolution.