A grandmotherly figure with white hair peers benignly over her reading glasses in a magazine ad. The caption: “Her smile seemed to light up the office.” The ad’s small print reveals that “granny” cost her employer $425,000 due to an age discrimination suit, citing the need for financial protection in the form of employment practices liability insurance.

Medical device and life-science firms—much like many other businesses—face employment practices liability from a host of situations. These include allegations of not just age discrimination, but also gender discrimination, sexual harassment, wrongful termination, hostile work environment or violating fair labor practices. Despite increased automation of manufacturing processes, the medical device and life-science industry is labor-intensive. Whenever you have employees, a company risks employment practices liability claims and lawsuits. Prime sources of such claims are layoffs and terminations.

Life-science firms are vulnerable to layoffs, employee terminations or employee complaints. A myriad of factors drive and accentuate this trend. Sometimes, employee performance—or lack thereof—is an issue. Other, larger financial factors dictate cost-cutting and reducing headcount. Economic downturns and recessions slow demand. Long waits for U.S. Food and Drug Administration approvals diminish output.

Many pharma firms face “patent cliffs,” where blockbuster drugs will soon lose their patent exclusivity, lowering demand for branded drugs. Increasingly, sales reps have difficulty getting to doctors, reducing the need for field sales personnel. Global competition is another factor. Bottom line: Layoffs are unfortunate but often financially necessary steps for life-science firms.

Sources of Claims and Risk
Bungling these situations can create needless and expensive risks for a device company.
These include:

• Wrongful termination claims and lawsuits from those who feel they were unjustly let go. Even groundless claims consume hours and thousands of dollars in legal defense fees;
• Spike in workers compensation claims from employees who allege they were hurt on the job, seeking workers compensation benefits to replace lost wages;
• Cost of unemployment benefits;
• Lowered morale on the part of the “remaining” workers if they feel those laid off were dealt with unfairly. Even if such a perception does not exist, the “lucky” survivors may have low morale as workloads increase with fewer resources and no comparable pay jump; and
• Negative public relations and a tainted public image spurred by “malcontents” who claim they were treated unfairly.

While layoffs and terminations are unpleasant but often necessary realities for life-science firms, there are ways to handle these steps to minimize employment liability risks. Fortunately, life-science professionals can manage this risk just like any other. Let’s look at tools and strategies for life-science leaders to consider when managing the risks of layoffs and terminations. Many insurance companies offer coverage for employment practices liability. Examples are Monitor Liability Managers, Chubb and XL Catlin. (Caveat: These are examples, not rankings or recommendations.)

Work with your insurance agent or broker to identify promising candidates from whom to obtain coverage quotes. Prepare for the process by anticipating the questions that insurance companies will pose. Life-science firms that show the greatest readiness to provide cogent answers to these questions and demonstrate strong internal risk management procedures have the leverage to get the broadest coverage at the lowest cost.

Anticipate Insurer Questions
Questions that an insurance company asks on its coverage application reveal areas it views as risky. They also offer a road map for the company’s risk management program addressing employment practices.

Expect to face questions like the following in an insurance application:

• Do you plan a merger, acquisition or consolidation for you or any subsidiaries? Comment: Such corporate maneuvers often spawn layoffs for the sake of “synergies” and efficiencies. A strong business rationale may exist for layoffs, but an expected result will be claims and suits from wrongful termination or discrimination.
• Are you undergoing or contemplating employee layoffs or early retirements in the next 12 months, including those resulting from company restructuring or office or manufacturing plant closings?
• What is the total number of employees, broken down amongst full-time, part-time, seasonal, temporary, leased, domestic within the United States, and foreign? Comment: Employment claims are more common in the United States, so the mix of foreign versus domestic labor force is a risk factor.
• What percentage of employees are union versus nonunion? Tip: Insurers correlate a unionized workforce with a higher risk of claims and litigation.
• What percentage of employees are in Texas or California? Caution: These states are perceived as “hot houses” for employment practices claims due to laws congenial to such actions.
• Is the device firm or any of its subsidiaries subject to a collective bargaining agreement? If so, how many employees are subject to the agreement and when does the agreement expire? Moral: Collective bargaining agreements can foreshadow aggrieved employees filing employment practice claims or suits.
• Do any employees have written employment contracts? If so, how many? Suggestion: Contracts may be a good idea, but they risk breach-of-contract suits if relationships sour.
• In the past three years, what has been the annual percentage turnover rate of employees, both domestic and foreign? Takeaway: Many see turnover rate as a barometer portending employment liability claims.
• What percentage of employees have salaries larger than $50,000, $500,000, $200,000 or above? Tip: The higher the pay scale, the higher the stakes in employment litigation.

With answers to such questions prepared, medical device and life-science firms can craft strong internal programs to minimize the risk of employment practice liability and claims.

Risk Management Strategies
First, maintain an updated/amended human resources manual or equivalent risk management guidelines addressing:

• Legally prohibited discrimination;
• Sexual harassment;
• Compliance with the Americans with Disabilities Act;
• Compliance with the 1991 Civil Rights Act;
• Compliance with the Family Medical Leave Act;
• Employee disciplinary procedures;
• Employee appraisals/reviews; and
• Terminations, layoffs and early retirement.

Insurers writing this coverage want to make sure the company has its house in order and represents a safe risk. None of these features guarantees that a medical firm will not have a claim, but they reflect a systematic human resource approach that may minimize headaches.

Second, update all management, supervisory employees and nonsupervisory employees on amendments to the company’s human resources manual or written guidelines.  Have employees acknowledge in writing that they received such manuals or guidelines.

Third, establish a toll-free number for reporting allegations of and claimant practices violations. Some insurers may offer to provide one or help offset the cost.

Fourth, consider hiring a full-time risk manager, human resources manager and general counsel. Tip: insurers like to see seasoned, full-time risk managers, human resource specialists and general counsel at the helm.

Fifth, prepare essential documents and have them ready, since insurers often request the following materials as part of the underwriting process:

• Latest annual report or audited financial statement;
• Employee handbook;
• Human resources manual/guidelines;
• Procedures regarding job applicants, employee discipline, termination, harassment or discrimination allegations; and
• Latest EEO-1 report (a government form requiring many employers to provide a count of their employees by job category and then by ethnicity, race and gender).

Which strategy is better—buying insurance or implementing risk management? It’s not an either/or choice. Life-science firms capturing the best coverage deals blend management practices with savvy shopping strategies in the insurance marketplace. Companies that combine these two approaches will have nothing to fear from a vindictive grandmotherly employee or from business-driven reductions in force. 

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Kevin M. Quinley, CPCU, ARM, is the principal of Quinley Risk Associates LLC, a risk management consulting firm. He can be reached at kevin@kevinquinley.com or at (804) 796-1939.