A warning has been issued to more than 700 firms in York and North Yorkshire: "Be careful not to hurt your employees' feelings - or it could cost money."

Len Cruddas, chief executive of the York and North Yorkshire Chamber of Commerce, plans to alert his organisation's legal advisory service to a new court judgement which has put the spotlight on recognising the effect of stress in the workplace.

The Dunnachie v Kingston upon Hull City Council judgement is a landmark case, in that for the first time in more than 30 years an employee has been awarded damages for hurt feelings.

Mr Dunnachie, a former employee of Hull City Council, successfully claimed that his resignation was due to a "prolonged campaign of harassment and undermining" on the part of his line manager and that he had been constructively and unfairly dismissed.

He was awarded a total of £54,940 - which included £10,000 for injury to feelings.

Mr Cruddas said: "It is another reminder, if it is needed, that we need to treat staff properly.

"I shall be bringing this case to the attention of the legal experts who manage our 24-hour, seven-day-a-week employment law hotline, to which all our members are entitled. As long as they follow the advice given they are protected under our insurance policy against any industrial tribunal judgement up to £50,000."

Paul Cotton, human resources partner at law firm Eversheds, said: "While it is unlikely that this case will open the floodgates to a large number of 'injury to feelings' awards being made, businesses need to be aware that it is not only economic loss that will be considered in future unfair dismissal cases, but also emotional impact."

In this case, he said, there was no evidence to suggest that the distress caused by his resignation amounted to a recognised psychiatric condition, but the tribunal found that Mr Dunnachie had been "reduced by his treatment to a state of overt despair".

Mr Cotton said: "Up until now, the universally understood principle was that an employee could not recover compensation for injury to pride or feelings, if they had been unfairly dismissed, only economic loss based on loss of earnings.

"In many highly-charged work environments, stress can be an issue that needs to be closely monitored, and it is vital that in large organisations, where layers of management and reporting structures may be in place, line managers are properly trained to identify and respond to employee issues that involve harassment or bullying."

Updated: 10:43 Wednesday, April 14, 2004