New recognition rights won by sex change patients could expose employers to huge financial risks unless they clamp down on workplace prejudice.
Sex discrimination is already an area where employers have to tread carefully, or face unlimited compensation payments to victims, says employment law specialist Ranjit Dhindsa.
But when the person alleging discrimination started life in the opposite sex, the complexities can be magnified.
"Just the simple question of whose loos to use is fraught with difficulties," said Ms Dhindsa, head of employment law in the Midlands office of international law firm Reed Smith.
"In the case of a man who believes he has been wrongly sexed at birth, the law says he has to live as a woman for two years before any surgery can be undertaken.
"During this period he will also receive psychological counselling and hormone treatment to bring about physical changes which will make the transition easier to cope with. The same procedure applies to women who want to become men. The actual surgery only takes place at the very end of the process, once the individual is certain they want to go ahead."
The issue for the employer is that at some point during this period the gender switch has to be formally recognised - and the "man" has to be treated as a woman.
"The difficulty is in deciding at precisely what point the change should take place," said Ms Dhinda. "The law says that once a man, for example, starts dressing as a woman and living as a woman, he should be treated as a woman.
"But because the corrective surgery comes at the very end of the process, that means women workers could be expected to share their toilets and changing rooms with a colleague who has a man's body.
"The problem is that there are around five thousand gender reassignments in the UK every year, and although most of them go ahead, many are called off because the people concerned realise they are making a mistake."
She added: "Imagine the reaction of female employees - who may have been extremely reluctant to accept that someone they first knew as a man was now using their loos and rest room facilities - when they learn he's had a change of heart and wants to remain as a man."
Animosity in the workplace from colleagues unhappy with sharing facilities with a transsexual could expose employers to allegations of constructive dismissal, Ms Dhindsa said.
Employees should be warned against the use of verbal and physical abuse in a written policy of which all workers are made aware.
With co-operation on both sides there may be compromises that individuals would be prepared to accept in the short term - such as the use of disabled toilets, which are usually unisex anyway.
However once a transsexual is legally recognised in his or her new gender, the employer has to ensure that permanent facilities are in place.
"People going through gender reassignment have enough on their minds, and most of them want privacy," she added.
"There have been cases of obvious discrimination in the past. In one case a man who told his company that he wanted to become a female was served notice. That was an extreme response, and under the new laws would be totally unlawful."