Three employee-related litigation trends companies need to manage

Litigation risks for businesses typically call to mind threats from outside a company. But the reality is that litigation within the workplace is becoming more common. Whether it can be attributed to greater media coverage, broader awareness of social inflation or even the changing demographics within the labor force, it is more important than ever that companies take steps to reduce their exposure to employee-related litigation. For private companies and nonprofits, which may lack the legal staff and financial resources of a larger company, even one lawsuit could be its undoing.

Here are some litigation trends we are seeing in a few segments:

Employee practice litigation

Employees can file charges for a variety of employment practice allegations, including wrongful termination, failure to promote, negligent evaluation, discrimination and sexual harassment. And while the risk of an employee suing an employer has always existed, changing expectations, social issues and even social inflation have put employers at greater risk.

Consider this:

• According to preliminary data, the U.S. Equal Employment Opportunity Commission (EEOC) significantly increased the number of its litigation filings in fiscal year 2023, including systemic cases, which are at the highest level in five years.¹
• The most common charge filed with the EEOC has historically been retaliation, which accounted for 35% of total EEOC filings in 2022^,2 and while 2022 was no exception, claims of religious discrimination are the driving force behind the overall increase in EEOC charge filings from fiscal year 2021 to fiscal year 2022.³
• In Alfredo Martinez and Justin Page v. Southern California Edison Co. and Edison International, a Los Angeles jury recently awarded more than $464 million to two men who accused their employer of forcing them out of their jobs after complaining about sexual and racial harassment. The jury award included $24.6 million in compensatory damages and $440 million in punitive damages. Costs will increase significantly once attorneys’ fees are calculated.⁴

One of the best ways companies can reduce their risk of a lawsuit is by adopting employment practices that include establishing clear protocols for acceptable workplace behavior, requiring mandatory employee training and creating mechanisms that enable employees to report concerns with an assurance that the company will respond to them quickly.

Crime

Another area of evolving risk exposure is employee theft and other crimes. The U.S. Chamber of Commerce estimates that 75 percent of employees have stolen from their employer,⁵ while FBI data suggests that 60 percent of employees would steal from their employer if they knew they would not get caught.⁶

Consider these statistics:

• According to one recent report, more than $4.7 trillion is lost annually to occupational fraud globally,⁷ and organizations lose 5% of revenue to fraud every year.⁸
• Employee theft has been estimated to cost employers $50 billion per year,⁹ and 33% of U.S. corporate bankruptcies are linked to employee theft.¹⁰
• Criminal property damage results in an average of $17.2 billion losses to businesses annually._¹¹

The increasing use of technology in the workplace means companies must focus more than ever on how to protect themselves against cyber risks, including social engineering fraud, a broad term that can include impersonation of another person for the purpose of stealing corporate funds, obtaining and sharing confidential information with competitors, or otherwise misappropriating a company’s funds.

One-third of all fraud cases occur because companies lack internal controls, so experts recommend companies establish strong anti-fraud controls like unannounced internal and external audits, strong computer controls, security systems, a strong company code of conduct and management certification of statements.

Fiduciary liability

Litigation centering on employer retirement plans is increasing by some measure. The most common allegations are excessive recordkeeping fees, a lack of investment options and a failure to govern the plan appropriately. Consider that the yearly average of excessive recordkeeping fee lawsuits rose from 21 in 2017-2019 to 85 in 2020.¹²

A few dynamics might be contributing to this development:

• A plaintiff-friendly filing standard affirmed by the U.S. Supreme Court in Northwestern vs. Hughes in 2022 indicates that it will remain difficult to have excessive fee cases dismissed early in the case.
• Plaintiff law firms have marketed themselves as specialists in bringing these types of suits, particularly ones targeting “mega” plans valued at $1 billion and above. A single law firm filed 44 such suits in 2020 using the same allegation of excessive fee charges.¹³
• The potential for large awards given the “make whole” doctrine mandated by the Employee Retirement Income Security Act of 1974, by which losses are calculated by the “total return” measure of loss, where the recoverable loss is the amount necessary to restore the plan to the value it would have been if the plan’s assets had been properly administered. A six-year statute of limitations makes a potential award size even more of a target for litigation.

Some common threads emerge among companies that have been targeted in these lawsuits:.

• Plans held by financial institutions that include proprietary funds or services as well as Educational 403(b) accounts and those held by religiously affiliated entities..
• Plans with an in-house recordkeeper rather than an outside recordkeeper.
• Plan governance/oversight includes one or fewer investment committee meetings annually without meeting minutes..

These threads point to some practices to consider adopting to reduce risk exposure. When it comes to best practices, companies should ensure a strong, transparent governance model, regularly evaluate fee structure, implement request for proposals (RFPs) when it comes to fund management and recordkeeping, and include a variety of funds with due care when considering proprietary offerings..

A trusted partner

Insurance from a reputable provider is also a key part of managing risks related to employee litigation. With years of experience and expertise in this area, Zurich can offer tailored solutions, such as Employment Practices Liability Insurance (EPLI), Crime Insurance and Fiduciary Liability Insurance (including ERISA Fidelity Bond coverage). Zurich Resilience Solutions (ZRS), can offer risk assessment services that can reveal vulnerabilities which our risk specialists can then help you to address to strengthen your company’s resilience.

1. “EEOC Announced Year-End Litigation Round-Up for Fiscal Year 2023.” 29 September 2023. Equal Opportunity Employment Organization (EEOC). https://www.eeoc.gov/newsroom/eeoc-announced-year-end-litigation-round-fiscal-year-2023. https://www.eeoc.gov/

2. "Retaliation Accounts for 35% of All EEOC Complaints.” 21 November 2023. US-Rx Care. https://usrxcare.com/retaliation-accounts-for-35-of-all-eeoc-complaints/#:~:text=Retaliation%20charges%20accounted%20for%20more,complained%20about%20harassment%20or%20discrimination. https://usrxcare.com/

3. “Spike in Religious Discrimination Charges Stemming from COVID-19 Vaccine Mandates Fuels Increase in EEOC Charges.” 19 July 2023. Lexology. https://www.lexology.com/library/detail.aspx?g=55acff59-a137-4016-8497-6f47e272128e. https://www.lexology.com/

4 Winton, Richard. “Jury awards over $460 million to 2 ex-Edison employees in lawsuit over sexual harassment and retaliation.” Los Angeles Times. 2 June 2022.

5. “60+ Employee Theft Statistics for 2023.” 6 June 2023. Embroker. 60+ Employee Theft Statistics for 2023 | Embroker. https://embroker.com

6. “60+ Employee Theft Statistics for 2023.” 6 June 2023. Embroker. 60+ Employee Theft Statistics for 2023 | Embroker. https://embroker.com

7. “60+ Employee Theft Statistics for 2023.” 6 June 2023. Embroker. 60+ Employee Theft Statistics for 2023 | Embroker. https://embroker.com

8“An SMB’s Guide to Detecting (and Avoiding) Occupational Fraud.” 13 November 2023. Extensis HR. An SMB’s Guide to Detecting (and Avoiding) Occupational Fraud (extensishr.com)

9.“60+ Employee Theft Statistics for 2023.” 6 June 2023. Embroker. 60+ Employee Theft Statistics for 2023 | Embroker. https://embroker.com

10. Kolmar, Chris. “22 Stunning Employee Theft Statistics [2023]: Facts Every Employer Should Know.” Zippia. 23 February 2023.

11. Sadler, Randy. “Amid Surging Crime Rates, Make Sure Your Business Is Protected.” Entrepreneur. 24 May 2022.

12. Based on Zurich North America data

13. Based on Zurich North America data