Jean-Yves Gilg

Editor, Solicitors Journal

Professional indemnity and successor practices

Professional indemnity and successor practices


During mergers and acquisitions, firms must take care to prevent employment issues arising among the transferring staff, writes Stuart Jones

Under Solicitors Regulation Authority rules, if your organisation acquires another firm of solicitors, you may well become the 'successor practice' for that firm. This may lead to significant liability for any professional indemnity insurance claims against the 'old' firm. This is obviously a core risk and compliance consideration for any practice planning to acquire or merge with another.

However, it is also crucial to consider the employment issues that inevitably arise when two firms come together. Failure to handle the transition properly could leave your business exposed to expensive employment tribunal claims.

TUPE requirements

When a firm changes hands, Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) is likely to apply. This means that the staff of the old firm (or at least the team or department you have taken on) will transfer over to your organisation on their existing terms and conditions. You will effectively step into that firm's shoes with regard to the transferring employees, taking on all of the rights, powers, duties, and liabilities of their former employer.

Crucially, this means that any acts or omissions of the previous employer are treated as having been done by you. If the firm you are acquiring has constructively dismissed staff or acted in a discriminatory manner, you
may be liable to meet the costs of a claim

There is also an obligation to consult with transferring staff.
A penalty of 13 weeks' pay per employee applies if this is not done properly and, in certain circumstances, both the old and new firms may be held to be 'jointly and severally' liable
for this.

Due diligence

A thorough due diligence exercise on the practice you
are acquiring is essential to accurately gauge your exposure. Identify any incoming employees who are involved
in disciplinary or grievance procedures. Is there a particularly high staff turnover rate? What interactions has the firm had with the regulator?

Look carefully at the practice's recruitment procedures and audit them. You may wish to conduct your own checks on the qualifications, experience, and references of incoming staff.
For example, you may be liable for a penalty if the practice you are acquiring has not carried out adequate immigration checks and an employee is found to be working illegally. You should carry out your own right to
work checks within a grace period of 60 days of inheriting staff under TUPE.

You will also need to review benefits in kind, such as cars, pensions, and healthcare, as
you have very limited room for manoeuvre to make changes post-transfer.

Some restructuring is
likely to be needed following
a merger, and this may mean redundancies. In a redundancy situation involving 20 or more staff at one establishment, collective consultation obligations apply. These are separate to your consultation obligations under TUPE but
may run concurrently. Careful planning and communication will be required and the costs of consultation and any potential redundancy payments must be factored into your budget.

Even when the merger
or acquisition is signed and sealed, you may face ongoing employment issues. For example, you may be required to tackle historical disciplinary issues arising from misconduct or gross negligence committed by employees at their old firm. Depending on the facts of the case, it may well be fair to dismiss an employee whose actions have exposed your firm to a claim (even if you were not the employer when the incident took place). However, investigating an allegation can be extremely challenging for a new employer.

In practical terms, combining two or more firms or teams can be stressful for a successor practice. Reconciling disparate ways of working can be tough and lead to grievances from disgruntled employees. Some staff may inevitably suffer a drop in status and it will take time to form effective new team dynamics. Specialist employment advice and focused HR involvement can help
smooth the transition.

Remember, too, that even where you do not acquire a body of staff, professional indemnity issues may arise when you take on an individual. For example, you may become a successor practice if a former sole practitioner joins your business (even as an employee rather
than a partner). It is important to carefully consider the wording
of the employment contract or consultancy agreement to minimise risk.

Stuart Jones is head of employment, pensions, and immigration at Weightmans @Weightmans