An Insight into Employment Practices Liability

Employment Practices Liability (EPL) has become a crucial concern for businesses in the UK, reflecting the rising complexity of the employer-employee relationship. EPL refers to the legal responsibility businesses have for claims brought by employees regarding employment-related issues.

From unfair dismissal and discrimination to workplace harassment, EPL encompasses a broad range of disputes, and this liability can pose significant financial and reputational risks for all companies.

Whatever the size of your business, EPL is something it needs to keep in its sights each and every day. In the UK, the EPL landscape is shaped by robust employment legislation, including the Equality Act 2010, Employment Rights Act 1996 and numerous law case precedents. Understanding employment practices liability is essential for employers to mitigate risks, ensure compliance and maintain a positive working environment for everyone who works in the company.

What is Employment Practices Liability?

Employment Practices Liability covers claims that employees (or former employees) may bring against an employer for violations related to employment laws or workplace rights. These can include:

Discrimination

Claims based on race, gender, age, religion, sexual orientation or disability discrimination. With the introduction of the Equality Act 2010, discrimination claims have risen sharply. This Act consolidates various anti-discrimination laws, covering protected characteristics such as race, sex, disability, age and more. A common claim involves indirect discrimination, where a policy or practice disproportionately affects a particular group.

Wrongful dismissal

Claims related to termination without proper cause or due process. The Employment Rights Act 1996 outlines employees' rights regarding dismissal, and claims arise when an employer terminates an employee's contract without a fair reason or without following proper procedures, such as redundancy, disciplinary processes or capability concerns.

Constructive dismissal

This occurs when an employee resigns due to the employer’s behaviour, such as creating intolerable working conditions. A constructive dismissal claim can arise from breaches of the employment contract, bullying or a toxic workplace culture.

Harassment

Claims involving inappropriate behaviour or harassment, including sexual harassment. Workplace harassment, particularly sexual harassment, has gained increasing attention, driven by movements like #MeToo. In the UK, employers are required to take reasonable steps to prevent harassment in the workplace, and failure to do so can lead to liability.

Retaliation

Claims that an employee was treated unfairly or dismissed after raising a concern or complaint, such as whistleblowing.

Failure to promote

Claims that an employer failed to promote or fairly compensate an employee due to discrimination.

The financial and reputational implications of such claims can be severe. Even if a company successfully defends against an EPL claim, the costs of legal fees, court time and potential damage to its reputation can be substantial.

The importance of Employment Practices Liability Insurance (EPLI)

Employment Practices Liability Insurance (EPLI) offers businesses protection against the costs of defending EPL claims and paying settlements or awards. EPLI is particularly valuable for small and medium-sized enterprises (SMEs), as they often lack the in-house legal resources that larger companies have at their disposal.

Key features of EPLI include coverage for legal defence costs, settlements or compensation, plus public relations support to help mitigate reputational damage following a publicised case.

Five key steps employers can take to mitigate Employment Practices Liability

1. Implement robust policies and procedures

Clear, written employment policies that outline expectations, grievance procedures and consequences for misconduct are essential. These policies should be regularly reviewed and updated to comply with current employment laws and best practices.

2. Provide regular training

Training employees and management on topics such as workplace equality, diversity and inclusion, as well as anti-harassment and anti-discrimination laws, can help prevent issues from arising.

3. Encourage open communication

Promoting an open, supportive environment where employees feel comfortable raising concerns can prevent grievances from escalating into legal claims. Formal channels for whistleblowing or raising workplace issues are also vital.

4. Conduct fair and transparent HR processes

Hiring, promotion, disciplinary actions and dismissals should be handled fairly, following clear procedures. Documentation is crucial in the event of a dispute. Employers must ensure all decisions are based on merit and are free from any bias or discrimination.

5. Obtain Employment Practices Liability Insurance (EPLI)

EPLI offers a safety net for businesses, providing them with resources and coverage for defending against employment-related claims. This insurance can be an invaluable tool in mitigating the financial and reputational impact of EPL claims.

Five cautionary claims examples

1. A water drainage solutions business with a turnover of £140 million

A senior staff member raised health and safety concerns regarding vehicles at one of the company's locations. He alleged that his concerns were mishandled and that actions taken after his disclosures undermined his role, leading to his resignation and a claim of constructive dismissal due to whistleblowing. Although the employment tribunal ruled in favour of the company, significant legal costs were incurred.

Total loss: £50,000

2. An employment outsourcing administration business with a turnover of £33 million

During a redundancy review, an employee on maternity leave was made redundant, leading to claims of sexual discrimination and unfair selection. The company was found at fault for not following the proper legal process, and the claimant was awarded significant damages.

Total loss: £55,000

3. A creative agency with a turnover of £7.9 million

A former employee and shareholder was dismissed for mis-using company funds. He claimed unfair dismissal, arguing the real motive was to trigger a shareholder agreement clause forcing his shares to be transferred at par value. While most defence costs were covered under Directors and Officers liability, the Employment Practices cover also incurred significant expenses.

Total loss: £25,000

4. A hotel operator with a turnover of £14 million

A housekeeper resigned and filed a constructive dismissal claim, alleging the employer used performance reviews and unrealistic demands to push her out after an illness. The case was settled through mediation.

Total loss: £32,000

5. A leisure goods distributor with a turnover of £10 million

An employee was dismissed after her probation period for being unapproachable and unsuitable for her role. She later filed a tribunal claim, citing mental health issues and alleging disability discrimination. The claim was dropped after the company provided evidence supporting their actions. Despite the unsuccessful claim, legal costs were incurred in the defence.

Total loss: £15,000

EPL Risks for SMEs

SMEs often face greater challenges in managing EPL risks due to limited human resources and legal support. However, they are not immune to employment disputes, which can have disproportionate effects on smaller businesses. For SMEs, EPLI is particularly vital, as the costs associated with defending a single claim can be crippling.

Moreover, SMEs may be less familiar with evolving employment law regulations or may lack the internal mechanisms to deal with disputes effectively. Thus, investing in regular training, proper documentation and third-party legal advice when necessary is essential for smaller businesses.

Employment Practices Liability represents a significant risk for UK employers, regardless of their size or industry. By staying informed about evolving employment laws, implementing best practices and investing in EPLI, businesses can better protect themselves from the financial and reputational damage that employment-related claims can bring.

Ultimately, creating a fair, inclusive and transparent workplace is not just about avoiding liability—it’s about fostering a positive organisational culture where each and every employee feels valued, safe and respected, every day.

Other blogs which may be of interest:

Understanding management liability claims

Why you need D&O insurance as a company leader

Any questions? Please don’t hesitate to contact one of our team.

Matthew.collins@ascendbroking.co.uk  | Office: 01245 449060