Employers' liability is growing risk for firms

If so, it may be a good idea to take a cold shower. At least your boss may well think so.

The misdeeds that staff get up to beyond the office walls, sexual or otherwise, are an increasing worry for employers.

A series of legal cases has made it more likely that they will be held liable and have to pay damages, whether to their own employees or to outsiders.

The head of HR at a leading European investment bank says: 'It's a big headache. We can't constantly keep an eye on what our people are doing, but there have been cases brought against us for things that have happened outside the office.'

Most of the cases against banks have involved sexual harassment by one employee against another. They have also been settled out of court.

Fraser Younson, a partner at the law firm McDermott, Will & Emery, says banks have traditionally paid up simply to avoid bad publicity.

Younson says that typical out-of-work incidents are related to existing tensions in the office. Subtle undercurrents become not so subtle harassment when combined with the disinhibiting effects of alcohol provocative comments made to a female colleague in a wine bar can land an employer with a hefty bill.

A trader at a US bank says: 'Opportunities for misbehaviour are legion. I have had an affair with a colleague that ended somewhat acrimoniously. My boss is having an affair with a bond saleswoman. 'Incest' is rife on the trading floor.'

While such relationships are nothing new, there is a growing likelihood that associated harassment outside the office is the responsibility of an employer under the principle of 'vicarious liability'.

This could apply to other wrongdoings, too, such as assault, or even libel.

Kate Brearley, head of the employment and pensions group at law firm Stephenson Harwood says several recent UK cases have widened the scope of 'vicarious liability'.

In a 1999 case, a policeman was harassed by a colleague in a pub. A court decided the police force was responsible.

Previously, it was easier to argue that such a case had nothing to do with the employer.

The line between purely personal actions and employer responsibility is fine.

The traditional test has been that an employer is off the hook unless an incident takes place 'in the course of employment' - as an ordinary person would understand the phrase.

This has led to some seemingly arbitrary results. The presence of family and friends may, for example, render an event not 'in the course of employment', even if it is an employer-organised affair.

In May this year, the boundaries of employer responsibility may have been pushed wider still. Younson says that the House of Lords case, Lister v Hesley Hall, broadened the test to include any 'close connection' with the employment of the wrongdoer.

This could make it more likely that employers will be liable for fights or harassment as employees celebrate deals, for example, at restaurants or lap-dancing bars.

Staff behaviour towards outsiders is also a worry. 'Wherever there is a lot of client entertaining, vicarious liability can be a problem,' says Brearley.

By this reckoning, mingling with fellow delegates at a conference could create the potential for trouble.

Brearley says that even after the Lister case, the UK is less likely than some other countries to hold employers responsible.

In Canada, an employer was recently held 25% responsible for damage caused by an employee who was drink-driving after an office party.

And in the US state of Utah, for example, employers can be liable for any injuries that employees sustain while doing anything that benefits the company.

One man successfully sued his employer after breaking his back while clearing his driveway to enable a company vehicle to park there.

In some cases, banks can take action to absolve themselves of blame. Younson says that in sex and race discrimination actions, evidence that all reasonable steps have been taken to prevent it can be used in defence.

But the law is never clear cut. Banks may be increasingly tempted to chain employees to their desks. 'It's a bit like being a parent. The employer can never relax its guard,' says Brearley.