Respect@Work developments and doing your due diligence: The "Weinstein warranty" in the era of #MeToo and Respect@Work

Investigations into the behaviour of Harvey Weinstein and other high-profile figures in business, law, politics and entertainment have pushed workplace sexual harassment to the forefront of social discourse in recent years.

In the world of business, the #MeToo movement has prompted companies to consider the reputational risk of sexual harassment allegations when undertaking merger and acquisition (M&A) deals. As well as considering the financial and legal "health" of a target company, businesses conducting due diligence are now also considering the company's culture, policies and procedures.

In this update, we explore what is being referred to as the "Weinstein warranty" in the context of M&A, and provide an update regarding the implementation of changes to the Fair Work Act 2009 (Cth) and the Sex Discrimination Act 1984 (Cth) resulting from the Respect@Work recommendations.

The "Weinstein warranty": What is it?

The extent of workplace sexual misconduct, including harassment, assault and other gender-related discriminatory behaviour is a critical social issue, evidenced by the findings of the Australian Human Rights Commission in its Respect@Work Inquiry Report (a recent update on the implementation of recommendations following the report is located at the end of this article).

The trend towards managing the risk of employee behaviour is a phenomenon born out of both Wall Street and Hollywood, leading to suggestions that there should be a "Weinstein warranty" added to M&A agreements. These clauses serve the purpose of "vouching" for the behaviour of a company's senior leadership, providing a warranty that senior employees have no current or prior sexual misconduct complaints against them.

In the United States specifically, there has been a rise in the inclusion of sexual misconduct claims warranties within sale agreements. For example, when Del Frisco’s Restaurant Group Inc. acquired the Barteca Restaurant Group for $325 million, as part of the deal Del Frisco required information as to whether any manager who supervised eight employees or more had been accused of any sexual misconduct from 2015 onwards.¹ Another acquisition saw Cotiviti, a leading healthcare information company, enter into a merger agreement requiring disclosure of sexual harassment allegations made against senior employees supervising at least eight other employees.²

Whilst the "Weinstein warranty" is not yet commonplace in the Australian market, it is starting to make an appearance in Australian deals as advisors begin to urge their clients to consider its inclusion. Buyers, sellers and employers alike should be aware of its existence.

What does a "Weinstein warranty" look like?

A "Weinstein warranty" is more extensive than the traditional "no litigation and disputes" warranty. It places the buyer's focus on the potential for employees of a target business to have undisclosed sexual harassment or misconduct issues.

Typically, a sexual misconduct claims warranty requires the seller to warrant that:

• none of the target company's senior executives is, or has ever been, subject to complaints or claims of sexual harassment, and
• no target group company has entered into any settlement in respect of any sexual harassment complaint or claim.

The extent of these warranties varies. Although they are typically limited to allegations against senior management and founders, they do not usually mandate a restriction that allegations stem solely from employees, but are also designed to capture allegations made by a seller's contractors or clients.

A clause will usually require a seller to disclose sexual harassment cases on foot, along with any past allegations or complaints, introducing an element of historical transparency.

What does this mean for businesses?

Australian businesses that are contemplating acquiring a new target and are concerned about employee litigation – whether from a strict liability perspective or due to reservations about brand/reputational impact – should consider including a "Weinstein warranty" in sale agreements.

Buyers should make formal inquiries into a target's anti-discrimination, harassment and bullying policies along with inquiries into staff training processes. If you are considering buying a business and are concerned about past employee grievances, some questions worth asking as part of the due diligence process include:

• Does the business have an anti-harassment policy?
• Is there a guide distributed to employees regarding a no-tolerance approach to sexual misconduct and harassment?
• What are the company's procedures for reporting sexual misconduct?
• How does the company deal with complaints once they are raised? For example, is there a system in place to prevent victimisation of people who raise allegations of harassment or sexual misconduct?
• What actions has the company taken in response to findings of sexual misconduct or harassment to date?
• What employee complaints have been made in the past?
• Has the company entered into any non-disclosure agreements with employees or others outside the business in relation to any findings of misconduct?
• What training have employees received on harassment and sexual misconduct?
• How often is training given and how often is it updated in line with new laws and policies? This is particularly pertinent given current government debate around the Sex Discrimination and Fair Work (Respect at Work) Amendment Bill 2021.

Implications for employers

Employers may choose to make their business more attractive (and protect their reputation) by asking employees appointed or promoted to senior positions to sign a declaration as part of the recruitment or promotion process, declaring that they have had no current or prior sexual misconduct allegations made against them. A signed declaration may widen the scope for an employer to take action later on, or at least to distance itself from the conduct, if it becomes apparent the candidate knowingly lied.

If a potential candidate expresses that there have been previous allegations made against them and the employer chooses to proceed with recruitment, the employer should consider taking reasonable steps to inquire about the allegations with the applicant's former employer, and/or provide additional harassment training to the candidate.

Employers who do not take sexual harassment in the workplace seriously are leaving themselves open to significant risk. Not only can employers be vicariously liable for sexual harassment by employees (with trends demonstrating that complainants are receiving increased compensation); there are the added issues of reputational damage, loss of community confidence and, in the M&A context, reluctance from buyers to purchase a business that has a reputation for allowing issues of sexual harassment and misconduct among employees to go unchallenged.

Although lawsuits concerning employment-related misconduct may not have traditionally factored into a buyer's decision to purchase a business, in the current climate evidence of sexual misconduct from a senior employee is fast becoming a critical issue.

An update on Respect@Work recommendations and sexual harassment laws

On 24 June 2021, the Federal Government introduced the Sex Discrimination and Fair Work (Respect at Work) Amendment Bill 2021 to implement several recommendations of the Respect@Work report.

After being referred to the Senate Education and Employment Legislation Committee for inquiry, on 2 September 2021 the Bill passed both Houses of Parliament.

The Sex Discrimination and Fair Work (Respect at Work) Amendment Act 2021 (Respect@Work Act) implements six of the 12 recommendations for legislative reform arising from the Respect@Work report, and introduces reforms to the Australian Human Rights Commission Act 1986 (Cth), the Sex Discrimination Act 1984 (Cth) and the Fair Work Act 2009 (Cth).

The Respect@Work Act introduces the following notable changes to the Sex Discrimination Act 1984 (Cth) (SD Act):

• The Act inserts a new provision into the SD Act expressly prohibiting harassment of a person on the ground of their sex. This amendment confirms the existing position that sex-based harassment is unlawful
• expands the coverage of the SD Act by incorporating concepts of "worker" and "person conducting a business or undertaking", as commonly seen in work health and safety legislation. This has the practical effect of covering people not previously included under the SD Act, such as interns, self-employed workers or volunteers
• expands the coverage of the SD Act to include members of Federal Parliament, their staff and Commonwealth judicial office holders.

The Respect@Work Act amends the Australian Human Rights Commission Act 1986 (Cth) to extend the timeframe during which a complaint can be made to the Australian Human Rights Commission from six months to two years, in order to reduce procedural barriers for complainants.

It also amends the Fair Work Act 2009 (Cth) to allow the Fair Work Commission to make an order to stop sexual harassment within its anti-bullying jurisdiction, even if it is a one-off occurrence (in comparison to bullying, where the behaviour must be repeated); changes the definition of serious misconduct in the Fair Work Regulations 2009 (Cth) to include sexual harassment; and clarifies that sexual harassment constitutes a valid reason for termination of an employee (in determining whether a dismissal is harsh, unjust or unreasonable and therefore, unfair).

Finally, the legislation also provides for two days' paid compassionate leave if an employee, their spouse or de-facto partner has a miscarriage (unpaid for casuals).

Interestingly, the government declined to implement the "positive duty" recommendation in the Respect@Work report that would impose a duty on employers to take reasonable and proportionate measures to eliminate sex discrimination as far as possible.

In responding to the Respect@Work report, the government stopped short at accepting this recommendation, which it considered was already addressed by an employer's obligation under occupational health and safety laws to, so far as reasonably practicable, ensure an employee is not exposed to risks to health and safety, but agreed to "assess whether such amendments would create further complexity, uncertainty or duplication in the overarching legal framework."

The new legislative changes will take effect the day after the Respect@Work Act receives royal assent. Employers should be ready to review their workplace policies and complaint processes in line with the new laws.

Authors: Kaitlyn Gulle, Partner and Gemma Weller, Lawyer

¹Ascenta, (2018, November), "The Effect of #MeToo on Business Deals. The Rise of the Weinstein Warranty".

²Tippet, Elizabeth C. (2018, August), The Conversation, "#MeToo movement finds an unlikely champion in Wall Street with the new 'Weinstein clause".