Baloney Meter: 'Antidiscrimination Bond' Will NOT Prevent You From Being Sued
By Jennifer Millman
November 05, 2007
Employers beware: A new "invention" by Anne Marie Knott, an associate professor of strategy at the Olin School of Business at Washington University in St. Louis, may sound like an antidote to your legal woes, but it could actually make your problems worse.
The DiversityInc Baloney Meter, which ferrets out diversity claims and tells you the truth, heard about this and decided to investigate.
The "antidiscrimination bond" purports to reduce employer liability for discrimination lawsuits by screening out those most likely to sue, who Knott says are people of color, women and other "protected groups."
It works this way: Employers would offer the "bond" to prospective employees, who would pay an annual premium and earn interest the company would match on their investments. If the employees never sue the employer, they get the principal, interest and employer contributions back about six months after leaving the company to coincide with the period within which they could file suit. If they do sue, they forgo their investment. The bond is priced such that theoretically, job applicants with litigation in the back of their minds would opt not to purchase it, and the employer wouldn't hire them.
"[The bond is] a golden handcuff-type approach to get you not to sue; it's the strangest thing I've ever heard," says Weldon Latham, senior partner in the Washington, D.C., office of Davis, Wright, Tremaine, who advised The Coca-Cola Co. in its historic $192.5-million race-discrimination lawsuit. He also is diversity advisory board chair for Deloitte & Touche. Coca-Cola is No. 3 and Deloitte is No. 19 in The 2007 DiversityInc Top 50 Companies for Diversity®.
"It encourages poor behavior. The factor that is going to make you make your decision as to whether to sue or take some action is the wrong motivator," says Latham.
5 Wrong Assumptions
The bond is in the process of being patented by the University of Pennsylvania. Check out the patent application and its status for more information. What are the implications for employers who purchase it if it ends up on the market? Here are five wrong assumptions that could cost you millions, what Knott says, and our rebuttals.
Wrong Assumption #1: The bond is like a 401(k).
Knott Says: "The bond itself is something like a 401(k) plan. You explain to employees that [litigation] is a high cost for employers and this employer in particular is committed to being nondiscriminatory, but they would like to have this be a more conciliatory environment where you make a contribution and the employer matches the contribution."
Knott claims it's a win-win contract for everyone in which the employer avoids costly litigation and the employee earns interest on his or her contributions.
Rebuttal: There's a big catch: Unlike a 401(K), employees' money isn't protected by the federal government in the event the company goes bankrupt or has its assets frozen by the government. There's no guarantee your money will be there when you leave, and the money isn't tax-deductible anyway—two major benefits of a 401(k) plan that the "antidiscrimination bond" does not afford. In order to safeguard the investments of those who purchase the bond, Knott would have to appeal to Congress to relax Employment Retirement Income Security Act (ERISA) restrictions, a virtually impossible task.
Wrong Assumption #2: The bond will restore "race/gender-blind" hiring by employers.
Knott Says: Knott's prior research alleges that expanded rewards and protections under the Civil Rights Act of 1991 have increased discrimination against people of color and women at the hiring point and down the line because employers are wary of hiring people who will sue them. "The easiest way to avoid suits is to avoid people who have more grounds to sue," she says.
Knott's logic is that employers' fear of lawsuits looms heavily in their minds when they make hiring decisions, and this has a disproportionate impact on people of color and women. "Protected-group employees are implicitly more costly than non-protected-group employees for the same ability," she says.
"Clearly, there are people who are discriminated against, there's no question about that," notes Knott. "The intent here was to try to get rid of discrimination by the people who are discriminating precisely because it's economically costly to have these lawsuits."
Rebuttal: Knott's claim that fewer people of color and women are being hired is not true. In 1980, people of color were 18 percent of the work force compared with 22 percent in 1990, according to the U.S. Census Bureau, and 32 percent in 2005, according to the U.S. Equal Employment Opportunity Commission. Clearly, the numbers are going up.
Knott's contention that the bond will restore "race/gender-blind hiring" presumes that employers only are discriminating against protected groups because they perceive them to be more litigious. This argument ignores the recognition by an increasing number of companies, especially those on the Top 50 list, that the talent pool has changed demographically and that to succeed, they must hire more people of color and women.
Wrong Assumption #3: Avoiding lawsuits is the most "cost-effective" solution.
Knott Says: The bond can reduce litigation by 85 percent and increase productive-group employment by 1 percent to 3 percent. A new line of insurance called the Employment Practices Liability insurance emerged in 1990 in anticipation of increased claims under the Civil Rights Act of 1991, and the total cost to employers to protect themselves from discrimination lawsuits averages about $300 to $500 annually per employee for large firms, she says. The value proposition for employees to sue isn't very compelling either—with the expected value of the award less than $1,000, and the probability that they sue in the first place at 0.7 percent.
Rebuttal: High-profile discrimination lawsuits can irrevocably damage brand reputation whether you're ultimately found liable or not. The average two-day loss in market value of a company's stock after a discrimination lawsuit is more than 40 times the average cost of a settlement and legal fees—$169 million versus $4 million, finds Washington University.
Proactively addressing potential cause for discrimination is cost-effective. The Top 50 have meaningful and mandatory diversity training, employee-resource groups that have the ear of senior management, employee surveys on diversity, and strong mentoring programs.
Wrong Assumption #4: The bond won't cause discrimination by weeding out women and people of color.
Knott Says: An experiment she conducted indicates the bond doesn't disproportionately weed out women and job applicants of color, which is illegal discrimination. This means "protected groups" aren't necessarily more likely than white men to sue their employers, which means employers' practice of discriminating against these groups because of fear of litigation is unfounded, she says. The bond should put their minds at ease, says Knott.
Rebuttal: Implementing the "antidiscrimination bond" in a real company might prove more complicated. Once on the market, if it turns out that companies that use the bond end up turning down women and people of color at an 80 percent higher rate than white-male job applicants because they're perceived to be more litigious, it could cause a discrimination lawsuit against the company.
Wrong Assumption #5: Companies that purchase the bond have no discrimination problem.
Knott Says: "The enlightened firm that offers the bond would not offer it to these firms unless they agreed to specific employment practices that made them the nondiscriminatory firm that we want them to be."
Rebuttal: But what's to say the bond companies themselves aren't discriminatory? What kind of standards are they using to judge employment practices? What does the bond firm stand to gain by denying services to companies such as Madison Square Garden, which recently lost an $11.6-million sexual-harassment lawsuit implicating Knicks head coach Isiah Thomas, which might use the bond to avoid litigation rather than create an infrastructure that condemns discrimination in the first place?
(See also: Stripteases, Porn, the B-Word: Isiah Thomas Is Not Alone in Sex Harassment)
"The problem with the whole premise of this is that you must presume that the company is doing everything right," says Latham. "If they were cutting out frivolous lawsuits, then it would sound a lot better, but they're just cutting out lawsuits, and the lawsuit might even be legitimate and the conduct of the company might be inappropriate."
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