Hundreds of small franchise companies throughout the UK are paying premiums for legal fees insurance that is largely worthless.

Many franchise businesses take out insurance against the costs of fighting claims at employment tribunals, some as standalone policies and some as “add ons” to employer’s liability or other policies. Insurance companies always write these policies on the basis that they will only cover claims that have more than a 51 per cent prospect of being successfully defended – cases where they assess the employer has acted incorrectly will not be covered.

Premiums for this type of insurance before August 2013 were set to reflect the large number of ill-conceived or totally spurious employment tribunal claims filed by disgruntled employees.

However, the rules for bringing claims to employment tribunals changed in 2013. It is now a requirement not only for ex-employees to go through Acas Early Conciliation before they can lodge a claim; they must also pay a fee of up to £250 when they file the claim and a further £950 before there is a hearing. The effect that this has had on the number of claims being lodged has been dramatic – the overall number of claims has fallen by 79 per cent.

Peter Abraham of human resource compliance advisers HR4UK said: “The reduction in the number of claims means the risk of an employer who has attempted to comply with the law being taken to an employment tribunal for a misconceived claim is now much lower than it was just over a year ago.

“What’s more, because there are now costs to the employee of bringing a claim, only cases where the claimant is likely to succeed are being pursued. These are the very cases where insurance companies believe the employer has less than a 51 per cent chance of success and are therefore much more likely to refuse to cover.

“These two factors together mean that businesses are paying for insurance which is of dubious benefit. Insurers have generally not significantly, if at all, reduced their premiums. They are creaming in profits on this area of business – especially as many small businesses simply renew a policy without reviewing its costs and benefits.”

Until recently, as part of its services, HR4UK offered a complimentary insurance to clients to cover the costs of fighting employment tribunal claims. Due to the changes that have taken place HR4UK is no longer doing so because it sees insufficient benefit to its clients. Instead it is providing free representation in Acas Early Conciliation negotiations and employment tribunals using its expert team of employment lawyers and barristers, allocating up to £20,000 of its own money to cover such costs in any one case. What is far more beneficial to its clients is that it will represent them regardless of the chances of success at the employment tribunal and this offer is no longer tied to the rigid rules of insurers.

Peter Abraham said: “We tried to renegotiate the insurance policy but, despite the huge reduction in risk faced by the insurer, we were being asked for a premium that was little different to what we have paid in the past.

“We are so confident in our advice and systems that we no longer see a need for legal expense insurance to fight employment tribunal claims when the misguided and ridiculous claims that flooded the system in the past are simply no longer there. So we are putting our own money where our mouth is and offering to provide free representation in Acas Early Conciliation negotiations and employment tribunals up to £20,000 per claim to our clients – provided they follow our system. They do not even have to ring us for advice.

“We have been delighted that our clients have seen the sense in what we have done, many saying they feel this is better than the insurance-backed service as they do not have to worry about the chances of success to know whether their legal fees will be covered.”

Photo caption: Peter Abraham of HR4UK.