What EPLI Limits Should Franchisors Actually Require from Child Education Franchisees?

Most franchisors set EPLI minimums based on what their attorney drafted into the FDD five years ago and what the brand next door is requiring. That's not a risk strategy. That's cargo-cult compliance — performing the motions without understanding the mechanics beneath them.

The child education franchise space sits at the intersection of every factor that makes employment practice liability expensive: a workforce that is over 90% female in early childhood settings, mandatory reporter obligations baked into state law, intense parent-facing interactions, and a geographic concentration in the five most plaintiff-friendly employment law states in the country. When you layer franchising's inherent joint-employer exposure on top of that, you have a claims environment that most FDD Item 8 schedules are not built to handle.

EEOC charge filings hit 88,531 in fiscal year 2024 — the highest level in years, representing a 44% surge from the pandemic trough. Median EPLI claim costs have more than tripled since 2015, sitting at roughly $258,500. The average combined defense and settlement cost for an SME employment claim runs approximately $160,000, and defending a claim that gets dismissed still costs an employer around $50,000 before anyone writes a check to a plaintiff.

The FDD minimum that most franchisors set for EPLI sits between $250,000 and $500,000. The median claim cost is $258,500. That is not a safety margin — that is a coin flip.

Here is where the structural failures actually live, and what franchisors should do about them:

Key Takeaways

• The FDD Minimum and the Actual Claim Cost Are Not the Same Number. The $250,000 EPLI minimum that appears in most child education FDDs covers the defense of a single dismissed claim — and not much else. The median EPLI claim cost is $258,500. A single claim at median severity exhausts that limit before any settlement is reached.

  
  

• Small Employer Size Is the Amplifier, Not a Mitigant. 75% of all EPLI claims are filed against businesses with 50 or fewer employees. Companies with 15–100 employees face a 32% higher probability of an employment claim than larger employers. Small does not mean low-risk.

  
  

• State Law Turns Federal Caps Into a Floor, Not a Ceiling. Federal Title VII caps damages at $50,000 for employers with 15–100 employees. California, New York, and New Jersey impose no damage caps whatsoever. Franchisees in those states face unlimited exposure on every claim.

  
  

• Mandated Reporter Laws Create a Retaliation Trap. Every childcare worker in all 50 states is legally required to report suspected abuse. Terminating that employee afterward — for almost any reason — creates a near-automatic retaliation claim. Employees win nearly 60% of retaliation cases that reach court.

  
  

• Third-Party Coverage Is Absent by Default. Standard EPLI policies don't cover claims by parents, volunteers, or contractors. CGL excludes discrimination and harassment entirely. Without a third-party endorsement, a parent's discrimination claim has no policy responding to it.

  
  

• The Franchisor as Additional Insured on EPLI Is a Legal Liability. Naming a franchisor as an additional insured on a franchisee's EPLI policy creates documented evidence of joint employer status. It is not a coverage solution — it is a litigation liability.

  
  

• Wage and Hour Exposure Is the Largest Category Nobody Is Covering. Advisen's database of 175,000 EPLI cases shows that 143,000 of them — over 80% — involve wage and hour matters. Standard EPLI excludes these. A defense-cost endorsement with a $100,000–$250,000 sublimit is not optional for hourly workforces.

Why Does the "Same Limits Everyone Else Uses" Approach Fall Apart in This Sector?

The $250,000 EPLI limit that tutoring franchises commonly require in their FDD was probably set when employment claims in the sector looked very different than they do now. The EEOC recovered approximately $700 million in fiscal year 2024 for over 21,000 workers. That is a record. The average recovery per private-sector victim was $34,740, but those are the small cases. The median jury verdict when cases go to trial sits between $217,000 and $250,000. Defense costs alone — before any settlement — run $75,000 to $120,000 per claim.

A franchisee operating a single tutoring center with 12 employees, a $250,000 EPLI policy, and a $5,000 deductible looks adequately covered on paper. Two simultaneous claims — one wrongful termination from a teacher who reported suspected abuse and was subsequently let go, and one pregnancy discrimination claim from an employee whose hours were cut after disclosing a pregnancy — and that policy is gone before either case reaches a settlement table.

This is the specific tension that FDD Item 8 schedules have to resolve: paper compliance versus actual risk transfer. Setting a $250,000 minimum demonstrates that you require EPLI. It does not mean the franchisee is protected. And when a claim reaches the franchisor as a named defendant — which plaintiffs' attorneys do regardless of the NLRB's current joint employer standard — that gap becomes a shared problem.

The Pregnant Workers Fairness Act generated 2,729 charges in its first full fiscal year (FY 2024). ADA disability charges grew 38.9% between FY 2019 and FY 2024. The child education workforce is disproportionately female, disproportionately hourly, and operating in states that have systematically expanded plaintiff rights since 2019. The claim frequency environment is structurally worse than it was when most FDD insurance schedules were written.

Why Are Small Franchisees at Greater Risk Than the Size of Their Payroll Suggests?

The instinct is to think small employer size reduces exposure — fewer employees means fewer potential claimants. The data says the opposite. Seventy-five percent of all EPLI claims are filed against businesses with 50 or fewer employees. Companies with 15–100 employees face a 32% higher probability of an employment claim than larger employers. The Hiscox 2017 Guide to Employee Lawsuits — still the most cited source on this — put the average company's annual probability of facing an employment charge at 10.5%. In California and New Mexico, that probability runs 46–81% above the mean.

The structural reason is straightforward. Large employers have HR departments, employment counsel on retainer, documented progressive discipline systems, and compliance infrastructure. A franchisee running a tutoring center with 18 employees typically has none of that. The owner or location manager handles terminations, manages accommodation requests, and navigates leave policies without dedicated employment law expertise. When something goes wrong, there is no internal compliance layer to catch it before it becomes a charge.

State agency jurisdiction amplifies this further. The EEOC requires 15 or more employees to file under Title VII. But the California Civil Rights Department covers employers with as few as five employees — and one employee for harassment claims. The New York City Human Rights Law covers employers of any size, period. New Jersey's Law Against Discrimination has no minimum employee threshold. Illinois extended harassment protection to employers with one or more employees. For child education franchisees concentrated in these states, the federal threshold is irrelevant. Every employee is a potential claimant from day one of operations.

The geographic concentration is not incidental. Texas, California, Florida, New York, and Illinois are where child education franchise density is highest. They are also five of the most aggressive enforcement states in the country. California employment claims cost 260% more to resolve than the national average. New York eliminated the "severe or pervasive" harassment standard in 2019 — a single discriminatory act is now actionable. New Jersey allows plaintiffs to sue directly in court without administrative exhaustion, bypassing the EEOC process entirely. A franchisee in one of those states carrying $250,000 in EPLI coverage is operating with limits calibrated for a different legal environment than the one they're actually in.

What Happens When a Teacher Reports Abuse and Gets Fired?

Mandated reporter obligations are woven into child education employment in a way that has no parallel in other franchise verticals. Every childcare worker in all 50 states carries a legal obligation to report suspected abuse or neglect. That obligation does not disappear when it's inconvenient for operations or uncomfortable for the location owner.

When a teacher reports suspected abuse by a colleague or a parent, and that teacher is subsequently terminated — whether for the report or for an unrelated performance issue that happened to surface at the same time — the retaliation exposure is structurally acute. Employees win nearly 60% of retaliation and wrongful termination cases that reach court, per Zurich Insurance litigation data. Retaliation has been the number one EEOC charge category for 17 consecutive years. In FY 2024, it accounted for 47.8% of all charges filed — and that percentage actually declined because other categories grew faster.

The compounding factor in child education is that a single incident can trigger two simultaneous coverage needs. The mandated reporter files a retaliation claim (EPLI responds). The child's family files an abuse claim against the organization (Sexual Abuse and Molestation coverage responds). These are distinct claimants, distinct wrongs, and distinct policies — and both are needed. An EPLI policy that adequately covers the employment claim but a SAM gap that leaves the abuse allegation uninsured creates a crisis on the other side of the same event.

The EPLI policy language matters here in a specific way that most FDD schedules do not address: retaliation claims arising from reports of abuse need to be explicitly covered as a wrongful employment act. Some policies define retaliation narrowly around internal HR complaints. A franchisee who terminates a mandated reporter needs that termination decision covered, regardless of whether the report went to HR or straight to CPS.

Why Does Adding the Franchisor to the Franchisee's EPLI Policy Create More Risk Than It Solves?

The instinct makes sense on the surface. A franchisee has an EPLI claim, the franchisor gets named as a co-defendant (which happens routinely regardless of the NLRB standard), and the franchisor wants to be on the insurance. Adding the franchisor as an additional insured on the franchisee's EPLI solves the coverage problem.

It also potentially hands opposing counsel a document that goes directly to joint employer status.

Fox Rothschild, a leading franchise law firm, states directly that "an additional insured endorsement is typically not available for employment practices liability insurance" and that "in almost all cases a franchise system won't be successful in obtaining coverage under its franchisees' EPLI policies." The structural reason is that EPLI insures the employer's employment practices. A franchisor who is not the employer cannot be the insured under that policy without implicitly accepting employer status.

The recommended structure is a co-defendant endorsement or franchisor endorsement on the franchisee's policy. This provides shared defense when the franchisor is named in an employment suit — which is the actual problem being solved — without creating additional insured status. The distinction is not semantic. It is the difference between a coordinated defense and a co-defendant arrangement that the plaintiff's attorney uses to establish vicarious liability.

The current NLRB joint employer standard, reinstated by the reconstituted board in February 2026, requires that an employer possess and actually exercise substantial direct and immediate control over essential terms of employment. Reserved contractual control alone is insufficient. That is favorable ground for franchisors. Naming yourself as an additional insured on an employment practices policy is a voluntary step off that ground.

The correct structure separates the policies cleanly: the franchisee is the named insured on EPLI and Workers' Compensation, the franchisor carries its own separate EPLI, and general liability and umbrella use additional insured status through ISO endorsements where appropriate. Waivers of subrogation on Workers' Comp accomplish what many franchisors think they're accomplishing by being added to EPLI — without the joint employer exposure.

What Does It Actually Cost When the Limits Are Wrong?

The numbers are worth sitting with. The median EPLI claim cost as reported by the Insurance Information Institute is $258,500. That is the median — half of claims cost more. The average jury verdict sits between $217,000 and $250,000. Average combined defense and settlement for SMEs runs approximately $160,000. And 98% of employment claims settle before trial, which means the $50,000 to $120,000 in defense costs happens regardless of whether the employer did anything wrong.

A single-location franchisee under $1 million in revenue carrying a $250,000 EPLI limit will come close to exhausting that policy on the defense of a claim that gets dismissed. The defense is gone before the merits are even evaluated. At that revenue level in child education, you are likely running a lean location — a handful of full-time staff plus part-time and hourly instructors. The staffing model is not large, but the claim exposure is. Every termination, every accommodation request that doesn't get handled correctly, every schedule change that follows a pregnancy disclosure is a potential claim.

A franchisee between $1 million and $2 million in revenue with a $500,000 standalone EPLI limit is better positioned, but that limit can be consumed by two concurrent claims. High turnover in child education settings means more employment relationships beginning and ending per year than in a comparable-revenue business in a different sector. Each one is a potential wrongful termination exposure. Each accommodation request denied without documentation is a potential ADA or PWFA claim. Two claims running simultaneously at median severity will push through a $500,000 limit before either case closes.

Above $2 million in revenue — or at any revenue level for a multi-location operator — the claim profile changes. Class action exposure becomes real. PAGA claims in California can stack penalties across employees with no single triggering event. A three-location operator in California, New York, or New Jersey needs to be thinking about $1,000,000 to $2,000,000 in EPLI limits as a floor, with excess EPLI in the conversation. Class action settlements against employers reached nearly $2 billion in aggregate in 2022. That ceiling is not theoretical for a multi-unit franchisee operating in plaintiff-friendly states.

The third-party coverage gap compounds all of this. A parent who alleges that an enrollment policy discriminated by race, or that a staff member made harassing comments, has a claim that standard EPLI doesn't cover without a third-party endorsement — and that CGL excludes by definition. That endorsement typically adds about 15% to base EPLI premium. It is not optional for a business built around daily parent interaction.

FAQ

Is a $250,000 EPLI limit ever sufficient for a child education franchisee?

Rarely. The average defense cost for a dismissed claim runs $50,000 to $120,000 before any settlement discussion begins. A $250,000 limit covers the defense and leaves little headroom for indemnity on a claim that actually has merit. In California, New York, or New Jersey — where damage caps don't exist and a single discriminatory act is actionable — a $250,000 policy is a paperwork exercise, not a risk transfer. Standalone EPLI with adequate limits, a wage and hour defense endorsement, and explicit third-party coverage is the correct structure for this sector.

What is the right minimum EPLI limit to put in the FDD for a tutoring or enrichment franchise?

$500,000 per claim and aggregate is the minimum defensible standard for a single-location franchisee under $1 million in revenue. That accommodates typical defense costs plus median settlement with headroom. For early childhood and full-day care models — which run higher payroll, more staff, and more daily parent-facing interactions than tutoring or enrichment franchises — $1,000,000 per claim is the appropriate floor regardless of revenue. Franchisors whose FDDs still reflect $250,000 minimums should ask whether those numbers were set based on actual claim data or on what the brand next door was requiring.

What happens to EPLI exposure if a franchisee expands to multiple locations?

Multi-location operators need to be recategorized. The limit structure appropriate for a single tutoring center does not scale to a three-location operator spread across California, New York, and Illinois — even if total headcount at each location looks modest. Class action exposure becomes real at that scale, and PAGA claims in California can stack penalties across employees in ways that generate seven-figure exposure with no single triggering event. Excess EPLI should be part of any multi-location operator's program regardless of per-location revenue.

How does wage and hour exposure interact with EPLI for hourly childcare workers?

Standard EPLI policies exclude wage and hour claims. Advisen's database shows that wage and hour matters represent over 80% of total EPLI claim volume. For a workforce that is predominantly hourly, that exclusion is a structural gap. A defense-cost-only endorsement with a $100,000 to $250,000 sublimit is the standard market solution and should be required, not optional. Wage and hour violations also frequently generate companion retaliation claims that are covered — making proper documentation of pay practices a first-order risk management priority.

Is the current soft EPLI market a reason to reduce limits or terms?

No. The soft market (2025 rates at the lowest since 2017 per the CIAB Q4 2025 Commercial Market Index) is a reason to secure better terms and higher limits at favorable pricing — not a signal to reduce coverage. Lockton has stated explicitly that "rates have bottomed out" and that the 44% surge in EEOC charge volume from 2021 to 2024 will eventually translate into higher loss ratios. The window to lock in adequate limits at current pricing is narrowing.

What should the franchisor's own EPLI program look like given this landscape?

The franchisor's EPLI should cover the corporate entity independently, not rely on franchisee policies. Franchisors who get named as co-defendants in employment suits — which is standard plaintiffs' practice regardless of legal theory — need independent defense coverage. The co-defendant endorsement on the franchisee's policy provides coordination; it does not substitute for the franchisor's own program. Franchisors operating systems with 100+ locations in plaintiff-friendly states should be discussing excess EPLI and umbrella follow-form coverage with their brokers annually.

Conclusion

The EPLI limit structures that appear in most child education FDDs were not built from actuarial analysis of what claims in this specific sector actually cost. They were built from convention, legal minimums, and what was reasonable in a different claims environment. The environment has changed.

EEOC charge volume is at a multi-year high. Median claim costs have more than tripled since 2015. The states where child education franchise density is highest have spent the last six years expanding plaintiff rights, removing damage caps, lowering employer thresholds, and extending statutes of limitations. The predominantly female, hourly, high-turnover workforce of child education franchisees faces structurally elevated exposure from the PWFA, ADA accommodation demand, mandated reporter retaliation, and wage and hour liability — most of which standard EPLI either underfunds or excludes.

A franchisor who sets EPLI minimums based on what was standard practice in 2018 and calls it a compliance obligation is not managing risk. The franchisee carrying a $250,000 limit and a $50,000 defense bill on a dismissed claim learns that lesson without a warning. Getting the limits right — and structuring the franchisor's relationship to those limits correctly — is the only way the coverage actually does what the brand system needs it to do.

About the Author

Wade Millward is the founder and CEO of Rikor, a technology-enabled insurance and risk management company focused on the franchising industry. He has spent his career working with franchisors, franchisees, and private-equity-backed platforms to uncover hidden risk, design scalable compliance systems, and align insurance strategy with how franchise systems actually operate. Wade writes from direct experience building systems, navigating claims, and helping brands scale without losing visibility into risk.