The Difference: Workers’ Comp, Employer’s Liability, and EPL Insurance
Hiring employees, vendors or contractors? Find the right coverage as your exposure increases and risks change.
Since the pandemic, litigation against employers is on the rise, and many startup founders have found themselves on the receiving end of employee lawsuits. According to law firm Seyfarth Shaw’s 2021 Workplace Class Action Litigation Report, “As state and local governments responded to the COVID-19 threat, many employers moved their employees to tele-work or work-from-home arrangements, many laid off or furloughed workers, and many businesses shut down or postponed critical operations.” The result? The law firm’s report also found that, “The pandemic spiked class actions (of all varieties) and litigation over all types of workplace issues.”
So, what does this mean for your startup? How can you protect your company in the hybrid work environment? And, if you are an early-stage startup with less than ten employees, does this even affect you? The answer is: it can. Once your startup has grown to the point where you begin hiring employees, using outside vendors, or working with independent contractors, your startup business insurance needs change as your risk exposure increases.
But in order to understand what kind of insurance protects your startup and your employees, you’ll need to understand the difference between the three types of employee-related insurance. Broadly speaking, Workers’ Compensation and Employer’s Liability cover the costs of physical injuries, though in slightly different ways, and Employment Practices Liability covers emotional damages and distress of your employees caused by team members or the environment in your workplace.
It’s important to note, state laws and industry standards vary, so this is by no means a comprehensive guide. Please speak with an insurance advisor about your specific needs.
Workers’ Compensation Insurance (Workers’ Comp) can cover the medical costs and lost wages of an employee injured or killed on the job—either while on the premises or off-site carrying out work duties. Workplace accidents are not just mishaps with large machines or slip and falls, but can also include your programmer getting carpal tunnel and other ergonomic injuries.
During the average year there’s more than $15 billion in Workers’ Compensation claims related to posture or repetitive stress injuries. And this last year has been far from average. The increase in working from home has led to a decrease in proper ergonomics as people lack dedicated work spaces with properly positioned office equipment.
Workers’ Compensation Varies State By State
All 50 states in the US require Workers’ Comp to some degree. There are many state-to-state variations in who is required to purchase insurance and when. Every state has its list of exempt employment types. For example, Arizona makes Workers’ Comp insurance for domestic workers voluntary, and Montana has an exemption process for independent contractors.
There are two other variables you must be aware of: how many employees you can hire before you are required to buy Workers’ Comp and whether you purchase your coverage from the state or a private entity. (Work-from-home employees still count when determining the total number of employees working in a state.)
Workers’ Comp is handled administratively, separately from civil court. Once the claim has been filed, it’s designed to quickly compensate the injured employee or pay out benefits to the family in cases of employee death. Accepting the Workers’ Comp payment precludes the ability for an employee or their beneficiaries to sue. But there are times when an employee or their family rejects Workers’ Comp and instead files a lawsuit.
Workers’ Compensation Insurance Across State Lines
With the increasingly decentralized workforce, especially for businesses such as SaaS startups, Workers’ Comp can become complicated. The insurance requirements are determined by the state laws where your employee lives, not by where your business is based. If you have employees across multiple states, it may seem confusing about when you need to get insurance. However, many private insurance companies will not let you purchase piecemeal Workers’ Comp insurance even if you end up with a situation where you have five employees in Alabama and only two in Missouri.
Employer’s Liability Insurance (EL) picks up where Workers’ Comp and a General Liability Insurance policy leave off. While Workers’ Comp covers the medical costs and lost wages from a workplace injury, it’s not meant to handle the legal expenses associated with lawsuits and settlements arising from work-related injuries. Workers’ Comp doesn't cover pain and suffering, and an employee may also claim that it was employer negligence that led to their injuries.
Regardless of the motivation or the veracity of the claim, there will be legal expenses involved. Fortunately, EL has what is commonly referred to as “defense outside the limits.” The costs of investigating claims and defending yourself in court do not mean you’ll have less money to pay out any settlement, so you’re less likely to have to cover those costs.
Does Employer’s Liability Cover Third-Party Lawsuits?
Yes. This insurance can also help cover the cost of third-party lawsuits arising from the injury or death of an employee. An example might be a spouse suing because the death or disability of the worker means a permanent loss of income.
In the private market, EL is usually sold side-by-side with Workers’ Comp. It is often called Part 2 coverage, with Workers’ Comp being Part 1. While they are sold together, they’ll have separate limits, and payouts from one policy shouldn’t affect the payouts from the other. In the places with state-funded Workers’ Comp, you have to purchase EL separately.
EL is restricted to the legal costs of injuries that occur during the course of work. Other lawsuits call for different coverage.
Employment Practices Liability
Employment Practices Liability Insurance (EPL) is not required by local, state, or federal law. Some business partners will stipulate it as part of a contract to protect their investment. While the first two cover the cost associated with physical injuries to your employees, EPL covers the cost of being sued for something that would fall under the broad heading of “poor management practices.” This includes improper hiring, firing, or promotion practices, sexual harassment, hostile work environment, discrimination, retaliation, and most other forms of mistreatment of employees. While you can mitigate these risk factors with the proper strategies, that doesn’t mean that claims won’t be filed.
Employment Practices Liability for Startups
Common issues in the startup world that lead to lawsuits are employee misclassification and wage and hour issues. Startups entering into the gig economy might think it’s a good idea to save money by classifying members of your team as independent contractors instead of employees. The legal battle against such a claim can be costly, and if you’re found at fault, the consequences can range from monetary penalties to jail time depending on if it’s ruled to be an intentional or unintentional misclassification.
Offering equity or shares in lieu of payment may also seem like a cost-savings measure for a startup struggling to get off the ground. But even founders themselves can still count as employees of the company and are subject to wage and hour laws. A wage theft case is expensive, including the wages you’ll have to pay out in the end.
How Hybrid Work is Affecting Employment Lawsuits and Startups
While EPL insurance has always been an essential way to protect your business, it’s become even more vital now. According to EECO data, between 2019 and 2020, the percentage of disability discrimination complaints has increased more than any other category.
The number of COVID-related employment lawsuits continues to grow, especially as employers begin calling their employees back to the office. After an employee has effectively worked from home for more than a year, asking them to return to the office can quickly become an accommodation failure and a lawsuit. Additionally, the lingering effects facing COVID long-haulers further increases the risk of discrimination claims.
What Else Does EPL Cover?
EPL can also cover third-party cases that would arise from things like an employee sexually harassing a client, vendor, or contractor who then sues the employee and the company.
EPL provides for legal defense and is a “defense inside the limits” policy. That means any money spent defending against claims of discrimination or mismanagement diminishes your policy’s financial capacity to pay a settlement.
Hiring employees at your startup brings with it significant risk. You can mitigate risk by increasing workplace safety and putting in measures to reduce improper management practices. However, there is no way to guarantee there will be no workplace accidents or legal issues. Having the proper insurance in place shifts the financial burden of those risks from you to your insurer, protecting you from possible business-ending costs.