When planning to start a small business, should insuring against employment liability claims be considered?
Some small businesses are run by a sole proprietor without employees, but others will employ anywhere from just a handful of employees to larger staffs. When planning a small business, the liability that comes along with employing people should be considered; specifically, small business owners should consider whether to insure against this liability.
Employment liability for small businesses can present itself in various forms. When an employee is terminated for any reason, the discharged employee may seek damages for wrongful termination. An employee may sue the small business owner for sexual harassment, either by the owner or by another employee within the business. If the small business is the type to promote employees after periodic evaluations, employees who feel they were wrongly passed over for promotion may seek a negligent evaluating cause of action.
By purchasing employment liability insurance, a small business may protect itself from the legal fees and potential damages that result when an employee pursues an employment-related legal action. Potential damages may cripple a small business. Just the legal fees required to defend complicated employment lawsuits may prove too much for a small business to absorb.
When considering the purchase of an employment liability insurance policy, various factors should be examined. One of the most important factors is the size of the business. With each additional employee comes additional risk of a future lawsuit. Therefore, the larger a small business, the more likely employment liability insurance will be worth the premiums.
Another variable to examine is the turnover the business will experience. Each time an employee voluntarily leaves or, more frequently, is fired or otherwise let go, the departing employee may be disgruntled and may seek a legal action for a perceived wrong. It is important to remember that former employees may file lawsuits, thereby causing a small business to incur legal defense fees, even when their claims are based on little more than false allegations.
Whether a small business owner chooses to purchase employment liability insurance or not, there are other ways to protect the business from litigation. Employee handbooks and human resources manuals should be reviewed by an employment attorney. Often, these documents can protect a small business in legal actions because they put employees on notice of various company policies and procedures.
Also, the documents that are executed by new employees should be reviewed. Non-compete agreements, harassment and discrimination policies, and termination procedures can provide protection down the road if they are legally enforceable.
Small businesses often purchase various types of insurance, including premises liability insurance and personal injury insurance. When considering how to manage risk, a small business employing any number of employees should, at a minimum, consider employment liability insurance when planning how to best manage these risks.
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