Risk management for small business.

Howard, Jack L. ; Jawahar, I.M.

ABSTRACT

Every organization is exposed to risks associated with employment practices and must develop strategies to avoid and/or minimize risks. Risk management is particularly crucial for a small business because a single poorly managed risk could threaten survival. In this paper, a framework that small business owner/managers could use to systematically analyze risks is described, and various options to manage risks are identified. Next, a risk transfer device is discussed in detail. This discussion focuses on protections, coverage, cost, and benefits of obtaining employment practices liability insurance (EPLI). Finally, risk reduction tools and techniques to complement EPLI are discussed.

INTRODUCTION

Small businesses employ almost 58% of the workforce and represent 99 % of the organizations in United States (http://www.sba.gov/advo/stats/sbafaq.pdf). Every organization including small businesses is exposed to risks and must develop strategies to avoid and/or minimize risks and also to mitigate the effects of risks. In contrast to large organizations, small businesses do not have the resources to employ risk managers or risk management consultants to deal with risks. Yet, managing risks is, at least as much, if not more important, for smaller organizations than for larger organizations because a single poorly managed risk could drive a smaller organization to bankruptcy.

An organization engages in several operations or activities. Almost all of these activities, including technical activities (e.g., production, manufacture), commercial activities (e.g., buying supplies, selling products/services), financial activities (e.g., finding sources of capital, managing capital flows), accounting activities (e.g., recording and analyzing financial information), and human resource activities (e.g., hiring employees, disciplining employees) involve exposure to risks. The focus of this paper is on the risks posed to small businesses by human resource activities.

In large organizations human resource professionals and risk management specialists guide and help the organization manage the risks associated with human resources. In contrast, in small organizations, the owner or a manager directs all activities including those related to the management of human resources. The owner or manager must engage in several human resource/employee relations activities, such as hiring employees, promoting employees, resolving conflict among co-workers, disciplining employees, and terminating employees. Mistakes made in performing any of these activities will expose organizations to severe risks and consequences. For instance, disciplining employees in an inappropriate manner or terminating employees in an insensitive manner could lead to a discrimination lawsuit or charges of wrongful termination against the employer.

The primary purpose of this paper is to educate owners and/or managers of small businesses to better manage risks. First, an overview of the risk management process is presented to help managers/owners think about risk management issues in a systematic manner. Second, options available to managers/owners to manage risks are described. Third, a comprehensive discussion of EPLI is provided. Finally, tools and techniques that small businesses could use to complement EPLI are described.

OVERVIEW OF RISK MANAGEMENT

Knowledge of the risk management process will help small business owners and managers to think about risk management in a systematic matter. The risk management process consists of the following 6 basic steps (Vaughan, 1997).

Determining objectives

Identifying risks

Evaluating the risks

Considering alternatives and selecting the risk treatment device

Implementing the decision

Evaluating and reviewing the effectiveness of the decision

A brief description of each step is presented. The focus as each step is described is on the risks associated with employment practices that organizations face in an everyday manner.

DETERMINATION OF OBJECTIVES. Employees in the United States receive numerous protections based on federal, state and local laws and statutes. As such, employment practices can come under the scrutiny of various enforcement agencies, as well as the court system. How employees are treated in an organization can lead to situations where employment practices can be questioned. An employer must decide which risks associated with employment practices he or she wants to address, as well as how to address these practices. As such, one or more objectives need to be set. One objective could be to protect the organization's financial position. Another objective could be to ensure that all employees are treated fairly. A third objective could be to prevent (if possible) or minimize the number of potential employment discrimination lawsuits, or the number of lawsuits associated with employment practices. Although the actual objectives may vary from one organization to the next, every organization must explicitly set objectives.

Setting objectives has two benefits. First, it forces the manager or owner to foresee potential risks. Second, it will serve as a control device to help ensure objectives are met. Setting objectives that are realistic is likely to be a challenging task for a small business because the owner and/or manager is forced to consider the large number of negative possibilities that could result from employment practices.

IDENTIFYING RISKS. The second step involves identifying the major actual or potential risks posed by employment practices of the small business. This is a daunting task. Small businesses that employ 15 or more employees must take this task seriously because organizations of this size have to comply with several federal and state laws and regulations. As such, identifying the pertinent laws to comply with at both the federal and state levels is a must for all small business owners and managers. It is important to have at least a basic understanding of these laws (Ledvinka & Scarpello, 1992; Sovereign, 1994).

The essence of most laws is to prohibit discrimination in all terms and conditions of employment on the basis of race, color, religion, sex, and national origin (Ledvinka & Scarpello, 1992; Sovereign, 1994). It is important to understand that every employment decision (e.g., recruiting, selecting/hiring, deciding who to promote, allocating pay increases) should be free from bias or prohibited discrimination. In essence, what this means is that any type of decision that deals with employees (e.g., hiring, promoting) can be legally challenged. The best way to ensure compliance is to always make decisions based on job-related qualifications (e.g., hiring the best applicant, promoting the best performer or the most senior employee). Additionally, employers are obligated to provide a harassment-free work environment. Employers including small business owners must take this seriously because sexual harassment lawsuits could significantly influence survival of an organization.

While the risks seem unending, a first step would be to become familiar with the various employment laws at both the national and state level (Ledvinka & Scarpello, 1992; Sovereign, 1994). The purpose is to identify employment practices that may not be in compliance (e.g., has been challenged in the past) or the practices that could be easily questioned. Practices that have led to litigation should be considered as known risks. Those that have not, but could, should also be considered as risks.

A second step is to examine the organization's written policies and procedures that shape employment practices. Certain policies may help one decide not so much whether a risk exists, but more precisely, how much of a risk exists (Gavin & Jawahar, 2002).

EVALUATING THE RISKS. Once a small business owner has identified the risks associated with specific employment practices, the next step is to evaluate those risks. The most effective approach for evaluating risks is to classify them into one of three categories (Vaughan, 1997).

"Critical risks: all exposures to loss in which possible losses are of
a magnitude that will result in bankruptcy.

Important risks: those exposures in which possible losses will not
result in bankruptcy, but will require the firm to borrow in order to
continue to operations.

Unimportant risks: those exposures in which possible losses can be met
out of the firm's existing assets or current income without imposing
undue financial strain."

The key to using these categories is to understand the potential costs of employment litigation, along with a complete awareness of the organization's assets. This will help the business owner to identify if they can financially withstand the potential $100,000 discrimination lawsuit. For a small business that is barely making ends meet and has no employment policy manual, this could be viewed as a critical risk. For a small business with an employment policy manual and some financial assets ($10,000-50,000), then this might be evaluated as an important risk. Each business must carefully and honestly evaluate risks that could result from poor human resource decisions in the context of its financial resources tied to human resource management decision (Cascio, 1987).

CONSIDERING ALTERNATIVES AND SELECTING THE RISK TRANSFER DEVICE. There are four basic techniques that can be used to address risk in the workplace. Risk can be avoided, reduced, retained or transferred. Risk avoidance is when an organization refuses to accept a risk. An example of this type of action could be the small business owner who has employees, determines that the risks associated with having employees is higher than he or she is willing to accept, and then chooses to be a one-person business. This could be the case when small contractor chooses to remain small.

Risk reduction involves taking steps to prevent or control the effects of risk. One way to accomplish this in a small business is to establish an employment policy and procedures manual. If a small business educates its managers and employees on its policies and procedures, and then follows and enforces these same policies and procedures, risks associated with employment practices can be reduced.

Risk retention is pursued when a business owner understands that a risk exists, but that alternatives to retaining the risk are unattractive. For example, inherent risks exist when a business owner employs individuals to perform work for an organization. This risk might be retained since the net result for the business owner is better than if he or she were working alone.

Risk transfer is when the business owner transfers the risk to another party. The best illustration of risk transfer is insurance. The business owner can transfer risks associated with certain employment practices by obtaining insurance.

To determine which of these tools is appropriate, one must first consider the severity and frequency of the risk being addressed. Risks can be classified by their level of severity (high or low) and by the frequency (high or low) with which they occur. As such, risks can be placed into any one of the four cells as illustrated in Table 1.

Once a risk has been classified, then the following methods for addressing the risks can be taken. The key is to attempt to take action to alter or reshape the risk so that the risk is moved from its current position in the matrix to another position that reduces either its frequency and/or severity from high to low.

For risks that are classified as being high in both severity and frequency, risk avoidance and risk reduction are appropriate courses of action. In terms of dealing with employees, a certain level of risk always appears to be present, so on the surface, the only avoidance option appears to be not having employees. Risk reduction can also be pursued, and the attempt is to reduce the severity or frequency of a risk to a manageable level. If it cannot be reduced to a manageable level, the risk should be avoided.

Risks that occur often (high frequency), but have a low severity, can be effectively addressed through retention and reduction. The risk can be retained as it is, or actions can be taken by the organization to reduce the frequency of the risk in the workplace. Risks that have high severity, but low frequency, can be transferred through insurance. The idea is to prevent that one catastrophic event from causing a business failure.

Finally, risks that are low in both frequency and severity are best handled through retention. Certain risks associated with having employees are implicitly retained. For example, a small business owner cannot control every action taken or statement made by his or her employees, but these actions can be shaped by employment policies, thus resulting in a situation where low frequency and severity do exist.

IMPLEMENTING THE DECISION. Once the alternatives have been considered and a risk treatment device is selected, then the next step is to effectively implement the decision. Depending on the issue and specific situation, this could mean implementing policies, selecting insurers, or providing training to employees and managers. For example, an employer may decide that in order to reduce the risks associated with employment practices of his or her managers employment practices need to be standardized. Accordingly, the employer may publish standard employment policies and procedures in an attempt to reduce the variability of actions, decreasing the likelihood that one employee is treated differently than another employee in a similar situation. This action could be aimed at reducing the chances of a discrimination claim.

EVALUATING AND REVIEWING. Once the programs are in place, it is imperative that organizations evaluate the effectiveness of their program. Employers may have to adapt their policies and practices to fit the changing legal environment. For example, employment laws are constantly changing and being updated. Prior to 1991, many discrimination claims against employers had maximum limits on how much a plaintiff could be awarded. Today, depending on which laws a case is being heard under, punitive damages could total millions of dollars (Sovereign, 1994). Continual evaluation and review is key to effectively managing the risks associated with employment practices.

Once an employment policy and procedure has been implemented, it is imperative to check whether or not the policy and procedure achieved its objective. Implementing a policy and procedure and then assuming that it was effective is a common mistake that should be avoided. One way to evaluate and review the effectiveness of this type of action would be to see if the number of complaints, both formal and informal, increased, decreased or remained the same. If the number of complaints increased, then the policy and procedure did not correct the problem. That does not necessarily mean that the policy and procedure was an incorrect one, but that perhaps another course of action is necessary. If the number remains the same, again the issue could be that additional actions need to be taken in conjunction with the policy and procedure, such as formal training. If the number of complaints decreased, then the objective appears to have been met. The key is to evaluate and determine if the course action chosen made progress towards its intended objective.

THE USE OF INSURANCE TO ADDRESS THE LIABILITY ASSOCIATED WITH EMPLOYMENT PRACTICES

Purchasing insurance has long been one way of transferring the risks associated with conducting business (Hagglund, Weimer, Speidel, & Whitman, 1998). Most, if not all businesses understand the importance of purchasing general liability insurance to protect employers from property damage and bodily injury. Put quite simply, this is a basic insurance that for the most part does not cover employment practices. Employment benefits liability insurance can be added as an endorsement with general liability, but it only protects employers from failing to offer benefits to an employee and from failing to offer COBRA coverage to former employees. Intentional acts of non-coverage are not covered in this type of insurance.

A second type of insurance required by law is workers compensation (Hagglund et al., 1998; Ledvinka & Scarpello, 1992; Sovereign, 1994). This is an insurance that covers injuries and illnesses arising from work or working conditions. As such, it only covers very specific instances for very specific amounts of damages. Again, this type of insurance does not protect an employer from charges of discrimination or harassment.

Directors and officers' insurance policies protect members of the board of directors and/or officers of the company, should they be specifically named in a lawsuit (Hagglund et al., 1998). This type of insurance does not protect the company or corporation as a whole, just the specific directors and officers. Additionally, this type of insurance is generally not appropriate for small businesses that do not have a board of directors.

As evidenced by the foregoing discussion, the coverage provided by these types of insurance fails to cover most of the concerns that arise out of employment practices. Additionally, coverage by these types of policies is provided when the act or situation occurred. As such, if a business were to somehow operate without workers compensation insurance and an accident occurs, coverage would not be provided even if a business added this type of insurance prior to a claim being made. While some specific endorsements might be added, liabilities resulting from employment practices are largely uncovered.

EMPLOYMENT PRACTICES LIABILITY INSURANCE

In an attempt to address growing employment discrimination and harassment litigation, employment practices liability insurance (EPLI) has been developed by some insurance providers. This type of insurance is designed to fill in the many areas not covered by other types of insurance coverage. Generally, this type of insurance covers the broad category of employment practices that lead to allegations and claims of employment discrimination and harassment in the workplace (Hagglund et al., 1998). These claims are largely the result of the lack of knowledge of the various employment laws and the protections they afford employees and/or lack of knowledge about how to enact employment practices so that they are in compliance with the various laws and regulations.

EMPLOYMENT PROTECTIONS. Employees in the United States receive considerable protections against discrimination and harassment (Ledvinka & Scarpello, 1992; Sovereign, 1994). This protection covers most aspects of employment, from recruitment and selection practices prior to an individual being an actual employee, to the processes associated with ending the employment relationship. As one can imagine, this encompasses many different employment actions associated with managing employees. The intent of the protections is to not only provide employees from different backgrounds equal access to employment opportunities, but to encourage business to make sound business decisions, based on the merits of the employee, rather than issues associated with age, race, sex, and so forth.

WHAT DOES EPLI COVER? In the United States, employees can seemingly sue an employer for almost any reason. Given the wide range of federal and state protections that employees have in the United States, employees can allege discrimination in virtually any employment decision, such as hiring, promoting, disciplining, and terminating employees. EPLI is a type of insurance that employers can purchase to transfer the risks associated with employment practices should such practices be legally challenged. The problem is that most businesses, including small businesses, do not know what EPLI covers, what it does not cover, and how this type of insurance fills in the gaps not addressed by other insurance policies that the business might already have.

Generally speaking, EPLI is designed to provide protection against claims that an employer's practices and decisions are discriminatory in nature (Hagglund et al., 1998). Insurance policies will vary from insurer to insurer. Therefore, it is important to carefully study the policy to understand what the policy covers (or does not cover) before purchasing one from an insurance provider.

Generally, employment discrimination, whether it is based on color, race, religion, sex, national origin, age or disability, will be covered by EPLI if the discriminatory act is found to be unintentional. Intentional acts may be covered by some companies, but may not be covered by all companies. Additionally, these allegations of discrimination may be related or connected to demotion decisions, promotion decisions, disciplinary decisions, evaluation decisions, training decisions and termination decisions. It is important to understand that when making decisions that affect employees, decisions can be perceived to be discriminatory in nature, especially if the decisions are not or do not appear to be based on factual, job-related information.

Most EPLI policies provide protection for employers against wrongful discharge of employees. Typically, the employment relationship between an employer and employee is an "at-will" relationship. At-will employment relationship means that the employment relationship between an employer and an employee can be broken for any reason other than those prohibited by various employment laws (Hagglund et al., 1998; Ledvinka & Scarpello, 1992; Sovereign, 1994). For example, a woman cannot be terminated from a position because she is a woman. However, she can be terminated if an employer can demonstrate that she did not perform her job to a specified standard.

There are several exceptions that make it more difficult to discharge employees (Hagglund et al., 1998; Sovereign, 1994). One of these exceptions is when a specific contract exists between the employer and the employee. It is difficult for an employer to break a written contract with an employee unless the employer can demonstrate "just cause". Just cause means that the contract was violated in some way, or that the employee was not performing to standard.

A second exception is that an employer cannot legally discharge an employee for disobeying an order that violates public policy. For example, ordering an employee to discriminate against an individual or individuals or harass any member of a protected group is an order that violates public policy. An employee cannot be legally discharged for refusing to take part in such an activity.

A third exception is an implied employment contract. This has long been a concern of many employers, and is a reason why many employers do not have an employee handbook. However, if worded carefully, an employee handbook is not considered an implied employment contract. Rather, it can be designed to clearly address many of the concerns addressed by EPLI itself. More often, statements to employees to the effect that "as long as I am here, you will always have a job here" are considered to be implied employment contracts.

Additional reasons that employees cannot be discharged include complaining about wage-related matters, union membership or union activities, filing health or safety complaints or asserting benefit rights associated with retirement. Taking unpaid leave as authorized by the Family and Medical Leave Act, reporting unethical and illegal acts by employers (i.e., whistle-blowing) and filing workers compensation claims cannot be used as the basis for discharge decisions. EPLI can help provide coverage against some of these claims, depending on the language of the insurance policy.

Workplace harassment is also an area of risk for businesses. With the past publicity associated with several sexual harassment cases, it has become clear that harassment in the workplace can be very costly to businesses. Even if an organization takes all the correct steps (e.g., having a written policy, educating employees about harassment), misconduct by just one person is all that is necessary to be faced with a sexual harassment lawsuit. EPLI can help to address this potential risk, by protecting the financial assets of a small business through coverage of sexual harassment.

While coverage of specific acts will vary among insurers, in general, discrimination and harassment claims resulting from employment practices are likely to be covered. Many policies explicitly state the specific acts that are covered such as demotion, wrongful discharge, failure to promote, retaliation, and wrongful discipline.

Some insurers will cover intentional acts, while others will not. Also, the norm on this type of insurance is that coverage is provided based on when the claim is made, not when the incident occurred. This is generally different from other types of insurance coverage that businesses purchase.

PRIME CANDIDATES FOR EPLI

Every business is exposed to risks. However, some businesses are exposed to more risk than others. Discussions with insurance professionals and anecdotal evidence associated with employment litigation indicate that two factors enhance exposure to risks associated with employment practices. The first factor is the wage rate of the positions within an organization. The higher the wage rate, the more likely it is that someone might contest employment decisions, claiming discrimination. The reason is if someone earning a high wage is discharged, it is more difficult to find a job at an equivalent wage than someone who earns a low wage, such as minimum wage. As such, a person who earns a high wage might be more willing to contest the legality of the decision in order to protect their earnings than someone who makes minimum wage. The ability to replace the minimum wage is much easier than the ability to replace a $15--$20 per hour job.

A second factor that has been supported by anecdotal evidence is high turnover. Organizations with high levels of turnover might be more likely to experience claims of discrimination or have their employment practices questioned. There are many possible causes of high turnover. One could be that the jobs in the organization are low paying jobs and that the employees find higher paying jobs. This situation is not troublesome from a risk perspective. The troublesome situation is one in which jobs in the organization pay reasonably well, but turnover remains high. It is important to understand why this occurs. If it is occurring due to negligent management or indiscriminant terminations, then a problem might exist.

Ultimately, the combination of the two factors could be a larger problem. When pay and turnover are both high, exposure to employment practices related risks is enhanced. Such organizations should seriously consider purchasing an EPLI.

REQUIREMENT FOR QUALIFYING FOR EPLI

To obtain EPLI coverage an organization must meet some basic requirements. For EPLI the requirements are very specific. A business, or the business's insurance agent, must complete a very specific and detailed application. Applications typically inquire about a business's history. Specifically, closing of facilities and staff reductions are examined from the organization's recent history (i.e., 2-4 years), as well as any anticipated facility

closings or staff reductions. The size of the organization, salary ranges and turnover rates are also required, as these may indicate the level of potential risks associated with employment practices. Finally, many human resource management practices are examined in detail (Hagglund et al., 1998). Information must be provided on affirmative action plans, employment applications, employee handbook and the policies contained within the employee handbook.

In addition to asking about the employment policies and procedures, copies of these procedures typically must accompany the application form. Having in place written policies required by the insurer may not guarantee EPLI coverage. In many cases, the insurer requires that policies be worded in specific ways. On the surface, this may appear to be a situation that many businesses may not want to pursue. However, the insurer typically bases the wordings on its knowledge of the legal environment, that is, based on how various policies have withstood legal scrutiny in the court system. Thus, they are using their collective experience to help provide as much legal protection and risk reduction as they possibly can.

HOW MUCH DOES EPLI COST?

There are several factors that influence the cost of an EPLI policy. Premiums are based largely on the number of employees, geographic location of the business, and the industrial classification of the business. Additionally, the employer's history will further influence the premium. As an example, a small business located in Illinois employing 25 employees (prior to accounting for the industrial classification) may pay an annual premium of about $4300. Depending on the industry code of the business, the premium could range from slightly less than $3700 annually to slightly more than $6500 annually. As with any type of insurance, the deductibles vary but typically begin at $2500.

While the premiums might seem expensive, it is important to consider the potential costs of an employment related lawsuit. If an employer loses an employment related lawsuit, it is not uncommon to have awards in the neighborhood of $100,000 or greater. The size of the award depends on which law is being used to pursue the claim. In this case, an annual premium of $5000 with a deductible of $5000 only represents 10% of the award. The awards typically do not include "other" fees that accompany a lawsuit, but depending on the coverage of the EPLI policy, those fees may be covered as well. It is at this point that one carefully examines how losses and damages are defined to determine which specific damages are covered. The specific damages to inquire about from a human resource management and small business perspective are: compensatory; punitive/exemplary damages; defense; pre/post judgment interest; back pay; non-monetary; and liquidated damages. Policies may vary in terms of which of these types of damages are covered. Additionally, they may also vary in terms of coverage limits. Examining and understanding these limits is necessary to make informed decisions.

RISK REDUCTION TECHNIQUES TO COMPLEMENT EPLI

It is important to understand that EPLI is just one of the many ways to address the risks associated with running a business and having employees (Hagglund et al., 1998). Again, EPLI is a way of transferring risk (Vaughan, 1997). However, several alternatives to EPLI do exist, and the risks associated with employment can be reduced through a variety of ways. Among the ways to reduce these risks are to establish a comprehensive employee handbook that includes various company policies and procedures, communication programs to communicate policies and procedures, objective and job-related selection and evaluation procedures, and the use of formal training to ensure that all employees understand the business' policies and procedures.

ESTABLISH AN EMPLOYEE HANDBOOK. Even if a business decides not to purchase EPLI, examining an EPLI application provides information on how to begin to reduce risks associated with employment. For instance, an application for EPLI will ask for specific information on a number of employment practices most likely to expose the organization to risks. A small business could use this information to shape its policies and procedures so that they are in compliance with the most common types of allegations of discrimination and charges of wrongful termination (Gavin & Jawahar, 2002; Hagglund et al., 1998). For instance, having an employee handbook with specific employment policies, such as harassment and discrimination policies, can go a long way toward reducing the risks associated with employment practices. Specifically, businesses should consider including the following in an employee handbook:

An employment-at-will statement

An equal opportunity statement

An affirmative action plan (if conducting business with the government)

A discrimination policy

A sexual harassment policy

A complaint procedure for reporting discrimination and harassment

A disciplinary policy

An attendance policy

This list of policies represents an essential, minimum baseline in terms of what should be contained in an employee handbook. Each business must examine itself and the environment in which it operates to determine what additional policies should be included.

One apprehension that many businesses have toward establishing an employee handbook with specific policies is that the handbook could send a signal that there is an employment contract. While that could represent one risk, that risk can be addressed and avoided. A statement can be provided in the employee handbook specifically pointing out that the employee handbook is not a contract, implied or otherwise. Additionally, without a handbook, managers and supervisors have a much greater likelihood to take actions involving employment matters in an inconsistent manner. This can lead to numerous problems with a business' employment practices. Standardizing and following employment policies and procedures can reduce the ability for an employee to demonstrate that he or she was treated inconsistently--a very common form of discrimination. Thus, the benefits of establishing a comprehensive employee handbook far outweigh the potential costs.

Before implementing and disseminating the employee handbook, an important step for a business to take is to consult with an attorney or law firm that specializes in employment law. This person or firm will ensure that the wording of the handbook or the policies is consistent with employment law, further reducing the risks associated with employment. These individuals are familiar with not only the federal discrimination and harassment laws, but are also familiar with the state's discrimination and harassment laws, as well as the case law in the business' area of operations. Finally, they can further assist the business in ensuring that its specific HR practices are legally sound.

COMMUNICATION PROGRAMS. Establishing a comprehensive employee handbook is an important step to take in reducing the risks associated with employment practices. However, it is equally important to communicate and follow the policies and procedures once they have been established. One area that the courts consider when hearing cases on employment practices is whether or not employees were made aware of the policies, as well as whether or not the business followed the stated policies and procedures. This means that once an employee handbook is established for use, employees should be made aware of its existence and its contents.

Increasing employee awareness of the various employment policies can be accomplished in a number of ways (Gavin & Jawahar, 2002). One approach is to provide all employees with a copy of the employee handbook. This should be done with all incumbent employees, as well as when any new employees enter the organization. Additionally, to ensure that employees are aware of what the handbook addresses, conduct orientation sessions to make employees aware of policies and practices and document employees' attendance. This can be done until all employees have been exposed to the policies and procedures contained in the employee handbook. This also should be conducted as new employees enter the organization, during new employee orientation. Documenting that all employees have been made aware of employment policies and practices reduces an employee's ability to say they did not know about a practice if they challenge an employment practice. It will also make it easier for the business to defend its actions if those actions are challenged in court.

A number of other communication steps should be taken by businesses as well. First, any updates or changes to the policies should be given to all current employees, so that their employee handbook remains current (Gavin & Jawahar, 2002). Second, policies and procedures should be publicly displayed in numerous areas so that employees have the opportunity to view the policies. Third, for businesses with a web site or intranet, posting the policies and procedures on this web site or intranet could allow employees access to this information as well. Finally, changes can also be communicated electronically. The key is that all employees need to have this information communicated to them if a business is to benefit from having an employee handbook.

SELECTION AND EVALUATION PROCEDURES. Selection and evaluation procedures of the business also need to be evaluated to ensure that they do not lend themselves to situations that can be considered discriminatory or harassing. In many instances, selection and evaluation procedures can create questions in the minds of candidates as to the legitimacy of the questions asked. Employment selection devices including application blanks, tests and employment interviews should be based on objective, job-related information (Gatewood & Field, 2001). Questions and information should be focused on job qualifications and working conditions, not on whether or not someone's spouse will like the idea of the candidate traveling as part of a job, for example. Also, employment applications should contain an employment-at-will statement, indicate that references provided and criminal convictions listed can and will be checked, contain an equal employment opportunity statement, and require the employee to sign the application, verifying that all information provided is correct (Howard, 2001; Katz, 2000). As such, not only will the employment application be improved, each of the devices used in the selection process should be standardized, to ensure that only job-related information is collected.

Performance evaluation devices should also be reviewed to ensure that the devices are measuring job performance in an objective manner. The focus should be on outcomes, such as projects completed or amount produced or sold, rather than on substitutes for performance, such as putting forth effort to complete a job. By focusing on outcomes and objective performance measures, the evaluations can be verified (Hagglund et al., 1998). This should make it easier for an organization to defend its actions, provided that the ratings are consistent with the objective performance measures.

FORMAL TRAINING. A final way to reduce the risks associated with employment practices is to train your workforce (Bensimon, 1994). First, training should be provided to all employees at some point to make them aware of a company's policies and procedures. Additionally, as new policies and procedures are developed, or policies are changed, additional training should be provided to all employees. This training should be documented, indicating the date and time of the training, the topic, the trainer and the attendees. This information can be used to verify that all employees were made aware of the company's policies and procedures, and should be kept in the company's training records. Some training, such as sexual harassment, should be conducted annually, to stress that the policy does exist and that sexual harassment will not be tolerated.

Second, all employees involved in employment decisions, such as hiring, promotion and performance evaluation decisions, should receive formal training on a number of topics. First, the employees should be trained on how to make such decisions. Second, the employees should receive training on how to use the various devices and document information. For example, employees interviewing applicants for positions should be trained not only on what questions to ask, but also on taking notes about the response and how to evaluate or score the responses in an objective manner. Again, documentation on when this type of training was given as well as who has received this training should be done. A business might go so far as to require this type of training prior to making these types of decisions. This can keep managers and supervisors focused on the job-relatedness of the task at hand, as well as make the business better in the long run.

CONCLUSION

Employment practices of any business can be called into question at any time. If a business has employees, it is virtually impossible to eliminate all risks associated having employees. It is possible, however, to effectively manage the risks associated with employment practices. One option is to transfer the risk by purchasing EPLI. By purchasing EPLI, businesses are paying a price to ensure that if their practices are questioned, they would not necessarily have the same financial crisis that businesses without EPLI might face. EPLI cannot, and should not, be pursued without considering a variety of risk reduction techniques.

To obtain an EPLI policy, several risk management practices largely human resource management practices must exist or must be developed. This represents a set of actions that not only must be taken to obtain EPLI coverage, but also represents a set of actions that should be taken to reduce the risks associated with employment practices even if EPLI is not pursued by the business. Developing a comprehensive employee handbook can substantially reduce the risks associated with employment practices. Additionally, contents (i.e., policies and procedures) of the employee handbook should be communicated to employees. Selection and evaluation procedures need to be evaluated, to ensure that they are clearly job-related and objective. Finally, employees should receive regular training on employment practices. Some training should be provided to all employees, while other training should be provided to those employees who make employment decisions, such as hiring, promotion and performance evaluation decisions.

REFERENCES

Bensimon, H.F. (1994). Crisis and disaster management: Violations in the workplace. Training and Development, 28, 27-32.

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Jack L. Howard, Illinois State University

I.M. Jawahar, Illinois State University

Table 1

 High Frequency Low Frequency

High Severity Risk avoidance Risk transfer/insurance
 Risk reduction

Low Severity Risk retention Risk retention
 Risk reduction