The Business of Running a Home: Why Employment Practices Liability Insurance Matters

One does not climb the ladder of success without considerable business savvy and a commensurate work ethic. Boldly innovative ideas typically launch successful organizations, but dexterous management skills keep the profits flowing.

The irony is that some business leaders—individuals who deftly manage workforce risks and liabilities at the company—fail to have the same precision on the home front. They become so personally close to domestic staff that their emotions often cloud their reason, with potentially devastating consequences.

Jack McCalmon, founder of The McCalmon Group, which provides loss prevention services reducing an employer’s litigation risks, said he sees this disparity often in his line of work. “High-net-wealth businesspeople are successful for a reason, but when it comes to liabilities arising in their homes, they sometimes don’t pursue the same best practices that made them successful in business,” Jack said. “They manage their family staffs in ways they would never manage their employees at work.”

He recounted the all-too-common scenario in which a family office or wealthy homeowner doesn’t check whether or not a nanny is undocumented. “The nanny doesn’t have a bank account, so the family pays the nanny in cash. If the nanny is terminated and a claim is brought, the employer has a difficult time proving how much and when they paid the nanny, which is a violation of state and federal wage laws. It happens more than you think,” he said.

Independent agent Chris McCrady has seen it, too. “Many of our clients are successful business owners, yet they have different processes to hire someone at the company than hiring domestic employees,” said Chris, CFO and partner at Simpson & McCrady LLC, an independent agency based in Pittsburgh. “Necessities like a background check are not given the same degree of attention, when the truth is this should be even more important when hiring domestic staff.”

Why is there such disconnection? The emotional elements involved in hiring nannies, tutors, household managers and others who will spend so much time with family members overwhelm more principled employee hiring and management practices. Many families tend to think of domestic staff as Downton Abbey-like family members, trustworthy to a fault. But family squabbles happen. When someone is fired for just cause, the family affair is over and a lawsuit is likely.

Family Affairs

Employees sue their employers for a host of reasons, including job discrimination, wrongful termination, sexual harassment and retaliation. According to Chubb’s 2013 Private Company Risk Survey, the most common charge levied by an employee is retaliation, e.g., “I complained about sexual harassment and got fired for it.”

While the survey doesn’t distinguish domestic employers like a family office from other private employers, the findings are instructive nonetheless. One-quarter of respondents reported they had experienced an employment practices liability-related event in the past three years. Nearly half (45%) stated significant concerns they would be sued for wrongful termination, sexual harassment, discrimination or retaliation, and 22% said such lawsuits would cause the “most” financial damage, given the reputational repercussions.

These concerns are not unfounded: Employees in 2012 filed 99,412 charges with the U.S. Equal Employment Opportunity Commission (EEOC), the federal agency that enforces laws against workplace discrimination.

Workplace bullying also increases employment liability risks. A nanny fired who later alleges verbal harassment by a family member regarding her race, religion, age, national origin or even gender orientation, among other classes protected by anti-discrimination laws, is apt to retaliate with a lawsuit. “Juries love to hear stories of hardworking people mistreated by rich, Dickensian employers,” said McCalmon, who is an attorney.

Defending against such allegations is far from easy. “One of the most difficult aspects of employment practices litigation is that it often falls into the ‘He said; She said’ camp,” Chris said. “Not that these lawsuits reach court. Domestic employers realize that household staff members often have intimate knowledge of you and your family that could be used to tarnish your reputation, unlike employees at the office. They have this leverage on their side.”

Jack agreed: “They know things about the family others do not, like who had an affair, financial problems and problems with teenagers, like substance abuse.”

In his legal experience (he’s a partner at the law firm of Titus Hillis Reynolds Love Dickman & McCalmon), the public relations costs of clearing a smeared reputation can exceed the expense of defending and settling an employment practices liability lawsuit. “Many defendants I’ve represented settle and settle quickly, to keep it out of the news,” he explains. “The stuff you read about celebrities being sued is just the very tip of the iceberg of the risks all family employers face.”

How Clients Can Protect Themselves

What can domestic employers do to reduce the risk of an employment practices liability lawsuit and the potentially ruinous impact on one’s reputation? Thankfully a lot, and much of it is in written form.

Both experts say to have policies and procedures, including a family employee handbook, and have new employees acknowledge receipt of it and that they read it. The same goes for time sheets that stipulate scheduled hours of work. Have an attorney create a confidentiality agreement and make signing the document a condition of employment.

What else? Implement procedures for employees to report instances of wrongdoing or other complaints to management. Ensure all complaints will be fully and quickly investigated. Then insist that specific steps will be taken to eliminate such behavior in the future. The objective is to halt all forms of aggression before they are perceived as discrimination based on a protected class.

Most importantly, buy employment practices liability insurance through an insurance agent and from an insurance company specializing in these risks and related coverages.

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