Saturday, July 20, 2013

Damages and Indemnification Challenges for Employers

Claims by Individuals

An employer using a personality assessment as part of its recruiting and hiring process may be subject to a variety of legal claims and charges by applicants and employees. These include claims based on alleged violations of Title 1 of the Americans with Disabilities Act, 42 U.S.C. § 12112 (ADA), including, without limitation:

  • The assessment is a pre-offer medical examination that is prohibited by 42 U.S.C. §12112 (d)(2);
  • The assessment screens out or tends to screen out an individual with a disability or a class of individuals with disabilities and the Assessment is neither job-related nor consistent with business necessity, violating 42 U.S.C. § 12112(b)(6);
  • The employer fails to select and administer the assessment in the most effective manner to ensure that the assessment results accurately reflect the skills, aptitude or whatever other factor that the assessment purports to measure, rather than reflecting an applicant’s impairment, and, as a result, violates 42 U.S.C. § 12112(b)(7); and,
  • The employer fails (i) to maintain the information collected from the assessment regarding the medical condition or history of the applicant on separate forms and in separate medical files and (ii) to treat such information as a confidential medical record, violating 29 C.F.R. § 1630.14(b)(1).
Damages available under Title I of the ADA include claims for back pay, front pay, compensatory damages and injunctive relief. Punitive damages may also be available if the employer has engaged in intentional discrimination against a protected class and has done so with reckless indifference to the federally protected rights of persons in that class (Please see the PunitiveDamages post).

If the assessment is determined to be a medical examination, each applicant (not just those who have a mental disability) who took the assessment has a claim against the employer under Title I of the ADA. Courts have repeatedly held that claims of improper disability-related inquiries or medical examinations, improper disclosure of confidential medical information, or retaliation may be brought by any applicant or employee, not just individuals with disabilities. As noted in the WhatAre the Issues post, some companies have more than one million applicants each year.

Indemnification Challenges

Any employer that continues to use pre-employment personality tests should seek indemnification from the testing company whose product it uses. If the employer is currently indemnified by the testing company, the employer should review the limits, restrictions and conditions of that indemnity.

The success of the testing companies in marketing employment personality tests over the past twenty years has created "systemic risk" for its customers. If one employer has violated the law and subjected itself to significant liability as a consequence of its use of an assessment provided by a testing company, then all customers of that testing company are similarly at risk.

Even if testing companies were willing to provide indemnification to all customers, those customers will have to determine whether the testing companies and their insurers have adequate resources to indemnify all customers. As Kenexa, an testing company now owned by IBM), consistently noted in its annual 10-K risk factor disclosures:
The failure of our solutions to comply with employment laws may require us to indemnify our customers, which may harm our business. Some of our customer contracts contain indemnification provisions that require us to indemnify our customers against claims of non-compliance with employment laws related to hiring. To the extent these claims are successful and exceed our insurance coverages, these obligations would have a negative impact on our cash flow, results of operation and financial condition.

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