Legal guardians

As employment law changes once again, employers could find themselves unknowingly exposed to new risks. Unfortunately, pleading ignorance is no defence but legal expenses intermediaries can offer clients advice and the chance to indemnify themselves against future problems, writes Marcus Alcock

If there is one area of legislation virtually guaranteed to never stay still then it must surely be employment law. Since Labour came to power 11 years ago there has been a steady focus on making important changes to the rights of employees and, by extension, opening up new potential liabilities for their employers.

Just think how the situation has changed over this period. In 1997, there was no national minimum wage, no legislation fixing maximum working hours or providing for paid holidays, and the employment provisions contained in the Disability Discrimination Act 1995 had only just come into force so any real impact was yet to be felt. Furthermore, staff had to be employed for two years before they would gain the right to claim unfair dismissal. How times have changed.

With such a growth in potential liabilities the need for businesses to protect themselves against the legal costs of court actions has steadily increased, partly driving growth of the commercial legal expenses sector as a result. But the pace of new employment legislation has not exactly slowed down and 2008 looks to bring its fair share of changes. Most commentators agree these will only serve to open up employers - and by implication their legal expenses insurers - to ever greater liabilities.

Harassment case changes

Guy Guinan, a partner and employment law specialist at law firm Halliwells, says: "The biggest (new legislative) impact on the legal expenses market is likely to come from changes relating to the defence of harassment charges." He explains that the Equal Opportunities Commission alleged the government had not implemented the Equal Treatment Directive and this is leading to important changes with respect to sexual harassment. "The definition of harassment has been amended to eliminate the need for causation and allow claims where the conduct had something to do with the gender of a woman or a man other than the claimant. In an open-plan office, for example, someone who overhears a colleague being harassed can bring a claim because they feel their overall environment is being affected. Therefore, the legal expenses market will be more wary of this change because it widens the liability net even further - although if you have an employer who puts into place proper procedures and practices I don't think they will have too much to be concerned about."

He adds that potential financial costs can add up in this respect. While there are high-profile City harassment cases that the national newspapers love, even with the more 'run-of-the-mill' harassment cases - based on injury to feelings - payouts can reach £25,000, and it is possible to have loss of earnings allied to that.

Claire Birkinshaw, legal information manager at Abbey Legal Protection, agrees that changes with respect to the actions of third parties are highly significant. "Much of what has come into force since 6 April is fairly mundane," she says. "But a lot of what is important relates to sexual harassment and there is a new definition in relation to third party harassment - meaning your clients and suppliers. You could be liable if harassment occurred on two or three occasions, but it doesn't have to be with the same client. We're only talking sexual harassment here, but that's still significant because it is the biggest category of harassment."

She adds there are also quite a lot of changes to maternity provisions coming into force on 5 October, explaining that at the moment additional maternity leave after the first six months is limited. But the government is making the additional maternity leave period of the next six months the same with regard to holiday provision given by employers and other benefits, such as healthcare (see box, above).

Callum Taylor, management liability underwriting manager at insurer Hiscox, agrees there are important changes to employment law expected this year. However, he adds, at present: "The main focus for us has been the changes to corporate manslaughter legislation and the impact this might have in terms of a senior manager being accused because the fines being talked about are 10% of a firm's turnover."

Pleading ignorance

Yet whether we are talking about changes introduced in 2007 or changes set for this year, one thing is clear: ignorance will be no excuse if an employer is taken to a tribunal and has failed to keep up to speed with changes to the law. Richard Candy, underwriting director at Abbey Legal Protection, comments: "One of the important issues to draw out relates to businesses themselves. If you run a business, how are you supposed to know all this has happened? It's important for employers to protect their staff from harassment, but for that you need knowledge.Whether you get good professional advice from your insurance broker, accountant or legal expenses adviser it doesn't matter. What's important is that you get good professional advice. Otherwise how are you, as an employer, expected to know about these changes?"

Mr Taylor agrees with this appraisal. "Undoubtedly the responsibility rests with the management of a company," he says. "They need to keep abreast of employment issues by taking external legal advice, such as a monthly update on changing employment legislation. But even with the best will in the world they should also look for cover in the market. For example, we provide a product known as the management liability portfolio, which provides cover for legal costs and awards, where appropriate, in response to legal action from regulators, employees or shareholders. In essence, it's packaged all the different offerings into one."

But surely the historical difficulty with the legal expenses market is that it has not necessarily always offered what a business needs? To a certain extent, Mr Taylor agrees: "The danger with legal expenses cover is that there are often onerous warranties associated with it, such as there being a particular probability of success for a defence or else the insurer will not pay to defend the case. Historically it's been a difficult area for many businesses because so many insurers have been cautious."

Alan Strange, chief underwriter at legal expenses specialists LAMP, says that what businesses now seek is a made-to-measure approach to their cover. "The introduction of new legislation is increasingly driving firms to seek a tailored insurance solution that provides a cover specific to their needs rather than an off-the-shelf product that often fails to meet all the insurance requirements of a business," he says. "We are receiving an increasing number of enquiries from solicitors and human resource consultants who are searching for bespoke, rather than generic, cover that will better protect them in the light of encroaching legislation."

Some legal expenses specialists, however, argue that the focus going forward should be on prevention rather than cure, especially for small to medium-sized enterprises. "The approach we take is that small businesses in particular need access to a risk management process because what they really want to do is run their business and not have to worry about changes to maternity pay regulations or amendments to the sex discrimination legislation," comments Andy Glynne, national sales manager at First Assist.

"Many of them are overly burdened by this and it may even be a barrier to them starting up or running their business," he continues. "I believe there's a real need for risk management advice, which can be treated as an outsourced human resources function. This is not about there being someone to 'catch' when something goes wrong in the form of insurance, it's about effective risk management to ensure that things don't go wrong in the first place."

Widening the net

Frank O' Malley, director at intermediary Arc Legal Assistance, agrees: "Unlike larger organisations, small businesses do not tend to have the time, resources nor expertise in-house to enable them to cope with the complexities of employment legislation. Recent changes in the law do indeed add to that burden. By making legal expenses insurance available to the client, the intermediary is giving the small business access not only to indemnity, in respect of legal costs when things go wrong, but also to expert legal advice that is a core benefit offered by the majority of providers."

As such, he claims, legal advice lines provide clients with the information they need to help them make the right decisions when faced with problems that could potentially impact on their business - a key area clearly being employment law. "If the wrong dismissal procedures are followed, a small business could be faced with a crippling award against it at tribunal," explains Mr O'Malley. "Access to the right legal advice can help prevent such an outcome."

So what does the future hold for this sector? It seems that with ever more legislation and serious levels of costs and potential damages involved, the need for commercial expenses cover to protect businesses - especially SMEs - can only grow. After all, Mr Taylor points out: "the average award for various areas relating to employment issues is £10,000 and that's without legal costs. It's not unusual to have awards in the region of £10,000 to £50,000. So I anticipate strong growth in this market over the next 18 months to two years, as the purchase of legal expenses cover is now becoming more of a norm."


Sex Discrimination
The Sex Discrimination Act 1975 (Amendment) Regulations 2008 narrow the extent to which it is not discriminatory to deprive a woman of the benefit of her terms and conditions of employment during maternity leave. The amendment facilitates claims for discrimination in relation to eligibility for remuneration by way of a bonus while on compulsory maternity leave. In addition, it enables claims for discrimination to be made for the additional period of maternity leave in the same manner as claims can be made for ordinary periods of maternity leave. The amendment applies where a woman's expected week of childbirth begins on or after 5 October 2008.

Harassment - actions of third parties
Employers will now be liable if they knowingly fail to protect their employees from repetitive harassment by third parties, such as customers and suppliers.

Under the old law, harassment in employment is unlawful only if it is done by an employer, or by a person for whom the employer is vicariously liable. An employer was not liable for harassment done by others in the workplace, such as customers or entertainers hired by an employer.

Under the new law, an employer is treated as harassing a woman if a third party harasses a woman in the course of her employment or the employer knows that the woman has been harassed on at least two other occasions by a third party - although the third party need not be the same on any of these three or more occasions - and the employer failed to take steps that would be reasonably practicable to prevent the third party from doing so. A 'third party' means someone other than the employer, or another of the employer's employees.

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