When looking to select an outsourced HR partner, it is sensible and appropriate to include managing employment law risk as a selection criterion .  Good risk management will include identifying the employment law risk faced by the business, and assessing the likelihood of that risk crystalising, and the impact it would have were it to happen.

Employment law risk should be given a weighting along with other employment risks such as high staff turnover, the difficulty of attracting the right calibre of people, the cost of the wage bill, employee productivity and commitment to the business.  There is a danger that employment law risk may not be assessed objectively and scientifically.

The facts

Small and medium sized organisations may consider employment law risk risk anecdotally and emotively, and not consider the risk realistically.  There can be a misconception that employment law rules are unreasonably strict, compliance too difficult and the consequences of non-compliance catastrophic. The focus is often on the fact that Employment Tribunals can award up to £78,335.

However, the objective reality is significantly different. Only 1% of tribunal awards are in excess of £50,000.  Tribunal Awards are capped at 1 year’s gross salary except for breaches of health and safety, whistle blowing and unlawful discrimination. The fact is that in 2013 the median value of Employment Tribunal Awards in England and Wales was £2,600.  Also those claiming for unfair dismissal were more likely to :

  • have worked for large employers with 250+ staff;
  • have worked for the public or third sector;
  •  be over 55 and
  • have in excess of 10 years’ service.

Changes introduced by the last government, which are unlikely to be rolled back by the current one, made it expensive and risky for an employee to take an employer to a tribunal. They encouraged frank and protected conversations so employers and employees who no longer see eye to eye can agree on a binding settlement that avoids the need for litigation. They also encouraged mediation as a step prior to litigation. This has been reflected in the massive reduction in the number of ex-employees seeking redress through an Employment Tribunal since these changes were introduced. There was a 74 per cent fall in unfair dismissal claims between April and June 2014, relative to the same period in 2013.

Employment law risk should be dealt with proactively

A business may choose to avoid the risk completely. For whatever reasons, small business owners may consider the risks of employing staff as outweighing any benefits having employees will bring to the business.  Businesses that choose to take this route clearly deny themselves access to some opportunities, but it is a legitimate if somewhat narrow course to follow.

Some employers choose to transfer the employment risk to a 3rd party.  Although they may take out an insurance policy so if a risk does crystalise, they can claim on that policy.  Often they sign up with an HR advisor, who will give a warranty that if they follow the advice they are given, they will be indemnified against the cost of any legal fees they incur and the damages awarded against them.  This does offset the risk, but it can also takes significant amount HR decision making away from the business.  If they want the insurance to stand these companies must follow the advice of their HR advisor. There is a real danger that the principle concern of the HR advisor is the interest of the insurance company.  In this case the legal fees and the damages resulting from an Employment Claim will not be borne by the business. However, as shown above, the cost is rarely that high, the chances of litigation are quite low, and the indemnity may be acquired at the cost of being able to deal with HR issues pragmatically in a way that suit the business.

The alternative

In my view, a more pragmatic, flexible and cost effective way to manage employment risk is to outsource HR to an HR Business Partner, not solely to an employment law advisor.  With a true HR Business Partner the focus will be on helping the business achieve its objectives, as well as making sure the business is legally compliant.

HR Business Partners will  work with owners and managers to help increase productivity and to control HR administrative overheads.  HR Business Partners help to mitigate risk by ensuring the business has up to date HR policies and procedures.  They will offer expert independent advice to the business if they are faced with an employment issue.  They support the business by ensuring that there are effective systems in place to monitor trends, and to identify and anticipate potential problems. They will, of course, support the business to deal with problems when they arise.  The focus is on helping the business to manage its employment issues proactively.  They offer tailored policy advice and support the business in implementing its HR policies, systems and procedures.  HR Business Partners seek to advise businesses on the full range of HR best practice, not just employment law and procedural matters.

Put simply, HR Business Partners help businesses reduce their employment law risk by leveraging the full range of HR tools and techniques, and not just by mechanically following procedural steps to meet the need of an insurance policy broker.

This article has been posted by Sean McCann, the Managing Director of People Based Solutions an HR consultancy specialising in outsourced HR. If you would like to discuss how People Based Solutions could operate as an HR Business Partner e-mail enquiries@peoplebasedsolutions.com


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