Over the past ten years there has been a dramatic increase in employment tribunals, with single and accepted employment claims increasing from approximately 135,000 in 2001 to approximately 220,000 in 2011, a rise of 63 per cent.

Vince Cable, the business secretary, clearly thinks this is a major issue for employers, saying that it deters managers from hiring staff, and he is currently calling for the maximum £72,300 award for unfair dismissal to be cut significantly.

Employment issues impact smaller businesses much harder as they often don’t have specialist in-house resources and the legal costs associated with a claim can run to thousands regardless of whether a claim is ultimately dismissed, of which over 50 per cent are.

What’s often more important than any third party cost is the management time that is often swallowed up handling cases. This article explores what actions smaller businesses need to take to ensure that dismissal, redundancy or any changes to an employees’ terms and conditions do not result in a huge legal bill, regardless of whether they win the case or not.

Employment tribunal claims

The six most frequent claims brought before an employment tribunal last year in order of numbers are working time directives (114,000), unauthorised deductions (71,000), unfair dismissals (48,000), breach of contracts (35,000) equal pay (35,000) and sex discrimination (18,000). Employment law is a discipline in its own right so this article can only cover some of the main issues.

Firstly, I would recommend that all businesses buy legal expenses insurance which, at a cost of around £300 for an small and medium-sized enterprise, will cover potential legal costs of up to £100,000. There are many good providers and your insurance broker will be able to guide you.

First of all, as an employer, you need to make sure that you keep up to date with the basics of employment law, employees’ rights and any new regulations that are being brought in. The failure to adhere to them could result in a costly legal case being made against you.

Working Time Regulations is a case in point. They came into force on October 1 1998 to ensure that workers do not work excessive hours, get regular rests and have a minimum amount of holidays per year. As an employer you have an obligation to monitor staff and keep records to ensure that the weekly average of 48 hours over a seven-day period (for example), is not exceeded.

Unlawful deductions to wages is another of the most popular claims accepted by employment tribunals (ETs). Under the Employment Rights Act 1996, no deduction from a worker’s wages can be made unless it is required by statute, permitted by the contract of employment, or the worker has given his prior written consent to the deduction.

Although unauthorised deductions are unlawful, employers do have a simple mechanism to make deductions by introducing an appropriate clause in the contract of employment, yet deductions of wage clauses are quite often missed when an employer drafts a contract of employment.

Unfair dismissal

There are also other circumstances in which deductions may be made. Unfair dismissal is another of the top six claims. Basically, an employee who qualifies can challenge their dismissal in the ET. If the ET finds the dismissal was unfair then the employee is entitled to compensation. The maximum compensatory award for unfair dismissal is currently £72,300 – not an insignificant sum if you are a small business. In addition, the successful employee will be entitled to a payment equivalent to statutory redundancy pay which is currently capped at £12,900.

It is therefore essential to ensure that when disciplining a member of staff, a fair and objective procedure is used and that records are kept. Remember that making someone redundant without using a proper process can also lead to an unfair dismissal claim. Meanwhile, the Equality Act 2010 which drew together numerous pieces of anti-discrimination legislation received royal assent in April 2010 and was implemented in October 2010.

Discrimination claims, unlike most others, can be brought against individuals in the ET rather than solely against the company. For larger employers, overall responsibility for implementing the company’s equal opportunities policy generally will probably rest with the personnel manager responsible for co-ordinating equal opportunity activities on a day-to-day basis. However, failure to comply with the equal opportunities policy by any member of staff should normally be considered to be a disciplinary matter and should be dealt with in accordance with the company’s disciplinary procedure as contained in their staff handbook.

Discrimination and harassment

Similarly, complaints of discrimination or harassment (as well as other complaints raised by employees) should, if possible, be dealt with in accordance with the company’s grievance procedure as detailed in their staff handbook. Discrimination legislation (age, disability, gender reassignment, pregnancy and maternity, marriage and civil partnership, race, religion and belief, sex and sexual orientation) aims to protect not only employees (regardless of length of service), but also prospective employees, casual workers, and self-employed contractors.

It is important to bear this in mind when recruiting. Any financial director of a small business should always seek comprehensive legal advice when dealing with any areas of human resource and personnel management, and this need not always be expensive and can save a lot of money in the long term.

Nowadays, there are a number of legal firms that provide guidance online for, say, the drafting of employment contracts or the setting up of disciplinary, grievance and absence procedures, and business operators can often download documentation and guidelines at a fraction of the cost.