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Insurance Coverage

An employer's liability insurer may not be responsible for defending or indemnifying the company against claims of intentional wrongful discharge. See, e.g., B & E Convalescent Ctr. v. State Compensation Ins. Fund, 8 Cal. App. 4th 78 (1992). In La Jolla Beach and Tennis Club, Inc. v. Industrial Indemnity Co., 9 Cal. 4th 27 (1994), the California Supreme Court held that a workers' compensation carrier under a standard workers' compensation policy has no duty to defend its insured in a civil suit brought by a former employee alleging wrongful termination, violation of public policy, and intentional infliction of emotional distress. The supreme court examined whether La Jolla's workers' compensation insurance policy, which required Industrial Indemnity to pay benefits to employees who are occupationally injured or disabled, provided coverage for and a defense against the claims asserted in the former employee's lawsuit. The court considered whether the suit potentially sought damages within the coverage of the policy. The court found that it did not because, regardless of the merits of the former employee's claims, a superior court does not have jurisdiction to award workers' compensation benefits. Therefore, Industrial Indemnity had no obligation to defend or indemnify La Jolla.

However, in another case, a California Court of Appeal held that an insurer's broad duty to defend applied under an insurance policy that expressly covered liability for "discrimination...violation of civil rights, and sexual discrimination." Melugin v. Zurich Canada, 50 Cal. App. 4th 658 (1996).

Employers should review their insurance policies or seek professional guidance in this regard. Consideration should be given in every case to tendering a complaint to one's carrier.

Supervisor's Checklist For Personnel Decisions

Supervisors should carefully review the following considerations in making decisions affecting personnel.

Consider whether the decision is based solely on the employee's individual performance, or whether general assumptions have been made about an ethnic minority, women, persons 40 years of age or older, persons with disabilities, and so on. Are there solid business-related reasons for the decision? Document the reasons for the decision, giving specific examples. Ensure that the decision and its implementation are consistent with company policies. Consult with the personnel department regarding any inconsistency. If there is a performance problem, document your efforts to help the employee improve. The employee's failure to respond to counseling should also be documented.

Be accurate and straightforward in evaluating employees, both in praising and criticizing when warranted. Rate employees as satisfactory only when you really believe their work is satisfactory. Consult with the personnel department when you believe a problem is developing, before it gets out of hand. Ensure that the bases for the decision are consistent with the employee's work record and what other supervisors have told the employee. Check that actions taken against this employee are consistent with treatment accorded other employees. Finally, be complete and accurate in telling the employee the reasons for the discharge.

Procedures To Limit A Company's Exposure To Liability

The following guidelines can help companies limit their liability.

Carefully train supervisors about personnel matters and their obligations under the applicable laws governing the employment relationship. Insist on thorough and complete documentation of supervisory decisions involving all personnel matters. Review employee handbooks, work rules, job applications, and other forms of employee communications to delete or limit statements regarding fair treatment, progressive discipline, and permanent employment. You should review all employment handbooks and personnel policies at least annually. Appropriate disclaimers and legal safeguards should be incorporated as advised by counsel.

If you retain language defining the circumstances under which an employee may be terminated, make sure that the language includes layoff and change-in-operation situations. In addition, consider using a merger and integration clause in your employment application and handbooks.

Use "at-will" language in both employee handbooks and employment applications. Suggested at-will language is:

"You are free to resign at any time, just as the company is free to terminate your employment for any reason at any time. The company further reserves the right to change your compensation, duties, assignments, responsibilities, or geographical location of your job at any time, with or without cause. These provisions may be modified only in a writing signed by an officer of the company. [To be signed by the employee:] I understand that my employment can be terminated at any time, with or without cause, and with or without notice, at the option of either the company or me. I further understand that the company has the right to change my compensation, duties, assignments, responsibilities, or geographical location of my job at any time, with or without cause."

Consider defining the employment relationship to clarify the employer's right to exercise its sole discretion in implementing such actions as demotions, transfers, and changes in assignments, duties, responsibilities, and rate of pay. By contrast, consider not using a probationary period. If you use a probationary period, define its purpose and state that completion of the period does not increase the employee's rights in his or her job. Suggested language is:

"A probationary period is a training and getting-acquainted period. Completion of the probationary period does not mean that you have any right to continued employment. Following completion of the probationary period, you may still resign and the company still has the right to terminate your employment or change your compensation, duties, assignments, responsibilities, or geographical location of your job at any time, with or without cause."

Recruiting is another area to scrutinize. Review what recruiters and interviewers, including supervisors, say to prospective employees. Avoid references to "the good future that exists here if you work hard." Use standardized language in all interviews -- and make certain interviewers stick to the script. Avoid references in recruiting to job tenure, partnership track, career path, security, permanent, the future. In addition, avoid references to an annual salary or a merit increase -- these terms may imply job tenure.

Evaluations are another area requiring care. Ensure that employee reviews are conducted on time, and are accurate and consistent with company policy and practice. Establish a system to review evaluation forms so that the evaluation correlates with the particular job the employee performs. Review completed evaluations to ensure that individuals are not being overrated. Consider using narrative rather than checklist evaluations, and generalizing the standards for evaluation.

Terminations require very special handling. Establish a system to review employee terminations when they involve individuals in protected classes or with long service. Review all employment policies to ascertain what obligations they impose (for example, an obligation to consider alternate job placement when an individual demonstrates inadequate performance). Delete those obligations that are not usually followed, and follow those policies that remain.

Consider providing an internal appeal procedure or mandatory arbitration. Some employers have considered different types of internal dispute resolution systems, such as an ombudsman or mediator.

Consider obtaining a release and/or settlement agreement from certain terminated employees. Standardize the procedures used for communicating and implementing terminations. Do not deviate from the established method. Consider to what extent you will explain to the employee, either orally or in writing, the basis for the termination. Carefully monitor all statements made by the employer in describing the termination, such as in response to an unemployment insurance compensation claim, or to any other inquiry. And, consider offering reemployment immediately when you determine that a substantial exposure to liability exists or a material error has been made.

Any time an employee leaves, consider using exit interviews. Managers should be prohibited from providing letters of reference. Never provide a letter of reference that contains inaccurate statements (either positive or negative) regarding a terminated employee.

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