The 'costs' of facing an employment tribunal claim: increase in compensation rates, penalties & fees

27 February 2014

The introduction of tribunal fees on 29 July 2013 attracted a lot of criticism from various commentators that claimants were being forced to shoulder the financial burden to enforce rights conferred on them by law.

From 6 April, the statutory limits on the level of compensation that employment tribunals can award will go up. Furthermore, tribunals will have the power to impose financial penalties of up to £5,000 on employers, where it determines that the employer has breached worker's rights and the breach has one or more aggravating factors.

In addition, we are beginning to see the consequences of tribunal fees for respondents. Recent case law suggests that the general position will be that a successful claimant will recover tribunal fees paid from their employer by way of a costs order.

So what does this mean for employers?

Increase in statutory compensation limits

While there are exceptions, the most significant of which are discrimination and whistleblowing claims, for the most part the level of compensation that tribunals may award is subject to statutory limits. For instance, the maximum unfair dismissal basic award/statutory redundancy payment is currently £13,500 and the maximum unfair dismissal compensatory award is currently £74,200 with a new secondary 'individual' cap of 52 weeks' pay introduced in July.

The rates are subject to an annual revision in accordance with a statutory formula. For years the date for the annual revision has been 1 February. However, the Enterprise and Regulatory Reform Act (ERRA) 2013 changes this. The date for the annual increase has been pushed back to 6 April and the statutory formula now allows rounding up to the nearest £1 rather than the nearest £10 or £100 pounds. While the ERRA 2013 does allow for a one off no revision to compensatory awards in the year following the introduction of the 'individual' cap, the government has not elected to use this power.

So from 6 April 2014 the new limits will be:

  • Week's pay £464 (currently £450)
  • Maximum basic award/statutory redundancy payment £13,920 (currently (13,500)
  • Compensatory award £76,574 (currently £74,200)
  • Basic + compensatory will be £90,494 (currently £87,700)

The new limits will apply where the event giving rise to the entitlement to compensation or payment occurs on or after 6 April. For example, in unfair dismissal and most redundancy pay claims, the appropriate date is the effective date of termination.

It is interesting to note the effect the change to the rounding up mechanism has made. For claims in Northern Ireland, the changes in the ERRA 2013 do not apply. Changes, which came into effect in Northern Ireland on 16 February 2014 increased the week's pay limit from £450 to £470 and the compensatory award for £74,200 to £76,600.

Financial penalties

The new power

From 6 April, employment tribunals will have a new power to impose financial penalties on employers in claims involving an employer and worker where it:

  1. concludes that the employer has breached any of the worker's rights to which the claim relates, and
  2. is of the opinion that the breach has one or more aggravating features.

When will it be payable

The new power will only apply to cases lodged on or after 6 April 2014 where the tribunal has found against the employer and the case has 'one or more aggravating features'.

It remains to be seen how the tribunal will determine what amounts to 'aggravating features'. What we do know is that 'aggravating features' is not the same as 'aggravated damages' that can be awarded in the most serious discrimination cases. The bar for an 'aggravating feature' is expected to be set considerably lower.

The only guidance currently available is contained in the Explanatory Notes to the ERRA which state; 'a non-exhaustive list of factors...could include the size of the employer; the duration of the breach of the employment right; or the behaviour of the employer and of the employee. The Explanatory Notes go on to state that tribunals will be more likely to impose penalties where; 'the action was deliberate or committed with malice, the employer was an organisation with a dedicated human resource team, or where the employer had repeatedly breached the employment right concerned.'

These examples include factors which are not usually considered "aggravating" e.g. the employer's size and dedicated HR function. We wait to see just how low the 'aggravating features' bar will be set.

Who is it payable to?

This penalty will be payable to the Exchequer (not the claimant) and may be imposed regardless of whether or not a financial award is made in favour of the claimant, suggesting that these penalties will be used as a punishment to employers for breaching employee rights.

How much will it be?

The amount of the penalty can vary from a minimum of £100 to a maximum of £5,000. Where a financial award is made in favour of the claimant, the penalty will be 50% of the total award (subject to the minimum and maximum limits). In addition, tribunals must have regard to an employer's ability to pay when deciding whether to impose a penalty and also when deciding the amount of penalty to award.

An early payment discount applies to reduce the penalty by 50% if paid within 21 days. Therefore, respondents have an opportunity to reduce the penalty if they are unfortunate enough to find themselves ordered to pay such a fine.

Fees

Over seven months after fees were introduced for tribunal claims, the courts are beginning to consider the issue of repayment of fees to successful claimants. Under s. 76(4) of the Employment Tribunals (Constitution and Rules of Procedure) Regulations 2013, tribunals may make a costs order where a party has paid a fee in respect of a claim and that claim is decided wholly or partly in favour of that party.

Initially, this appeared to give the tribunals a discretionary power to award costs to the winning party without any presumption that fees paid would be recoverable by a winning party. However, the Lord Chancellor has now clarified that the presumption should be that a winning party recovers fees paid. The Government Guidance on this point has now been amended to make repayment of fees the general position: 'the general position is that, if you are successful, the respondent will be ordered to reimburse you'. Therefore, unless there are exceptional circumstances, employers should expect to have to repay a claimant's tribunal fees, should they fail to successfully defend any claims brought against them.

This presumption also seems to apply to appeals. The Employment Appeal Tribunal has confirmed that a respondent does not need to have acted improperly (as is usually the reason for awarding costs to a party) for reimbursement of fees to be awarded to a successful appellant.

However, what happens in situations where employers are deemed to have technically breached employee rights but due to the employees own actions contributing to the dismissal, the damaged awarded are of nil value? This is not mentioned in the Government Guidance. It therefore leaves further financial uncertainly for employers facing tribunal claims.

Action points

  • Try to avoid all breaches of employee's rights - In terms of best practice this should always be the aim. In practice however, things don't always work that way. With business reasons, personality traits and genuine mistakes always being factors to consider, it is impossible to avoid tribunal claims completely. If you aim to conduct procedures and all employee relations in the best possible way you place yourself in a better position to defend any claim that may arise.
  • Seek advice - When faced with an employment claim, seek legal or HR advice in the first instance. By doing so you will be able to understand from the earliest point whether your case is strong and worth defending or not. By taking advice at an early stage you can also be advised as to the level of the financial risk you face if you choose to defend such a claim. By having this information to hand, you can make an informed decision of the next steps.
  • Settlement options - In the course of preparing to defend a tribunal claim there will come the point where you consider whether you wish to attempt to settle the claim or not. With the financial risk of losing a tribunal claim set to increase significantly under these two new regimes, more companies might choose to settle for commercial reasons at an earlier stage than they previously would have done.
  • Don't feel pressured - There is the risk however that claimant's will use the penalties and repayment of fees as a tool to attempt to pressure employers into settling claims which have a strong chance of success if they were defended. Again, seek advice and take your time to consider your options, rather than being pressured into a settlement.
  • Early payment discount - If you decide to defend a tribunal claim and are unfortunate enough to be unsuccessful, make sure you pay any financial penalty awarded within 21 days to have the value reduced by 50%.

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