Q. How can a risk manager get ahead of exposures related to the human resource management function?

A. Whether or not a risk manager is in a people-intensive business such as a restaurant, the risk of significant loss from human resource functions that include hiring, firing, promotion, development and the way in which people are managed is substantial.

The order of magnitude of this area of risk is driven by many factors, including the obvious quality of the way in which the functions mentioned are executed. Other drivers include the jurisdictions where the company operates, the expertise of plaintiffs counsel in the related areas of law, the overall quality of the workforce, the various demographics of that workforce and, most importantly, the controls in place to minimize the cost of risk in this area.

Jurisdiction is a critical issue and not something over which a risk manager has much control, as it will be driven primarily by where the company operates. California law, for example, essentially imposes strict liability on the employer in cases of sexual harassment, meaning the burden of proof shifts to the employer to show that an offense did not occur. Of course, in tort law the normal burden is upon plaintiffs to prove the defendant was negligent. This relative statutory anomaly has raised the stakes considerably for employers doing business in California and suggests a loss prevention urgency some would suggest is beyond practicality.

The expertise of plaintiffs counsel in the area of employment law can be the difference between a pre-lawsuit resolution without payment to the plaintiff-and perhaps even to defense counsel-and a seven-figure settlement or jury verdict. While this can hold true in most types of cases, I've seen its repeated application in employment cases, suggesting more urgently that the quicker an employer moves to address the concerns of the aggrieved party, using sensitivity and showing sincere concern for understanding the facts and implementing remedial action, the cheaper and less disruptive the matter will be for the company.

Workforce also is a critical driver of this exposure. There's nothing magical about this. It's the age-old issue of putting the right people in the right jobs and focusing heavily on this "fit." Does the prospective employee's skill set match the job requirements? If not completely, then at least make sure the more critical job requirements are met. Does the person's demeanor and personality fit the culture within which he or she would be working? The employer needs to understand and screen for the baggage the prospect may be bringing to the table, within legal limits.

Is it appropriate to do a criminal background check, run a personality profile assessment or actually test the desired skill set before hiring? Should the employer ensure that education, work experience and accomplishment claims are verified, within reason? Is the employer making sure to check and go deep with references? In sum, do employers effectively screen prospective employees? If not, companies probably shouldn't be in business today. Remember, however, all these processes and many others that affect the human resource management functions often are restricted by federal, state and local laws and should be done only in accordance with those laws.

Workforce demographics is a "gravity" issue. Employers can only work with the population pool from which they have to draw. However, they need to be aware of the nature and characteristics of the workforce from which employers draw their personnel. Why? Because, for example, different ethnic groups have different expectations of the employment relationship. To the extent this comes from cultural differences in ethnic groups, it's important to understand how those differences drive expectations in the workplace and develop human resource policy around those distinctions. In this area, it is particularly important to completely understand the nuances of equal employment opportunity law.

Controls are the most critical element of the risk manager's obligation in managing the employment liability risk. I've touched on some of the controls, e.g. employment screening, that should be employed to minimize this risk, but there are others to consider as well.

They include: thoroughly developed and legally approved employment operating policies; equal employment opportunity-sensitive training programs; comprehensive employment applications and application process including a mandatory dispute arbitration clause, where legal; open communications around promotion and development policies; an effective internal dispute resolution process; a comprehensive process that allows employees to bring complaints and concerns anonymously to the attention of management above the level of immediate supervisor; a comprehensive sexual harassment policy; a comprehensive and consistent process for terminating non-performing employees; a comprehensive equal employment opportunity policy; and an effective and properly staffed complaint investigation and response mechanism that involves the right levels of management at the right times.

Of all the controls employers consider for their programs, none is as important as the anonymous reporting mechanism and an effective fact-gathering investigative process. Without these now-common and thus expected mechanisms and processes, juries will hammer employers every time for putting employees in a no-win position wherein they will complain uniformly that they have no effective way to tell their stories without the risk of reprisal. And no matter what type of "employee first" culture an employer thinks it might have, the company can never expect that all employees always will feel safe in voicing concerns that often by their very nature are much too sensitive and potentially embarrassing to reveal without these mechanisms. To address these important controls, start by engaging a toll-free third-party reporting service to help anonymously collect employee concerns over toll-free lines. Then construct a thoroughly thought-through investigative policy and execution mechanism and put both in the accountability basket of the company's field human resource professionals.

As important as controls are in this area, don't overlook the need to finance this risk. Of course, that doesn't mean just go buy insurance; it means find the most financially efficient way to ensure that whatever the cost of risk is for employment liability, the company has got it covered. More and broader coverage vehicles are emerging regularly, so look carefully at who offers not only the best rate but the best terms, conditions, expert assistance and recommendations for loss control and prevention programs. Financial efficiency implies a need to figure out what the "working layer" of loss is, enabling the company to set aside the funding to cover retained losses and transfer only that portion of the risk that truly would be unpredictable.

Finally, in ensuring proper coverage of this risk, work with the right functional representatives, such as senior function heads in human resources, finance, operations and control. Approach this exposure as a team with the right functions, and the company will be well on its way toward minimizing the employment liability risk.