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Directors beware – your financial liabilities just increased

Employment lawyers by nature tend to be a scrupulous bunch. However, when it comes to getting the best for clients it is not uncommon to see some “tactical creativity” being used to increase the chances of a higher financial settlement or increase the prospects of success in a matter.

Over the past 2 to 3 years we have seen a marked increase in employment tribunal claims naming not only the employer, but also individual members of companies as respondents to employment tribunal claims. This is done for a number of reasons, but mostly to ensure that an employee has the back up of enforcing any judgment against the individuals should the company enter liquidation. It does of course also cause issues with the individuals named as they will often also have to enter a separate Tribunal or other defence claims.

Can senior management be liable for claims?

In short, the answer is yes and no.

For straightforward unfair dismissal claims, it is normally the company as the employer alone, which must bear the brunt of any claims brought. This must make sense as the claimant will normally be employed by the company and not by individual members of management.

What is often overlooked by senior management, officers and directors however, is that they may be personally liable for claims of discrimination, harassment or subjecting individuals to a detriment owing to a protected act. As is normal in disciplinaries, grievances and even whistleblowing allegations, senior management are usually brought in at the latter decision making stages or at the appeal stage. Whether it is personally making decisions or pressurising junior members of the company into making a decision, the actions of senior management often dictate the direction of matters, creating a large personal risk.

Timis and anor v Osipov

The risk for senior management has recently been highlighted in the Court of Appeal case of Timis and anor v Osipov. Mr Osipov had been employed by International Petroleum Ltd (IP) since 2011. In 2014 he was promoted to CEO of the company. Almost immediately upon starting his new role, Mr Osipov became concerned regarding contract awards in Niger and what he believed to be potential corruption in relation to these contracts. Mr Osipov made a number of disclosures regarding these concerns and relayed his belief that senior individuals in the company were engaged in wrongdoing. Shortly after raising these concerns, Mr Osipov was dismissed by a Non-Executive Director, Mr Sage, without notice.

Mr Osipov brought claims against IP, Mr Sage and a fellow Non-Executive Director, Mr Timis who it transpired gave the instruction to dismiss Mr Osipov. Both the Employment Tribunal (ET) and Employment Appeal Tribunal (EAT) found that Mr Osipov had been dismissed for raising a whistleblowing allegation. As a result, Mr Osipov was awarded £2m for losses arising from his dismissal.

In their findings, the  ET and EAT confirmed that Mr Timis and Mr Sage were jointly and severably liable for the dismissal and thus any compensation awarded. This point was key as the employer, IP, had recently become insolvent and a finding of personal liability of Mr Sage and Mr Timis would be the only way Mr Ospiov could recover any compensation. 

Mr Timis and Mr Sage appealed to the Court of Appeal on the belief that such an award for compensation could only be made against IP, not them personally, as the loss flowed from an unfair dismissal claim. Whilst such claims have been upheld before for discrimination claims, never before had an unfair dismissal because of whistleblowing seen individuals made personally liable. The Court of appeal held that whilst the matter was “not straightforward” it cannot be the case that whistleblowers receive fewer rights than those who are discriminated against for other protected characteristics. As a result, the Court of appeal upheld the award of £2m against the two individuals.  

What should you be doing now?

Employers can protect their Directors and Officers through insurance products specifically catered to cover such acts or omissions. Any insurance product should be closely analysed to ensure that claims by employers are specifically covered under the terms.

What does this mean for your business?

The first thing to remember is not to panic if your senior management are named as a respondent in a claim.

Businesses will need to consider the facts of each claim separately and decide whether they are happy for their legal team to serve a response for the business as well as the individuals. This is often quite a straightforward process. However, in instances where individuals have clearly gone off on a “frolic of their own” and the business can show that they did everything in their power to stop the act from happening, it may be that a conflict arises. In such circumstances it is recommended that the individuals are asked to seek separate legal advice.

Recommended Reading

A copy of the full judgment from the Court of Appeal can be found HERE.

 

These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.