Proposed sentencing guidelines published on 13 November 2014 will be under consultation until 18 February 2015. If implemented, they are likely to have a dramatic impact on the level of fines imposed on businesses convicted of health and safety, corporate manslaughter or food safety and hygiene offences. For any business with an annual turnover in excess of £50 million the new norm will be fines of millions, rather than thousands, of pounds.
The Sentencing Council has published a consultation which suggests that the courts should use very different guidelines to those currently in force when sentencing for health and safety, corporate manslaughter, and a range of food safety offences in England and Wales.
The stated aim of the proposed guidelines is "to ensure that all sentences are proportionate to the offence committed and in relation to other offences" while following the principle that any fine "should be sufficiently substantial to have a real economic impact which will bring home to both management and shareholders the need to comply with the legislation and achieve a safe environment for workers and members of the public".
The Council makes clear that the starting point for its recommendations is that any fine must reflect: the seriousness of the offence, the culpability of the offender and take into account the financial circumstances of the offender so that it meets, "in a fair and proportionate way, the aims of punishment and deterrence."
For corporate offenders, the guidelines recommend that a number of steps should be followed by the judiciary in determining sentence in each case.
Step 1 - will determine the offence category by looking at culpability and harm factors. In other words how serious is this offence taking account of matters such as the risk it created; how serious was any injury actually suffered; how far short of appropriate standards did the defendant fall, and how widespread was the non-compliance.
Step 2 - will focus on the turnover of the offending organisation to determine a starting point for the appropriate level of fine. It is anticipated that corporate offenders will be required to provide comprehensive accounts for the last three years to enable an assessment to be made of financial status. Normally, only information relating to the convicted organisation before the court will be relevant, "unless it is demonstrated to the court that the resources of a linked organisation are available and can properly be taken into account".
The suggested ranges into which fines will fall depending on corporate turnover, leads to some alarming results. A "large" organisation is proposed to be one with an annual turnover of £50 million. There are categories for medium, small and micro businesses below this.
An assessment of very high culpability with a high degree of risk created or significant harm actually caused will lead to a "large" organisation looking at a fine on conviction of:
- for corporate manslaughter £4,800,000 to £20,000,000 (starting point - £7,500,000)
- for health and safety offences £2,600,000 - £10,000,000 (starting point - £4,000,000)
- for a food hygiene offence £500,000 to £3,000,000 (starting point - £1,200,000)
This is serious for business. Fines by law cannot be insured. Make no mistake, these fines are intended to be punitive. They come straight off the bottom line, as do the prosecution costs which on conviction are also normally ordered to be paid by a convicted defendant.
Furthermore, if annual turnover of the organisation convicted "very greatly exceeds" £50 million, "it may be necessary to move outside the suggested range to achieve a proportionate sentence". Logically it would seem that a business with an annual turnover of £100 million might expect to receive double these fine bands.
Step 3 - will involve a consideration of whether the fine suggested by steps 1 and 2 is "proportionate to the means of the offender". This will allow the court to take into account:
- the profitability of the business before tax, directors' remuneration, loan accounts and pension provision, and
- the assets of the business.
Those factors might push the suggested fine up or down, or might simply lead to the court allowing more time for payment, or for payment by instalments.
Step 4 - suggests other factors will then be considered that may warrant further adjustment of the proposed fine. If the organisation for example is a charitable or public body the fine is likely to be reduced if it can be shown it would have a significant impact on the provision of that organisation's services.
Steps 5 to 9 - broadly set out matters which you would currently expect would form part of any reasonable plea in mitigation to reduce the penalty. This includes such matters as a discount for an early guilty plea, previous good record, and consideration of whether the total sentence is just and proportionate where more than one charge has been brought. There is also encouragement for consideration to be given, for example, to making a compensation order to anyone injured or damaged by the breach. The final step suggests that there is an obligation for the court to give reasons for, and explain the effect of, the sentence on the convicted defendant.
There is some logic to the recommendations, and legitimate concerns regarding inconsistencies in the application of current sentencing policy. However, particularly for businesses with turnover in excess of £50 million annually, the scope for considerable inconsistency in sentencing has not been addressed.
The current approach to sentencing when death has occurred (which it is reasonable to assume would be regarded as high harm category under the proposed regime) is set out in Sentencing Guidelines published in February 2010 (the 2010 guidelines). These suggest that on conviction:
- for corporate manslaughter the appropriate fine will "seldom be less than £500,000 and may be measured in millions of pounds"
- for health and safety offences where the offence caused death (not justifying corporate manslaughter charges) the appropriate fine will "seldom by less than £100,000 and may be measured in hundreds of thousands of pounds or more".
The 2010 guidelines specifically say, "the law must expect the same standard of behaviour from a large and a small organisation. Smallness does not by itself mitigate, and largeness does not by itself aggravate these offences... A fixed correlation between the fine and either turnover or profit is not appropriate".
The proposed guidelines will, on the face of it, radically change that approach. However, in practice we have already seen a move away from the 2010 guidelines with turnover very clearly being taken into account in the calculation of fines for larger businesses. Inconsistency remains an issue though. For example, the Court of Appeal earlier this year confirmed sentence imposed in two cases which are difficult to reconcile:
- Sellafield Limited with a turnover of £1.6 billion was fined £700,000 for health and safety failures which caused no harm and where the risk of harm was low.
- Network Rail with a turnover of £6.2 billion was fined £500,000 when health and safety breaches led to a driver and his grandson suffering injury, where the risk of harm was both serious and foreseeable and had existed for many years.
The 2010 guidelines would not have applied because in neither case was there a death, but they may have led to an expectation that a fine would fall below those guidelines because they were less serious cases. Clearly turnover was relevant to the size of these fines.
Though the inconsistency between those cases seems glaring on the face of things (with the smaller fine going to the larger business for a more serious offence), in the Network Rail case the court seems to be have taken account of the fact that a fine could harm the public by leading to a compromise in the maintenance of the rail infrastructure or a call on public funds – these are matters envisaged by step 4 of the proposed guidelines as still being relevant factors to take into account.
If the proposed guidelines can achieve greater consistency and transparency in how each determination is made, that would be a positive outcome. However, given that the proposed guideline bands stop at an assumed annual turnover of £50 million for a defendant business, that potentially leaves scope for inconsistency to continue unabated where turnover of a defendant business is materially above that level. It is in such cases where the very high levels and on the face of it greatly inconsistent fines are currently imposed.
Is it just or excessive that a fine up to £200 million should be the norm for corporate manslaughter offences where turnover of a business is £500 million annually? And if that isn't the norm, then wouldn't smaller businesses have every right to feel aggrieved at their proportionately higher penalty levels when the guidelines are applied to them in the same accident circumstances?
The latest statistics from the Health and Safety Statistics Annual Report for Great Britain 2013/14 show that the average penalty per case in the last year for health and safety prosecutions (excluding corporate manslaughter) was £30,511 for matters prosecuted by the HSE and £17,743 where the local authority was prosecuting.
These statistics involve a range of harm and culpability of course, and not all prosecutions would have been against organisations. There is a material difference between these averages and the proposals for businesses of all sizes, for example, the fine range of £150,000 to £450,000 is being suggested by the proposed guidelines for a highly culpable micro organisation with a turnover of less than £2 million annually.
And should businesses the turnover size of Network Rail by worrying about potential fines over £2.4 billion given its turnover, if fines are inflated pro rata?
As a final point for anyone with their head in the sand thinking this isn't going to happen, it is worth noting that the proposed guidelines are not without precedent.
The proposed guidelines have marked similarities in approach to the Environmental Offences guidelines applicable to organisations sentenced after 1 July 2014 and which also suggest a stepped guide to sentencing and penalty levels for which one of the starting points is a defendant organisation's turnover.
What can you do about this change?
The proposed guidelines are at the consultation stage at present. They have not yet been finalised or accepted. There is a window of opportunity before 15 February 2015 to make your views known.
Since public sector and charitable entities already seem able to derive a substantial discount and this seems likely to continue, it may be increasingly relevant in mitigation to be able to identify the extent to which a business is operating for the benefit of public sector clients, and to consider the impact on corporate responsibility and charitable initiatives which a high fine would have.
Could you shift risky parts of your business into limited liability businesses which have a lower turnover (below £50 million annually) to escape the more serious financial implications of the change?
It is the case that fines should not generally be beyond the means of the convicted defendant organisation's ability to pay. There is also a general principle in law that the fine should be paid by the convicted defendant without taking account of the wider corporate family.
However, the proposed guidelines do seem to anticipate that there will be occasions when the court can look to the wider corporate structure and the court does sometimes pierce the corporate veil. For example in R v Brintons Limited, the Court of Appeal convicted the company which bought premises which it knew might have asbestos, did in fact have asbestos, and allowed its staff to work on those premises without testing to establish if asbestos was present. Sentence took into account the entire corporate group finances which had an annual turnover of £91 million.
Whether or not a sentencing court will in fact look at the wider corporate or group picture when sentencing a company is likely to depend primarily on the timing and purpose behind a particular structure.
The court has the ability to pierce the corporate veil where the corporate structure is viewed as being merely a façade concealing the true facts and is being abused for the purpose of some relevant wrongdoing. If avoidance/limitation of penalties is not the purpose of a particular corporate structure, then the protection afforded by limited liability should still be available and the court may accept that it must punish based on the financial position only of the convicted defendant company and not based on the financial position of the wider corporate structure. That is more likely to be the case if the structure had been arranged before, rather than in response to, a change in sentencing guidance.
Better still of course, would be to use the window of opportunity before the likely change in sentencing policy occurs, to revisit and re-galvanise consideration of health and safety in your business. Where possible, eliminate the risks of a serious incident. Ensure there is plenty of mitigation to which you can refer evidencing a responsible approach to health and safety throughout your organisation, and, very importantly, ensure that there can be no evidence of any lack of board and managerial concern to get things right so that you never get above the lowest culpability bands for sentencing in the event of an accident.
This is something on which our Regulatory Crime team can assist to help ensure that you are in the best possible position going forwards to avoid the risk of a serious accident and the risk of prosecution, to maximise the mitigation available to you and to defend your position and keep the penalty down if prosecuted.
Susan Dearden is a partner in our Regulatory Crime team, specialising in helping business defend regulatory prosecutions, particularly in connection with health and safety, environmental and food hygiene issues.