How to prevent employee discrimination lawsuits

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Ensuring a harassment-free workplace is a key step to preventing many discrimination lawsuits. Learn the best steps you can take to prevent lawsuits and how to protect your business if they happen.
Coworkers reviewing their employer's code of conduct guidelines.

As a small business owner, you may already be aware of the strict laws surrounding employment discrimination and harassment. Chances are, you take care to avoid overtly discriminatory practices.

However, employment discrimination can take many forms, and you don't want to be caught off-guard. A proactive approach to addressing potentially discriminatory practices will protect your business from the devastating impacts of a lawsuit.

How to prevent employee discrimination lawsuits

To help your business avoid a costly and reputation-damaging employment lawsuit, here are some tips on adhering to Equal Employment Opportunity (EEO) laws when hiring, firing, managing, and promoting employees.

Educate managers and employees on EEO laws

Federal laws govern discrimination and harassment in the workplace. Though federal regulations typically only kick in when a business has 15 or more employees, your state's EEO laws may be designed to include smaller companies as well.

The law applies to business owners and managers and to fellow employees as well. Your business could be sued if employees feel harassed or discriminated against by their colleagues, or experience a culture of discrimination without support.

Consider enlisting the help of a lawyer with experience in EEO laws to create workplace anti-harassment and discrimination policies.

Each employee should receive a copy of the policies during their onboarding process. Informing new employees early on that you are fostering an inclusive workplace can help prevent future interpersonal issues and incidents of discrimination among staff.

Ensure all managers and employees undergo discrimination and harassment training, and require them to sign a form affirming they understood it. You might also consider posting your policy in the workplace so all employees can see it.

Acquaint yourself with the term “protected classes”

There are many different forms of discrimination, and federal anti-discrimination laws are built to cover an array of groups that have been systematically disenfranchised and who are more often the victim of a hostile work environment.

So, when hiring, promoting, and terminating employees, take special care to make sure these decisions are based on objective criteria. Not on the fact that the individual is pregnant, belongs to a particular religious sect, race, sexual orientation, marital status, gender identity, national origin, or has a physical or mental disability.

Avoid gender-specific descriptions in job ads and throughout the entire hiring process (e.g., "handyman" or "counter girl"). A passed-up candidate could use the ad as evidence of discriminatory practices.

Also, there are certain questions you can't ask employees. For instance, you can't ask their age or any questions that might inadvertently unearth this information, as this could be perceived as age discrimination.

Be fair and consistent with employees (and potential employees)

It may be tempting to give raises to the employees you've known forever, but preferential treatment can trigger lawsuits. Be sure you always base salaries on market demands. Fairness is not only good for circumventing potential lawsuits, but it also helps with employee morale and retention.

Remember, if you give a performance evaluation to one employee, you should give it to all employees. Similarly, if you let an employee go, your decision should be based on documented reasoning.

If you want to give a potential hire a pre-employment screening test, you must administer it to all candidates. The same goes for performance evaluations and reviews. The goal is to be fair and unbiased in every part of the decision-making process.

Create systems for discrimination education, reporting and documentation

One way to prevent discrimination and harassment claims is to intervene before an issue becomes untenable.

Train employees on how to report workplace harassment issues and let them know that they can't be retaliated against for raising these concerns. Ensure your management members understand that they must respond quickly to these notices and help employees who bring complaints.

You must maintain thorough and accurate documentation of your workplace practices and anti-discrimination policies. This will help you defend your business if it's sued for violating EEO laws.

Your documents should illustrate that your hiring, promotion, demotion, and firing decisions have been based on objective and consistent criteria.

It's also crucial that you train employees to spot and identify discriminatory practices, including unconscious bias and unfair treatment. These training programs will ensure that coworkers from different backgrounds can work together without discrimination issues.

Having a human resources manager who can manage these company policies, address concerns, and implement disciplinary actions before they become potential discrimination lawsuits is often hugely beneficial to protecting the company and bolstering employee well-being.

An HR manager can also facilitate anti-discrimination training initiatives and keep workplace policies up-to-date.

Find the right insurance for your small business

What is considered a discrimination lawsuit?

The United States has several federal laws that make it illegal for employers to treat prospective, current, and former employees differently based on their protected class, such as ethnicity or LGBTQ+ identity.

If your business has fewer than 15 employees, the U.S. Equal Employment Opportunity Commission (EEOC) may not be able to intervene in small business affairs, but employees still have the right to sue your business for discrimination and harassment issues on their own.

Additionally, most states have their own employment laws, some of which apply to businesses with fewer than 15 employees.

Employment lawsuits are often among the most expensive disputes to settle and litigate. In wrongful termination cases, for example, former workers can sue for back pay, and there is no cap on these damages.

Employment discrimination lawsuit examples

Employment discrimination lawsuits are not uncommon. The past few years have seen a number of high-profile legal battles between employees claiming unfair work practices and their employers.

Per the EEOC, there were 143 employment discrimination complaints in the 2023 fiscal year alone across many different sectors, including healthcare and hospitals, retail, construction, and transportation.

In 2024, a woman sued a potential employer in New York State for discontinuing her interview process when they found out she was deaf. According to the Americans with Disabilities Act (ADA), employers cannot choose not to hire based on disability status. The woman was awarded $1.675 million in the lawsuit.

Another recent example involves the firing of an African American woman after her employer insisted that her natural hair wasn't "professional" enough. When she refused, they fired her, and she sued. According to the EEOC, she was awarded $50,000 in the lawsuit.

While statistically, large businesses are more likely to be sued by employees, small businesses often have fewer resources and protections to handle a lawsuit.

Best practices for preventing workplace discrimination

There are many strategies to prevent workplace discrimination, but they boil down to:

1. Treat employees equally and with respect.

2. Keep accurate records so you can ensure fairness in your hiring, promotion, and firing practices.

3. Never underestimate the high cost of a discrimination charge and plan accordingly.

Without proper documentation, it may be difficult to recognize potentially discriminatory practices, even among management. Good records help you identify problematic patterns or instances of unconscious bias.

Also, be sure your small business has the means to survive a costly fine or lawsuit if it is accused of illegal harassment or discrimination. With employment practices liability insurance (EPLI), you’ll have financial compensation for attorney’s fees, settlements or judgments, and other court costs.

Why small businesses need EPLI in their risk management plans

To be clear, any business can be sued for workplace discrimination and harassment allegations.

According to the Conflict Solutions Center, a California-based nonprofit that specializes in workplace mediation services, managers and supervisors spend 30% to 40% of their time dealing with workplace conflicts.

The Conflict Solutions Center notes that the average cost to litigate an employment practices claim is $162,000. That doesn’t include settlement or judgment costs. The average amount of punitive damages awarded in employment cases? $2.7 million.

You can start to see why employment practices liability insurance may be worth your while. In general, the cost of EPLI is reasonable and can save thousands in the event of a lawsuit. 

Employment practices liability insurance can cover:

  • Settlements
  • Attorney's fees
  • Punitive damages
  • Witness and court fees
  • Judgments

EPLI is a claims-made policy, which means you must have an active policy when the incident occurs and when the business is sued in order for the lawsuit to be covered.

Businesses with employees, from nonprofits to startups, should consider EPLI insurance. However, EPLI may not be right for all small businesses. For example, it doesn't make sense for business owners to carry EPLI if they don't have any employees.

Protect your small business with the right coverage through Insureon

Having the right insurance is one of the most important steps you can take to protect your investment. Complete Insureon's easy online application today to compare quotes for employment practices liability and other types of insurance from top-rated U.S. carriers.

Our licensed insurance agents will help you find the right policy for your small business, and you can typically begin coverage in less than 24 hours.

Kate Sortino, Content Specialist

Kate is passionate about all things related to content, marketing, and SEO. She enjoys taking complicated topics and making them delightfully readable. Kate has a background in software content marketing and has professionally written about many topics, including finance, SEO, and mental health. Before becoming a full-time writer, Kate worked in social services and healthcare. When Kate’s not sitting in front of a computer, she’s typically exploring the outdoors with her husband and puppy.

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