Coping With Employment law

Staying one step ahead of the legislators and the lawyers when it comes to employment law has always been difficult – and in recent years it has become near impossible. SMEs looking for a lifeline have a number of options available to them. The best solution depends on the type of business.

Businesses of all shapes and sizes have been affected by massive increases in legislation since the mid-1990s. A host of anti-discrimination and working practice laws have appeared in the UK, as a result of the shift to a Labour administration and the imposition of European legislation. The effect has been magnified by an increased awareness amongst employees, who are now more conscious of their rights than at any time before.

In the past five years alone, there have been over 40 legislative changes to employment law. The period between 1998 and 2001 saw a 42% rise in the number of employment tribunals, as the balance of power tipped heavily toward the employee and away from the employer. Tribunal awards continue to escalate, with the cap on awards having increased to nearly £55,000. Awards for racial, sexual and disability discrimination cases are uncapped. At the same time, changes to the civil litigation system through the Access To Justice Act have brought about the no-win, no-fee system – giving individuals greater access to both legal representation and advice.

The increasingly litigious nature of the employment environment has not been bad news for everyone, however. The employment services sector has experienced massive growth. A market that was once monopolised by legal expenses insurance has now spawned packaged consultancy services, legal software providers, employment practices liability (EPL) and employment relations specialists. The total services market stands at over £200m and is expected to reach £300m by 2004.

The range of services available for small and medium sized organisations looking for a lighthouse in the sea of red tape is therefore extensive. But how do businesses decide what form of risk management to buy?

Much depends on the size and sophistication of the business. The smallest, with little or no experience of employment law, will rely heavily on trade organisations. These provide advice and employment law updates free of charge, and bulk marketed legal expenses packages that give advice as well as insurance.

Options are less clear-cut for larger businesses. Those that have been involved in an employment dispute and realise the impact that it can have on their business will opt for legal expenses insurance or, in some instances, EPL cover. The case for having legal expenses insurance is probably more convincing for this size of business, simply because it offers a higher level of risk control.

Insuring legal expenses
Companies that do not have a dedicated and efficient HR function, robust employment risk management systems and controls or internal legal support need not just insurance protection but also legal guidance and risk management advice. Consultants base their product offerings on annual retainers, providing individually tailored documentation such as employment contracts and handbooks. Their products are in turn backed by insurance.

A number of legal expenses insurers now provide a professional legal advisory service managed by solicitors. This level of legal expertise ensures that insurers know of any impending legislation and can advise their clients of how to prepare for it.

Having direct and free access to a solicitor also ensures that the client has the benefit of immediate support for an employment problem and that the issues can be managed from the outset, ensuring compliance with the law from the earliest stage. This support is extended to either a negotiated settlement or representation at tribunal, if needed. Emphasis is also put on protecting a client's reputation and guarding the client's management time.

The basis of legal expenses cover is that the insurer is involved as soon as an employment problem arises. Clients are required to call the insurer's legal service following an incident, before any action is taken against an employee, or prior to any material changes being made to an employee's terms of employment. Crucially, this allows the company to ensure that it is working within the framework of the law. At the same time, it allows the insurer to manage each situation as it arises and thus limit its claims exposure – consequently offering an attractively priced product.

Legal expenses insurance is built upon the concept that there must be a reasonable prospect of a successful outcome to any employment law case arising from the client's business. This removes any hazard that would result from supporting an autocratic, bad employer.

Is EPL cover viable?
The other main alternative open to mid-sized businesses when it comes to employment exposure is EPL. EPL cover originated in the US, where the contractual relationship with employees differs greatly from the UK and the level of damages awarded is generally far in excess of UK awards. The concept is that employment risks can be treated like any other liability exposure, and that insurers select their clients, with an understanding of their ability to deal with an employment action if it arises. Clients are then left to their own devices, relying on their own internal systems and legal support to guide them through any employment issues that arise.

In the event of a claim, the case is referred to the insurer at a stage where little negotiation remains possible. The client company is not usually required to speak to a solicitor at any stage of the dispute and, furthermore, the insurer does not benefit from influencing the choice of solicitor. However, the insurer will still want to ensure that the chosen solicitor is competent and cost effective.

If a claim comes to tribunal, the client and the insurer can both be at disadvantage if the client has taken incorrect action at a point in the dispute before the insurer became involved.

For example, a situation might arise where a client has selected an employee for redundancy without selecting other employees at a similar level. After the event, there is little an insurer can do to alter the inherent bad practice of its client at the point of claim. Client and insurer then must reach a settlement to the employee's satisfaction, or risk having to fight a public case.

Companies often buy EPL cover as it allows them to run their own affairs without having to seek external advice. However, it can be a costly mistake – it is not a shortcut to understanding the law.

Insurers backing the wrong client will also find EPL costly. EPL providers control their exposure through a vetting process, before accepting the risk. There is rarely, though, any ongoing risk management support.

However, companies that have reliable HR systems, a risk management structure and an internal legal resource may find EPL insurance attractive, provided they are willing to take a proportion of the risk themselves. Unfortunately, it is likely that EPL costs will increase in the future. Underwriters targeting mid-sized corporates are unlikely to find the risk profile they require to sustain a long term account without increasing excesses or raising premiums. This will result in a more competitive market for traditional legal expenses insurers.

Clearly, there is a growing need for access to legal guidance and risk management advice on top of insurance. Mid-sized operations in particular wish to use services that help them to understand employment law and to deal with its consequences.

Leo Gibbons is legal expenses business development manager for specialist liability insurer PRI. Tel: 0207 090 1226, E-mail: leo.gibbons@prigroup.co.uk

UK Employment Tribunals Reform
There were 100,878 applications to employment tribunals in 2001/2002, with 75% settled before the hearing. However, the Government hopes that these will reduce when it introduces provisions later this year, requiring employers to follow a statutory minimum disciplinary procedure and employees to raise grievances internally before resorting to a tribunal.

Government reforms are also aimed at creating a unified tribunals service in the UK, initially bringing together the 10 largest tribunals, as a distinct part of the justice system accountable to the Lord Chancellor.

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