Organizations have faced a seemingly infinite number of obstacles with their employees since the pandemic. Shifting to remote work, navigating the Great Resignation and facing economic uncertainty have put employers in the precarious position of taking cost-cutting measures, which—as we've seen in the headlines—can sometimes mean a reduction in their workforce.

The labor market can be a tumultuous place. As recently as August 2024, 1.6 million people were laid off from U.S. businesses, according to the U.S. Bureau of Labor Statistics. Most employers do everything they can to prevent downsizing but sometimes it's unavoidable. Agents have the opportunity to step in as trusted risk advisors to explain how layoffs can create new risks for their clients and educate them on potential gaps in their current coverage to help ensure they have protection when it's needed the most.

How Layoffs Create Liabilities for Employers

When it comes to layoffs, business leaders need to consider their potential risks. We live in a litigious society where a lawsuit can be brought against an organization for countless reasons—including from a disgruntled former employee who believes they've been wronged.

Layoffs are often a sensitive issue for employees, as they may make employees feel that they were mistreated or discriminated against based on their age, race, gender or other protected characteristics. Suppose an employee feels that they were let go unfairly or illegally. In that case, they may file a lawsuit against the company, which can be costly in terms of legal fees, settlement costs and damage to the company's reputation.

In addition, companies may face claims of a violation of state or federal laws if they do not follow proper procedures when laying off employees. Documenting clear and consistent employment policies and procedures is one way of accounting for these potential risks.

Sometimes, small and midsize businesses may lack the in-house expertise to manage the situation. However, even without a dedicated HR team, organizations can still implement certain controls to reduce their risk.

Mitigating Layoff-Related Risks

To help decrease an employer's risks related to layoffs, careful consideration must be taken in relation to communication, compensation and documentation. For agents assisting their clients through the tumultuous time of a layoff or restructuring, here are a few questions to ask:

• Have you established specific criteria for deciding which employees to let go, such as seniority, skills and competency?
• Have you previously conducted performance reviews to validate your decision when terminating employment?
• Will you offer severance if the terminated employees waive their right to make future claims?
• Do you currently have a plan for communicating the transition to all impacted employees? Is the reason they are being laid off clear?
• How do you plan to communicate this change to the rest of your organization?
• How will you handle benefits administration, reference requests, employment verification and unemployment claims?

What Insurance Policy Provides the Right Coverage?

If the worst should happen and a former employee brings a lawsuit following a layoff, having the proper insurance coverage will be imperative for any small business.

The primary insurance to provide coverage in the event of a lawsuit related to layoffs is employment practices liability insurance (EPLI). It's important for small business owners to know they're much more likely to experience an EPLI insurance claim than to have their building burn down.

EPLI can help cover the costs resulting from a lawsuit related to layoffs. This type of insurance provides protection for a company in case a business is sued or accused of wrongful termination, discrimination, harassment and other employment-related claims.

Layoffs are one of the many consequences a company could be facing if they're having financial troubles and the decisions that resulted in financial issues could result in claims against the directors and officers. Directors & officers (D&O) insurance helps protect the personal assets of business executives, and often their spouses, if they're sued based on the decisions made on behalf of their company.

Such policies—protecting against breach of duties, negligence, errors and misleading statements—often include coverage for legal fees, settlements and other associated expenses. And since directors and officers can face personal liability for their role with the company, D&O coverage is often seen as a mandatory purchase.

Having appropriate insurance coverage, in addition to following best practices regarding employment, can help a company mitigate its risks and focus on the actual business at hand.

Wilson Zhao is general manager, executive risks at Coalition.