The Covid-19 crisis has put directors’ actions very much in the spotlight and exposed them to a new level of vulnerability and liability legally, writes Ivor Adair, who here describes ways they may mitigate those risks.
Who would choose to be a director in the Covid-19 era? The corporate world is now a riskier place within which a director must continue to walk a tightrope of legal responsibilities above a far-from-ideal safety net.
A director is not generally personally liable simply for acting as an agent of a company. However, there are still circumstances in which a director may be personally liable on a contractual, tortious, statutory or criminal basis. A director must remain vigilant to protect their personal position. The role of director as a manager and key decision maker in the business brings with it risks of personal liability, especially in the context of an employment dispute.
A likely rise in claims
There is likely to be a significant rise in the number of discrimination, whistleblowing and health and safety claims in the coming months, as employers begin to deal with the unprecedented process of bringing employees back to the workplace. Such steps are likely to be set against a backdrop of industry wide redundancies and prolonged social distancing measures. An escalation in the number of claims brought against directors to fill the void left by insolvent companies seems inevitable.
Directors in the spotlight
The enormous business and workplace disruptions of the pandemic will place directors under the spotlight like never before. Many have made big calls in response to the crisis and will have to face the music if those decisions appear misjudged in hindsight. Many more will have a part to play in the decision making that leads to dismissals and other changes within businesses that could be the subject of claims. Directors need to appreciate where personal liability risks lie and take steps to protect themselves.
Under the Equality Act 2010, a director as an employee or agent of the business can be personally liable for unlawful discrimination committed by them in the course of their employment, or as an agent, liable for unlawful discrimination, harassment or victimisation authorised by their principal. A company will be vicariously liable for such discrimination.
However, the Equality Act also provides for a “reasonable steps” defence, the effect of which is an employer will avoid liability if it demonstrates it took all reasonable steps to prevent its employee committing the discriminatory act before it took place. Whereas in the past many employers have tended to avoid running this defence, in the current climate the relative worth of an individual director to the business might be more questionable. In those cases, individual directors may be exposed to potentially large awards of compensation.
In the whistleblowing context, the groundbreaking case of Timis v Osipov established that coworkers may be personally liable for detriment which amounts to dismissal. This means whistleblowers can bring a dismissal claim against their employer and a claim against a director who was involved in the decision-making process, for detriment which amounts to dismissal, for which the employer may be vicariously liable (subject to a “reasonable steps” defence). Under the whistleblowing regime it is easier to succeed with a detriment claim – all that is required is the protected disclosure had a more than trivial influence on the detrimental act or omission.
In the Timis case, the insolvency of the employer did not stop the tribunal from awarding the claimant £1,745,000 compensation for the detriments and dismissal he had suffered against the employer and its two non-executive directors on a joint and several basis.
A claimant can also bring a claim for losses caused by earlier detrimental treatment prior to dismissal, which may include post-termination losses. Such a claim offers real benefits to a claimant, particularly where an employer effects a lawful termination after earlier acts of detrimental treatment have taken place. These developments have led to a proliferation of claims against individuals in whistleblowing proceedings.
Joint and several liability
Following the case of London Borough of Hackney v Sivanandan, which began in the late 1990s, if a claim succeeds against both the employer and the individual director, they will each be jointly and severally liable for the whole amount of any compensation awarded. In other words, employment tribunals do not have the power to apportion compensation between respondents.
However, it is still possible for there to be a dispute between respondents as to who pays what. This might be more likely in a high value discrimination or whistleblowing claim where individual liability is pursued against all the directors involved in a decision to dismiss, but a number of the directors are considered far less culpable. In addition, the fact that a tribunal is bound to make an award on a joint and several basis against jointly liable respondents means it will be rare for a director named in the proceedings to succeed in having the claim against them struck out.
High value employment tribunal claims can be ruinous for an individual director, particularly if the employer is insolvent or uninsured. Companies can purchase insurance to protect directors. However, protection can only be obtained for the cost of civil damages and for the legal costs in defending proceedings, and not for criminal fines or penalties.
Directors should check that they have effective directors and officers liability insurance in place and ensure the policy wording covers them personally for any breach of employment practices. Asking to be provided with a copy of the policy document should be a prerequisite to being appointed as a director. Directors should also document carefully what they are and are not responsible for and ensure they are only involved in the decision making of sensitive HR issues where appropriate and necessary.
Furthermore, if a director is required to be involved in an internal grievance, disciplinary or dismissal process, they must be very astute to scrutinise the case presented by an employee’s manager. Doing so not only protects the business but also themselves from allegations.
The content of this article is not legal advice and is not intended to provide more than general commentary on the subject matter. Specialist employment law advice should always be sought about your specific circumstances.