EPL An inevitable trend

Hardly a day goes by when action against organisations, alleging discrimination, sexual harassment or unfair dismissal, isn't filed in a US court. As the world becomes more litigious, the idea of employment practices liability (EPL) has begun creeping its way across the pond into Europe.

With a growing number of trade unions, law firms and associations choosing to help workers bring claims, and the issue of employee discrimination and harassment finding its permanent home on the news pages, employers have begun to sit up and take note.

One big difference between the continents is that US workers are considered employees at will. This means their only recourse if fired is to take their case to a jury – a body that tends to lean in favour of David over Goliath. Settlements tend to be much higher in US law, which works on a punitive basis, and where a large specialised plaintiff bar chooses to target large corporations.

Elsewhere, as in Europe, most workers are employed by contract, which makes it clear what the employer's obligations are. Because they are already protected by these workplace rules and regulations, many feel that in Europe workers are less likely to bring a legal claim against their employer.

Nevertheless, claims are on the rise and there remain facets that are unique to each regime – in some parts of Europe the list of criteria that can be invoked to prove discrimination is exhaustive. As a result, an awareness of evolving local laws and the exposures in different jurisdictions, and an understanding of cultural nuances come to the fore.

European regulation

The UK is the most developed EPL market in Europe, perhaps because the concept has been easily transferred from one English speaking country to another. The situation in the rest of Europe looks set to follow the Anglo-American trend.

“Employers have begun to sit up and take note

The transposition of recent European anti-discrimination directives (all EU member states were due to have transposed the directives into national law by the end of 2003), shifting societal standards, a breakdown of the employee/employer relationship, more media attention, increasing union-sponsored litigation, and a growth in awards and settlements, are all pushing the issue forward.

This year marks the European year of equal opportunities for all: a five year €630m EU initiative. The programme aims to raise people's awareness of their right to equal treatment and promote a broad debate about diversity.

At the same time, the EU trade union confederation has agreed to assist workers with work-based harassment claims. Meanwhile, more and more independent equal opportunities centres are springing up, making it easier for people who feel disgruntled to bring a claim against their employer.

Two European Community directives, the racial equality directive and the employment framework directive, define a set of principles that offer everyone in the EU a common minimum level of legal protection against discrimination. The language specifies that the compensation awarded in a discrimination claim must be effective, proportionate and dissuasive. ‘We'll have to see how the European courts choose to interpret that,’ warns Michael Thyssen, European EPL product manager with Chubb. ‘But it could leave the door open to punitive damages.’

In certain member states, existing equal treatment legislation is already in place; in others legislation has to be adapted to conform to the directives. Understanding legislation, the primary driver of employment-related claims, is important in each jurisdiction but case law is equally significant. While some parts of Europe have yet to face high value discrimination claims, cautious employers may want to get ahead of the pack and prepare their policies and procedures.

UK employers suffer first

In the UK, where anti-discrimination legislation has existed in one form or another for over 30 years, the position is less employer friendly than in the rest of Europe. ‘Britain is very much closer to the US environment,’ says Chris Hewitt, a director at Lockton financial risk.

“French trade unions have their sights set on the deep pocketed manufacturing employers

2006 was a defining year, with the implementation of the employment equality age regulations. These made discrimination on the grounds of age before, during and after an employment relationship unlawful. There were just under 1000 age discrimination claims on record in the first year.

It is difficult to overstate the concern that the age discrimination legislation has caused in the UK. Afraid that they may make mistakes in the hiring process or in the wording of a job offer, employers are increasingly appointing lawyers to look over their job descriptions. Recruitment is a significant danger area, and here even big companies sometimes fall foul of the law. In a recent case, Ryanair was fined €8,000 (£5,411) after advertising for a ‘young dynamic professional’.

The new law completed a ‘six-pack’ of legislation that outlaws discrimination on the grounds of age, sex, race, disability, religion, and sexual orientation. In June this year, the UK government proposed introducing a Single Equality Act in an attempt to draw all equality legislation together in one place. ‘The UK will have a Single Equality Act on the books by 2009,’ predicts Adam Turner, an employment partner at Lovells.

The increasingly litigious nature of British society encourages more claims. The trend is exacerbated by employment tribunals, which offer easy access to the courts, and by the increasingly high sums of money being awarded for discrimination and unfair dismissal.

According to the latest figures from the Employment Tribunal Service (ETS), there were just under 240,000 employment-related claims made between April 2006 and March 2007. The ETS said the largest compensation, £250,470, was awarded in an unfair dismissal case. This figure may be misleading as employers often choose to settle large, high profile cases out of court. Turner explains: ‘Big, “sex in the city” claims often do not go all the way to tribunals, and these settlements can often stretch into the millions.’

The City of London has seen its share of discrimination and sexual harassment claims, driven by the macho male dominated work environment. In June 2007, Katharina Tofeji claimed that a sexist work culture forced her out of BNP Paribas; she lost her £1.3m claim.

In the same month, the BBC reported that a huge sexual discrimination claim worth more than $1bn was being brought against a major investment bank in London and New York as a class action for 500 women. And in May of last year, one of the most senior women at HBOS began an £11m lawsuit against bank executives over claims she became suicidal after suffering sex discrimination from a male boss. But large payouts are not confined to the financial services sector. Telewest Communications reportedly settled a sexual discrimination claim for £30,618 in 2000.

“The practice is very different from the law. It is actually quite common to ask people their age and marital status when they apply for a job. It is information that employees are willing to give.

Philippe Thomas, a partner with Lovells, based in Paris

In certain parts of Europe, employees have used statutory reinstatement requirements as leverage against their employers. In a 2001 Dutch case, a female employee requested an extension of her contract and was refused by her employer. She believed this to be the result of gender based discrimination and not, as the employer argued, because of lack of ability. She decided to sue her employer in a Dutch Civil Court. In this case the court ruled that discrimination in an employer-employee relationship could never result in an obligation for the employer to renew or extend a contract, only in damages. None were awarded in this case.

Although the lack of a policy aimed at preventing sexual harassment is not automatically a ground for liability if and when harassment actually takes place, employers who have not already done so would nevertheless be well advised to think about implementing such policies.

A survey released by Bermuda-based insurer Hiscox in September, revealed that bad language, rude jokes, over familiar behaviour and sexual innuendo are common in the workplace. The study found that well over half of employees swear in the office (65%) and conjure up nicknames for their colleagues (63%); over a third like to laugh at sexual innuendo (42%) and a third (32%) regularly hear jokes of a racist or sexist nature.

Commenting on the results, Gary Head, professions underwriting director at Hiscox, says: ‘The potential cost of employee lawsuits is huge and could even result in bankruptcy for a small business, not to mention untold reputational damage. It is essential that businesses review and revise their workplace practices and consider taking adequate insurance protection in the event that the worst happens.’

In a survey of 1,765 human resources managers conducted by OfficeTeam, the Netherlands topped a poll (39%) that asked if respondents had ever experienced bullying in the workplace. It was followed closely by Germany (38%).

New rules

As companies open subsidiaries and operations beyond their borders, they are encountering regulations and opening themselves up to exposures with which they may be unfamiliar.

“Two or three years ago it was mainly European companies with US exposures that bought EPL cover. Now that is changing and we are seeing a trend towards more submission from companies without US exposures.

Michael Thyssen, European EPL product manager with Chubb

The Transfer of Undertakings Protection of Employment (TUPE) regulation, an important element of British law, is designed to protect the continuity of the employment contract where one business is purchased or taken over by another. This is particularly important when a firm chooses to outsource, because it can inherit new employees and terms of agreement. Under the rules, employees could argue that their new conditions – salary, pension scheme, or working hours – do not represent continuity with their old employer.

‘TUPE is a notoriously difficult piece of legislation for UK business – it gives extensive protections to transferring employees and can apply whenever a company is involved in a merger or acquisition or outsources a function, or when it changes its suppliers,’ comments Naomi Feinstein, employment partner at Lovells.

Trade unions drive French claims

As in Britain, French anti-discrimination law was largely in place before the EU directives came into force. Differences in culture, however, have sometimes discouraged employees from making claims of discrimination. ‘The practice is very different from the law,’ says Philippe Thomas, a partner with Lovells, based in Paris, ‘It is actually quite common to ask people their age and marital status when they apply for a job. It is information that employees are willing to give.’

The way that claims have developed in France is largely through the trade unions, whose members are protected from dismissal. Employees tend to claim unfair dismissal rather than discrimination, because if they claim the former, the burden of proof is placed on the employer.

‘It's clearly growing but we have not seen a tremendous increase in discrimination claims,’ adds Thomas.

The attention of the French equal opportunities commission (HALDE) is currently on communicating more information about discrimination laws and assisting employees with filing a claim. French trade unions have their sights set on the deep pocketed manufacturing employers such as Peugeot-Citroen and Nestlé, both of whom have become the target of discrimination or harassment cases. Nestlé was condemned to pay €585,000 to one worker who claimed their career had been stunted because of trade union membership.

“According to the latest figures from the Employment Tribunal Service, there were just under 240,000 employment-related claims made between April 2006 and March 2007

In July 2007, the French cosmetic group L'Oréal was made to pay €30,000 to a civil rights association, SOS Racisme, and a further €30,000 to the state, for discrimination at the time of recruitment of sales and marketing staff. The same court decision condemned the recruitment agency that had interpreted L'Oréal's request for young white women. The fine was among the highest of its kind so far.

Collective bargaining agreements have an important role to play in France, and companies can face stiff resistance from staff who feel overworked. According to the World Health Organisation, France has the highest figures for work-related depression. In February 2007, a French prosecutor opened an inquiry into working conditions at Renault's ultramodern Beehive complex after the third suicide in less than six months.

Union officials said that workers had been under increased stress and mounting pressure since a restructuring plan was introduced. Renault has denied that there is a link between the deaths and working conditions. Earlier this year, four European trade unions and other social partners signed an agreement to fight against harassment and violence at work.

A recent trend in Europe is trade unions compiling information and inviting multiple employees to claim for discrimination. Since the early 1990s more and more European jurisdictions have enacted laws similar to US class actions that enable multiple plaintiffs to join forces to pursue claims that are too small to sue for individually. The trend towards class actions is a serious concern in Europe.

In a recent survey conducted by StrategicRISK, 92% of respondents believed that if an increasing number of European countries were to allow class actions, it would increase the potential cost of risk. Over half the respondents (53%) felt that employer's liability would be the area with the greatest potential vulnerability to a class action for their organisations.

Germany unaffected – as yet

The general act on equal treatment (Allgemeines Gleichbehandlungsgesetz), AGG, which came into force on August 18, 2006 implements a comprehensive discrimination regime in Germany. So far the courts have yet to see a spike in EPL-related claims. This could be attributed to the length of time courts take to process claims. Even so, in 2006 in the German state of Baden-Württemberg – home to one eighth of the population of Germany – only 0.3% of all labour claims were discrimination claims under the new law.

“The advice for employers that are active in more than one jurisdiction is to consider EPLI where it is necessary, but also to stress the importance of equality and fairness to all their employees.

‘The European directives have had a limited impact in Germany, because there is already strong legal protection under existing anti-dismissal law,’ says Mark Zimmer, employment partner German liability at Baker & McKenzie.

In one case of note since passage of the act, three Lufthansa captains filed a lawsuit against the airline challenging the mandatory retirement age of 60 stipulated by the airlines' current collective bargaining agreement with its pilots.

European insurance take-up low

It is little wonder that employment practices liability insurance (EPLI) – covering employers for claims of poor employment practices bought by employees – is seen as a must by most corporations with US exposures. However, most large employers outside the US do not see EPL as a risk that needs to be transferred to the insurance market, says John Batch, Marsh's head of EPL for Europe.

The EPLI market in Europe remains small. This is mainly because discrimination claim payouts do not tend to be as big as in the US, and companies are weary of handing over control of their legal issues to insurers.

Those in the know say the market is growing steadily, as more and more insurers take an interest and rates begin to fall. ‘EPL cover is growing and there has been a marked increase. Without question the European anti-discrimination directives have had the effect of focusing minds. But the take-up remains low compared to perceived risks,’ says Hewitt.

‘Two or three years ago it was mainly European companies with US exposures that bought EPL cover. Now that is changing and we are seeing a trend towards more submission from companies without US exposures,' comments Thyssen.

The main EPL insurers, such as Hiscox, AIG and Chubb, are also taking more of an interest in the small and medium enterprise market. Wendy Lamin, senior client adviser at Marsh's Brussels office, comments: ‘In the past, the deductibles on EPLI were so high that for a small company it wasn't attractive to purchase. Now, more players are trying to adapt their deductibles.’

Traditionally, employers have tended to rely on the coverage afforded by D&O policies to protect themselves from claims against individuals, says Paul Bluck, director financial services group at Aon. But Thyssen warns that a standard D&O policy will not cover the entity or personal injury losses – such as claims of mental anguish. ‘All employees are insured and the entity is covered with EPLI,’ he adds.

While the offer to insure against employer liability risks may have originated in the US, it certainly hasn't remained there. The question remains as to the extent to which it has spread.

The advice for employers that are active in more than one jurisdiction is to consider EPLI where it is necessary, but also to stress the importance of equality and fairness to all their employees.