In sexual harassment cases, your worst-case scenario is harassment by a supervisor. That's because sex harassment by a supervisor resulting in a tangible employment action (firing, demotion, pay cut, etc.) is indefensible. Even if you have the best-written policy, you're liable.
But if a supervisor's sexual harassment is not tied to a tangible job action, you can put forth a legitimate defense. That defense is a well-crafted sex-harassment policy with teeth accompanied by swift action. That's why it's vital to train all staff to respond immediately to even the hint of harassment and to require those who are harassed to report right away.
A good policy does double-duty: By encouraging employees to report harassment, you can stop supervisors before they take "tangible" action against subordinates. And employees who don't complain may lose their right to sue.
Recent case: Two female mental-health facility employees kept quiet about alleged harassment they endured from their supervisor. But five months after the supervisor moved to another facility, one of the women blurted out that the supervisor often rubbed up against them and pulled down his pants.
The organization immediately investigated and suspended the supervisor. He admitted his actions and quit. The women still sued, but the court tossed out their case, saying they waited too long to complain. Plus, the court said the organization's well-written policy (and complaint procedure), plus its prompt response when it did learn of the behavior, persuaded the court that it would have stopped the harassment if given a chance. (Williams, et al., v. Missouri Department of Mental Health, et al., No. 04-1510, 8th Cir. 2005)
Bottom line: You'll limit your liability in supervisor-harassment cases with a solid harassment policy, employee and supervisor training and, most important, prompt action.