Employer Liability for Data Breaches: Avoid Getting Eaten By Your Own

By: Nicole Kardell

When a company suffers a data breach, it is hit with a barrage of issues. For instance,

• How can it safeguard against another breach?
• Who should it notify of the breach and when (Authorities? The people whose data was compromised?)?
• What type of measures should it undertake to minimize possible damage to those whose data was compromised?
• How can it guard its reputation and brand?
• How can it minimize possible lawsuits and governmental investigations?

These decisions are often made on the fly and under a sense of urgency.  As we regularly state in the data security world, “the best defense is a good offense.” To prepare, all organizations should have a plan of action, including a leadership team of IT, legal and public relations professionals, already in place for what to do in case of a breach.

A key issue companies face is possible legal liability. As though tackling the breach itself wasn’t enough, companies regularly confront follow-on lawsuits from those whose data may have been compromised as a result of the breach. Lawsuits regularly are filed almost as soon as a breach is announced. The premise of these legal claims is that the company was at fault for failing to sufficiently safeguard against the breach.

Adding insult to injury is when the lawsuits come from within as employees join the feeding frenzy. Employees may break rank and sue the company if their personal data was the subject of the breach.[1] This happens more often than you may think. Companies collect and maintain significant personal data on their employees, including tax documents, employment eligibility forms, bank account information, and benefits materials. This makes employee data rich fodder for ne’er-do-well hackers and scammers, and can result in lawsuits even when the breach involved mere employee negligence rather than malfeasance. Access to employee data can and has been misused as well by disgruntled employees who want to “stick it” to their employer.

What Does a Lawsuit Filed by an Employee Look Like?

Employees who sue their employers in the wake of a data breach commonly make claims alleging:

• Negligence, e. that the company was supposed to, but did not, take the necessary precautions to protect employee data from a data breach; and that its failure to do so exposed the employee to harm from the breach; and
• Breach of Contract, e. that the company was obligated by contract (either an express or implied contract) to protect the employee’s data and breached its contract by failing to do so.

Courts from different jurisdictions have treated these claims inconsistently, but there are helpful takeaways for companies to apply. A federal court in New York recently allowed an employee’s lawsuit to go forward under these theories of liability, i.e. negligence and breach of contract (the defendant company had requested the court dismiss the case in its early stages, arguing that the employee failed to make a legal claim for relief).  In contrast, a federal court in Pennsylvania sided with the employer.

The Legal Upshot

Why have cases come out differently? An obvious reason for any disparity would be application of different state’s laws to determine what makes a negligence or breach of contract claim. There are some important takeaways for companies to consider: The New York case, Sackin v. TransPerfect Global, involved a phishing scam while the Pennsylvania case, Enslin v. The Coca-Cola Company, involved a rogue employee stealing company laptops. A phishing scam conceivably can be foreseen and prevented through employee training. Employee theft is harder to anticipate and prevent. And so a court may be more inclined to impose liability on a company where the breach might have been prevented by reasonable measures. Another important distinction is that the employer in the Pennsylvania case, Coca-Cola, had a code of conduct that expressly outlined the company’s responsibilities with employee data. The employee could not turn around easily to claim contractual obligations beyond those clearly defined by the company.

How Can You Shore Up Your Company for Leaking Your Information?

These court cases provide some important guidance to companies. You should anticipate a legal battle if you do not take reasonable measures to protect your employees’ data. This means you should:

• Incorporate industry standard IT measures to protect against data hacks; and
• Train employees on responsible handling of personal data, including being on the lookout for phishing or other hacker scams. Some companies require data security training via an online module with a test that must be completed at the conclusion of the training.

(Hint: Tax season is coming up; and that’s a ripe time for scam attempts. Consider circulating a memorandum to personnel with access to employee data that identifies some popular scams and pitfalls to avoid.)

Other things you should do to minimize your liability:

• Revise employment contracts and company policies to clearly define and limit your data collection and duties (e. what data you intend to collect, what you will do to protect that data, and limits on how the data may be used); and
• Update your data retention policies to ensure you—and any follow-on processors such as payroll providers—hold data only for so long as necessary and destroy that data promptly once no longer needed.

Such foresight and measures can shield not only against a data breach in the first place, but may also help protect against legal exposure in the event of a breach. Frontloading your efforts is much better than conducting damage control after the fact. In the words of Sun Tzu: “The greatest victory is that which requires no battle.”

[1] Customers also may file suit if their data was compromised, but those claims are distinct from employee claims. We discussed the legal landscape for consumer actions in a previous article and address employee legal actions here.