Is Title Inflation Putting Your Business At Risk?

Is Title Inflation Putting Your Business At Risk?

Title Inflation occurs when superior-sounding job titles are given to non-superior employees. Despite recent trends, title inflation is not new. It was even a topic of conversation in a 1998 episode of Seinfeld.

ELAINE: Do you know how embarrassing this is to someone in my position?

JERRY: (Confused) What’s your position?

ELAINE: I am an associate.

GEORGE: Hey, me too.

WAITRESS (passing their table): Yeah, me too.

While having too many “Vice Presidents of This”, “Chiefs of That” and “Directors of Those” can be comical, it can also be risky. Let’s see what happened in Aleynikov v. Goldman Sachs, a case out of United States Third Circuit Court of Appeals.

This case involves a Goldman Sachs employee who was indicted for stealing computer source code before quitting his job. The employee spent over $2.3 million defending state and federal criminal charges relating to the theft, and, according to the employee, Goldman Sachs was required to cover the costs of his criminal defense. Why would Goldman Sachs possibly have to pay to defend the person who allegedly stole its own source code? Title inflation.

This employee worked as a computer programmer. He did not supervise other employees, did not transact business on behalf of Goldman Sachs and did not have any management or leadership responsibilities. Nevertheless, he was given the title of Vice President in Goldman Sachs equities division, and under its By-Laws, Goldman Sachs is required to indemnify officers for their legal expenses. (Indemnification provisions like this are commonly found in corporate By-Laws.)

The court considered a number of factors to determine whether the employee, as a Vice President, is entitled to indemnification under Goldman Sachs’ By-Laws. For example, the court noted that Goldman Sachs employs tens of thousands of employees and that approximately one-third of them hold the title of Vice President. Despite the apparent absurdity of the employee’s position, the court ruled that additional facts are needed before a final decision can be made. In other words, Goldman Sachs, the victim, still faces the possibility of having to pay the defense costs for its former employee, the perpetrator.

Though this case is extreme, it highlights a significant risk associated with title inflation. Employees must be given titles that are consistent with their functions and responsibilities because employees with artificially inflated titles, even those without criminal intentions, can create significant risks and expose businesses to substantial liability.

Additional protection can be obtained with a Directors and Officers Liability insurance policy. These policies generally protect directors and officers against monetary damages resulting from lawsuits or claims resulting from actions taken in their official capacity. While these policies do not cover all potential liabilities, such as those resulting from fraudulent or intentional acts, or those that caused by someone who is not entitled to coverage under the policy (perhaps due to title inflation?), they can provide a much needed security blanket.

Since variations among these policies can be significant, it is important to select a policy form which addresses any particular risks with appropriate coverage terms. When shopping for a Directors and Officers insurance policy, it is important to use the services of an insurance agent with substantial expertise in this field.

If you would like more information about obtaining the right insurance coverage for your business, please contact us.