Good practice might save the day in court

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Human resources departments, often vilified as pointless bureaucracies, play an important role in ensuring companies follow correct personnel procedures. The saga between Merrill Lynch and Stephanie Villalba is a warning of what can happen if it goes wrong.

Villalba, a former head of private client business at Merrill Lynch in Europe, launched a sex discrimination case against the bank last June, claiming she was victimised and forced out of her job. In December, Merrill Lynch won the case. The tribunal found it had not discriminated against Villalba, who it said was dismissed for poor performance, rather than issues related to gender.

Villalba has launched an appeal, accusing the judgment of being unintelligible, perverse and erring in law. A crucial element of her case is the tribunal's finding that Sean Woodroffe, Merrill Lynch's then international HR director, as well as two senior line managers, allegedly lied under oath about a discussion on discrimination between Villalba and an HR officer.

Woodroffe and the others said the discussion did not take place. Villalba said it did and she was victimised and lost her job as a result.

Lawyers said Merrill Lynch won the discrimination ruling despite, rather than because of, the interventions of its HR department.

Jane Mann, head of employment law at UK law firm Fox Williams, said: 'Although in this case Merrill defeated the discrimination claim, employers should not assume it is OK to disregard the correct HR procedures. This is a risky strategy.'

A head of human resources at a European bank in London said the Villalba case marked a reversal of the usual situation in which line managers come across badly in tribunals and it typically falls to the department to portray the business in a favourable light: 'Tribunals don't understand much about investment banking and they tend to misinterpret things.'

Alleged lying under oath was not the only shortcoming identified in Merrill Lynch's HR team. The 78-page initial judgment highlighted a catalogue of failings. They included a haphazard performance rating system, an informal and opaque system for promotions, failure to address Villalba's poor performance correctly and victimisation during the final months of her employment.

Victimisation was reflected in several ill-conceived e-mails. When Villalba told the bank she was starting proceedings,Woodroffe sent an e-mail saying: 'The fun begins!' Although it said she was not discriminated against, the tribunal ruled Villalba was treated 'shabbily and unfairly', that she was victimised and unfairly dismissed.

Compensation for unfair dismissal is capped at 56,800 (€82,930), while compensation for discrimination is unlimited. Villalba claimed more than 7m in damages and is rumoured to have spent 1m in legal fees. Her appeal against the discrimination ruling was inevitable, according to most lawyers.

Regardless of the outcome, Merrill Lynch's HR department has attracted unfavourable attention.

Paul Fontes, a partner in employment law at law firm Eversheds, said many of the criticisms levelled at Merrill Lynch in the initial judgment suggest HR did not have a sufficiently strong role. 'A lot of decisions seem to have been made by senior executives, according to their perceived interest of the business. HR did not ensure the proper processes were followed and may have been too willing to please.'

A spokesman for Merrill Lynch said it has taken steps to ensure the mistakes are not repeated: 'This case related to events in 2002 and the beginning of 2003. There have been many changes within the business since then and processes are continually enhanced and improved.'

Woodroffe is no longer with the bank, having become global head of human resources at Financial Guaranty Insurance Company, a US insurer. Woodroffe declined to comment on the case but said his departure from the bank was unrelated.

What are the implications for HR departments at other banks? The head of human resources at a European bank said the function should aim to reduce the risk of banks falling foul of the law: 'You need to do things in a fair way, otherwise you run a litigation risk, to say nothing of alienating talented employees. HR needs to be transparent and not try to play games.'

E-mails are a particular risk, he said: 'In a tribunal, everything you have done is analysed to death. E-mails are terribly dangerous: once written, they never go away.'

Mann is similarly cautionary: 'The big message is that companies need to remind staff to be more aware of what is likely to be disclosed in subsequent litigation.'

Lawyers said performance assessments also need to be tightened. Although the initial judgment said Villalba's pay was justified, the notion that bonuses were awarded as a result of a 'haphazard and subjective process' does not augur well for future discrimination claims.

Stephen Sidebottom, chairman of the City Personnel Group and head of HR at Nomura, the Japanese investment bank, said banks have devoted considerable effort to improving performance management and rating systems in recent years. 'Court cases have reinforced the need for fairness. Effective performance management processes help achieve this and several banks have done good work in this area.'

Banks are coy about the way bonuses are determined: several declined to comment. However, a human resources manager at a US bank said its appraisal system was upgraded to ensure gender fairness: 'After performance has been ranked we conduct a diversity review to see whether male and female employees have the same pay for the same rankings.'

Where rankings and pay diverge, he said, managers are asked to justify their decisions. 'We're not the police but we will always ask them to reconsider.' Merrill may be left wishing its human resources department had been similarly robust.

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