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Ring-fencing wage and hour liability in M&A deals

Wayne Imrie

Wage and hour insurance is traditionally purchased by US organisations to mitigate risk resulting from alleged violations of US state and federal employment rules, which often end up in protracted and expensive class and collective action cases. Since we introduced our standalone wage and hour product Workplace Protect in 2015, the wage and hour market has matured; in particular, we are seeing a growing trend towards cover being bought to facilitate M&A transactions. 

A significant proportion of demand today is therefore driven by private equity (PE) firms involved in M&A transactions. These firms are looking to ring-fence liabilities in the face of changing employment practices, evolving workforces and increasingly aggressive plaintiff lawyers. PE specialists are recognising the benefits of smoothing the path for complex M&A transactions by working with multi-skilled insurance specialists to deliver tailored insurance solutions that manage these long-tail liabilities.

Growing wage and hour risk

Wage and hour liability risk is growing as changes in working practices and the rise of the on-demand economy have created new liabilities linked to employee compensation. In many instances where the law and employment regulations have failed to keep pace with the times, we are seeing new avenues open up for claims and litigation. According to law firm Seyfarth Shaw, the combined cost of the top 10 wage and hour settlements in 2017 was more than 70% above the previous year's tally, rising to US$1.2bn.

There is appetite for wage and hour cover from a variety of sectors, including healthcare, financial services, hospitality and manufacturing. Clients covered by Workplace Protect are typically mid-market firms, with between 500 to 5,000 employees, buying wage and hour limits of up to $10 million. We've also seen growing interest from larger organisations of 10,000+ employees, which are offered limits of up to $25 million via the Beazley-led Concorde Consortium at Lloyd's.

M&A transaction exposure

Wage and hour issues create significant liability exposure in M&A transactions. Traditionally, in order to cover this exposure, funds would be held in escrow to cover a potentially lengthy period of liability. More recently however, our wage and hour underwriters have been working closely with Beazley's Executive Risk team which specialises in transaction liability insurance to develop a bespoke package which avoids the need for funds in escrow and smooths the way to closing a transaction.

Given the complexities of M&A transactions, underwriters must have the requisite experience, understanding of the risks, capacity and ability to deliver the most appropriate, tailored solution. Beazley's policies are underwritten in the London market, where the unique ecosystem enables specialist insurers to come together and do this successfully.

Case Study

Negotiations ahead of an acquisition by a major logistics firm (A) of a smaller firm (B) stalled due to drawn-out discussions concerning the differing employment status of the firms' drivers and other workers. The smaller firm, which was private-equity owned, had a strong preference for more flexible worker contracts and retained more self-employed contractors.

Anticipating that a future owner of Firm B could inherit significant legal disputes over the employment status of workers on casual/flexible contracts, lawyers for Firm A demanded protection against any future claims, which were not available under their traditional warranty and indemnity insurance policies. For the exiting PE backers of Firm B meanwhile, the requirement to hold funds in escrow, potentially for a long time, was unappealing and proved to be a hurdle to releasing gross sale funds to investors. 

As an alternative, the lawyers for Firm A recommended a wage and hour insurance policy to insure their client against any future actions made on behalf of people currently working for Firm B. This provided the necessary clarity to both parties and provided Firm A with risk management advice around their risk exposure and the risk of future claims.                                                  

About the author:

Wayne joined Beazley in August 2006 as a member of the Management Liability team. He is responsible for underwriting various ML coverage lines including D&O, EPL, Fiduciary and W&H. He has over 20 years experience in the insurance industry, having held roles in broking, claims and underwriting.

Wayne Imrie
Wayne Imrie

Underwriter - US Executive Risk - London