We are all familiar with the various classes of people provided for by both the Federal and State fair employment practices acts. These include the traditional race, gender, age, disability and many more too numerous to be listed here. Well, hold on to your hats as there seems to be a new one being added. It now seems that the unemployed are being added to the list.

The unemployment rate seems to be on the decline, i.e. around 8.3% still without jobs. However, this is still 3% higher than when the financial "fit hit the shan" almost 4 years ago. Obviously, when the ranks of the unemployed are high, employers who are looking to hire are inundated with candidates. So much so that some employers are now disqualifying qualified applicants by advertising that "the unemployed" need not apply.

In light of this phenomena in job advertisements, Congress in their usual, under-informed method of operating, as well as several states, have begun the process of amending their anti-discrimination laws to add "unemployed status" as a covered class. New Jersey has already passed such legislation and believe it or not, the California legislature is also considering a bill. I can only wonder if this tendency to stupidity will ever end. In the meantime, be forewarned ...

Can You Refuse To Hire A Felon?
Suppose you are looking to hire someone for a sensitive position? One where the person hired will handle large amounts of money and/or materials. Your normal practice is to conduct a criminal background check on all applicants. What do you do when during your initial telephone interview, the applicant reveals a significant criminal felony conviction for the distribution and sale of narcotics, she/he has served time, and is now on probation?

Most employers would normally reject this applicant out of hand. The basis for your decision would be two-fold. First is the timing of the recent conviction with the second being the very nature of the offense. The person you are looking to hire could be responsible for large amounts of money, merchandise or even supplies. You conclude that if this person is willing to sell drugs for money, they are too a high a risk for you to hire them. However, like the situation with the "unemployed" person noted above, don't be so hasty to act.

In this case (it is real), the applicant filed a charge of discrimination with the Equal Employment Opportunity Commission (EEOC) alleging race discrimination. Your initial reaction, which was mine as well, is "You have got to be kidding."

You conducted the interview over the phone so that you could not see what race the person was. Secondly, your decision to not hire was based on a legitimate business reason. You would think this would be more than enough to defend your position. Well, it was not ...

The Equal Employment Opportunity Commission decided that they would expand the overall scope of their investigation and began looking at this employer's entire hiring practices including its use of criminal background checks. They have taken the stance that an employer's policy or practice of not hiring someone because of a criminal conviction is a violation of Title VII of the Civil Rights Act of 1964 unless the policy or procedure can be show nto be a necessary business practice.

They start by using statistics that show that African-Americans and Hispanics are convicted at a higher rate than other races. They then extrapolate this to mean that employment decisions which have a criminal conviction component create an adverse impact on the two classes which they have labeled "adverse impact discrimination" which they define as a "substantially different rate of selection at all levels of employment."

It must be noted that both the Fair Credit Reporting Act (FCRA) and the Equal Employment Opportunity Commission as the enforcement agency have established the overall legal framework. Note that they are very serious about this issue as evidenced by the recent agreement entered into by Pepsi where Pepsi agreed to pay over 3 million dollars and to provide job offers and managerial and supervisor training to settle the case.

Here in California, an employer cannot ask questions about any arrest that did not end in a conviction and may not get this information from other sources. Even if the employer does gather this data, but does not use it in its employment decision, the fact that they had it could have a chilling effect on their final decision, which would be very difficult to overcome if challenged. The best way to protect yourself is the development and implementation of a policy that takes into consideration the actual offense, the timing (6 weeks ago or 16 years ago) and of course the very nature of the job that you are looking to fill.

This is very similar to what you go through when doing an interactive process with an employee who is ready to return to work. Employers need to be thorough in your hiring process and if someone is going to be rejected because of a criminal conviction, be sure to go that next step to ensure that you have all the information needed to make an informed and defensible decision. And of course document, document, document everything in case you are challenged.

And to add fuel to the "big brother is watching you" fire ...

The following is a direct quote from a recent Board of Equalization flyer (Publication 165):

"Board of Equalization (BOE) permit and license verification visits help educate business owners and keep our tax system fair".

"Most business owners know they need a state seller's permit to sell or lease merchandise in California ..."

I cannot argue with this statement. It is the next paragraph that scares me:

"As part of the Statewide Compliance and Outreach Program (SCOP), Board of Equalizattion representatives (SCOP specialists) conduct door to door visits to nonresidential businesses. They visit individual businesses to educate business owners regarding their tax responsibilities, to make sure the business has the required state tax and fee permits they need, and to make sure the business has a city or county business license, if one is required. In addition, they verify/update Board of Equalization account information and review business operations compared to returns filed to provide guidance on proper reporting." You can limit what they see, so if someone from the Board of Equalization arrives, ask for specifics as to what they want to see.

This article is an excerpt from the April 2012 edition of From The Hotline published by Stuart Baron & Associates and Workers' Compensation Claims Control. It is used with permission under the copyright of Stuart Baron & Associates.

If employers could have influence over their cost of workers' compensation insurance, wouldn't they want to know how?

If insurance agents would help their employer clients lower their costs, wouldn't that be a valuable service?

Most employers consider the renewal date of their workers' comp policy to be the most important annual date for their policy. Unfortunately, employers have been misinformed by the insurance community and this is not the most important annual date.

Yes, the renewal date is when the incumbent carrier offers a new 12-month policy with their rates. This is also the date when the employer's new Experience Modification is used to modify the rates the employer will pay. The Experience Modification is an important factor that rewards (lowering the Ex-Mod) for employers with little or no claims and penalizes (raises the Ex-Mod) for those employers who have had greater than expected claims for the employer's industry and size.

The application of the Experience Modification is a State process that applies to employers who meet a minimum annual premium. One of the goals of the Experience Modification process is to promote low claims activity and to provide a means to compare that success between employers.

The most important annual date to employers is the review and evaluation of all claims information from the employer's workers' compensation carriers before this data is presented to the California Workers' Compensation Rating Bureau. This data determines the Experience Modification that in turn calculates what the final rates the employer's incumbent, or any other insurance company, can offer when the policy renews. This event occurs approximately six months into the employer's policy term. The information provided includes payroll (per classification) and the actual value of each claim the employer may have incurred over the last 4 years. All insurance companies are obligated to use this Experience Modification factor.

Just before the information is sent is the time the claims information needs to be reviewed and perhaps questioned to make sure it is an accurate reflection of the employer's claims. In my experience, the majority of the value for open claims at this time can be lowered — which will result in a lower Experience Modification factor — which results in a lower future premium paid by the employer. This is really the most important time for employers to be involved — armed with advisors to review claims and audit payroll, the employer has a golden opportunity to reduce their future premiums.

Workers' compensation is unlike other insurance programs. Think of it as a credit line. Use it and you must pay it back plus more. So, workers' comp is more of a way of financing workers' comp claims.

It is amazing to me is that this most important annual opportunity for employers is continuously ignored by insurance agents, insurance companies, and employers (who typically are not informed of this opportunity). Those employers who know about this process become immediately engaged and involved and actively participate in this review process.

Any insurance broker who is not working with their clients to manage this information in an effort to reduce employer's cost is committing malpractice and should be dismissed. Unfortunately, I continue to see that most insurance agents overlook this important time because they are either disorganized, do not know what to do, or just don't care.

Insurance companies also seem to not have any financial incentive to lower employer costs. Even Warren Buffett, Chairman of Berkshire Hathaway, a large insurance holding company, commented that since open claims are like free money,we have all of these extra funds to invest to increase stockholder value and higher profits. (Stockholder Letters)

Facebook Frenzy Over Password Privacy Misses the Bigger Legal Point: Most Social Networking Profile Content is Off Limits for Hiring Decisions

Unless you took an early Spring Break on a deserted island over the last week, you've seen the explosion of media stories surrounding the practice by some employers of asking applicants for their Facebook passwords in order to view a profile (or Wall) that is set for viewing only by the individual's "friends," and therefore not publicly accessible.

The reaction was swift and almost universal condemnation of the practice as an invasion of privacy. One law professor likened it to asking for the applicant's house keys, in order to have a look around their personal living space.

Facebook's website focused exclusively on the potential privacy issue: The company strongly condemns the trend and urges users of the service never to share account information: "The most alarming of these practices is the reported incidences of employers asking prospective or actual employees to reveal their passwords. If you are a Facebook user, you should never have to share your password, let anyone access your account, or do anything that might jeopardize the security of your account or violate the privacy of your friends. We have worked really hard at Facebook to give you the tools to control who sees your information."

Two U.S. Senators who just happened to be interviewed on National television on Sunday morning (March 25, 2012), called openly for a formal investigation by the U.S. Justice Department to determine whether asking applicants for their password violates the Federal Stored Communications Act. They also called upon the Equal Employment Opportunity Commission to investigate whether the practice itself (presumably just asking for the applicant's password or viewing his/her social networking profiles) runs afoul of discrimination laws. There are rumblings about Congressional hearings and proposed legislation to ban this approach to the pre-employment process.

Turning to the Internet for information about job applicants isn't new. Public and private sector employers often perform Google searches for information on potential new hires and draw tidbits from many sources, including social networking sites. In a study last year of 300 hiring managers and recruiters, Palo Alto-based social networking monitoring service Reppler reported that 76% of hiring managers look at applicants' public Facebook profiles. An additional 56% are looking at Twitter.

Whether the practice of asking applicants for their Facebook passwords is legal or even advisable will be debated thoroughly in the weeks to come. The current Facebook frenzy about password privacy misses entirely the reality for hiring managers and Human Resources professionals: much of the information they are likely to see on an applicant's social networking profiles is simply off limits in any hiring decision. And, this is true even for information that is publicly available.

Under the laws enforced by the Federal Equal Employment Opportunity Commission (EEOC), it is illegal to discriminate against an applicant or employee because of that person's race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability or genetic information. An employer may not base hiring decisions on stereotypes and assumptions about a person's race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability or genetic information.

The California Fair Employment and Housing Act (FEHA) also prohibits employment practices that discriminate against applicants or employees on the basis of race, religious creed, color, national origin, ancestry, physical disability (including HIV-positive status) or mental disability, medical condition (specifically cancer-related conditions and genetic characteristics), genetic information (added in 2012), marital status, sex (including pregnancy, childbirth, or related medical conditions, and gender), age (40 years and older), sexual orientation, and gender identity or expression. It includes discrimination based on a perception that a person is a member of a protected class or is associated with a person who is, or is perceived to be, a member of a protected class.

Personal profiles on social networking sites such as Facebook and MySpace are a rich source of information about an individual: gender, sexual orientation, marital status, number and ages of children, national origin or ancestry of family members, religious affiliations or organizations, even preferred charitable giving. Pictures with family and friends don't have to be risqué to be revealing. Posts about the activities of spouses and children — activities, schools, ages, health issues, etc. — are all conveniently collected in a single location on the applicant's Facebook wall. Employers cannot use the majority of this information for any lawful purpose.

Consider the most common areas of employment discrimination lawsuits based on rejections of a job applicant: age, gender, national origin/race, religion disability and recently, genetic information.

Age Related Inquiries: Most hiring managers in today's environment know that they can't ask applicants for their age, birth year, or even the year they graduated from high school because it might reveal age-related information that they cannot use for any lawful purpose. So, what happens when the same savvy manager logs onto the Facebook profile and stumbles on a flurry of "Happy 50th Birthday," posts from the applicant's friends and family?

It's not a defense to a later age discrimination lawsuit to say, "Well, I didn't ask the applicant for his birthdate." You cannot use it to inform a hiring decision, just as you must ignore the applicant's date of birth if it is prominently displayed on an educational transcript properly obtained to verify the conferral of a required degree.

Gender, Family Status And Related Information: The Equal Employment Opportunity Commission provides the following pre-employment inquiries may be regarded as evidence of intent to discriminate when asked in the pre-employment context:

• whether applicant is pregnant;
• marital status of applicant or whether applicant plans to marry
• number and age of children or future child bearing plans
• childcare arrangements
• employment status of spouse
• name of spouse.

Now, consider the typical Facebook profile: posted pictures with family (including children), postings about school activities for the applicant's children, affiliations that may include religious schools, information that discloses the employment status, chatter about the travails of childcare or spouses, and more.

Religious Questions: Questions about an applicant's religious affiliation or beliefs (unless the religion is a bona fide occupational qualification) are generally viewed as non job-related and problematic under federal law. Do you attend church or synagogue? Do you belong to any outside organizations? What clubs or organizations do you belong to?

From a cursory review of a Facebook profile or "news feed," it is likely that your organization will uncover a lot of personal information. Some of this information will serve no employment-related purpose or will provide information regarding an applicant or employee that would be better left unknown.

National Origin Questions: Improper interview questions include questions about the applicant's "native language," or where parents and grandparents were born. Now, consider the Facebook post that congratulates the applicant's grandparents on their wedding anniversary, including a picture with the creative caption: "Gramma and Grampie's wedding picture from the old country."

Disability Related Inquires Are Strictly Forbidden: The Equal Employment Opportunity Commission's published "Prohibited Employment Practices" states: "As a general rule, the information obtained and requested through the pre-employment process should be limited to those essential for determining if a person is qualified for the job; whereas, information regarding race, sex, national origin, age, and religion are irrelevant in such determinations. Employers are explicitly prohibited from making pre-employment inquiries about disability."

Acquisition of Genetic Information — Including Family Medical History: Facebook and other social media sites are also a high risk area for acquiring improper genetic information about applicants and employees.

The Federal Genetic Information Non Discrimination Act (GINA) prohibits requesting, requiring, or purchasing Genetic Information about an applicant, employee or family member. And, it defines "genetic information" to include family medical history — down to fourth cousins. The Genetic Information Non Discrimination Act allows acquisition of genetic information that is publicly and commercially available. But, the Equal Employment Opportunity Commission expressly states that this does not apply to the acquisition of genetic information from "social networking sites and online media sources which require permission to access from a specific individual."

A manager who reads about an employee's family medical history on the applicant's Facebook page will not be able to defend against a charge by saying that the information was "commercially and publicly available" if the employee has set the privacy settings to "friends only." This is true even if the employee has previously accepted a "friend request" from the manager, or voluntarily provided his/her password to the employer for a pre- or post-employment process.

If a manager or Human Resources specialist learns protected information by doing a simple Google search, it will likely be an inadvertent acquisition. But, in-depth searches or visiting sites that are likely to uncover genetic information about applicants, employees or their family members violates Genetic Information Non Discrimination Act standards and California law. A post such as: "I can't wait for this weekend, when I'm participating in the Susan G. Komen Race for the Cure in honor of my grandmother and my sister" is enough information to cross the line by providing information you can't possibly use to make an employment decision. Just acquiring the information violates the tough new standards.

Avoiding Unlawful Recruiting And Hiring Practices
This isn't a new area of the law. And, it isn't a "gray" area either. If you cannot properly ask the applicant for the information in a personal interview, you cannot obtain it from any other source and then use it to deny an otherwise qualified individual an equal employment opportunity. The California Fair Employment and Housing Act specifically prohibits employers from asking questions about protected characteristics (or activities associated with those characteristics, such as family status and religious affiliations) unless the characteristic is related to the applicant's ability to perform the job. The California Fair Employment and Housing Act covers employers with as few as five employees.

Managers or others tasked with conducting interviews should be aware of areas involving impermissible inquiries. Remember, disability-related questions are unlawful on their face — the applicant has an automatic discrimination charge without having to prove the information was used improperly to deny employment. With every other area of protection, it is not the question itself which is unlawful — it is how the manager/employer uses the answer.

For example, if an applicant is asked about marital or family status and then is not hired because of those factors, the employer has discriminated on the basis of gender. Likewise, if a manager inquires about a person's age, date of birth or date of high school graduation, and then does not hire the person because of an objective determination that he or she does not have the skills for the job, no discrimination occurred. But, if the manager does not hire the person because of his or her age, and he or she is otherwise qualified for the job, the result is unlawful age discrimination.

Prevention Strategies
Develop concrete pre-employment practices, including background investigations and personal interviews. Then, train your Human Resources staff and managers or supervisors who make hiring decisions on what's lawful — and what's not. Develop a policy on whether the employer will search the internet or social media sites in hiring. If you decide to use social media in hiring, do the searches on applicants consistently and in a uniform manner. Notify candidates in writing about what your company gathers on the web.

Designate a non-decision maker to conduct the search. The individual should be properly trained to avoid improper access and to screen out information that cannot be lawfully considered in the decision-making process. That way, the non-decision maker can segregate the information that can't be used to make an employment decision, and can keep the decision maker from having to later explain how he or she ignored the plethora of information from the applicant's Facebook profile.

Finally, train your decision makers to rely only on objective, job-related requirements for vetting candidates for every job. Then, apply consistent documentation procedures to capture the non-discriminatory reason for the ultimate decision to hire or reject particular candidates.

Boardroom protocol is being exposed every day on the internet. Does Rupert Murdoch really think we can't see beyond his prepared remarks to determine for ourselves the "tone at the top" coming from his boardroom?

Imagine what happens when 100 million people on Twitter can now get involved in the conversation happening in the boardroom from the outside in.

I know that many people in the boardroom are still on the sidelines about social media. What will it take to get your board ready to tackle their willingness to learn what is happening on the internet? Will it take seeing your company's name in the news before you add digital literacy to your director's education? I can see the incredulous look on the directors' faces when the board is called on for their oversight of digital issues.

I can only imagine a board being characterized as:

• "illiterate": showing or marked by a lack of personal knowledge with the fundamentals of a particular field of knowledge.
• Or maybe a board will be portrayed as "ignorant": Lacking knowledge, information, or awareness about something in particular: "ignorant of social media."

Worse yet is as a board leader to know that it is true. So I ask, when are you planning to get digital and social media on your agenda? Who is going to be responsible for taking action to get it on your fall board agenda? Whatever title you have in the boardroom (board chair or lead directors), you are setting the boardroom agenda. Are you waiting for your CEO, Corporate Secretary, Corporate Counsel, Audit Committee Chair to bring resources and spend budget to get this to happen for you and your board?

Time To Learn Where Your Customers Spend Their Time
Social media accounts for 22.5 percent of the time that Americans spend online, according to "State of the Media: The Social Media Report." This is compared with 9.8 percent for online games and 7.6 percent for e-mail. You can read more in the New York Times.

This is a voluntary opportunity for you to keep your board current and relevant. If you're waiting for a regulatory push to get your boardroom thinking digitally, you may not be ready to take action and learn what is happening 24/7 on computers and mobile devices around the world.

Here are some statistics about digital connectivity to help you consider moving this up as a priority. Digital knowledge leads to opportunities for companies to grow, reach and help their customers, employees, investors and stakeholders. Are your business revenues connected to connectivity in Asia? Has digital connectivity impacted new patterns in:

• Consumer and supply chain behavior?
• Operating model innovations?
• Security and transparency issues?

Connectivity In Asia
Growth in mobile Internet usage is outpacing them all:

• 45% of metro Chinese are online via a mobile device at least monthly, up 21% from 2010.
• 11% of metro Indians access the mobile net monthly, up from just 1% in 2010.
• Japan saw the biggest jump in mobile Internet usage: 57% of adults now have access, up 24% from last year.

Are you challenging yourself to look beyond the status quo, to understand how changes are disrupting your business? Is your board operating in a twentieth-century mode? If so, your business is being challenged to expand communications, attend to shareholder concerns, address issues of trust, take on new technologies (cloud, social media) and more, in order to succeed in and meet the needs of the twenty-first century.

Preparing Our Board Leaders For What's Next
When most of our board chairs were deciding on a college major, the founders of Google were not yet born. Fast forward a couple of decades (or more), and we see that the career landscape has changed so drastically that jobs need new definitions: social media strategist, app developer, mobile web engineer.

How can you prepare for what's ahead? Cathy Davidson has a few ideas. She is a professor at Duke University and suggests that "65 percent of today's grade-school kids may end up doing work that hasn't been invented yet."

"We're 15 years into something so paradigm-changing that we have not yet adjusted our institutions of learning, work, social life, and economic life to account for the massive change."

www.theiirc.org The International Integrated Reporting Committee (IIRC)

Corporate Spring — Is It Only A Matter Of Time?
Salesforce.com CEO Marc Benioff last week predicted that following the Arab 'spring' uprising against dictators facilitated by social media, it would only be a matter of time before similar demonstrations would unseat CEOs — what he referred to as 'corporate springs.'

Benioff has said, "We need to pay attention [to the Arab spring] because it is not so long from now that we'll start to hear about corporate springs and enterprise springs. We've seen Mubarak fall, Gadaffi fall — when will the first corporate CEO fall for the same reason? Because of unhappy customers rising up, or not listening to their employees. Not paying attention. Because it is more important to listen than ever before. That is the social revolution."

On Leading A Digitally Intelligent Board:

1. Time is now to get your board "on board." Schedule a briefing to level-set the board on the fundamentals of your social media risks and opportunities:
   1. Have your board briefed on social media's impact on your business, competitors and mentions of key executives.
   2. Identify where your business is positioned in the conversation: Google, Yahoo, Bing, Facebook, Twitter, LinkedIn. Understand the sources where you can go to gain independent information and business intelligence.
   3. Expand your sources of information on the business beyond management reporting.
2. As you start asking digitally literate questions of your CEO, have a baseline "Social Media for the Boardroom" assessment of your company from an enterprise perspective:
   1. Know the risks on how your company is using social media;
   2. Have a map of your company's engagement:
      1. What marketing is doing for outbound conversations, along with other departments' usage (human resources, customer service, etc.)
      2. What is being said by whom on major social media sites: Google, Facebook, Twitter, LinkedIn.
   3. Become familiar with your own website from a corporate governance and investor relations perspective;
   4. Identify what policies are in place for employees, contractors, etc.;
   5. Begin the discussion on your business readiness to manage crisis communication on social media;
   6. Identify how your board is being portrayed in social media. Think executive and board compensation, say on pay, etc.

Use this briefing and/or assessment to introduce your board to the fast-changing communications happening on line.

If your board is beyond this basic information, it would be great to hear how you got this ball rolling. I'd love to hear how you see this digital business mandate being managed in the boardroom. Do you see a committee taking this on in their charter, or will individual board members be stepping up with "digital expertise and skills" to guide the conversations?

This is the third and final installment in a three-part series of articles on the ten questions all prospective captive owners should ask themselves (or, that their financial representatives should ask them) to help in the captive formation decision making process. Part 1 in the series can be found here, and Part 2 can be found here.

Forming a captive insurance company is an incredibly big decision. To help decide if you should form a captive, please answer the 10 questions, the last three of which are presented below.

Am I comfortable placing money into a business enterprise for an extended period of time?

When forming the captive insurance company, the insured — the person forming the captive — must place money into the captive so that from day one, the captive can pay claims. While some people use jurisdictions that have a low initial capital requirement, the Internal Revenue Service will look at the captive's ability to pay the actual claims underwritten, making a low initial statutory capital requirement moot.

In addition, the captive can't do anything to jeopardize its financial position regarding the risks it has underwritten, so removing money via dividends or loans can't be considered until the captive has developed adequate reserves and surplus (usually 3-5 years minimum). So, after placing capital into the captive, you have to leave it there. Are you financially able and willing to do this?

Am I committed to lowering the cost of my risk?

Captives should be used in conjunction with an overall plan to lower the cost of insurance coverage. As such, are you ready to undertake risk minimization strategies?

For example, if your captive underwrites a cyber-risk policy, are you willing to purchase anti-hacking services from third-party vendors? If you underwrite an employment practices policy, are you willing to hire a third party human resources company to help with your internal HR policies?

Am I willing to add another set of corporate responsibilities to my schedule?

Remember, you're starting another business. That means you now have additional corporate responsibilities to undertake — more reports to read, another set of corporate meetings to hold, etc. A properly run captive has at least one annual meeting, quarterly reports and standard ongoing conversations with the captive manager about a variety of issues. Do you have the time to engage in this activity, and do you even want to?

You'll notice that I've specifically mentioned nine items, and yet the title of the article states there are 10 questions. In theory, the tenth question to ask is, do you want to lower your taxes — which is a trick question because everybody would answer yes.

Underneath the captive transaction is a tax mitigation event. In each year in which the insured pays a premium, he is also lowering his taxable income. This money is placed into an insurance company, which, if it writes less than $1.2 million in premiums, can elect to be taxed on its investment portfolio rather than its gross income. And when the insured sells the captive (or liquidates it after 15-20 years of operation) the transaction is a capital gains transaction.

However, if this is your primary motivation in forming the captive, you will run into a legal buzzsaw called anti-avoidance law, which stands a high probability of taking away the deductions associated with the insurance premiums (but only after you've claimed them for a few years, creating an even bigger headache). In short, this should not be the primary reason to form the captive, but is instead a happy benefit thereof.

This is the second installment in a three-part series of articles on the ten questions all prospective captive owners should ask themselves (or, that their financial representatives should ask them) to help in the captive formation decision making process. Part 1 in the series can be found here, and Part 3 can be found here.

Forming a captive insurance company is an incredibly big decision. To help decide if you should form a captive, please answer the 10 questions, the second three of which are presented below.

Have I seen my insurance prices increase?

Sometimes, simply being in a certain line of business can mean you see insurance costs increase despite your individual loss experience. For example, OB/GYNs have incredibly high insurance costs, simply because of the nature of their work.

And some individuals — depending on their geographic location and despite having an excellent loss history — have seen sharp increases in their premiums for certain types of coverage. For example, after Hurricane Ike in Houston, property owners saw their property premiums increase.

For people in this situation, a captive makes tremendous financial sense. Remember that most large insurance companies spend between 20 percent and 30 percent of their gross revenue on selling, general and administration expenses. Captives, in contrast, are much leaner and have far lower overhead, thereby lowering the overall cost of insurance.

As a corollary to the above point, captives can also provide stable pricing. When the public's premium for a particular line of insurance increases, a captive's may not, depending on the experience of the parent company.

Captives focus on a smaller number of insureds. Therefore, if the insureds also control their risk, they can work to prevent premiums from increasing, thereby creating a more stable pricing environment.

Have I started an asset protection or estate plan?

Asset protection is the legal discipline of mitigating, or attempting to mitigate, the negative impact of various financially and legally catastrophic events, while estate planning is the process by which the client plans for the disposal and dispersion of his estate on death. A captive insurance company, while primarily a risk mitigation tool, also has ancillary benefits.

Primary among these ancillary benefits are the fact that they also provide some degree of asset protection (by segregating assets into a separate business entity) and estate planning (operating in a manner similar to a family limited partnership). However, these are not and should never be the main reason for forming a captive.

Am I committed to a long-term business plan?

That is, am I willing to see this through for at least 3-5 years? Captives require a long-term commitment; you can't simply start one and then end it a year later.

There are many reasons for this. First, because a captive is an insurance company — and therefore what an economist would call a financial intermediary — it takes at least several years for the captive to build up capital and reserves to become a truly independent company.

However, the owners have to let the captive actually go through the process to get there, which takes time (and the time value of money).

Second, a captive should also be part of an overall risk-mitigation plan, meaning that the company is probably going to engage in certain policies and practices to lower their long-term cost of risk. But, again, it will probably take several years for these plans to take effect.

Third, starting and then ending a captive after only a few years will probably draw unwanted regulatory scrutiny.

The above reasons — considered alone — are all good reasons for form a captive. But we'll add to the list in the next installment.

This is the first in a three-part series of articles on the ten questions all prospective captive owners should ask themselves (or, that their financial representatives should ask them) to help in the captive formation decision making process. Part 2 can be found here, and Part 3 can be found here.

Forming a captive insurance company is an incredibly big decision. To help decide if you should form a captive, please answer the 10 questions, the first three of which are presented below.

Has there been a problem with one of my existing property and casualty insurance plans?

For example, have I had a difficult time getting a claim paid, have I have a hard time reaching my agent, or have I found the service to be lacking?

Two personal stories should help to illustrate this point. I have several friends who are corporate counsel, meaning they are attorneys whose client is a corporation rather than an individual. When asked what their biggest problems are, dealing with insurance companies tops the list.

Or, consider another story from my personal experience. I had a real estate development corporation client that had a claim related to Hurricane Ike. It took the company two years and the actual filing of a lawsuit to receive payment on their claim. During those two years, the property could not be rented, negatively impacting the company (which eventually dissolved).

Most professionals in business for a number of years typically have at least one insurance company horror story to tell. This is a prime reason to form a captive: to take control of the captive in order to prevent an insurance company horror story from happening to you.

Do my current policies cover all my risks?

Even if you have an insurance policy, it's likely there are big gaps in your coverage. For example, most manufacturers have inadequate (or non-existent) product liability and product recall insurance.

I was recently looking at an employment practices policy for a company that had an annual cap of $300,000 — which is not going to provide adequate coverage in case of a large claim. In short, most policies don't have adequate coverage for certain risks that, should they occur, could seriously jeopardize a company's financial well-being.

A captive insurance company can help to fill gaps in coverage, ultimately creating what I call an insurance tapestry where third party policies cover standard risk and the captive covers specialty risk.

Can I actually negotiate the coverage terms with my current insurance carrier, or do they hand me a policy to sign?

Remember that an insurance policy is in fact a contract between the insured and the insurance company.

Case law provides an excellent example of this benefit. The Beech Aircraft Company was sued in the early 1970s, but their insurance company maintained complete control over the attorneys during litigation; the insured had zero input.

Beech did not like their attorneys — in fact, they went so far as to file a motion to remove their counsel a few weeks before trial. The court denied this motion and Beech went on to lose the case to the tune of $21.7 million. Because of this loss, Beech formed a captive in order to gain control of their attorneys during litigation.

There are many other contract terms that can be included in the policy — in fact, the only limitations are commercial reasonableness and legality (which are standard restrictions on a contract).

The above three reasons are all great reasons — in and of themselves — to form a captive. However, in Part 2 of this series, we'll add to the list.

Political pundits continue to argue the advantages and disadvantages of President Obama's health care reform act (i.e., Patient Protection and Affordable Care Act). Early projections of the potential cost were estimates at best and even the Congressional Budget Office estimates of the cost were seriously questioned by most (i.e., proponents thinking they were too high, opponents thinking too low). In a report¹ released last week by the non-partisan Congressional Budget Office, the latest projections showed:

• The Congressional Budget Office and the Joint Committee on Taxation now estimate that the insurance coverage provisions of the Affordable Care Act will have a net cost of just under $1.1 trillion over the 2012–2021 period — about $50 billion less than the agencies' March 2011 estimate for that 10-year period.
• The Affordable Care Act's provisions related to insurance coverage are now projected to have a net cost of $1,252 billion over the 2012–2022 period (see Table 2 in the report, following the text); that amount represents a gross cost to the federal government of $1,762 billion, offset in part by $510 billion in receipts and other budgetary effects (primarily revenues from penalties and other sources).
• Fewer people are now expected to obtain health insurance coverage from their employer or in insurance exchanges; more are now expected to obtain coverage from Medicaid or the Children's Health Insurance Program or from non-group or other sources. More are expected to be uninsured.

Whether or not you are for or against health care reform, the projected costs of this program are much higher than initially anticipated. Some of this cost increase is directly tied to the way the program was initially introduced. The Congressional Budget Office completes its analysis over a ten year period. The first few years of the program, once approved, offered limited benefits and changes but started to collect taxes to help fund it. When we look at the program today, those years of no cost are cycled out of the projection with additional years with costs now included. So some of the cost increase should be expected, but there is more to consider.

First of all, costs continue to escalate and it will be harder to "bend the trend" and get the system under control. As initially predicted by some experts, it is more obvious that fewer people will be covered through the exchanges and more groups will be willing to pay the penalty and discontinue their benefit programs. These undesirable changes show some of the flaws of the proposed program.

The President's proposed gross cost of about $900 billion has nearly doubled to $1.76 trillion, with the net cost increasing substantially. Although there are many advantages to the new program, the projected cost is much different than anticipated by those voting for the program. The advantages fail to offset the price tag, but is the price worthwhile? Some recently observed examples in my sphere of influence include:

• Introduction of Health Information Exchanges: San Diego County is one of the Beacon communities where hospitals are now able to communicate with each other, transferring valuable medical record information to assist with the care in other facilities. A recent study showed that almost 90% of those being readmitted within 30 days of a stay go to a different facility. Oftentimes that facility knows nothing about what happened at that stay and usually orders tests that are unnecessary if they had access to what happened elsewhere. This is now a reality in San Diego County based upon funding from the Patient Protection and Affordable Care Act.
• Creation of Accountable Care Organizations and Coordinated Care Organizations: Accountable Care Organizations and Coordinated Care Organizations are being developed in many communities. The Patient Protection and Affordable Care Act encouraged providers and risk bearing groups to get together and establish entities that, through the assumption of risk, would be able to impact the cost of care. These are being established all over the country. In Oregon, Governor Kitzhaber recently introduced the Coordinated Care Organization concept and will be establishing these through the State of Oregon as an extension of the Accountable Care Organization concept. Significant activities are underway and progress being made.

Yes, the cost of the Patient Protection and Affordable Care Act has changed. It is more expensive. Yes, some advancements have been made and/or are in progress. These, although encouraging, don't offset the increased costs.

The big question is whether or not the system would have been better without the Patient Protection and Affordable Care Act. This will not likely result in agreement. The big question is, are we moving in the right direction? From my perspective, we need solutions or we will experience financial costs far worse than projected under the recent Congressional Budget Office projections.

¹ http://cbo.gov/sites/default/files/cbofiles/attachments/03-13-Coverage%20Estimates.pdf

Workers' Comp Is Different
While rating providers in group health is a long-practiced endeavor, its elements and parameters have not significantly migrated to Workers' Compensation. Efforts to translate group health provider quality measures to Workers' Compensation have fallen short of the mark because they omit several factors crucial to Workers Comp.

Quality medical performance indicators in Workers' Comp encompass medical treatment, outcome and cost factors similar to those in general health, but they also include non-medical functions. In Workers' Comp, those non-medical elements can be primary drivers of cost, quality, and outcome.

Return To Work, An Indicator Of Performance
A major quality goal in Workers' Comp is return to full work. Responsibility for achieving that goal rests with the treating physician. Another major quality goal in Workers' Comp is return to maximum or full work capacity at the least cost. This article explores the many non-medical functions of treatment that spell quality in Workers' Compensation, factors that must be considered in rating doctors' performance.

For instance, multiple and repeated studies have shown that early return to work is a major indicator of better outcomes in Workers' Comp (Google search: Return to Work Studies in Workers Compensation). The overwhelming take-away from these studies is that the sooner employees return to work after a work-related injury, the sooner they are re-acclimated to the job and the lower the overall cost of the claim.

Alternatively, the longer the employee is kept off work, the higher the cost of the claim, with reduced chance of successfully returning to work. Studies show a 1:1 correlation between length of time off work and returning to work — ever. Treating providers are the major driver in returning claimants to work. Therefore, early return to work and reduced overall work loss are key indicators for evaluating medical provider performance.

Cost Measures Of Performance
Also important to rating provider performance in Workers' Compensation is the issue of cost. Two quantifiable generators of unnecessary costs are frequency and duration of medical treatment. Because Preferred Provider Organization, Managed Care Organization and Medical Provider networks discount each unit of service delivered, the tendency of some providers is to exploit both frequency and duration of treatment to overcome their discounted fees. Individual providers' frequency and duration of medical treatment for specific injury types should be measured and compared with the performance of their peers treating similar injuries.

Another comparative quality indicator is direct medical costs. Billed costs are not a true performance indicator by themselves. However, assessing billed costs with paid amounts or percentage reduction of charges recommended by bill review is a more accurate measure.

Prescriptive Practices
Recent research indicates a problem of opioid misuse or abuse in Workers' Comp. Evaluate prescribing practices of individual physicians by monitoring current data, thereby creating an opportunity to intervene. Prescribing practices are a valid indicator in measuring performance.

Outcome
Of critical importance is evaluating providers in terms of outcome — how did things turn out in the claims where they were involved? Is the employee back at work, permanently disabled or somewhere in between? What is the provider's record? If a provider is associated with a high rate of litigated claims, that should also be considered in the descriptive mix.

Create Algorithms To Measure
Providers can be rated specifically for Workers' Comp by creating a set of algorithms measuring these factors using data. An algorithm is simply a defined process, often mathematical, used to solve a problem or reach a conclusion. Algorithms should be used to compare similar types of providers who have treated like injuries in the same jurisdiction during the same time frame. Consistency is achieved because the computerized algorithms apply the same standards to all medical providers who meet a set of conditions.

Analyze Data From Multiple Sources
The data used to evaluate provider performance should be derived from more than one source. Raw billing data or bill review data should be integrated with claim data in order to reach a valid conclusion. Billing and treatment data must be integrated with loss time and outcome information, usually found in different systems, in order to reach legitimate conclusions regarding providers.

Ratings for medical providers must be transparent, fair, and objective. Fairness and accuracy in developing and measuring provider performance is critical. The indicators can be found in the data. The data must be integrated and evaluated using computerized algorithms that measure and monitor provider performance based on a combination of Workers' Compensation-specific values.

Measuring Provider Performance Is A Good Thing
In July of 2010, Joe Paduda, Principal of Health Strategy Associates, wrote an article entitled Like It Or Not, Physician Ratings Are Coming. The title might suggest that rating doctors is a bad thing. It is actually a good thing, unless you are a poorly performing provider.

Using legitimate Workers' Comp-specific rating systems to provide objective evidence for selection and for weeding out the less effective or even fraudulent providers is positive progress. A poorly performing provider guarantees complexity and cost in the claim. Informed decisions about medical providers based on data will replace personal biases and unknown outcomes. Basing provider selection decisions on objective data is imperative.

Pick up any newspaper and you will see headlines announcing the latest lawsuit filed against an employer for retaliation.

Examples

• On March 1, 2012, a news story described a lawsuit by a TV anchor in Florida, fired after 17 years on the job, accusing the station of dismissing him as a reprisal for his complaint to the Occupational Safety & Health Administration (OSHA) about unsanitary conditions in the workplace.
• On March 4, 2012, the U.S. Department of Labor announced its lawsuit against the U.S. Postal Service, alleging a pattern of adverse actions against a safety specialist after he had assisted another employee in exercising her rights under the Occupational Safety & Health Act.
• And, on March 14, 2012, the U.S. Equal Employment Opportunity Commission (EEOC) announced that Sterling and Sterling, Inc., a New York insurance company will pay $120,000 to settle a retaliation lawsuit the agency filed on behalf of a sales telemarketer. While on maternity leave, the employee filled out an EEOC questionnaire stemming from her complaints of race and sex harassment. Two weeks after she returned to work, she was suspended and then fired. Astonishingly, the company actually cited her EEOC filing when it terminated her, which on the eve of “March Madness” made the EEOC's charge a slam dunk.

Jury verdicts for retaliation are increasing at an alarming rate, which is probably why the number of such charges filed with federal and state enforcement agencies are at all time highs. The Equal Employment Opportunity Commission received a record 99,947 employment discrimination charges in the last fiscal year. Retaliation charges under all the statutes enforced by the Equal Employment Opportunity Commission were the most frequently made at 37,334, which represents 37.4 percent of all charges. The California Department of Industrial Relations, California Department of Fair Employment & Housing, and the U.S. Equal Employment Opportunity Commission all have established special "retaliation units" to cope with the rise in claims.

Even the United States Supreme Court, which is generally business-friendly, has systematically expanded the range of who may win damages for retaliatory actions in the workplace over the last three terms. The Equal Employment Opportunity Commission actively litigates retaliation claims. The Los Angeles Fire Department recently agreed to pay $494,150 to a firefighter/engineer who was continually harassed by fellow firefighters who mocked him and made offensive comments of a sexual and religious nature. An Equal Employment Opportunity Commission investigation uncovered evidence that the harassment was linked to a lawsuit he had filed against the Catholic Church for sexual abuse and that he had suffered retaliatory discipline for his participation in another employee's discrimination complaint.

In another lawsuit by the Equal Employment Opportunity Commission, a federal jury in Atlanta awarded $51,500 back pay, compensatory and punitive damages to four family members who were all fired from a small restaurant when one resisted sexual harassment and they all reported it to management.

Despite increased media and judicial attention paid to workplace retaliation over the last decade, and the growing recognition that California employers may be held liable for abusive behavior by their leaders, both public sector and private industry organizations are still coping with retaliation charges on a regular basis. Why is that so, and what can you do to minimize the potential risks of facing such a lawsuit?

There are several reasons that retaliation charges are at an all time high.

1. Protection From Retaliation Is Quite Broad
Every federal employment discrimination statute defines retaliation as a separate form of wrongdoing. Individuals who make reports or complaints about any kind of discrimination or harassment in their workplace, or who participate truthfully and in good faith in the investigation of a co-worker's complaint, are protected from reprisals or punishment for their "protected activity." Whistleblowers who report suspected illegal or unethical practices also enjoy expanded opportunities to collect hefty damages if their employers later punish them without justification. Finally, workers who request or take a job-protected leave of absence and those who seek a reasonable accomodation for a disability can't be penalized for doing so.

• There are 31 separate bases for employees to launch a retaliation charge enforced by the California Department of Industrial Relations and Labor Commissioner.
• There are an additional 22 job-protected leaves of absence under a combination of federal and state law that also carry penalties for retaliating against an employee who requests, takes or returns from leave.
• Beyond that, there are dozens of "protected characteristics" under California's employment discrimination standards and a complaint about discrimination or harassment for any of these carries protection from retaliation.

In a trio of cases, the U.S. Supreme Court has paved the way for more workers to seek sizeable damages based on reprisals for their participation in a broad range of activities.

The march toward expanded rights for individual employees began in 2009 in Crawford v. Metropolitan Government of Nashville, in which the Supreme Court again expanded workers' freedom from retaliation for opposing discriminatory practices. Prior to this case, such oppositional activity was largely limited to participation as a witness or complainant in a formal investigation by the employer or an enforcement agency.

In Crawford, the Court extended protection to an employee who communicates less formally to her employer regarding a belief that the employer was engaged in a form of employment discrimination, by answering a manager's question. The opinion concluded "there is, then, no reason to doubt that a person can 'oppose' by responding to someone else's question just as surely as by provoking the discussion, and nothing in the statute requires a freakish rule protecting an employee who reports discrimination on her own initiative but not one who reports the same discrimination in the same words when her boss asks her a question."

In January, 2011, the U.S. Supreme Court unanimously ruled that the scope of the anti-retaliation provisions in Title VII of the Federal Civil Rights Act applied to an individual harmed by retaliation, even if that person had not himself filed a charge of discrimination or responded to formal or informal questioning about a co-worker's complaint.

In Thompson v. North American Stainless, Eric Thompson's fiancée, Ms. Regalado, filed a sex discrimination complaint with the Equal Employment Opportunity Commission. Thompson was fired three weeks later. He then filed his own charge with the Equal Employment Opportunity Commission, claiming his termination was in retaliation for his fiancée's initial complaint. The justices concluded that Thompson "was the employer's intended means of harming Regalado. In these circumstances, we think Thompson was well within the zone of interests sought to be protected by Title VII." The employer argued that allowing Thompson to sue would open employers up to retaliation lawsuits from everyone who is terminated and has any connection to a complaining employee. In response, Justice Scalia wrote in the opinion, "We expect that firing a close family member will almost always meet the standard, and inflicting a milder reprisal on a mere acquaintance will almost never do so, but beyond that we are reluctant to generalize."

Two months later, the Supreme Court ruled in Kasten v. Saint-Gobain Performance Plastics Corp., that oral complaints are sufficient to support retaliation cases under the federal Fair Labor Standards Act (FLSA). Concluding that the phrase "filed any complaint" in the Fair Labor Standards Act's statutory text can include both oral and written complaints, the Court relied on an examination of congressional intent and the Department of Labor's and the Equal Employment Opportunity Commission's interpretation of the phrase.

The Court focused heavily on the fact that, at the time Congress passed the Fair Labor Standards Act, a relatively high number of American workers were illiterate, and thus an interpretation of the phrase "filed any complaint" to include oral complaints furthered the Act's stated purpose of protecting workers. The Court also noted that the agencies tasked with enforcing the Fair Labor Standards Act have consistently interpreted "filed any complaint" to include oral complaints.

The list of protected activities is long and growing. Here are some highlights:

• Filing for or receiving workers compensation benefits
• Filing an Equal Employment Opportunity Commission or Department of Fair Employment & Housing charge of discrimination
• Participating in an Equal Employment Opportunity Commission or Department of Fair Employment & Housing investigation
• Reporting discrimination or harassment through internal employer policies
• Participating in an internal employer investigation as a witness
• Supporting a co-worker's complaint or report of discrimination or harassment
• Answering informal questions from a manager or supervisor about workplace issues
• "Opposing" discriminatory, unlawful, or unethical actions
• Filing a complaint or report of workplace hazards with CAL-OSHA or FED-OSHA
• Filing a complaint for wages with the Department of Labor or State Labor Commissioner
• Filing a complaint with the National Labor Relations Board about workplace conditions
• Posting commentary on social media concerning workplace conditions
• Refusing to perform an illegal or unethical act within the workplace
• Threatening to report suspected wrongful activity (whistleblower laws)
• Reporting or threatening to report safety violations or lack of safety training
• Reporting accounting abuses or illegal activity in a taxpayer funded agency
• Complying with a valid subpoena
• Requesting or taking leave of absence (short term or long term)

Note: The list of job-protected, benefit-protected leaves is also lengthy (with many applying to small employers).

2. Employee Complaints Raised In Good Faith, Even If Mistaken, Are Protected Activity
If the employee has a reasonable, good faith belief that the employer is doing or has done something "wrong" (legal, ethical, policy violation or contractual breach), and the employee's response to the wrongdoing is reasonable, the law will protect that employee from retaliation. This is so even if the employee's claims are ultimately not substantiated.

Truthfully raising an issue, making a complaint, or participating in any proceeding (internal or external) is absolutely protected. Reason: an employee's concern about whether he can "prove it" may chill the exercise of rights and violates public policy. In Barbosa v. IMPCO Technologies, the worker sued for retaliation after he was fired, claiming he'd made a good faith wage complaint, even if ultimately his claim was in error, and that the company couldn't retaliate against him for it. The trial court dismissed his lawsuit. But, the Court of Appeals reversed, holding that under longstanding California public policy, employees must feel free to question their pay without fear of retaliation, even if the employee's concern is ultimately unsubstantiated.

Accordingly, a good faith complaint is sufficient to protect against retaliation. False complaints may still be dealt with appropriately. But be careful when determining whether a complaint is knowingly false or mistaken but in good faith because if later sued, a neutral and well documented investigation will be critical.

3. The Scope Of Potentially Retaliatory Adverse Actions Is Broad
In 2006, in White v. Burlington Railroad, the Supreme Court ruled that the Title VII anti-retaliation provision covers those (and only those) employer actions that would have been materially adverse to a reasonable employee or job applicant. The Court adopted a lower standard of harm the claimant must establish to prove he or she was subject to retaliation. Instead of requiring a showing that the employer engaged in conduct that materially adversely affected the employee in the terms or conditions of employment, the Court adopted a much looser and vaguer standard. Now, at least for purposes of Title VII, "adverse action" is any action by an employer that "well might have dissuaded a reasonable worker from making or supporting a charge of discrimination."

Retaliation may include:

• Adverse performance review — lower than the employee earned
• Changes in shift or work responsibilities with no objective business purpose
• Negative or abusive treatment by supervisors or managers
• Improper denial or delay of an earned promotion
• 3 "D's" - Discipline, Demotion, Discharge
• Ostracism or overt ridicule by supervisors
• Ostracism by co-workers that is ignored, tolerated, or incited by supervisors
• Taunts, threats or other coercive activities
• Bullying (verbal or via electronic communications)

4. Damages And Other Relief Can Be Significant
Successful claims for retaliation carry with them "make whole" remedies. This can include, but is not limited to: reinstatement of employment, reversal of a demotion, payment of back wages, reinstitution of benefits, purging personnel files of any adverse memos or letters, a cease and desist order, and the posting of a notice in the workplace. Reasonable attorneys' fees and court costs are also recoverable under federal and state anti-retaliation statutes and the California Private Attorney General Statute (PAGA).

5. Employees Don't Have To Quit Or Be Fired To Sue For Retaliation
Retaliation lawsuits used to predictably follow an individual's departure from the workplace, and the charges often centered on whether or not a termination decision was retaliatory. Not anymore. Retaliation charges are often raised while the employee is still coming to work. Because "protected activities" take place every day — particularly those involving participation in internal investigations or seeking job-protected leaves of absence — workers can vindicate their rights and still enjoy the privileges and benefits of employment. Naturally, this makes front-line leaders, who may already feel overwhelmed and under siege, reticent about managing performance of work teams in which someone is claiming to have been wrongfully treated.

What Can Employers Do To Minimize These Risks?
Prevention Strategies: When front-line leaders don't know how to respond to internal employee complaints, leave requests or informal questions about wages or benefits, they often react in ways that breed retaliation claims. Beef up your policies and emphasize consistent enforcement. A policy is ineffective without training leaders to understand what it means and how it should be applied. Focus on the variety of potential retaliation situations and provide specific direction on how to respond when a worker brings an issue to their attention. Emphasize the importance of appropriate communications and remind managers that a single intemperate e-mail can derail your defense and e-nail your company in the courtroom.