Fighting an unfair dismissal case, particularly when discrimination is included in the claim, can cost a charity tens of thousands of pounds in legal fees - even if it wins.
"One costly claim could put a small charity out of business, or at least make a major dent in its funds," says Helen Giles, HR director at the homelessness charity Broadway. She estimates that an eight-day discrimination tribunal case could cost £35,000.
Many charities opt for some form of insurance to cover this risk. The increase in the number of cases and the widening of the definition of discrimination in recent years to include sexuality, religion and age has heightened the need for cover.
But Giles says there are real questions about the effectiveness of such insurance and warns charities to select policies carefully.
She is particularly concerned about policies that advise employers to settle claims rather than fight them, even if the charity feels it is likely to win. They do this because it usually costs less to settle with a claimant than to foot the bill for a tribunal hearing.
"The danger of this approach is that it can encourage other employees to lodge complaints in the expectation of getting a payout," says Giles.
Avoid risk-averse advice
Charities therefore need to make sure that their employment litigation cover meets their needs and that the insurer will support them in fighting the case at tribunal if solicitors believe there is more than an even chance of winning.
"If a charity has sacked someone for gross misconduct, perhaps because of how they've behaved with a vulnerable client, they don't want to have to pay them off," Giles says. She adds that it is not uncommon for a charity that has had no claims for several years to receive one, settle it out of court, and then find two or three more claims are made shortly afterwards. Part of the problem for charities, particularly small ones, she says, is that it is hard to keep such settlements confidential.
Giles warns charities to be especially on their guard against insurance offered by business services companies, which may be well marketed and appear to represent good value but does not actually offer the right support. "They promise a helpline, but the advice is very risk-averse and they want you to settle," she says.
Other, more standard insurance packages promise legal support, but the response times might be poor and pressure is put on charities to agree a settlement.
Some policies are more expensive, but they can be more cost-effective in the long run because they actually support charities that fight claims.
An HR director at a research charity, who asked not to be named, said: "It's very challenging working out what you want and then finding an insurer that can provide it - you need to spend a lot of time talking to insurers or brokers, establishing what actually happens in the event of a claim."
She says the charity had a claim it thought was groundless, but had to fight hard with its insurer to avoid a settlement: "You need to check whether the insurance is just for legal costs or also includes some of any settlement costs, what happens if you disagree with their advice and so on."
Guy Pink, HR director at the drugs and alcohol charity Addaction, says charities must also check that any insurance is relevant to their structure.
"It can be very frustrating if an employer has to fork out substantial sums of money to fight a claim that has little likelihood of success," he says.
Addaction, he says, has refused to take out insurance, partly because it did not cover employees taken on after merger or transfers, which is a significant part of the charity's workforce. Pink says one of the challenges is that many insurers targeting the market do not know the voluntary sector very well: "For example, they may not appreciate that the sector has individuals who are very passionate about their work and who might insist on their day in court if they feel hard done by, even if the charity has followed all the procedures correctly."
The health charity Lepra has become more rigorous about insurance since experiencing several unfair dismissal claims a few years ago.
"In retrospect, it would have been good to have had insurance at the time, but we now have cover in place," says Bernard Farmer, director of development at the charity.