a company's drive to ensure that risks associated with workforce reductions are appropriately managed. Broadly when we s
RISK FOCUS MINING BULLETIN OCTOBER 2016 | ISSUE 4: COPING IN A COMMODITY DOWNTURN
Implications of cutting workforces When confronted with protracted economic downturn, it is the logical response of any corporate to immediately take stock of the company’s financial position and where appropriate, to look for cost-cutting measures. The decision to reassess staffing levels, on account of high labour costs, is rarely made lightly; cutting workforces is extremely contentious both from a legal and reputational perspective, and it can impact long-term productivity as staff morale is adversely affected.
Workforce reductions inevitably carry
many emerging markets are becoming
appropriately managed. Broadly when
a range of commercial and contractual
increasingly litigious. As such, mining
we speak about ‘employee benefits’
risks. These risks are more acute in
companies have a range of short and
we refer to group life, critical illness,
the mining sector on account of the
long term risks to manage when making
accident and health insurance, disability
unionisation of the workforce, but also
cuts to workforces.
insurance, travel medical coverage, and
because of complex, and ever evolving, employment legislation and, the fact that employment law and regulations vary immensely between countries. For mining companies with global portfolios, non-adherence to local employment law can carry financial penalties and heighten reputational risk. In addition,
employee professional counselling and
EMPLOYEE BENEFITS
rehabilitation programs.
Typically contractual obligations to
A company will usually only have to
workers – in other words, employee
provide employee benefits through the
benefits – will be part of the focus of
duration of an employment contract,
a company’s drive to ensure that risks
however, there may be additional,
associated with workforce reductions are
long-tail obligations, such as provisions
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MINING BULLETIN | Risk Focus | October 2016
“The risks of not properly implementing, managing and reviewing employee benefits can lead to uninsured liabilities and negative publicity for any organisation as well as fines or imprisonment for its most senior officials – clearly, getting this wrong is not an option but this requires stewardship and governance.” – Lee Thurston, JLT Employee Benefits Global Benefits Director
of trade union agreements, pension
company may find itself with unforeseen
typically rises when there are flaws in
liabilities, or financial commitments within
liabilities – which undermines the entire
the administrative process for managing
a workers’ compensation structure which
rationale behind cutting workforce in the
benefits. On account of the complexities
are less straightforward to pinpoint.
first place.
of benefits on offer to both employees and
Other employee benefits, such as end of service gratuities, may also be considered a liability in this context as in many cases these benefits are unfunded. Lee Thurston, JLT Employee Benefits Global Benefits Director, has seen a shift in large multinationals beginning to take their employee risks as seriously as the risks associated with assets. “The risks of not properly implementing, managing and reviewing employee benefits can lead to uninsured liabilities and negative publicity for any organisation as well as fines or imprisonment for its most senior officials – clearly, getting this wrong is not an option but this requires stewardship and governance,” comments Thurston.
The immediate challenge is understanding the company’s position in respect of employee benefits. Employment law and the regulatory environment around the hiring and firing of employees varies considerably from country to country and, as typically it is the HR function within a business that handles employee benefits, there can be an issue around whether risks associated with employee benefits are properly being identified, managed and even transferred, within the company’s risk management process. Step one therefore is to begin to consider employee benefits within the proper context of a risk management framework; the mismanagement of
contractors across a mining company’s portfolio, benefits administrators (typically the HR function) will need to structure a robust set of processes and procedures. Upfront planning around how to gather and store data is crucial for this. Employee records should be stored alongside benefit choices, there should be a procedure for adding new employees, spouses and dependants to a plan, for gathering information (and a method for updates) and waivers, administrators ought to have up to date plan details and guides at their fingertips to handle queries, and be properly equipped to communicate plan changes to the relevant group of employees.
As such, mining companies have to
employee contracts can result in financial
The above operational management of
manage immediate risks of reducing
loss and therefore should be considered
benefits also rests on the effectiveness
workforce size, such as heightened
a commercial risk that requires mitigation.
of the human resources (HR) team itself
risk of labour disputes, or an uptick in allegations of breach of employment law, and must also potentially have to manage long-tail liabilities which stem from the management of employee contracts and benefits today, should an asset be sold off in the future. If workforce reductions are not managed appropriately, a mining
Managing the risks of employee benefits requires a two pronged approach; stress-testing and refining the operational management of benefits and secondly, considering forms of risk transfer. The risk of an errors and omissions (E&O) claim from employees or their families
as high turnover of HR personnel, too few HR personnel, or personnel with suitable training in the administration of global employee benefits plans heightens the risk of the operational processes and procedures breaking down – in turn raising the risk of a legal dispute.
MITIGATING RISK Once the operational strategy for administering benefits has been improved, there are a variety of steps that can be taken to mitigate or transfer any perceived remaining risk. Firstly, in some cases multinational pooling can help reduce the risk of gaps or duplications of benefits for the insurance components of a benefits scheme, such as life, health, critical illness and disability. Look for
www.jltspecialty.com | Risk Focus
for its workforce by benchmarking
in workforce size. For labour intensive
against industry peers, which parts of
industries such as the mining sector,
the scheme employees value most and,
a cut in workforce size can make a
how benefit plans need to be structured
significant contribution to overall cost
depending on the make-up of the
saving strategies as not only salaries,
workforce (local versus expatriate, and
but also employee benefits, healthcare
employees versus contractors). Such
provisions, and other head count driven
reviews will help identify the effectiveness
expenses decrease.
of the benefits scheme to the company, and make recommendations around cost efficiencies.
an insurer which has a sufficiently large global footprint to avoid having to buy many different employee insurance policies across local territories. These
Buyers will want to minimise their exposure to workforce legal disputes, and may need the seller to make comprehensive representations regarding
“Independent third party reviews will help identify the
employee benefits where a Buyer is assuming the Seller’s benefit plans. Usually this will include a representation
insurers can also provide resource, such
effectiveness of the benefits
that the acquisition will not result in
as country reports, which outline local
scheme to the company,
the increase of employee benefits, or
The suitability of multinational pooling
and make recommendations
benefits, in addition to representations
is entirely dependent on your territories
around cost efficiencies.”
requirements for the hiring of workers.
accelerate the timing of payment of that the Seller has complied with all local
of operation and local regulatory
laws applicable to employee benefits,
requirements – your broker will be able to
and made representations around the
advise on the most suitable structure. Also consider whether the existing benefits scheme is as cost-effective as it can be. It may be that a restructuring exercise eases some of the pressure of making deep workforce cuts. Independent third party reviews can help employers better understand if their programme of benefits is appropriate
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MERGERS AND ACQUISITIONS
funding of the plans. Crucially, the
The current trend for mining asset
representations around any violations
sell-offs and acquisitions also has
of employment laws, previous labour
implications for workforces. In many
disputes, strikes, and work stoppages,
cases, mergers and acquisitions are
and will also have to detail pending or
undertaken with a commitment to cost
threatened labour grievances or unfair
reductions – often through a decrease
labour practice.
main representation will revolve around disputes; Sellers will have to make
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MINING BULLETIN | Risk Focus | October 2016
JLT Mining is a specialist broking team, with an exclusive focus on risks spanning the entire mining project lifecycle. We manage a large and established client base of mining companies, contractors, traders, and financiers, across a range of commodities and regions.
Should a company want to go one step
Acknowledged as placement leaders, our brokers know how to position complex mining risks to deliver the broadest coverage terms, for the best possible rate. We deliver local service, but with global reach, by leveraging JLT Group’s network of 10,000 specialists across 135 countries. Our in-house claims division has collected over GBP3bn since 2010, while our consultancy team helps clients identify, understand, and mitigate risk more effectively.
structure. Adding employee benefits into
Our objective is simple: to provide a competitive advantage by enhancing our clients’ resilience and empowering them to take risks.
liability (EBL)’ insurance, either on a
further and examine risk transfer, there are several options available. Captives are routinely used by the largest mining companies, but typically most mining companies tend to manage employee benefits risks outside the captive a captive structure enables diversification of the captive as well as removing some of the administrative burden of managing employee benefits in-house, as captive management can be entirely outsourced. This frees up HR personnel to focus more on managing the risks of the employee benefits plan, rather than the day to day administration. There is an option to consider an increasing trend for ‘employee benefits standalone basis or as an extension to directors’ & officers’ (D&O) insurance, or general liability insurance, if companies are particularly concerned around liabilities in the context of the administration of benefits plans. All of these steps can be used to properly assess the suitability of the structure of the employee benefits offering, to minimise risks associated with workforce cuts, and potentially make further cost savings.
CONTACTS
JLT Specialty Limited The St Botolph Building 138 Houndsditch London EC3A 7AW www.jltspecialty.com Lloyd’s Broker. Authorised and regulated by the Financial Conduct Authority. A member of the Jardine Lloyd Thompson Group. Registered Office: The St Botolph Building, 138 Houndsditch, London EC3A 7AW. Registered in England No. 01536540. VAT No. 244 2321 96. © September 2016 271708
Simon Delchar Managing Director, JLT Mining +44 (0) 20 7466 6226
[email protected]
Amy Gibbs Head of Global Mining, JLT Mining +44 (0) 20 75558 3958
[email protected]
Lee Thurston Global Benefits Director JLT Employee Benefits +44 1727 775067
[email protected]
Andrew Hulme JLT Insurance Management Bermuda +1 441 292 4364
[email protected]
This publication is for the benefit of clients and prospective clients of JLT Specialty Limited. It is not legal advice and is intended only to highlight general issues relating to its subject matter but does not necessarily deal with every aspect of the topic. If you intend to take any action or make any decision on the basis of the content of this bulletin, you should first seek specific professional advice.
