Firms face the growing threat of legal actions by ex-employees which can result in considerable cost and reputational damage, but cover is available to minimise the expense. Ben Cook reports

As the economic climate worsens, so the risk of employers having to confront a disgruntled former employee at an employment tribunal increases. Some companies will be forced to make redundancies and, if members of staff believe they have been sacked unfairly, they may seek compensation at a tribunal.

The penalties inflicted on employers for wrongly dismissing workers can be severe – awards of £200,000 are not uncommon – and Tribunals Service statistics show that the amount of employment disputes going to tribunals is on the increase. In 2006-07, the number of cases brought to employment tribunals stood at 132,577, a 15% increase on the 2005-06 total of 115,039. However, employers will be reassured to know that cover is available to protect against this growing risk.

Mark Shreeve, chief executive of Angel Underwriting, says current economic conditions mean that the risk of employers being taken to a tribunal is increasing. “The economy is tight and employers have to be realistic. They may have to ask employees to reduce their hours, or some will have to lay off staff,” he says.

However, problems arise for companies if employees think they have been discriminated against. “Some employees may claim they have been laid off because of their age or colour,” Shreeve says. He adds that these type of claims are common in the US, and that they are increasing in the UK. “It is happening more frequently, there is an underlying trend – the economic circumstances of the credit crunch are an overlay.”

Shreeve points out that, regardless of whether or not an employer successfully defends itself at an employment tribunal, it faces a bill of several thousand pounds to cover legal costs. But he adds that employers can insure against these costs for a small outlay by buying employment practices liability (EPL) cover (see box). “Some policies can cost less than £1,000. More brokers should point this out, as every employer has this potential exposure, but less than 10% have cover.”

Shreeve says that employers ought to acknowledge that they are at risk of being taken to a tribunal. “Employers should be realistic, these things do happen,” he says. Shreeve adds that employers may feel that they are adequately protected if they have legal expenses cover, but he urges companies to check the small print on such policies. “Often with legal expenses cover, if you don’t follow the exact procedures outlined in the policy, it won’t cover you,” he says. Shreeve warns that, while you may be able to purchase legal expenses cover for as little as £70, it will probably be inadequate if you are taken to a tribunal by a disgruntled employee. “It won’t give you a lot of cover,” he says.

Recent legislative changes have increased the risk, according to Shreeve. He highlights the age discrimination laws – which came into effect in October 2006 – as one of the area of risk. But he adds that purchasing EPL cover can minimise this threat. “You can save a large amount of money [by buying cover]. We recently had a claim that came in at £30,000.”

“Companies are five times more likely to face an employment tribunal than make a claim for fire.

Callum Taylor, Hiscox

However, as the number of cases going to employment tribunals increases, EPL cover may become more expensive. Shreeve says: ‘ ‘ “Has it got more costly? No, but we’re just at the beginning – it might go up.”

Brendan Dawson, director of insurance services at Qdos Consulting, says that small businesses that have rapidly grown from having a handful of staff to employing, say, 30 people are particularly at risk of being taken to a tribunal by a discontented ex-employee. This is largely because such companies may not be familiar with the intricacies of employment law.

“If you take a company that has done its own thing, been successful and taken on a few more people, it doesn’t know how to manage them. It is going to fall foul of the law because it is not familiar with all the red tape,” Dawson says.

Qdos Consulting offers to help companies tackle this problem by providing assistance in the drawing up of employment contracts and company employment handbooks. Dawson says that the credit crunch is likely to result in more employment tribunals taking place. “In the economic climate and with money being tight, there is a likelihood of redundancy as companies may need to shed some people.”

Dawson adds that defence costs for the average employment tribunal case total on average around £2,000 . However, in addition to defence costs, the size of an award in a sex or age discrimination case could be sizeable. “It can be as much as three months’ salary,” he says. Legal expenses cover is set to become more expensive as more disputes go to tribunals, according to Dawson. “The cost will go up as incident rates increase – loss ratios will go up, which will trigger a price increase.”

Dawson argues that companies are waking up to the need to insure themselves. “In the past six months, awareness among employers has increased.”

He also warns that an expensive employment tribunal could ultimately destroy some businesses. “We recently had a case which ran up £6,000 in defence costs and a £30,000 award – that would break some companies.”

“A company that has been successful and taken on a few more people does not know how to manage them. It is going to fall foul of the law because it is not familiar with all the red tape.

Brendan Dawson, Qdos

Mike Timmons, head of underwriting at legal expenses insurer DAS, says more employment disputes are going to tribunals because employees are more aware of workplace regulations. “There has been a lot of legislation in recent years – sex discrimination and age discrimination laws – and there has been an increase [in cases going to tribunals] because it’s so much on people’s minds,” he says. However, Timmons adds that this is being offset because companies are becoming more knowledgeable about employment law and how to manage employees correctly. “Employers are more aware that they have to follow procedures,” he says. In addition, Timmons says that more employers are looking at mediation as a way of resolving disputes rather than going to a tribunal.

Timmons warns that companies can face potentially crippling pay-outs if they lose an employment tribunal case. Compensatory awards in unfair dismissal claims have a maximum limit of £63,000, but, if discrimination is involved, the awards can be massive. “It’s open ended. We have seen £200,000 cases and legal costs on top of that,” says Timmons.

Callum Taylor, management liability underwriting manager at Hiscox, says it is not only when companies sack staff that they are at risk of being taken to an employment tribunal. He argues that employees who suspect there is a chance they will be made redundant may decide to bring a claim against their employer. “Any company is exposed when making individuals redundant, but also, when companies are not expanding, employees become nervous about future job prospects – the potential of redundancy can lead to greater claims activity,” Taylor says.

As well as employees becoming more aware of their rights, another reason for the increase in employment tribunal cases is that rules aimed at improving the workplace prospects of traditionally excluded groups are receiving considerable publicity. “Proposals on positive discrimination bring it into focus,” Taylor says.

Companies generally underestimate the risk of being taken to a tribunal by an employee and tend to focus on protecting themselves against more traditional risks even though they are less likely to happen, according to Taylor.

While companies will automatically insure their property against fire, less than 10% of employers bother to buy cover protecting them in the event of an employment dispute, he says. This is despite the fact that there is much greater chance of a company being taken to an employment tribunal than its premises burning down. “Companies are five times more likely to face an employment tribunal than make a claim for fire,” Taylor says.

The best way for small businesses or larger companies to protect themselves against tribunal-related costs is to buy EPL cover, argues Taylor. “It protects against defence costs, settlement and any award,” he says. “Most claims brought against UK employers are successfully defended, but potential recovery of costs from litigants is unlikely.”

Taylor adds that EPL cover will also enable a company to preserve its reputation in the event it is taken to a tribunal by a member of staff who is determined to cause as much distress as possible. “Cover can mitigate against the reputational loss if you have a robust defence against a vexatious litigant.”

How much does insurance for tribunals cost?

Employment practices liability (EPL) insurance can be purchased for under 1,000 pounds, though the premium will depend on the size of the company.
Companies with a turnover of up to 1m pounds can purchase 500,000 pounds worth of EPL cover for an annual premium of around 450 pounds. Meanwhile, companies with a turnover of between 5m ponds and 10m pounds are able to buy 3m pounds worth of EPL cover for an annual premium of around 1,400 pounds. However, not all EPL policies will cover financial settlements or damages awarded to the claimant.
Some companies prefer to buy legal expenses cover, which can be cheaper than EPL cover. Legal expenses cover can cost as little as 30 pounds. However, Callum Taylor, management liability underwriting manager at Hiscox, warns that legal expenses cover can often have onerous warranties. It is often a case of we will only cover when we feel there is a chance of succeeding, he says.
In addition, companies can pay for consultants to advise them on how to correctly draw up contracts of employment and company employment handbooks in order to minimise the risk of being taken to a tribunal by an employee. Such a service can cost in the region of 500 pounds to 1,000 pounds.