As 2010 comes to a close, risk managers and insurers alike await the outcomes of a number of court cases that may affect the employment practices (EPL) liability insurance market in 2011. For example, on December 6, 2010, the world’s largest retailer learned that the U.S. Supreme Court will hear its appeal in the estimated $1 billion gender discrimination lawsuit filed over a decade ago by six female employees on behalf of over 1.5 million female employees. A decision is expected by the Supreme Court in June 2011. Additionally, final approval of a $175 million settlement (following a historic $250 million punitive damages verdict in May 2010) in a gender discrimination class action brought against a U.S. unit of a Swiss pharmaceutical company is imminent.

This judicial activity, coupled with the skyrocketing wage and hour collective actions, is the foundation against which EPL class action trends have been measured. While significant, these trends were not the only EPL headlines nor newsworthy events of 2010. This article reviews the top EPL issues risk managers faced in 2010 and provides insight for the year ahead.

Unemployment and the EEOC

Despite double-digit job gains in various industries, the national unemployment rate has lingered around 9.6 percent since May 2010. The unemployment rate is a strong indicator that companies continue to conduct layoffs or are otherwise reducing their workforce in an effort to manage the costs and effects of the recession. Just as companies are looking for ways to deal with the slowly recovering economy, so are the unemployed; thus compounding today’s growing EPL risks. According to the U.S. Equal Employment Opportunity Commission (EEOC) Fiscal Year 2010 Performance and Accountability Report, the number of private sector charges of discrimination filed with the agency in 2010 is 99,922, an increase of 7 percent over the 93,277 charges filed in 2009. The 2010 percentage increase is higher than any previous year, with the exception of the 15.2 percent increase in 2008.

Studies have consistently shown that there is a correlation between the unemployment rate and an increase in employment-related claims. Retaliation claims, which are on the rise, are particularly common from disgruntled employees who have been terminated from employment. Further, older workers who are experiencing difficulty re-entering the workforce may surmise that their only option is to bring an age discrimination lawsuit against past or prospective employers.

The increase in employment claims can in part attributed to the additional funding provided to the EEOC in 2010 and the estimated additional funding for 2011. This funding has enabled claimants to file charges of discrimination via the Internet. It has also permitted the EEOC to hire additional personnel to facilitate charge processing, as well as pursue litigation involving systemic discrimination, which remains the agency’s priority.

The Benefits and Curse of Social Networking

Compounding the EPL exposure is the increasing popularity and use of social networking websites by employees. In this regard, Facebook announced in July 2010 that it reached the 500 million users mark, reportedly making it the third largest “country” in the world. Use of social networking websites during work hours (and non-work hours) has already led to claims of discrimination, wrongful termination, retaliation, invasion of privacy, and defamation by employees, as well as claims by non-employees (i.e., third parties) based on the conduct of employees. This exposure is illustrated by a recent lawsuit filed by the National Labor Relations Board (NLRB) on behalf of a union employee who was allegedly wrongfully terminated after she posted—from her home computer—negative remarks on her Facebook page about her supervisor. According to the NLRB, the employer’s Internet usage policy is illegal and “overly broad” because it silenced employees and denied them the right to engage in a “protected concerted activity.”

In addition to employees, companies create their own exposure as a result of their social networking activities. Many corporations now use social networking websites as part of their background checks of potential job applicants and as a means to monitor employees’ productivity or on-the-job activities. Although these practices may be beneficial, they are also fraught with EPL risks. As such, companies using information obtained from social networking websites about applicants for employment or current employees must be cognizant that they will be held to greater scrutiny and likely be required to prove that the information obtained is job-related. Therefore, it is critical to create and implement unambiguous Internet usage policies as well as educate/train supervisors and managers in an effort to minimize this growing EPL exposure.

Obama's Employment Law Agenda

As a result of the 2010 mid-term elections, 2011 is likely to be an uneventful year for the Obama Administration’s legislative agenda for employment law issues. On November 17, 2010, the Paycheck Fairness Act failed to secure the necessary 60 votes in the Senate; the final vote was 58-41. The Act, among other provisions, would have: (1) allowed the EEOC to collect compensation data from employers; (2) eliminated the caps on compensatory and punitive damages; and (3) prohibited retaliation against employees who share salary information with other employees. Similarly, the Employee Free Choice Act—a pro-union bill and a priority on Obama’s legislative agenda—is likely to be stalled in a “lame duck” session, if not entirely abandoned. The Employment Non-Discrimination Act, which prohibits discrimination in employment on the basis of gender identity and sexual orientation, is also likely to suffer a similar fate.

One bill that may survive the divided executive and legislative branches is the Employee Misclassification Act—a bill intended to prevent the misclassification of workers as independent contractors instead of employees—because of the fines and penalties to be collected by the Internal Revenue Service from offending employers.

Looking Ahead to 2011

In addition to federal legislation, state anti-discrimination laws continue to expand to afford employees greater rights and protection than those available under federal laws. Further, given the current composition of Congress, the EEOC and state administrative agencies are likely to be even more protective of employees and determined to litigate perceived violations of employee rights under existing anti-discrimination statutes. Companies are well advised to remain proactive in assessing and enforcing their employment practices policies and procedures, particularly regarding pay equity and retaliation issues.

Finally, contrary to current conditions, the EPL insurance market is still experiencing a “buyer’s” market: many of Marsh’s clients have received premium rate reductions between 5 percent and 10 percent. This soft market is largely driven by an abundance of capacity, competition, and unripened claims. Therefore, barring any catastrophic loss or exit of one or more major insurers from the market, EPLI premium rates are likely to remain “soft” through the first quarter of 2011.