Employ at your peril

UK and European legislation has ensured that the days of an entrepreneur or CEO being master of his own house with regard to employment issues has long gone.

Beware the ’serial saboteur’ if you are recruiting suitable people to work for your company. This new breed of chancer is someone who is not necessarily looking for work all that seriously, but knows enough about employment law to collect five-figure sums as compensation for being ‘unfairly’ passed over.

Employment law specialist Guy Guinan of solicitor Halliwells says he alone has dealt with four such cases in the past 18 months. It might be someone who applies for the post under the name of Patel and does not make it to the shortlist and who then applies as Smith, with virtually identical qualifications and experience, and is chosen.

Or, as in Guinan’s recent experience, it might be a wheelchair-bound job applicant who sent in two job applications, one enclosing a photograph of the applicant in a wheelchair and one without such a picture. The first application was rejected at an early stage and the second made it to the shortlist.

‘He had a prima facie case for discrimination’, recalls Guinan, ‘and it was settled amicably’, at an undisclosed cost to the employer. The applicant in question, he says, ‘presents lots of claims like this to lots of companies and is doing reasonably well out of not getting a job. In fact, that is his job. It helps that he is competent at law.’

In the modern world of work, employment tribunals, to which most complaints are brought, and the courts, which hear appeals and the larger cases, are being kept busier than ever. Government departments, Citizens’ Advice Bureaux, contingency-fee lawyers, benefit agencies and helplines are keeping employees and potential employees better informed than ever before of their rights — as employers have been discovering to their cost.

Anti-discrimination law dogs the unwary

Serial saboteurs are just one of the challenges now facing employers, as measures against discrimination in recruitment, promotion and treatment at work multiply. Small, young companies now need to take as much care and go through the same time-consuming and costly procedures as big businesses — and face penalties on top of the inevitable disruption ranging from a maximum £56,800 in unfair dismissal cases to unlimited compensation (millions of pounds in some City cases) if discrimination is proven.

Taking on employees is no longer the informal task it once was. The business of hiring people carries several potential hazards, most arising from anti-discrimination laws, which often stem from European Union directives.

The European Equal Treatment Directive now coming into force makes employers vicariously liable if, for example, a male member of staff harasses a female colleague, by, say, persistently disparaging her appearance, whether the boss knew about it or not. Sexual harassment need not take a sexual form: if, for instance, there is one woman and three men in a work group and the men put her tools on a shelf too high for her to reach, that is sexual harassment, says Denise Tomlinson, employment expert at solicitor Lewis Silkin.

Legalised blackmail?

Condemned by Forum of Private Business spokesman Rex Garratt as ‘legalised blackmail’, the directive joins an array of measures in force against discrimination on the grounds of sex, physical disability, religious belief and sexual orientation. And next October, discrimination on the grounds of age becomes illegal.

Tomlinson and Jo Evans, her colleague at Lewis Silkin, argue the impending new anti-ageism rules ‘will shake things up in the way the Sex Discrimination Act did in the 1970s’. With many client companies in the media and advertising, sectors that have placed a premium on youth, they can see momentous upheavals ahead.

Employers’ organisations, such as the Confederation of British Industry, are complaining loudly against Government proposals to remove the exemption of even the smallest firms (employing fewer than five people). In some cases, says Guinan, it would still be possible for a small, start-up company to avoid complying with, say, the anti-disability discrimination rules, if it could show the cost of altering its premises and facilities would be prohibitive.

Sometimes anti-discrimination rules can have unexpected ramifications. For example, if a woman asks to move from full-time to part-time employment and is refused, she could claim sexual discrimination, though, lawyers suggest, the company might get off the hook if it could prove that before hiring her it had advertised the position as a potential job-share and received no applications.

If a disappointed job candidate threatens to take you to an employment tribunal alleging discrimination, it would help to have your reasons for not hiring him or her ready in advance. You may be asked to show notes taken at the time of interview.

Many employers, even in small companies, feel they need staff handbooks to cover these issues. As one consultant puts it, ‘these rules can have a big effect on the culture of an owner-managed business; gone are the days when you could sort these things out down at the pub.’

One form of discrimination does remain open to you: nepotism. ‘Appointing your relatives is still OK,’ says Guinan. ‘It is part of the proprietor’s prerogative.’

Dismissal dangers

Sacking staff who prove unsuitable has become no less fraught with danger for those who omit to follow the right procedures, vexatious as they may be. You can dismiss an employee within 12 months of hiring simply by saying, ‘sorry, it hasn’t worked out’ or, ‘your work is not satisfactory.’ That is, unless you fall foul either of the discrimination rules or if the employee in question can claim you are firing him or her for complaining about a possible violation of Government edicts on health and safety at work.

After one year, you have to go through a formal procedure of writing to the employee, setting out your reasons for wanting to fire him or her and then arranging a meeting to explain these reasons. The employee could still then seek to appeal to an employment tribunal.

Redundancy risks

Getting rid of staff via redundancy can be a difficult and dicey process. An employee of at least two years’ standing is normally entitled to redundancy payments covering a maximum of 20 years, calculated by a multiple of the employee’s weekly wage and an age factor, all capped at £290 a week.

Some companies can afford better redundancy schemes and can offer these to employees as a favour to short-circuit the formal procedure — but not as an entitlement. One adviser speaks of a blue-chip client with a ‘very generous’ redundancy policy whose details are kept firmly under lock and key ‘so that no one can prove it exists’.

Whether redundancies are forced upon you by a downturn or fundamental change in your business, you are still obliged to go through long, time-consuming statutory consultation procedures.

Cases before the Employment Tribunal alleging failure to give adequate warning of dismissals and redundancies are frequent. The tribunal can award up to £25,000 and the courts can award more.

Another hot potato is ‘constructive dismissal’, where an employee can quit and accuse you of either making life needlessly tough or alternatively sidelining his or her efforts. This is one area where the employer’s lot has been somewhat eased by a requirement that the employee must raise his or her grievance first in writing with the employer before complaining to the Employment Tribunal.

Even hotter potatoes can be cases where you have to sack someone who has been passing key confidential information about your company, its contracts, clients, finances and/or intellectual property to commercial rivals or other unauthorised recipients. Departing staff members bound by ‘restrictive covenants’ not to divulge sensitive information gained during their employment may nevertheless seek to sell it to rivals. Most companies, especially large ones, insist they would not buy this information, except from a company’s owner. But, warn advisers, if these issues come to court, it can be hard to persuade judges that restrictive covenants are not the same as restrictive practices.

Outsourcing options

One option that many employers, faced with all these costly impositions, will want to study as an alternative to employing staff is outsourcing. Why not employ contract labour or freelancers?

After all, with direct employees, as well as the pitfalls of discrimination and redundancy, employers have a statutory obligation to deduct employees’ income tax and national insurance contributions at source — for both full- and part-time and remit them to the authorities. They are obliged to pay a minimum wage and provide paid holidays, not to mention paid maternity and paternity leave.

Needless to say, it is not as simple as it seems to switch to outsourcing and evade all the modern obligations of employment. ‘It is a balancing act,’ says Guinan. For example, it’s probably fine if you hire a self-employed contractor, who can be seen to be working on his own account and can be easily substituted for another and handles his own tax and National Insurance. But if the contract is for personal services and subject to your control, this will probably be deemed direct employment.

As Jo Evans at Lewis Silkin explains, it is essential to reach a clear agency agreement if using agency staff, setting out who is responsible for what and who bears what risks. ‘It is crucial that the agency plays ball,’ she adds, and it is also vital the agency handles its own tax affairs.’

Agency staff are more suited to project work, especially in a field such as advertising, she argues. However, in operations where skilled agency workers develop key working relationships with your customers or suppliers, they can create goodwill for your company in the process — which they could take away with them in a way that could be hard to prevent.

Galling as it may be, most employers working to build up their companies have little choice but to knuckle down and formulate codes for their employment practices, scrupulously keep staff informed as to what they are and — most irksome for a small group without the luxury of a human resources department — keep themselves informed of the frequent changes in the rules.

Informal arrangements, such as giving some loyal and/or outstanding employees favoured terms, have a nasty habit of crystallising over time from favours to entitlements. Outsourcing can work for some, but by no means for all and can bring its own risks. In the words of one adviser in this field, ‘the days of the owner-manager being master in his own house are long gone.’

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.