Personal liability in employment cases: Are executives in the legal crosshairs? (Part II)

This is the second article in a two-part series examining personal liability in employment lawsuits. To read Part I, click here.

Contribution by the wrongdoer

(The backdoor approach to personal liability in discrimination cases.)

Though the federal discrimination laws – Title VII, ADA, and ADEA – do not allow a plaintiff to sue an individual, some employers have tried to implead the manager who caused all the trouble. The employer seeks “contribution,” meaning if the company had to pay damages, it wants to get the money back from the individual who committed the discrimination. Some employers have been successful.

Not Under Federal Title VII. The U.S. Supreme Court in Northwest Airlines, Inc. v. Transport Workers Union 541, 451U.S. 77(1981) ruled that allowing employers to recoup damages from individual managers in Title VII discrimination cases would defeat the purpose of the act, which was to hold employers responsible. Employers would have less incentive to have comprehensive anti-discriminatory practices if they could pass the buck.

State laws differ. Some states (Michigan, Kentucky, Main, New York, Oklahoma) have allowed employers to sue the individual managers for contribution under their state discrimination laws.

Contract to pay. Even in states that do not recognize a general right to seek contribution in a discrimination case, the courts might recognize a separate contract right. In deciding against allowing general contribution, the Massachusetts court stated that a company could protect its interests “by contracting with employees for indemnification.” Then, if the employer has to pay for an employee’s discriminatory acts, it can sue that employee later in a separate suit under the contract for indemnification. Thomas v. EDI Specialist, Inc. (Mass.S.Ct., 2002). If this theory catches on, we may see managers having to sign agreements for noncompetition, confidentiality, and indemnity.

Protecting yourself and your managers

Good faith. Many of the laws on personal liability require a finding of “intention” before there can be a finding against an individual. Evidence of your good faith and fair dealing can be a powerful defense. Always take extra steps to show you were not “out to get” the employee or in a “rush to judge.” Intent can either be found from overt evidence or can be inferred from a manager’s preferential practices, negligent practices, or failure to follow standard procedures. Honesty is a crucial part of good faith. It is important not to overlook details or fill in gaps to try to strengthen a discharge decision. Be honest about the gaps in information when making employment decisions. An honest but mistaken belief is a defense against intentionality.

Training. Managers are falling into liability due to ignorance. Courts are inferring intentionality against companies for their failure to train managers on basic employment issues. Managers are making mistakes and getting named in suits due to their lack of knowledge.

My lawyer made me do it! A recognized defense against an allegation of personal or corporate intentionality is “reliance on advice of counsel.” This interjects another party between you and the liability. Taking the advice of another professional means that the decision was advised by the attorney and not a result of the manager’s intent to do harm. This helps insulate the manager from charges of personal intentionality. This means you should get legal counsel involved well before critical employment decisions are made. Last minute or “post facto” consultations will not suffice. You need to provide full details; advice of counsel is not a protection if managers hide information or overlook things in order to get the attorney to agree with their position or “side” with them. In fact, this could be additional evidence of intentional deceptiveness.

Follow rules and policies. If there are organization policies or procedures, they should be followed. Short cuts create liability and lack of documentation. Learn the state and federal laws and follow them, especially in highly technical areas such as FMLA and FLSA. Make certain that all required notices are given and time frames are followed.

Document. Your proof of good faith and just cause for decisions is worth the paper it’s documented on. A jury’s finding of “pretext” or intentionality is often based on a lack of contemporaneous documentation (“after the fact” documentation looks like a cover-up).

Monitor/control functions. Establish a control function to review all significant employment decisions (hire, fire, exempt status) before they are final to ensure they abide by standard procedures and possess sufficient foundation. Monitor the patterns of pay and employment decisions to assure nondiscrimination over time and consistency between different managers. Require managers to follow procedures and submit proper documentation. Review personnel files to be sure inappropriate information does not creep in.

Confidentiality/professionalism. Loose talk about employment decisions becomes evidence. Managers’ angry expressions of frustration or flip sarcastic comments about poor performers often come back as evidence of bad faith. Keep employment issues confidential. Stay professional and do not openly vent frustration or sarcasm about employees.

Ethics committees. Establish ethics policies, a mechanism for review of financial information, and a process for employees to safely bring their ethics concerns to the attention of the organization for an objective review.

(Continued)

Insurance may not cover your personal liability

Employment cases have been the fastest-growing category of litigation during the past decade. Employment practices liability (EPL) insurance policies have likewise increased in popularity to cover these risks.

EPL policies generally cover the organization’s liability. They may not necessarily cover individuals who are also named in a case. There is a wide range of coverage available and organizations are turning to more comprehensive policies. The most common are directors and officers policies that personally cover board members and key executives.

Directors and officers policies may not cover the lower-level managers who are most often accused of being the direct actors and named in cases.

Executive protection policies offer personal coverage for more levels of management.

EPL-Plus policies can cover the whole array of directors, officers, partners, stockholders, and all employees.

However, who is supposedly covered is just the beginning. The coverage listing does not guarantee that the insurance will actually work in a given situation. Insurance policies contain numerous exclusions or exceptions. For example, personal liability is often based on a finding of “intentional” actions. Many insurance policies do not cover intentional actions by the insured. Liability can also be based on violation of employment laws. Many insurance policies do not cover individuals for violations of law. These exclusions are used by insurance companies to deny coverage, leaving the person stuck with legal defense bills and paying the plaintiff’s damages.

Just as there is a wide variety of policies, each company may have different exclusions. The consumer must carefully review them to see if the policy will actually accomplish the protection they expect.

Buyer beware – insurance policy did not cover intentional acts. An employer purchased employment practice liability insurance. The insurance policy had an exclusion for any allegation of dishonest, fraudulent, criminal, or intentional acts. When an employee sued, alleging intentional racial discrimination under Title VII, 42 USC §1981 and 42 USC §1983, the insurance company refused to defend the claim. The employer sued the insurer demanding coverage, but the court ruled that the policy language was clear. The policy covered “disparate impact” discrimination but not “disparate treatment” (individual and intentional) discrimination. Coleman v. School Bd. of Richland Parish (5th Cir., 2005), citing as authority Solo Cup v. Federal Ins. Co. (7th Cir., 1970)).