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Employment practice liability

1 October 03

How employment practice liability insurance can protect a business against the increasing threat of litigation by employees who believe their rights have been violated

by John Hatfield

When Coca-Cola agreed to pay out £113 million in compensation to black employees who accused it of racial discrimination it set a new world record and provided a wake-up call to companies around the world.

According to the four African-American employees of Coke, who brought the case three years ago on behalf of 2,000 colleagues, they had been discriminated against in terms of pay, promotions and perfomance evaluations. As part of the settlement Coke, the world’s biggest soft drinks company, agreed to an independent audit of its policies on performance and pay.

But while the experience at Coca-Cola is an extreme example of the growth of discrimination claims, it is by no means unique. Both the number of successful claims and the levels of awards are growing. In 2001-2002 tribunals awarded a total of £3.53 million – an increase of 38% on the previous year.

Figures from the Employment Tribunal Service show that the number of awards of compensation in sex discrimination cases was up nearly 100%. The average compensation awarded in these cases was up to nearly £20,000, an increase of around 75%. The award of £1.4 million compensation to Julie Bower, an equities analyst at Schroder Securities, on grounds of sex discrimination set an important precedent in the UK. Ms Bower brought the action after she was awarded a £25K bonus, later doubled to £50K, while male colleagues doing the same job were receiving payments of £650,000.

And with a raft of new legislation being introduced from this year the trend is only going one way.

Hence the growing interest in Employment Practice Liability Insurance. The policy provides protection in respect of legal costs and expenses, as well as court awards for a wide range of employment practice violations. It also covers spurious or unfounded allegations which can often be just as costly to defend. “A good QC could cost you £45,000 a week,” points out Ian McCallum, director of Marsh, the world’s largest risk management company. “There is more of a ‘go for gold’ mentality. Many employees will get legal aid so it costs them nothing to pursue the case. It’s balance sheet politics – it’s all about transference of risk.”

We are entering a new golden age of employee protection laws. The Employment Act 2002 will affect paternity leave and flexible working hours while other legislation due to appear on the statute books before 2006, in compliance with EU directives, will prohibit discrimination on grounds of age, religion, belief, disability and sexual orientation. This will affect the existing Race Relations Act, the Disability Discrimination Act and the Sex Discrimination Act among others. Existing legislation such as the so-called Whistleblowers’ Act or the Human Rights Act remain largely untested. All these laws are enlightened and welcome in the main but there will inevitably be abuses. The need for companies to assess and manage the risks is urgent. All companies will be affected. By October next year the exemption from the Disability Discrimination Act, currently enjoyed by small employers, will be removed.

As a direct consequence of this surge in UK employment legislation, the potential for actions raised by dissatisfied employees against their employer has increased dramatically. We now live in a litigation-conscious society in which employees are far more aware of their rights. If they feel these rights have been breached or undermined by their employer then they are prepared to take legal action.

“With the maximum compensation for unfair dismissal now increased to £52,600, it is more worthwhile for employees to launch a claim” says Marsh’s McCallum. There is no upper monetary limit in cases involving discrimination, which makes raising a claim in this area even more attractive.

Employers are feeling more exposed than ever and the cost of defending actions is substantial. Employment tribunal actions will normally require both parties to seek legal representation. Hearings can last for months with legal costs racking up.

Apart from the potential costs of losing an action there is also the disruption suffered by the company as valuable management time and energy is redirected towards the court case.

EPL covers the entity whereas directors’ and officers’ cover (see the September Journal) covers individuals within the company. Employment law claims are generally made against the company although individuals may also be pursued.

There is no hiding place any more and McCallum warns against complacency and companies deluding themselves that it does not really apply to them: “Areas such as construction, engineering and financial services have traditionally been high risk but more and more sectors are falling into this risk profile,” he says.

Should a law firm be looking for EPL cover for its clients it could arrange for the insurer to underwrite clients on an individual basis or the insurer can arrange flat rate cover for all clients. It’s a virtuous circle because the insurers get the premiums, the clients get the cover and the lawyers get the fees should an action be raised.

In the US, where EPL cover has been a major sector for years, the excess is $150,000 (£88,000), though there is a culture of exemplary and punitive damages which does not seem to exist in the UK. British companies with US subsidiaries probably already have EPL in place, and certainly any company with a presence in the US that doesn’t have EPL cover should get it as a matter of urgency.

In order to qualify for EPL companies should have a human resources division and a properly devised employee handbook complete with codes and practices. Not every company will be hit as hard as Coca-Cola. But not every company has pockets as deep as Coke’s.