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Learn how to make the business case for diversity, October 25-27.
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More than ever, businesses must adopt a global mindset to remain viable in the worldwide marketplace. As companies attempt to promote cooperation among subsidiaries and affiliates, they may also seek to foster a corporate culture of diversity and inclusion. While that’s a noble goal, employers should be aware that there are significant risks in trying to implement a single diversity program that applies across national borders.
Here are a few of the legal approaches that different countries take toward diversity in the workplace and the potential consequences of running afoul of them.
In the U.S., the concept of “diversity” was first driven by race, but it has expanded to include gender, religion, pregnancy status, national origin, age and disability, among other things.
Equal opportunities for individuals in all of these groups are governed by federal legislation, including Title VII of the Civil Rights Act (race, color, religion, gender and national origin), the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Rehabilitation Act, the Fair Labor Standards Act (equal pay by gender), and the Dodd-Frank Wall Street Reform and Consumer Protection Act (diversity in the financial industry). In addition, individual states have separate diversity requirements, including some that track federal laws and others that are more stringent.
Problems that stem from U.S. diversity initiatives are often addressed through litigation, and employers that violate the law may face a variety of monetary penalties and equitable consequences as well as the negative effects of low public opinion and poor employee morale.
A key difference between diversity approaches in the U.S. and several other countries is in the use of quotas. While the U.S.’s Title VII does not permit businesses to use quotas based on gender, race or other prohibited factors, such quotas have been embraced in many European and Asian countries.
That said, a new rule that took effect on March 24, 2014, does establish “goals” for government contractors employing individuals with disabilities. The Office of Federal Contract Compliance Programs’ Final Rule 41 C.F.R. Section 60-741.45, which applies to individuals with disabilities under Section 503 of the Rehabilitation Act, establishes a “utilization goal of 7 percent for employment of qualified individuals with disabilities for each job group in the contractor’s workforce, or for the contractor’s entire workforce” if the contractor has fewer than 100 total employees. However, the rule provides that the goal should not be used as a quota or ceiling that restricts the employment of individuals with disabilities.
Federal legislation in Australia generally mirrors the diversity mindset of the United States. Australian Commonwealth statutes prohibit discrimination by employers against employees (or prospective employees) on the grounds of race, color, sex, sexual preference, age, physical or mental disability, marital status, family or career responsibilities, pregnancy, religion, political opinion, national extraction, or social origin.
In 2010, amendments to the Australian Security Exchange’s Corporate Governance Principles and Recommendations suggested that a diversity policy should be established in the financial industry as of July 1, 2010, and that the policy should be disclosed. According to an independent report covering the period of Dec. 31, 2011, to Dec. 30, 2012, and issued on March 8, 2013, a majority of Australia’s listed companies had a gender diversity policy in place or planned to implement one. Australia has also seen a significant increase in litigation stemming from diversity-related issues.
Unlike the United States, Australia has become increasingly interested in the use of quotas.
Many European diversity initiatives are aimed at achieving gender diversity, and they focus on doing that by imposing quotas for upper-level executives and company board members. Indeed, in 2011 the European Union called on all publicly listed companies in Europe to sign a pledge to increase women’s presence on corporate boards to 30 percent by 2015 and 40 percent by 2020.
Norway. Norway was the first European country to introduce such quotas in 2003 when the Norwegian Parliament amended the Public Limited Liability Companies Act of 1997 (PLLCA) to ensure adequate participation of women on company boards. The PLLCA required that each gender represent 40 percent of a company’s board. The rule applied to publicly owned companies as well as approximately 450 public limited liability companies in the private sector. Companies that did not comply ran the risk of legal sanctions, including delisting and dissolution by order of the court. Norwegian companies had until January 2008 to meet the requirements.
Spain. In March 2008, Spain enacted a similar law requiring effective equality between women and men. It introduced a provision to establish boards of directors with a “balanced presence” of women and men (defined as a maximum presence of each gender of 60 percent and a minimum of 40 percent) within eight years. The Spanish government encourages companies to meet this goal through incentives as opposed to penalties, offering potential priority status for government contracts.
France. France soon followed suit with its 2011 mandate that the proportion of directors of each gender may not be less than 20 percent as of 2014, and 40 percent as of 2017, in listed companies. Other European countries, including Belgium, Italy and the Netherlands, have imposed similar gender quotas.
United Kingdom. In 2010, the United Kingdom enacted antidiscrimination legislation, including the Equality Act 2010, that prohibits discrimination across the following “protected characteristics”: disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race (which includes color, nationality, and ethnic or national origin), religion or belief, sex, and sexual orientation. Discrimination under the Equality Act includes direct discrimination, indirect discrimination, discrimination arising from disability and reasonable adjustment (reasonable adjustment is similar to the U.S.’s “reasonable accommodation” requirement), unequal pay, victimization (retaliation), harassment, and third-party harassment.
In August 2010, the U.K. government asked Lord Davies, a former banker and government minister, to develop a business strategy to increase the number of women on boards; the resulting report, Women on Boards (also known as the “Davies Report”), was published in February 2011. Among its recommendations:
Financial Times and Stock Exchange (FTSE) 100 boards should aim for a minimum of 25 percent female representation by 2015.
By September 2011, chairmen of FTSE 350 companies should set out the percentage of women they aim to have on their boards by 2015.
Quoted companies should be required to disclose each year the proportion of women on the board, women in senior executive positions and female employees in the whole organization.
The Financial Reporting Council should amend the U.K. Corporate Governance Code to require listed companies to establish a policy concerning boardroom diversity, including measurable objectives for implementing the policy, and disclose annually a summary of the policy and report progress made in achieving the objectives.
A second report about women on boards was issued in April 2013. It showed that women accounted for 17.3 percent of FTSE 100 and 13.2 percent of FTSE 250 board directors (as of March 1, 2013), and that women accounted for 34 percent of all board appointments.
The Davies Report has faced significant opposition. In fact, a research study published by U.K.-based recruitment firm Search Consultancy suggests that 64 percent of U.K. businesses polled were fundamentally opposed to Davies’ voluntary quota proposal and 80 percent were opposed to mandatory quotas.
Many Asian countries use quotas in connection with the employment of individuals with disabilities.
In Japan, private firms with 50 or more employees must hire people with physical, intellectual or mental disabilities at a rate of 2 percent or more of the total number of their employees. Employers that do not comply must pay a fine equal to the numerical shortage of such employees multiplied by 50,000 yen, which translates to approximately $500 per month.
With so many types of diversity programs around the world, a global company that adopts policies to meet one country’s laws could violate another’s. For example, the quota requirements imposed by several countries in Europe and Asia would violate the law in many U.S. employment situations. To ignore the consequences of a company’s one-size-fits-all diversity policy may be a costly mistake.
For Novartis Pharmaceuticals Corp., a Swiss company with operations around the world, the price tag was over $200 million. In 2010, the company was involved in class-action litigation in the United States that led to a jury trial regarding allegations of gender discrimination, pay inequity and retaliation. During a six-week jury trial on these claims, there was enough evidence for the plaintiffs to make the case that the company had engaged in a continuing pattern and practice of discrimination against its female employees.
The jury returned a verdict of $250 million in punitive damages and $3.4 million in compensatory damages for the named plaintiffs; compensatory damages for the remaining class members were to be decided separately. The matter eventually settled when Novartis agreed to pay $152.5 million to class members, spend over $22 million to improve its internal processes and pay plaintiffs’ attorneys over $40 million in legal fees.
To avoid costly payouts such as that one, employers must be constantly vigilant of the ever-changing legal landscape—particularly in venues with aggressive enforcement—as they strive to achieve diversity for employees while also protecting themselves.
Larry Turner and Allison Suflas are attorneys at Morgan, Lewis & Bockius LLP in Philadelphia.
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