Litigation risks as start-ups overlook company policies

According to Companies House, a wave of entrepreneurship has resulted in a record numbers of start-ups; there have been 2,668,500 over the past five years. However, most of these employers are not following the correct company processes or have the appropriate policies in place, which is leaving these start-ups open to claims. For instance, many do not realise they can be held liable for the actions of employees, whether it is harassment, bullying, libel or breach of copyright, which is now resulting in a surge in claims since the temptation for small businesses is to try and deal with the problems as they arise.

One of the positives to come out of the recession is the wave of entrepreneurship that has led to record numbers of new business start-ups. According to Companies House, there have been 2,668,500 incorporations over the past five years, the highest number on record. Many of these companies have been trading a few years and are now starting to create jobs and take on staff.

Darren Hayward, employment lawyer at Nockolds, explains that some employers may feel that with the economy growing and unemployment relatively low, the risk of workplace disputes escalating to court seems even less likely. However, while external factors may have lessened the risk of claims, most employers don’t realise that the vast majority of employment disputes usually arise, not because the employer is not entitled to do what they wish to do when dealing with employees, but as a result of the employer not following the correct process or having the appropriate policy in place.

We are being approached by a growing number of owner-managers who started up during the recession and are now just beginning to employ people. Many of them are finding it difficult to manage their businesses in the way they would like. This is not because they want to do things that conflict with employment law, but because they did not put the correct policies and procedures in place before taking on employees.

It is quite common for SMEs to neglect to have a staff handbook which contains essential policies (many are legally required), which is a vital tool for owner-managers who want to run their businesses in the most effective way. It is usually far easier to obtain agreement at the outset when goodwill is high than impose contractual obligations at a later date when employees are more likely to resist any changes to the status quo.

A topical recent example of this is monitoring staff communications. A ruling in the European Court of Human Rights earlier this year established that an employer was not breaching an employee’s right to privacy by monitoring his email and instant messaging software. The court ruled that it was “not unreasonable for an employer to want to verify that employees are completing their professional tasks during working hours.” The key factor in the employer’s favour was that the company had issued a policy restricting the use of email and messaging systems for business use. Had the employer sought to monitor its staff without said policy being in place, the judge might well have ruled in favour of the employee.

Vicarious liability

Another example is vicarious liability. Employers can be held vicariously liable for the actions of employees, whether harassment, bullying, libel, breach of copyright, and so on. Many employers, especially start-ups, are unaware of this, but the risks can be significantly mitigated by ensuring that the appropriate policies (e.g. anti-harassment/bullying) are in place and included in the staff handbook.

Again, it is vastly more cost-effective to get this right at the beginning than have to deal with a discrimination claim or a dispute over employee privacy at a later date. Most claims in these areas can be avoided with an appropriately worded policy. The temptation for many small businesses, however, is to deal with problems as they arise.

While the desire to control costs is entirely understandable, it is very often a false economy and trying to impose policies on a workforce at a later date can engender a culture of distrust and negatively impact productivity – exactly what any small business should seek to avoid.