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Holiday Party Risks: Companies Could Face Costly Lawsuits, Claims

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As companies prepare to host gatherings for their employees this holiday season, there have been no shortage of reminders that these events can be fraught with unintended risks.

Some of the greatest holiday party risks revolve around the possibility of harassment or discrimination against employees, especially when alcohol is involved. This can make company holiday parties “lawsuits waiting to happen,” as employers can be held liable for incidents that take place during the festivities, Employee Benefit News reported Nov. 29.

“Personal conduct at a holiday party can lead to employment practices lawsuits,” said Melissa Martin, Broker, Professional Liability, Burns & Wilcox, Los Angeles, California. “If there is a situation where a company puts their employees in that environment, that could be considered a wrongful infliction of emotional distress and a hostile work environment. You could be looking at not only paying potentially hundreds of thousands of dollars, but also the cost to go to court and fight on your company’s behalf.”

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Personal conduct at a holiday party can lead to employment practices lawsuits. … You could be looking at not only paying potentially hundreds of thousands of dollars, but also the cost to go to court and fight on your company’s behalf.

Legal defense and other expenses related to this type of lawsuit could be covered by a company’s Employment Practices Liability (EPL) Insurance, Martin said. It is something companies will want to keep in mind as they plan their holiday parties, particularly if they have not hosted other social events in recent years.

“There is a growing number of employees who are just not used to being in social settings for work, especially if they are earlier in their careers and they came up during the pandemic,” said O’Neil Franso, Corporate Vice President, Human Resources, H.W. Kaufman Group, Detroit/Farmington Hills, Michigan. “These holiday parties may be the first work-related social experience they have. There are all kinds of liabilities arising from their inexperience navigating appropriate behavioral boundaries as well as their heightened sensitivities to offensive behavior.”

All companies vulnerable, regardless of size

In Los Angeles, California, a former Taco Bell employee recently filed a lawsuit against the company and a franchise owner over a variety of claims related to a holiday party in December of 2022, KTLA reported last month. The former employee reportedly claims several workers were overserved alcohol and that she witnessed explicit behavior during the event, and that she faced threats and vandalism to her vehicle after reporting the incident.

There are all kinds of liabilities arising from [employee] inexperience navigating appropriate behavioral boundaries as well as their heightened sensitivities to offensive behavior.

- O'Neil Franso, Corporate Vice President, Human Resources, H.W. Kaufman Group

According to a December report by HR Morning, the Taco Bell lawsuit is just one example of a lawsuit filed because of events that took place at an employer-sponsored holiday party. Other recent lawsuits relate to drunk driving accidents, religious discrimination, and more, HR Morning reported.

When these situations make national headlines, the damage may be amplified, Martin explained. “With the Taco Bell claim, for example, that could be very harmful to the brand and could cause clients to no longer be patrons of their business, resulting in unquantifiable lost potential revenue,” she said. “That is something else to keep in mind.”

Companies of all sizes are vulnerable to this type of threat, Martin added, and they may be at higher risk for not carrying EPL Insurance and other important policies. According to a 2023 report from Hiscox, 75% of U.S. small businesses are underinsured. In Canada, 7 in 10 small businesses dealt with at least one legal dispute during the previous three years, Canadian Underwriter reported in January.

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You do not have to be a large company to have an employment practices liability suit.

“You do not have to be a large company to have an employment practices liability suit,” she said. “Even if you only have two employees, you could have harassment occur. The likelihood may be less, but the exposure is still there.”

“It could be even worse for smaller businesses to be seen as an irresponsible employer,” she said. “It could cause additional employee flight, leaving them with a less experienced and less knowledgeable workforce.”

With the workforce returning to the office, “coworkers are getting more face-to-face time and strengthening inter-office rapport, but this does not mean that employees can interact with each other as they would with family or friends,” said Connor Cahill, Broker, Professional Liability, Burns & Wilcox, Minneapolis, Minnesota. “Something that may seem small like a hug, even with the best intentions, can make the recipient uncomfortable and lead to a potential EPL claim.”

Consider holiday event-related first- and third-party claims

According to a 2022 report from Insurance Business Magazine, the average employment practices liability claim costs more than $68,000. It is important for business owners to know that both first- and third-party employment practices claims can be covered by EPL Insurance, Martin explained. This can include claims alleging harassment, discrimination, humiliation, wrongful termination, retaliation, and more.

“Not only are you open to first-party lawsuits from your own employees but also third-party suits. If you have employees who are making other patrons at a venue uncomfortable, for example, they can most certainly be hit with a third-party suit,” she said. “A broad EPL Insurance policy will cover first- and third-party wrongful acts.”

Not all third-party claims originate outside of the office setting, either. “It could be a client that comes to visit the business, or it could be your FedEx or UPS driver who does not like being whistled at by an employee, for instance,” she said. “All of those things are exposures that EPL Insurance policies can address.”

Although many employers feel confident that their employees would not sue them, they should still be prepared for the possibility by taking steps to prevent incidents and carrying EPL Insurance.

“You may think your employees would never try to harm the company,” Martin said, “however, there are situations in which individuals feel they were wronged, and they will assert their right to well-being in the workplace. If you have a small company and get sued and you do not have EPL Insurance coverage, that sort of exposure could balloon quickly and become untenable.”

Taking precautions to host a safe event

Last year in Kentucky, a man was awarded $450,000 after he claimed a 2019 surprise birthday party thrown by his employer against his wishes caused him to suffer from panic attacks, BBC reported in April of 2022. It is important for employers to know their workforce, Martin pointed out. “That is where having on-the-ground, in-office management really helps,” she said, adding that this advice also applies to monitoring holiday parties during the event. “It is important for managers to be present and aware, taking the temperature of the room during the party and making sure individuals are not getting out of control.”

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Reinforcing what is appropriate in a work environment can help mitigate against potential claims that may arise when at the event.

According to Franso, holiday parties that include alcohol should have additional steps in place to prevent overserving and to encourage employees to use ride-sharing services. “Drinking and driving is a concern that companies have to pay attention to,” he said. “They need to make sure they are not putting their employees in a position to cause harm to themselves or others on the commute home. Supervisors should also be trained on how to handle overindulgence situations.”

Setting expectations is also important, Franso and Martin agreed, and it may be helpful to explain basic rules of holiday-party professionalism for newer employees who may not be accustomed to social gatherings with co-workers. “I think employers see that these social events are a way to drum up goodwill amongst their employees, and a way to conduct business in a more laid-back and fun environment,” Franso said. “It is still a work function, though, and there are still expectations to be met.”

“Companies should also communicate their harassment policies prior to the event,” adds Cahill.  “Reinforcing what is appropriate in a work environment can help mitigate against potential claims that may arise when at the event.”

Importantly, Martin said, company holiday parties should not be mandatory. “There is something to be said about individuals being forced to do something out of their comfort zone. For some employees who may be dealing with something personal, they may not feel comfortable attending a party at that point in time,” she said. “They need to know their absence will not be frowned upon and that they are in no way obligated to attend, especially if there is going to be drinking there.”

Of course, if attendance at a holiday party is expected, she said, “that begs the question, what is the disciplinary action that follows for not being in attendance?”

“Wrongful deprivation of a career opportunity, failure to employ, or demotion? All of those things are squarely within the four corners of an EPL Insurance policy,” she said.

According to Franso, managers can also help mitigate holiday party risks by modeling the behavior they expect from their employees. “Having a conservative approach and modeling the type of behavior you are hoping to see is certainly an important hallmark,” he said.

Employers that take the necessary precautions to host a safe event are likely to see their diligence pay off, Franso said. “Employers who make the investment on the front end of this, who anticipate the things that can go wrong and manage expectations and have contingency plans in place, will create a much more positive environment for their employees,” he said. “An ounce of prevention is worth a pound of cure.”

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