Creating an employee handbook can seem like a daunting task for an employer. Some employers have few, if any, written policies in place when they begin the process. Others may have adopted individual written policies in the past with little, if any, consideration given to how the policies can or should fit together in a handbook. Common questions include:

• Which policies should be included and which are optional?
• What does the law require?
• Can I use one policy for multiple states?
• How should the handbook be formatted?
• How often should the handbook be updated?
• Can and should signed acknowledgments be required?

This post highlights the key considerations for private employers seeking to create, distribute and maintain their employee handbooks. In particular, this post:

• Examines the primary reasons for creating a handbook;
• Provides guidance on creating a handbook, including drafting guidelines, considerations for employers that are creating a handbook from existing policies and tips for organizing a handbook;
• Considers steps to ensure compliance with the National Labor Relations Act (NLRA); and,
• Highlights best practices for distributing and maintaining a handbook.

KEY REASONS TO CREATE A HANDBOOK

Although there is no federal law requiring private employers to provide handbooks to their employees, there are numerous reasons for employers to do so, including:

• A handbook provides an opportunity to formally welcome new employees, introduce the organization and explain expectations;
• Grouping various employment policies together in a handbook makes it easier for an employer to ensure that each employee receives copies of all relevant policies;
• A handbook is a centralized place for employees to look for answers to common questions such as how often employees are paid; and,
• Handbooks and signed acknowledgments can assist in an employer’s legal defense.

CREATING A HANDBOOK

Most employers begin the process of creating a handbook by deciding which policies to include. Some policies are required or highly recommended. Other policies are optional and their inclusion in a handbook largely depends on the employer’s preferences. For example, although some employers may have a telecommuting policy in their handbook, others do not because not all employers permit telecommuting. Accordingly, employers seeking to create a handbook for the first time should evaluate which policies they currently have and which policies they should implement. Employers should only include policies they intend to follow because failure to follow written policies can cause employee confusion, significantly damage morale and recruitment efforts and create legal liability, including discrimination claims.

Drafting Guidelines

Although a handbook must be tailored to meet the specific needs of an employer’s workplace, employers should consider the following when creating policies for a handbook:

• Using a positive and professional tone that matches the organization’s culture;
• Eliminating unnecessary complex or legal terms. Instead, handbooks should use plain language to explain the employer’s policies and procedures;
• Avoiding overly rigid disciplinary rules and any other language that could be interpreted as creating a contractual obligation requiring just cause for termination. Instead, give the employer discretion to discipline and terminate the employment relationship. For example, a handbook should not claim to list all possible reasons for termination of employment;
• Including enough information so that the policies can be understood, but avoid providing too much detail. A handbook should not overwhelm employees, for example, by including all office procedures, such as instructions on requisitioning office equipment. Employers often have a separate manual covering workplace procedures;
• Evaluating the demographics of the workforce. For example, if employees speak a language other than English, consider providing the handbook in an alternate language;
• Using situations that are familiar to employees when providing examples;
• Including contact information for an employer representative who employees can contact if they have any questions about the policies (see Welcome Statement).

Creating a Handbook from Existing Policies

If an employer is creating a handbook from existing policies, the employer should consider conducting an audit to confirm all existing policies are up-to-date. Because policies may have been created by different departments, it is also important to ensure consistency among policies before employees read policies as a single collection in a handbook. Before finalizing its handbook, an employer should be certain all policies:

• Comply with current law. In addition to an employer’s compliance and legal obligations, policies should demonstrate an employer’s commitment to adherence to current law because the policies in a handbook often become exhibits in an employment litigation or administrative charge;
• Are current with respect to the employer’s business practices. Employers must reflect any changes to their policies or procedures;
• Are internally consistent and do not contradict each other. For example, the complaint procedures in an equal employment opportunity policy, anti-harassment policy and anti-retaliation policy should be consistent with one another.
• Use one voice and make sense when read together. Although numerous people are often involved in creating the handbook, at least one person should read the handbook in its entirety before the employer distributes it to employees.

Tips for Organizing a Handbook

Because handbooks include numerous policies covering various topics, they can become unwieldy if they are not properly organized. Best practice is to:

• Organize policies by subject matter. Use section headings to break up the policies. For example, see the second part of this Note beginning with Structuring a Handbook: Introduction.
• Create a table of contents. Employees can more easily find a policy, or group of policies, if the handbook includes a table of contents.
• Consider using individual pages for each policy instead of including multiple shorter policies on the same page. Organize the pages in a loose-leaf binder so that individual pages can be replaced easily when a policy is updated.
• For online handbooks, consider online acknowledgment and verification of having reviewed policies.
• Include the date on the first page of the handbook or if using a looseleaf binder, on each page. This makes it easier to confirm that a handbook includes the most up-to-date policies.

DISTRIBUTING OR POSTING A HANDBOOK

Employers should make handbooks available to employees either electronically or by providing a hard copy:

• When the handbook is first created;
• At hiring, such as at new employee orientations;
• Each time the handbook is updated. If an individual policy within the handbook is revised, for example, the anti-harassment policy, an employer may choose to distribute or electronically circulate only the updated policy to employees if employees have already received copies of the handbook and the remainder of the handbook has not been revised.

Employers that are making handbooks available to employees for the first time should consider scheduling a meeting to introduce the handbook to all employees. Best practice is to designate a specific person to distribute or coordinate access to them. This individual is typically someone from the organization’s Human Resources department who is able to answer any questions that employees may have regarding the employer’s policies.

After an employer makes the handbook available, it must continue to ensure that all new employees receive electronic access or a hard copy. Most employers make handbooks available to new employees during new hire orientation. Some employers set aside time during orientation for new employees to review the handbook and ask any questions they may have as they read through the policies.

Employee Handbook Acknowledgments

Employers should include an acknowledgment of receipt, review and understanding at the end of their handbook. This minimizes the potential for employees to later claim ignorance of a policy as an excuse for non-compliance, particularly when non-compliance leads to termination of employment or another kind of adverse employment action.

The acknowledgment should include a disclaimer that nothing in the handbook creates an employment contract. Additionally, in nonunion settings, the acknowledgment typically includes an acknowledgment:

• Of at-will employment. For employees who have an employment agreement, the acknowledgment can include language that the employment agreement governs to the extent there is a conflict between policies in the handbook and the employment agreement; and,
• That the employer has the right to modify or delete policies without notice.

Employers should be diligent in tracking acknowledgment forms and should conform to the following best-practices:

• Set a deadline for return or completion of signed acknowledgments. An employer should follow up with any employees who fail to submit acknowledgments;
• Keep signed acknowledgments in the respective employee’s personnel file;
• For electronically signed acknowledgments ensure that state law does not place limits on the validity of e-signatures and consider maintaining a separate manually signed acknowledgment as well;
• Identify the title and date or version of the handbook for which the employee acknowledges receipt, review and understanding. If there is a later dispute about or lawsuit involving which handbook an employee received, a signed acknowledgment that specifies the particular handbook will be helpful evidence for the employer.

What to Do if an Employee Refuses to Sign an Acknowledgment?

If an employee refuses to sign an acknowledgment, the employer should Ask the employee to write “I refuse to sign this acknowledgment” and the date in his own handwriting on the acknowledgment. If an employee later challenges receipt of the handbook, the employee’s statement is helpful evidence for the employer.

If an employee will not write that he refuses to sign the acknowledgment, the employer should have the primary contact for handbook distribution or posting write “I gave [EMPLOYEE NAME] a copy of the handbook on [DATE]. [EMPLOYEE NAME] refused to sign the acknowledgment.” Another employer representative should be present to witness the employee’s refusal and the statement from the individual who distributes the handbooks. The witness should also sign the refusal to acknowledge letter.

MAINTAINING AN EMPLOYEE HANDBOOK

Employers must review handbooks periodically to ensure that all policies are current and lawful. Some employers choose to review their handbook annually. Others designate a particular person to monitor changes in the law or in the employer’s procedure on an ongoing basis. At a minimum, a handbook must be reviewed and revised, if necessary, when:

• There is a change in the law. For example, when the Genetic Information Nondiscrimination Act of 2008 (GINA) was enacted, employers revised their equal employment opportunity policies to demonstrate compliance with GINA’s prohibition on discrimination on the basis of genetic information;
• There is a change to the employer’s policies or procedures. If, for example, an employer decides to limit outside employment and creates a policy prohibiting outside employment, the policy should be added to the employer’s handbook; and,
• The employer expands into new states. The employer’s handbook likely will need to be modified to be consistent with state law and to incorporate any additional policies required by state law.

A revised handbook should indicate that it supersedes any prior handbooks so that employees are clear about which policies are current. Employers should distribute or post revised handbooks, reissue acknowledgment forms and collect signed acknowledgments from all employees. Additionally, when an employer distributes an updated handbook, it should keep copies of any older versions. If the employer is ever involved in litigation, it should be able to point to the written policies in effect at the time of the challenged employment action. Best practice is to keep individual policies for the longest statute of limitations period applicable under federal or state law.

The risk of violating federal, state, and local employment laws is present even before an employment relationship exists. The pre-employment process, including recruiting and interviewing, exposes employers to potentially significant legal liability. This post provides an overview of the legal risks associated with recruiting and interviewing under federal law and Iowa law, and identifies practical steps to minimize those risks.

In particular, this post:

• Explains the risk of inadvertently creating a for-cause employment relationship;
• Identifies the risks and potential liability for discrimination claims at various stages of the pre-employment process;
• Identifies exceptions to the general prohibition against pre-employment discrimination; and,
• Provides practical steps for employers at each stage of the pre-employment process.

RISK OF CREATING FOR-CAUSE EMPLOYMENT RELATIONSHIPS

In Iowa, employees are generally presumed to be at-will; although employers may inadvertently convert an at-will employment relationship into a for-cause employment relationship during the interviewing and recruiting process.

At-will employment means that either the employee or employer may terminate the relationship at any time, for any reason, unless the reason is unlawful (such as a discriminatory reason).

For-cause employment can only be terminated for a reason specified in an employment contract as grounds for termination. Grounds for termination can include anything lawfully contracted by the parties, such as termination for “cause,” disability, breach of the agreement, or other reasons.

Common Issues

The ease with which at-will employment can be converted to for-cause varies from state to state. The three most common ways that at-will employment is converted to for-cause employment are:

• Job Security. Conversion can occur if the employer makes oral or written representations about the nature of the employment relationship to prospective employees. Oral or written statements suggesting job security, permanent employment, or that a job will be available provided that the employee performs their job, have been held to create a for-cause employment relationship.
• Introductory Periods. Representations regarding an introductory or probationary period can also alter the at-will employment relationship by suggesting heightened employment security following the introductory period. Employers should be careful not to imply any guarantee or security related to continued employment in policies describing probationary periods.
• Discipline Policies. Employers should also be careful describing progressive discipline policies (that is, policies that outline progressively more severe disciplinary steps for repeat behavior) because those policies can imply that certain steps must be taken before an employee can be terminated, negating the at-will nature of the relationship.

Practical Tips

The following tips will help protect employers from claims that an employment relationship has been converted from an at-will relationship to a for-cause employment:

• Ensure that all employees involved in recruiting, interviewing, and hiring understand the difference between at-will and for-cause employment and that they are prohibited from making statements that limit or modify the at-will status;
• Review written policies, handbooks, offer letters, and employment agreements to ensure no language could be misconstrued as a representation about the permanency of employment;
• Decide whether probationary periods and progressive discipline policies are necessary. If they are, those policies should expressly state that they are not intended to alter the individual’s at-will employment status;
• Include a stand-alone disclosure at the beginning of the employment handbook stating that the employment relationship is at-will; and,
• Make statements about the at-will employment relationship as conspicuous as possible, including using bold and underlined text in all written material where that language appears.

RISK OF DISCRIMINATION CLAIMS

Discrimination claims can arise at any point during the pre-employment process, from advertising and describing a vacancy, to making an offer of employment. Employers should be aware of the possibility for discrimination claims and ensure that employees involved in the pre-employment process are trained to avoid potentially discriminatory practices.

In addition, the Equal Employment Opportunity Commission (EEOC) regularly sends testers through recruiting and interviewing processes to ensure compliance with federal employment anti-discrimination laws. The EEOC can bring independent claims against an organization it believes has engaged in discriminatory practices.

Protected Classes Under Federal Law

Federal anti-discrimination laws prohibit employment discrimination on several bases, including:

• Race
• Color
• Religion
• Sex (including pregnancy)
• National origin and citizenship
• Age (40 and over)
• Disability (including perceived disability)
• Genetic information
• Past, current, or prospective military service

Most states and some municipalities also have anti-discrimination laws that cover various protected classes. Some state and local laws extend greater rights and protections to employees and applicants, such as by treating marital status, sexual orientation, and smokers as protected classes.

Iowa law expands the Federal anti-discrimination laws by also prohibiting employment discrimination on:

• Creed
• Disabiliy (including HIV-positive status)
• Pregnancy
• Sexual orientation

Multi-state employers should consider using policies, forms, and other materials that are specific to a particular state or municipality to ensure compliance across all jurisdictions. Employers may also consider adopting policies prohibiting discrimination against generally recognized protected classes, even if not all are protected in each state where the employer operates.

The Mechanics of Discrimination Claims: Disparate Treatment and Disparate Impact

Discrimination takes two basic forms:

• Disparate treatment. Disparate treatment is the most blatant and obvious form of discrimination against applicants and employees based on their protected class. Disparate treatment discrimination occurs when an employer treats one applicant or employee differently than a similarly situated applicant or employee because of that individual’s race, color, religion, sex, or membership in another protected class.
• Disparate impact. Disparate impact discrimination is a more subtle form of unlawful conduct that occurs when a seemingly neutral policy or practice unduly disadvantages individuals on the basis of their protected class. For example, minimum height requirements and physical strength tests are facially neutral but may have a disparate impact on women.

The “BFOQ” Exception

Federal law provides for a limited exception to the prohibition against discrimination for a “bona fide occupational qualification” or “BFOQ.” The BFOQ exception applies where an employer can show that its preference for a particular characteristic, such as religion or sex, is reasonably necessary to the normal operation of that particular business or enterprise. The EEOC and federal courts construe the BFOQ exception narrowly. Before relying on a BFOQ defense, employers must consider if the trait is necessary for the position or business operations.

Common Issues

Discriminatory conduct during the pre-employment process can include, for example:

• Failure to hire;
• Discriminatory compensation;
• Discriminatory terms and conditions of employment (such as access to training);
• Discriminatory classification or segregation of employees or applicants;
• Discriminatory preferences in job postings or advertisements;
• Failure to provide reasonable accommodation in the application process under the Americans with Disabilities Act (ADA);
• Failure to provide reasonable accommodation for an employee’s sincerely held religious belief; and,
• Retaliation.

Iowa law explicitly prohibits the following conduct:

• Any person to refuse to hire, discharge, or otherwise discriminate in employment against any applicant or employee because of that employee’s or applicant’s protected class (Iowa Code § 216.6(1)(a)).
• An employer to advertise or publicize that individuals of any protected class are unwelcome, objectionable or otherwise unacceptable for employment, unless the exclusion is based on the nature of the occupation (Iowa Code § 216.6(1)(c)).
• Any person to request or require an HIV test as a condition of employment, or to terminate or affect the terms, conditions, or privileges of employment of any employee solely as a result of the employee obtaining an HIV test (Iowa Code § 216.6(1)(d)).
• An employer and an employee or prospective employee to make an agreement concerning employment, pay, or benefits in return for taking an HIV test (Iowa Code § 216.6(1)(d)).
• An employer to pay wages to an employee in any protected class at a rate less than the rate paid to other employees who are employed within the same establishment for equal work on equivalent jobs (Iowa Code § 216.6A(2)(a)).
• An employer to have a formal or informal policy excluding persons from employment or application for employment because of pregnancy (Iowa Code § 216.6(2)(a)).

Practical Tips

• Consider whether individuals lacking a particular qualification could perform the job in question;
• Ask a qualified human resources professional or attorney to examine job descriptions to ensure that they comply with anti-discrimination laws;
• Consider stating in the job description that the organization considers the particular requirement to be a BFOQ and cite the statutory section on BFOQs to minimize risk of discrimination claims;
• Apply the BFOQ consistently.

WHERE DISCRIMINATION CAN OCCUR

Claims of discrimination can arise throughout the recruiting and interview process. Areas that require special attention by employers include: the method of advertising openings, the language used in job descriptions, the questions on employment applications, the selection of interviewees, the timing of interviews, the questions asked during an interview, and pre-employment tests.

Advertising

Advertising is generally targeted to a particular audience and where a company advertises job openings may exclude certain groups. Limited or targeted placement can form the basis of a discrimination claim, particularly if the same limitation continues over time. For example, if an employer only advertises job openings in publications with audiences that typically exclude a particular protected class, such as an ethnic or age group, the employer may be subject to a claim that it disproportionately excluded a particular group.

Similarly, an employer that only advertises positions by word of mouth can be subject to a discrimination claim where its current workforce is predominantly or exclusively members of a particular class. A plaintiff may allege that the employer is intentionally perpetuating the current limited makeup of the workforce by only advertising the position by word of mouth.

Practical Tips

• Consider the methods and locations of job opening advertisements to ensure coverage across protected classes;
• Request statistics about the target and actual audience of particular media to ensure protected classes are not excluded;
• Advertise job openings in a variety of media designed to reach separate audiences; and,
• Consider whether the existing workforce is homogenous and if so, whether advertising strategies contributed to that result. Diversify those strategies to reach a broader audience.

Language of Job Descriptions

Employers should consider the skills and experience actually required for the job to ensure that each requirement is defensible. For example, a job description requiring that the individual must be able to lift up to 50 pounds may have a disparate impact on women. Where a job requirement tends to discriminate against or is biased in favor of a particular class, employers should ensure they can justify that requirement as a BFOQ.

A job description should never suggest a non-BFOQ preference for or bias against any particular protected class, whether explicit or implicit. For example, a job description should not use gender-specific terms, such as “he” or “she” or “waiter” or “waitress,” or express a preference for a characteristic that may indicate a violation of any other protected class, such as “young and energetic.”

A job description should also identify the essential functions of the position. These are the basic duties that an individual must be able to perform, with or without reasonable accommodation, to be qualified for the job. The EEOC and courts will generally consider these written requirements as evidence of the actual essential functions of the job. Essential functions can protect employers from discrimination claims by individuals who cannot perform these job duties even with reasonable accommodation. Employers should be able to justify any essential functions identified for a particular position.

Employment Applications

Employment applications should be designed to gather standardized information about applicants and provide employers with the opportunity to use objective information to screen unqualified applicants. Employment applications also allow prospective employers and employees to share information in a consistent format, which helps deter discrimination claims.

As with job opening advertisements, applications should be accessible in a variety of media and locations to avoid claims of disparate impact. For example, applications should not be available only online because potential applicants may have limited access to the internet or require assistance with the application. Reasonable accommodation by the employer, such as making applications available in large print, audio file, or braille, or providing assistance to individuals filling out the application, may be required.

Federal, state, and local law prohibits the use of employment applications that express a preference or limitation with regard to a protected class unless based on a BFOQ or other lawful exception. Employers should review all application forms to ensure that they do not express an unlawful preference or limitation or request information about a protected category. Questions on applications should be limited to those that reasonably relate to the job for which the applicant is applying.

Areas of inquiry employers should avoid on employment applications may include, for example:

• Age
• Religion
• National origin
• Marital status
• Childcare plans and plans to have children in the future
• Criminal history
• US citizenship (as opposed to the right to work legally in the US)
• Medical history or disability
• Workers’ compensation history
• Bankruptcy

Employers should also include in employment applications a statement that the employer is an equal opportunity employer and that any information collected is solely to:

• Determine suitability for the position.
• Verify identity.
• Maintain employment statistics of applicants.

Employers should also be aware that notations on applications or resumes may suggest that the employer unlawfully considered a protected characteristic in the hiring decision.

Selecting Interviewees

To avoid actual or perceived discrimination in the selection of interviewees employers should:

• Ensure that only those individuals whose qualifications are best matched to the written job requirements are selected for interviews;
• Consider documenting the reasons for selection or non-selection to minimize the risk of discrimination claims; and,
• Use multiple decision makers to ensure that no one person’s biases, explicit or implicit, are allowed to affect the hiring process.

Location and Timing of the Interview

Employers should accommodate reasonable requests to modify interview locations and timing, such as by providing wheelchair access or an accommodation for sight or hearing impairments. Federal law requires covered employers to provide reasonable accommodation to qualified individuals with disabilities, including both applicants and employees, unless doing so would cause an undue hardship. Examples of undue hardship include excessive cost and major disruption.

Interview Questions

Inappropriate interview questions create a risk of discrimination claims. Although polite personal conversation often accompanies an interview, even indirect or inadvertent questions about a protected class characteristic can provide grounds for discrimination claims. For example, asking an applicant when they attended a particular college or asking a woman if she has children can suggest an age bias or a bias against marital or family status. Interview questions should be limited to those that reasonably relate to the job for which the applicant is applying.

Pre-Employment Tests

Employers may require applicants to take pre-employment tests to demonstrate various skills and traits, such as:

• Computer, typing, and other work skills;
• Cognitive and physical abilities;
• Personality traits;
• Emotional intelligence; and,
• Language proficiency.

While pre-employment tests can help the employer screen and select applicants for a job, they also present liability risks if the tests are not valid, accurate, or properly implemented. Before performing any kind of pre-employment testing, employers should consider whether the test is absolutely necessary to evaluate candidates. Where it is not, employers should consider eliminating the test to avoid the associated potential liability.

Employers should ensure that accurate validity studies are available in the event of a challenge by the EEOC or other enforcement authorities. The validity of pre-employment testing is measured using jurisdiction-specific standards. For example, the EEOC has developed the Uniform Guidelines on Employee Selection Procedures (UGESP), a set of guidelines to help employers comply with Title VII and federal equal employment opportunity requirements. The UGESP apply only to those protected classes recognized under Title VII (race, color, religion, sex, and national origin). The guidelines are somewhat complicated, dividing testing into three different categories (criterion-related, content-validation, and construct) and outlining validation studies for each.

Employers are not strictly bound to comply with the UGESP, but courts give the guidelines weight in assessing the validity of various employment tests. Courts are also mindful of the cost that can be associated with UGESP compliance and have suggested that deviating from the guidelines may be acceptable for valid reasons, including the cost of strict compliance. The employer has the burden to demonstrate a test’s validity, however, and may not solely rely on the assurances of the vendor providing the test.

Pre-employment tests should be applied uniformly. For example, employers may test language skills where proficiency in a particular language is an objective job requirement but should ensure testing is uniform and that no assumptions about language proficiency are made based on national origin or citizenship.

Finally, the Employee Polygraph Protection Act prohibits most private employers from using lie detector tests either for pre-employment screening or during the course of employment.

Practical Tips

Carefully consider whether a test is absolutely necessary to evaluate candidates. If not, consider eliminating the test to avoid the associated potential liability.

• Evaluate the test’s potential for disparate impact;
• Consider if the test invades an applicant’s privacy;
• Understand how feedback is given and how data is stored;
• Ensure that accurate validity studies are available to support the test should it be questioned by the EEOC or other enforcement authorities;
• Ensure the test can be appropriately administered and scored;
• Apply the test uniformly to all applicants for the relevant position;
• Provide reasonable accommodation for individuals with a disability;
• Understand federal, state, and local restrictions on the type of test considered. Separate requirement apply to different types of tests, such as drug and alcohol testing and medical screening;
• Monitor changes in job requirements and update pre-employment tests if necessary;
• Ensure that managers understand the effectiveness, limitations, and appropriateness of tests for specific jobs; and,
• Consider hiring an expert to assist in measuring the validity of any pre-employment test.

Candidate Selection

Candidate selection is an obvious target of employment discrimination claims. To avoid the influence of explicit or implicit discriminatory bias in hiring, candidate selection decisions should be:

• Made by committee.
• Based on job-relevant criteria.

Additionally, employers should document the reasons for both candidate selection and non-selection. Documentation of final hiring decisions can support an employer’s defense if those decisions are later challenged.

Commercial general liability insurance (CGLI) is often used to manage risk on a construction project. However, CGL policies can contain gaps in coverage or exclusions that may leave a contractor or subcontractor without the anticipated protection. This Hartung Schroeder Practice Note addresses common business risk exclusions in CGL policies and provides guidance on how all project participants can ensure they are properly covered.

OVERVIEW

Claims for personal injury and property damage commonly occur on construction projects. Unfortunately, project participants (owners, contractors, and subcontractors) often fail to adequately address insurance coverage issues during the contract drafting process and only learn that they are not protected when a claim materializes.

Whether the owner or a third-party makes the claim, the injured party will first look to the general contractor and its insurance coverage. Therefore, contractors must both:

• Ensure that their own insurance policies are in place and afford appropriate coverage for all risks.
• Confirm that the policies of their subcontractors and sub-subcontractors do the same.

From the owner’s perspective, it is critical to obtain appropriate coverage because in the event of a loss, an owner wants to avoid any concern over whether the culpable contractor has sufficient assets to pay the claim.

This article:

• Provides an overview of the basic concepts of coverage under a commercial general liability (CGL) insurance policy.
• Explains the common “business risk” exclusions in a CGL policy.
• Identifies insurance pitfalls that often leave owners and contractors without the coverage they expected when a claim is filed.

INTRODUCTION TO CGL COVERAGE

There are many important components to insurance coverage on a construction project. Since no two projects and scopes of work are exactly the same, collaboration among the insured’s risk manager, insurance broker, and counsel is necessary to adequately assess and hedge against potential risks. Careful drafting of the insurance requirements in the subcontract is essential as the first step of protection to ensure alignment with the insured’s scope of work.

While the interpretation of certain CGL provisions varies from state to state, most CGL policies follow one of the standard formats issued by the Insurance Services Organization, Inc. (ISO), which contain many of the same basic options. In the construction industry, most CGL policies provide coverage on an occurrence by occurrence basis rather than a “claims made” basis. This means that the occurrence (as defined in the policy) giving rise to the claimed loss or damage must have happened during the policy period.

A CGL policy essentially provides coverage to the insured (contractor or subcontractor) for those sums the insured becomes legally obligated to pay as damages for:

• Bodily injury or property damage. Property damage is generally defined as physical injury to tangible property or loss of use of tangible property that is not physically injured.
• Caused by an occurrence. Most policies define an occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”While not defined in the policy itself, an accident is generally considered to be something that is not intended, expected, or anticipated. Therefore, coverage under a CGL policy is thought of in terms of negligence, as opposed to an intentional act.
• In the coverage territory. This pertains to where the occurrence giving rise to the damage happened. For example, if the policy insures a specific construction project, damages occurring off-site might not be covered.
• During the policy period. This means that the occurrence giving rise to the personal injury or property damage must happen during the policy period, even if the claim or lawsuit is filed after the expiration of the policy period.

Each of the foregoing requirements for coverage under a CGL policy has been widely interpreted by the courts and is subject to ongoing changes in interpretation.

COMMON “BUSINESS RISK” EXCLUSIONS

While there are many exclusions that can limit coverage under a CGL policy, there are a few key “business risk” exclusions related to construction work of which an owner, contractor, and subcontractor should be aware. These exclusions are primarily predicated on the fact that a CGL policy is designed to provide the insured with coverage against third-party claims for injury or damage as opposed to covering the insured for its own losses due to the need to repair or replace its own work. Parties and their counsel should carefully review all policy exclusions and consult with an insurance professional to understand their application and determine whether any exceptions to these exclusions are available through endorsements to the policy.

Some of the more common business risk exclusions include:

• “Your work” exclusion. This exclusion precludes coverage for damages to the insured contractor’s own work and materials. Essentially, coverage is not available to repair or replace the contractor’s own faulty or defective workmanship. In 1986, the language of this exclusion was clarified to confirm that it did not exclude losses arising from work performed by a party retained by the insured contractor to perform a portion of the work, such as a subcontractor, even though the subcontractor performed its work on the insured’s behalf.
• Owned property exclusion. Coverage is not provided for damage to property that is owned or leased by the insured. This can have implications for a developer who, either directly or through an affiliated entity, acts as its own contractor in performing construction on property it owns.
• Contractual liability exclusion. This endorsement essentially excludes coverage for losses the insured is obligated to pay by reason of the assumption of liability in a contract or any claims sounding in breach of contract. This excludes claims predicated on a contractual warranty that obligates an insured to repair or replace its own defective work. However, exceptions to this exclusion allow coverage for: losses the insured would incur in the absence of a contract, such as common law tort liability; or, where the insured assumes the tort liability of another, such as an indemnification obligation in a contract, but only if the injury or damage occurred after the contract was signed.
• Residential exclusion. These endorsements vary but typically exclude coverage for the construction of condominiums. Policies for condominium construction projects are more frequently being written with this exclusion, which may completely void coverage. The problem is exacerbated by the risk that a multi-family project, such as a rental apartment building, is converted to a condominium post-construction, but prior to the expiration of any statute of limitations applicable to claims associated with latent construction defects. Owners, contractors, and subcontractors constructing any type of multi-family residential project must take precautions to ensure that their policies, as well as those purchased by others for their protection, do not include this type of residential exclusion.

CRITICAL POLICY PROVISIONS AND ENDORSEMENTS

There are certain insurance provisions and features that contractors should insist on in their own policies and in those procured by subcontractors performing work on their behalf. Subcontractors who contract-out work to sub-subcontractors should similarly require that all lower-tier contractors procure policies with these same features. Most standard CGL policy forms do not automatically include these critical provisions and endorsements must be specifically requested to obtain the proper coverage.

Additional Insured Status

Essentially all contracts require the contractor or subcontractor to obtain CGL coverage for their work. The contract should also require the contractor or subcontractor to name as additional insureds on those policies each of the following, to the extent involved in the project:

• The owner, often a single-purpose entity.
• Any separate developer, often an owner-affiliated entity.
• All construction lenders.
• Any owner’s representative.
• Any construction manager.
• All higher-tier contractors.

These project participants must be accurately named because an additional insured may make a direct and immediate claim for defense and indemnity under that particular insurance policy in the event of any occurrence that results in bodily injury or property damage covered by the policy.

Absent the additional insured coverage, the owner or a contractor against whom a claim is asserted as a result of another’s negligence or defective work must first obtain a judgment against the culpable subcontractor or sub-subcontractor before being able to make a claim to the culpable party’s insurance carrier. In the meantime, the owner or vicariously culpable contractor (or their insurance carriers) is forced to fund the cost of the defense, including attorney’s fees, along with incurring the associated remedial costs before being able to recover against the responsible party’s insurance carrier.

Products and Completed Operations

Insureds may not be aware that their CGL coverage is only in place while they are constructing the project. Once construction is complete, coverage under the policy ceases unless the insured obtains an endorsement for completed operations. While the “your work” exclusion may preclude coverage during construction, once the project is completed and turned over to the owner for its intended use, a completed operations endorsement covers future losses arising from the insured’s defective work.

Damage to property resulting from the performance of defective work may not manifest itself until years after project completion. Parties should familiarize themselves with their jurisdiction’s statute of repose, which allows claims for latent defects to be brought several years after a project’s certificate of occupancy has been issued, sometimes as much as ten years or more. This property damage will only be covered if the CGL and excess liability policies include an endorsement for completed operations coverage.

The bigger problem faced by owners and contractors is ensuring that completed operations coverage is maintained by every party that performed work on the project for the duration of time claims may still be made. It is also critical to ensure that the completed operations coverage is continued for all additional insureds during the same statutory period because the coverage for additional insureds is not automatic.

Primary and Non-Contributory Coverage

It is not unusual for policies procured by multiple project participants to be implicated by a single occurrence and to be called on to cover the same resulting property damage. This usually occurs when a subcontractor’s performance results in physical injury to other tangible property, such as the owner’s furniture or expensive fixtures like millwork, and a claim is asserted against the contractor. While the contractor’s status as an additional insured on that particular subcontractor’s policy may enable it to seek defense and indemnity under the subcontractor’s policy, the contractor may also have coverage under its own policy. Rather than defending and paying the claim, the contractor and its carrier would likely prefer that the subcontractor and its carrier provide a defense and pay the claim.

This issue may be exacerbated in the event of a catastrophic failure of major building components resulting in damages that exceed the limits of primary coverage and implicate the excess insurance policies of culpable lower-tier contractors. Even if the lower-tier contractors’ primary carriers agree to indemnify the contractor, their excess carriers may argue that the contractor’s own primary coverage must first be exhausted before the excess carrier will agree to contribute to pay the loss.

All subcontracts (and sub-subcontracts) must, therefore, mandate that policies procured include a provision confirming that they are primary and non-contributory with other potentially-implicated policies, such as the contractor’s primary policy. Absent this language, the higher-tier contractor for whom work is being performed may not receive the protection it thought it paid for when contracting with its subcontractor.

ENFORCEMENT AND CONFIRMATION

Contractors and subcontractors must ensure that they are protected not only by their own CGL policy coverage but by all parties performing work on their behalf. Even where a sophisticated contractor or subcontractor uses form contracts that were properly vetted by counsel well-versed in coverage issues, these forms must be continually updated to address State court holdings that may impact the interpretation of standard policy provisions and changes in state statutes governing the scope and validity of indemnification and insurance provisions in construction contracts.

There are several steps a contractor can take to avoid a situation where an insurance carrier disclaims coverage when a claim is made or a lawsuit filed.

Flow-Down of Insurance Requirements

Contractors and subcontractors must ensure that each of their agreements contains a flow-down of all insurance requirements in their own contracts to all lower-tier contractors. These insurance requirements should specify:

• The same types and limits of coverage.
• That the policies name as additional insureds the owner and its lenders and affiliated entities, the contractor, and those subcontractors on whose behalf work is being performed.
• That all coverage be primary and non-contributory.
• That the carrier will provide ample notice (usually 30 days) of an intention to cancel the policy for non-payment or other reasons.
• A flow down of insurance requirements not only for CGL coverage, but worker’s compensation, automobile, and any other coverage the particular project or risk requires.

Adequate insurance protection is required even where a lower-tier contractor is also obligated to indemnify other project participants for damages and losses arising from or related to their work. Given the proliferation of anti-indemnity statutes in most jurisdictions, an owner or contractor cannot rely on indemnification alone. However, many anti-indemnity statutes expressly do not impact or limit coverage under insurance contracts that may provide coverage where the lower-tier contractor is contractually obligated to indemnify another for negligence or where indemnified parties are also named as additional insureds.

Obtain Proof of Coverage

Contractually mandating the proper insurance is only the first step. An owner or senior-tier contractor must also enforce those requirements and confirm that the required coverage was actually secured. Without confirmation, gaps and mistakes in coverage can occur.

However, confirming that all project participants have procured the required coverage can be extremely challenging, especially on larger projects. Many contractors and subcontractors do not obtain evidence of coverage from all entities furnishing labor, services, and materials to a project. More often the evidence obtained is either insufficient or does not accurately describe the coverage actually in place.

Identify All Project Participants

Subcontracts frequently require the lower-tier contractor to either self-perform the scope of work or identify all entities discharging their contractual duties. However, these lists are usually prepared at the start of the project and may prove to be inaccurate or incomplete as assigned work changes during the course of the project. To obtain an accurate list of all those performing work, contractors should start by monitoring the service of notices (often in connection with lien laws) where required by state statutes.

An additional step at the project level is also recommended. Contractors should require their job site supervisors to log all individuals and entities working on the project on a daily basis and use that list to routinely confirm that they have procured the required insurance coverage.

Another possible way to address this concern is for all contractors and subcontractors to contractually condition payment to lower-tier contractors on meeting their administrative responsibilities to submit appropriate proof that all required insurance coverage was procured at the start of the project, including proof of payment of all premiums, and provide evidence that coverage is maintained during the life of the project, including confirmation of renewal of policies.

Obtain Proper Proof of Coverage

Owners or contractors often find it difficult to obtain reliable evidence of required coverage. Many construction professionals rely on certificates of insurance to confirm that the coverage has been procured and are surprised when a carrier disclaims coverage based on the actual provisions of the policy.

Because an insurance certificate is generally prepared and executed by an insurance broker, a carrier may argue that the broker does not have the authority to change the policy terms in the absence of an executed endorsement issued by the carrier. Therefore, even if a certificate of insurance identifies additional insureds or states that the CGL policy is primary and non-contributory, the owner or contractor relying on the certificate alone may learn that the coverage identified was not actually purchased.

The only true evidence of insurance coverage is what is contained in the policy issued, including all endorsements. Claims submitted to carriers in reliance on coverage reflected in certificates of insurance are often rejected and the certificates proven to be wrong or, even worse, fraudulent. While the better alternative is for the owner or senior-tier contractor to obtain a copy of each complete policy, including all endorsements, this can be a logistical nightmare depending on the number of subcontractors on a particular project.

Some contractors on larger projects only obtain complete documentation from high-risk trades, often leaving themselves at risk for work performed by other trades. Other contractors employ specially trained staff that solely focus on gathering policies and analyzing evidence of coverage. These present business risks and considerations that should be carefully weighed and addressed by construction professionals at the start of a project.

Personnel tasked with gathering and reviewing insurance documentation must be properly trained as many traps exist. For example, some insurance companies recently started using a different endorsement for additional insured coverage. While the new endorsement confirms an entity’s additional insured status, it only does so for ongoing operations and does not provide critical completed operations coverage for the additional insured. In these instances, an owner or contractor sued for property damage resulting from a subcontractor’s defective work manifested following completion of the subcontractor’s work and acceptance of the project would then not be covered.

In this instance, a named additional insured must confirm that the policy also contains a second separate endorsement covering it as an additional insured for completed operations coverage. Both endorsements must be executed for those named as additional insureds to have coverage for any potential liability for latent defects during the entire period of any statute of repose. This is particularly important since the time for bringing a claim against a subcontractor’s performance bond surety may expire, whether by contract or statute, years before the statute of repose allowing for claims for latent defects in that subcontractor’s work. This may leave a gap between a contractor’s potential liability and its ability to seek recourse from its subcontractor’s surety, making insurance coverage an important tool to hedge risk.

Confirm Continuation of Coverage

Monitoring renewal of completed operations coverage for the period of any statute of repose is especially difficult after project completion. It can become a full-time job to ensure that all subcontractors and, in some instances, sub-subcontractors, continually renew coverage through the statute of repose. This is particularly true given that in tough economic times, many contractors go out of business. Financially frustrated contractors may fail to take necessary steps to ensure the insurance coverage contracted for remains in place following project completion.

Despite the difficulties, continuing to monitor and enforce these contractual insurance requirements after project completion is as important as doing so before the project starts. Whether contractors manage the risk proactively or reactively, it will be costly. However, the overall cost tends to be higher when an uninsured or underinsured claim occurs than when the risk is proactively managed and mitigated up front.

Make Safety and Insurance Coverage a Priority

A contractor can hedge risks by letting all lower-tier contractors know, as early as the bid process, that risk management is a priority for the contractor and the project.

It can also use the subcontractor pre-qualification process and questionnaire forms as proactive tools. A contractor has the opportunity to convey to prospective subcontractors its commitment to safety, risk management, and insurance by asking key questions and requesting specific information:

• In the safety section of the form, contractors can request information related to the subcontractor’s:
  • full-time safety personnel;
  • return-to-work programs;
  • drug testing policy;
  • safety disciplinary plan;
  • Occupational Safety and Health Administration (OSHA) violations; and
  • experience modification factor.
• In the insurance section, the contractor can specify the key endorsements required, such as:
  • additional insured;
  • primary insurance;
  • waiver of subrogation; and
  • notice of cancellation.

This conveys to a prospective subcontractor the general and specific insurance requirements for specialized trades and prepares it to procure compliant coverage should it be awarded the work.

Social media usage has revolutionized the way in which companies communicate with consumers. This Hartung Schroeder Practice Series is presented in five parts and provides practical guidance on the potential risks to a company attributable to the use of social media tools by the company and its employees. The Series explains:

• Part One: How Companies Use Social Media.
• Part Two: The Four Main Risks of Social Media Faced By Companies and Employers
• Part Three: The Use of Social Media in Employment Practices.
• Part Four: Issues Associated with Employee Use.
• Part Five: How to Create and Implement a Social Media Policy.

HOW TO CREATE AND IMPLEMENT A SOCIAL MEDIA POLICY

A properly drafted and enforced policy on the use of social media by employees is an employer’s most effective tool in protecting itself against legal liability and harm to its reputation and goodwill from the use of social media. In most cases, a properly drafted policy pertaining to employee use of social media will assist an employer in protecting its interests and guiding employees on acceptable and unacceptable online behavior.

However, policies are not one-size-fits-all. They must be tailored to the culture, needs, and realities of your specific workplace.

Some elements to consider in creating and implementing a social media use policy include:

• Stressing the ownership and ability to monitor the company’s computer systems and related equipment and explaining that no duty of privacy can be expected with the usage of these systems.
• The company’s level of tolerance for personal use of social media.
• Whether the company should permit or even require use of social media for marketing and business development.
• How the company will handle employees who post arguably inappropriate, but not unlawful, posts such as illicit photos, profanity, or other potentially derogatory content.
• How the company will comply with laws protecting employees’ rights to engage in lawful non-working time and off-duty conduct, but still ensure nothing damaging is posted online.
• The company’s strategy to preserve good business relationships and promote a positive corporate image.
• How the company will train employees once the policy is in place so they understand what is forbidden (for example, one person’s definition of “crude” may vary from another’s).
• How the company will monitor compliance with and enforce the policy.
• What the repercussions will be for violations.
• Keeping the policy simple and reactive to ever-changing social media.

Use the policy to remind employees that public or workplace social media activity is not private and that the employer has the right to correct unproductive or harmful employee social media use as necessary. Include (in conjunction with related internet and email use policies) appropriate restrictions covering:

• Employee use of company technology.
• Employee use/misuse of company intellectual property assets, including confidential, proprietary, and privileged information.
• Employee use/misuse of third-party intellectual property assets.
• Protection of third-party privacy in the context of employees’ personal use.
• Harassment of other employees.
• Defamation and disparagement.

Train human resources management on appropriate and effective employee monitoring and enforcement of policies, restrictions, guidelines, and contract provisions, subject to compliance with employees’ privacy rights. However, do not impose unnecessary, impractical, or intrusive restrictions on employee use of social media. Disproportionate restrictions might undermine employee morale and invite non-compliance, without real benefit to the company in terms of protecting its property, reputation, or employees.

Social media usage has revolutionized the way in which companies communicate with consumers. This Hartung Schroeder Practice Series is presented in five parts and provides practical guidance on the potential risks to a company attributable to the use of social media tools by the company and its employees. The Series explains:

• Part One: How Companies Use Social Media.
• Part Two: The Four Main Risks of Social Media Faced By Companies and Employers
• Part Three: The Use of Social Media in Employment Practices.
• Part Four: Issues Associated with Employee Use.
• Part Five: How to Create and Implement a Social Media Policy.

ISSUES ASSOCIATED WITH EMPLOYEE USE

Employee misuse of social media can be devastating to a company, both legally and from a public relations perspective. Social media employee banter relating to protected traits such as race or gender may violate an employer’s anti-harassment policy and create a hostile work environment, just as it does when communicated in person by employees. Employees griping on social media about their work environment may impact the employer’s reputation but may also provide a window for the employer into employee morale and its potential negative impact on productivity. Social media may be used by employees, whether intentionally or not, to divulge trade secrets, or copyright-protected or other confidential company information.

Currently, the law with respect to employment and social media is practically devoid of any useful guidance for companies. Instead, employers must rely on basic principles related to employee privacy, anti-discrimination and harassment law, intellectual property law, and other applicable law, to discern how to best use (and control the use of) social media in the workplace.

The risks associated with employee use of social media include:

• Loss in productivity. Employees’ use of social media sites during working hours can result in a decrease in productivity.
• Inappropriate conduct among employees. Social media sites can be, and are often, used as communication tools between employees. However, at times, these employee communications may cross the line into harassing, threatening, discriminating, or other unlawful conduct that can subject the employer to liability.
• Disclosure of confidential or proprietary information. Employees’ disclosure of confidential information could result in the employee’s breach of his or her confidentiality and nondisclosure agreement, violate the terms of a confidentiality agreement between the company and a third party, causing the company to be in breach, cause the company to lose protections of its proprietary intellectual property rights, waive the attorney-client privilege, and violate securities laws.
• Unlawful disciplinary action for certain non-working time and off-duty conduct or otherwise protected social media use. Content posted anonymously is very difficult to police and several state laws prohibit employers from taking adverse action against an employee for engaging in lawful, non-working time and off-duty conduct, including political activity or affiliations specifically protected under state law. Employers must also be cautious about taking adverse action against an employee whose social media use could be protected under the NLRA or federal and state whistleblower laws, such as the Sarbanes-Oxley Act. Finally, government employers have the additional burden of avoiding any violations of their employees’ First Amendment and other Bill of Rights protections by disciplining them for content posted on a social media site.
• Liability for employee content. It is unclear to what extent, if any, an employer may be liable for an employee’s statements in social media. However, the FTC Guides suggest that both employers and employees may be liable in certain circumstances, such as when an employee posts messages on a discussion board promoting a company’s product without properly disclosing the employee’s relationship to the company (see Example 8 of 16 C.F.R. § 255.5). Similarly, laws against harassment, discrimination, and other unlawful conduct that can subject an employer to liability apply just as forcefully to social media conduct.

In light of these risks, it is important to send a clear signal about employer expectations for employee use of social media, by adopting a social media policy or provision in a company employee handbook. If your company has not developed policies for use of social media by your employees, do it now.

Continue to Part Five: How to Create and Implement a Social Media Policy.

Social media usage has revolutionized the way in which companies communicate with consumers. This Hartung Schroeder Practice Series is presented in five parts and provides practical guidance on the potential risks to a company attributable to the use of social media tools by the company and its employees. The Series explains:

• Part One: How Companies Use Social Media.
• Part Two: The Four Main Risks of Social Media Faced By Companies and Employers
• Part Three: The Use of Social Media in Employment Practices.
• Part Four: Issues Associated with Employee Use.
• Part Five: How to Create and Implement a Social Media Policy.

THE USE OF SOCIAL MEDIA IN EMPLOYMENT PRACTICES

Companies must recognize the employment law implications of use of social media during each stage of an employee’s tenure with the company. Failure to use social media cautiously and intelligently may create legal exposure. For example:

• Employment Decisions. If employers make adverse employment decisions based on protected class information learned through social media, they violate laws prohibiting discrimination. For example, an employer that learns about a candidate’s religion or sexual orientation through social media and decides not to hire the individual based on that information has violated anti-discrimination law.
• Employee Privacy. Numerous states have passed laws prohibiting employers from requesting applicants’ and employees’ social media account information. These laws are deemed necessary to protect account holders’ privacy and to prevent discrimination that may occur once an otherwise undetected protected class characteristic is revealed.
• NLRA Violations. The National Labor Relations Act (NLRA) protects the right of employees to exercise Section 7 Rights, including engaging in concerted activity to change their workplaces for the better. An employer that discovers through social media that employees or applicants for new positions are undertaking these activities and makes adverse employment decisions based on this information has violated the NLRA.
• Background Checks. The Fair Credit Reporting Act (FCRA) and its state equivalents regulate employers’ use of consumer reports in conducting background checks. Although an employer’s in-house search of online resources is unlikely to fall within the federal FCRA, state requirements may be more stringent. For example, an employer’s own search of social media that results in an adverse employment action taken without proper notice and disclosure compliance may create liability under broader state law. In addition, under the federal law, failure to provide required notice for relying on information in a consumer report, such as social media findings, may lead to liability.

Companies using social media in hiring decisions and background checks should:

• Maintain consistent protocols for social media screening of applicants regardless of their race, gender, or other protected class status to avoid disparate treatment liability.
• Develop a basic understanding of the activities protected by the NLRA to comply with those protections and respect the rights it protects.
• Develop a basic understanding of the requirements of the FCRA and its state equivalents to promote the lawful use of background checks.
• Access privacy-protected electronic resources only with proper authorization to avoid liability under laws governing electronic resources, such as the Stored Communications Act, state-specific prohibitions on seeking such information, and common law privacy rules.
• Comply with the terms of use of social media websites.
• Check facts and ensure that employment decisions are made using accurate information and account for the prevalence of false or misleading information in social media.

In addition, companies using social media in termination and adverse employment action decisions should:

• Not take retaliatory adverse employment action because of protected activity expressed through social media. It is common for federal and state laws to prohibit retaliation for the exercise of rights protected by statute, and employers considering terminations, demotions, or other adverse employment activity should ensure that the reason underlying the decision does not violate employee rights.
• Understand that some states have enacted laws barring employers from requesting applicants’ and employees’ login information to social networking sites.
• Comply with the NLRA in the use of social media for adverse employment decisions. If employees use social media to communicate about union activities or exercise other Section 7 Rights (such as discussing conditions of employment), refrain from restricting employee speech or taking adverse employment actions that could violate the statute. Even non-unionized workplaces must respect rights conferred by the NLRA.

Continue to Part Four: Issues Associated with Employee Use.

Social media usage has revolutionized the way in which companies communicate with consumers. This Hartung Schroeder Practice Series is presented in five parts and provides practical guidance on the potential risks to a company attributable to the use of social media tools by the company and its employees. The Series explains:

• Part One: How Companies Use Social Media.
• Part Two: The Four Main Risks of Social Media Faced By Companies and Employers
• Part Three: The Use of Social Media in Employment Practices.
• Part Four: Issues Associated with Employee Use.
• Part Five: How to Create and Implement a Social Media Policy.

THE FOUR MAIN RISKS OF SOCIAL MEDIA FACED BY COMPANIES AND EMPLOYERS

Although there are many potential benefits of undertaking these and similar activities, before entering the social media arena companies should identify and prepare for the associated risks. Companies should be particularly alert to:

• The terms of use that govern the relationships between the company, the third-party site owners, and the end users of branded pages and channels;
• The framework for endorsements and testimonials;
• Securities-related risks; and,
• Employment-related risks.

BRANDED PAGES AND CHANNELS

If a company creates customized pages or media channels on third-party social media sites (for example, the company’s fan page on Facebook or channels or communities on YouTube), the company should review the terms of use and privacy policies the third-party providers have put in place to govern the use of those sites, and have effective procedures in place to monitor usage and content, and to respond to negative posts.

Terms of Use

Company activities must comply with the terms of use of any applicable third-party social media platforms. Terms of use can vary significantly from site to site and may include important restrictions. Particular attention should be paid to terms relating to:

• The actions of the users who access, use, and interact with the service.  Many social networking sites (including Facebook, YouTube, and Twitter) prohibit the uploading or posting of content by any user that infringes a third party’s rights, including intellectual property, privacy and publicity rights. The company should assess whether such conditions will act as a deterrent and a meaningful enforcement mechanism, and what its liability might be in circumstances where infringing content is posted on its page.
• The process by which takedown notices are received under the safe harbor provisions of the Digital Millennium Copyright Act (DMCA).  In practice, the third-party site owner usually bears the responsibility for responding to these notices. The DMCA provides online service providers with a safe harbor under certain circumstances for copyright infringement resulting from acts by their users (for example, an infringing video posted by a user on YouTube).
• Any age limits for users of the platform.  The third-party site owner usually bears the responsibility for establishing age limits for users.
• The existence of any use restrictions.  Prohibitions or restrictions on the use of the social media platform, including restrictions on use for advertising or marketing, or for promotions and contests. Many social media platforms are beginning to restrict promotions and contests.
• Any issues related to ownership of the company’s IP. Ownership of intellectual property used on, or information collected or generated through use of, the site (for example, any of the company’s copyrighted material and trademarks that might be posted on the site, or customer information the company collects through the site, or UGC posted to the company’s page).
• Remedies and recourse in the event of conflicts.  Recourse available to the company if its rights are violated (such as infringement of its copyrights) by other users.
• Privacy policies, which can vary significantly among sites. Companies should ensure that the site owner’s privacy practices for any data disclosed by the company or collected by the company from users of the site are appropriate and sufficient for the company’s intended use of the site, and monitor such privacy policies regularly for updates and changes.

Monitoring of Usage

Despite the efforts by social media platforms to impose terms of use prohibiting individuals from posting content that infringes a third party’s rights, a company may nonetheless find that content is posted that:

• Infringes its intellectual property rights;
• Is defamatory or otherwise damaging to the company’s reputation; or,
• Contains confidential or proprietary information.

The company should implement procedures that will bring offensive or infringing postings to its attention. To protect against unwanted posts and mitigate the damage of such posts on their branded pages, the company can:

• Institute a monitoring program. The company should monitor social media sites, services, and applications (and websites generally) for potentially damaging comments about the company or its products or services and infringement of the company’s intellectual property. The company should consider whether to engage a third-party monitoring vendor or use company employees.
• Put together an internal response team to handle damaging statements and content. Responding appropriately to damaging statements and content posted by third parties may require coordination by multiple individuals across many company areas. The company should consider creating a response team that includes, for example, members of senior management, legal, corporate communication/public relations, marketing; and human resources (in case employees are responsible for the damaging activities).
• Do not ignore defamatory comments or misleading information. The company should not ignore misleading statements being made about the company or its products. The appropriate response, however, will depend on the type and severity of the conduct at issue and could include: if the offending post appears on a third-party website, requesting that the post be taken down; if the offending post appears on the company’s own website, including a disclaimer reserving the right to remove content at the company’s discretion and ban abusive users; deleting false or misleading postings if possible or replying to the post with correct information; responding via other social media outlets, such as a company blog or fan page; responding with a press release; and taking legal action (for example, sending a cease and desist letter or filing a lawsuit). However, drawbacks to litigation include the potential need to identify an anonymous author, bad publicity, and the high cost of litigation.

Companies should enforce their response policies consistently.

Endorsements and Testimonials

Companies that use bloggers, influencers, or other endorsers to advertise their products need to be aware that if endorsers fail to disclose a material connection between the endorser and the company (such as payment, free products, or other perks from the company to the endorser), both the endorser and company may face regulatory scrutiny. They may also face backlash from consumers who might feel as if they have been duped or that a blog or other social media post is a glorified advertisement.

The Federal Trade Commission (FTC) revised its Guides Concerning the Use of Endorsements and Testimonials in Advertising (FTC Guides) in 2009. The FTC Guides provide a general principle of liability for communications made through endorsements and testimonials, stating: “Advertisers are subject to liability for false or unsubstantiated statements made through endorsements, or for failing to disclose material connections between themselves and their endorsers. Endorsers also may be liable for statements made in the course of their endorsements.”

In March 2013, the FTC again reminded advertisers to disclose material connections in its revised guidance for .com disclosures.

The FTC has indicated that:

• Endorsers in social media, along with sponsoring advertisers, are subject to liability for failing to make material disclosures relating to the endorsement relationship (for example, gifts, employment, or other connections and circumstances).
• The endorsement relationship itself may trigger the obligation to disclose.
• Advertisers need to take reasonable steps to ensure that material disclosures are made.
• Advertisers cannot rely on the remoteness of the social media endorsers or on the advertiser’s lack of control over them to escape liability.
• Advertisers are technically liable for a remote endorser’s failure to disclose. An advertiser’s ability to avoid discretionary regulatory enforcement due to the endorser’s failure to disclose is a function of the quality of the advertiser’s policies, practices, and policing efforts.

In light of the FTC Guides:

• Companies that provide products to a blogger, influencer, or other endorser for purposes of a product review should never instruct the endorser regarding what to say in the review, or ask to review or edit the review prior to posting.
• Companies must disclose material connections with third-party endorsers and establish procedures to advise endorsers to make the necessary disclosures, such as through social media and endorser policies.
• While companies should provide endorsers with up-to-date, company-approved product information sheets, those information sheets should not reflect the companies’ opinions or include prices.
• In the event of a negative review, companies have the option of not providing products to the endorser for future reviews.
• Companies should caution their personnel about engaging in inflammatory disputes with endorsers (known as flaming) on any review or other community-based sites.
• Companies should monitor product reviews made by endorsers to ensure that the claims made are truthful and can be substantiated.

Recent enforcement actions suggest that the FTC is actively policing online disclosures, especially as they relate to endorsements and testimonials given by influencers through their social media channels. Companies should establish a system of monitoring endorser communications on social media about or on behalf of the company.

Securities-Related Risks

While social media presents an attractive channel for public companies to communicate with their investors, market professionals, and the public at large, the company should ensure that disclosures are appropriate and conform to applicable legal standards, and that those standards are understood and followed by the company’s employees and agents. Some key securities regulations that may be applicable include:

• Regulation FD. Regulation FD prohibits selective disclosure of material nonpublic information. If such information is disclosed, it must be disseminated by methods of disclosure “reasonably designed to provide broad, non-exclusionary distribution of information to the public.”
• Rule 10b-5. Rule 10b-5 of the Exchange Act prohibits companies from making untrue or materially misleading statements and omitting material information.
• Regulation G. Regulation G limits companies’ use of non-GAAP financial information. Generally, a company cannot disclose non-GAAP financial information unless it is accompanied by comparable GAAP financial measures and a reconciliation of the information.
• Forward-looking statements. The Private Securities Litigation Reform Act of 1995 (PSLRA) contains a safe harbor for certain forward-looking statements made by companies under limited circumstances. In order to benefit from this safe harbor, written statements must be identified as forward-looking statements and be accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements. For more information on these requirements, see Standard Document, Forward-Looking Statements: Standard Safe Harbor Legend.

Before a company adopts social media as a form of communication and disclosure, it must ensure that the proper controls are in place. The company:

• Must be careful not to violate Regulation FD through selective disclosures on social media aimed at market or securities professionals and not the public at large.
• Should create programs to educate its employees on insider trading rules and liabilities, the importance of Regulation FD’s prohibitions on selective disclosure, and keeping the company’s most important confidential information internal to the company. Employees need to know what information they can and cannot communicate electronically in order to stay within the limits of compliance. These programs, together with meaningful and well-circulated corporate Regulation FD and insider trading policies, will help to prevent violations in the first instance. If a problem should arise, these steps may tip the balance in the company’s favor when the SEC decides whether or not to bring an enforcement action.
• Should verify that all mandatory disclaimers regarding forward-looking statements and non-GAAP financial measures are included with any electronic disclosure.
• Should regularly monitor its websites and social media presence to ensure that the discussion is appropriate, the dispersal of information is compliant with the securities laws and, more simply, that these vehicles are being properly and lawfully used. The company also should conduct routine searches for the use of the company’s name and corporate logo or other image to ensure that false rumors or other forms of market manipulations are not occurring.
• Must carefully plan, execute and periodically revisit a strategy that ensures that its use of social media is compliant with securities laws and that it is protected against any abuse.

Continue to Part Three: The Use of Social Media in Employment Practices

Social media usage has revolutionized the way in which companies communicate with consumers. This Hartung Schroeder Practice Series is presented in five parts and provides practical guidance on the potential risks to a company attributable to the use of social media tools by the company and its employees. The Series explains:

• Part One: How Companies Use Social Media.
• Part Two: The Four Main Risks of Social Media Faced By Companies and Employers
• Part Three: The Use of Social Media in Employment Practices.
• Part Four: Issues Associated with Employee Use.
• Part Five: How to Create and Implement a Social Media Policy.

HOW COMPANIES USE SOCIAL MEDIA

Companies are taking advantage of social media in a variety of ways to promote brand awareness and to interact and communicate with customers. Common practices include:

• Use of branded pages. Branded social media pages created and hosted using a third-party service, such as Facebook or Instagram, allow companies to quickly and easily establish a social media presence. The official Starbucks fan page on Facebook has over 36 million fans and counting. The Starbucks YouTube channel has over 116,000 subscribers and over 45 million upload views of videos. On Instagram, Starbucks has over 12.5 million followers. And almost 12 million people are following Starbucks on Twitter and over 280,000 on Pinterest. Although these statistics fluctuate, they are a reminder of the importance of social media in the economy.
• Promotions and contests. Many companies are using their social media presence as a platform for promotions, by offering sweepstakes and contests within or founded on social media and user networks.
• User-generated content (UGC). Companies frequently and increasingly create promotions centered around UGC, for example by urging consumers to submit content-rich descriptions of why they love a certain product or service.
• Word-of-mouth marketing via blogs and influencers. Word-of-mouth marketing typically refers to endorsement messaging. Specifically, an endorsement is an advertising message that consumers are likely to believe is a reflection of the opinions and beliefs of the endorser rather than the sponsoring advertiser. Examples include providing products to third-party bloggers to create (hopefully favorable) product reviews, offering giveaways on third-party blogs, or creating a company-sponsored blog. Many companies are using amplified word-of-mouth marketing, by actively engaging in activities designed to accelerate the conversations consumers are having with brands, including the creation of Facebook applications based on a company or its product.
• Customer service and feedback. Social media can also foster customer feedback and engagement with a brand. Companies are using social media, such as Twitter, to receive customer feedback and provide nearly instantaneous customer service, which many consumers have come to expect.
• Responding to rumors and negative publicity. Companies can use social media to quickly respond to rumors or other negative publicity. For example, after two employees of Domino’s Pizza posted a video on YouTube in which they adulterated the chain’s food, the CEO of Domino’s Pizza responded by posting his own video, apologizing for what consumers saw and assuring them that such things were neither condoned nor practiced at the company. Both traditional media and the blogosphere applauded his open communication and willingness to engage in a conversation about the problem.
• Disclosure of information to the public. Social media can provide companies with the ability to more effectively reach more actual or potential customers, investors and/or shareholders. Notably, the SEC now recognizes social media channels of distribution for required and other public information disclosures (either to meet regulatory obligations or in connection with individual securities transactions).
• Employment practices. Human resources departments are increasingly using social media as a research tool to gather information for important staffing decisions, such as hiring new talent and terminating employment.

Continue to Part Two: The Four Main Risks of Social Media Faced By Companies and Employers.