Employment law reform – penalties for employers

by Laurie Anstis on January 30, 2011

Last week the government announced its consultation paper for employment law and employment tribunal reform.

The headline provisions – the introduction of fees, and the proposed increase from one to two years for unfair dismissal, have attracted much comment. In this series of blog posts, I will be looking at some of the small print of the consultation, which could be as significant as the headline provisions.

First, the government’s proposal to introduce penalties for employers who lose their cases at tribunal.

At page 52 of the consultation document, the government proposes that for the first time the employment tribunal should have power to impose penalties on employers who have breached employees’ rights. They say that:

Introducing such powers would allow the tribunal to send a clear message to an employer, and employers more generally, that they must ensure that they comply with their employment law obligations.  Over time, we would expect to see a fall in the number of ET claims as employers became better informed of these obligations, and so breaches will occur less often or not at all.

The penalty would be payable to central funds, as a source of funding to the taxpayer from employers, to counterbalance the new fees that would be paid by employees.

The penalty is proposed to be 50% of the total award to the employee, with a minimum of £100 and a maximum of £5,000, with the penalty reduced by half if paid within 21 days.

The government says that the median award for unfair dismissal is around £5,000. If an employer lost such a claim under the new proposals, they would have to pay a total of £7,500, or £6,250 if they pay within the time limit.

Except perhaps in the case of (1) protective awards for failures in collective redundancy and TUPE consultation, (2) increases or decreases for unreasonable failure to follow ACAS or statutory procedures and (3) awards for failure to provide proper written particulars of employment, the focus of the employment tribunal has always been on compensating the employee, rather than penalising an employer for their bad employment practices, so this would be a new development.

The new provision could, however, have some unintended consequences.

Typically in an unfair dismissal case, there will come a point at which the employee will serve a schedule of loss, and the employer has to decide whether or not to make an offer to settle. Often the advice from the employer’s lawyer will be that they consider that a tribunal will rule in the employer’s favour (but they cannot be sure) and that the claim is going to cost thousands of pounds to defend. The employer will want to know the worst case scenario, and will then make a decision on whether to make an offer, and how much that offer should be.

Under the new proposals, the worst case scenario is going to be the original award, plus 50 or 25% and, almost certainly, reimbursing the employee the fee that they have had to pay to start the claim. If, under the old rules, the worst case scenario is £5,000, under the new proposals it would be £7,500 or £6,250, plus the employee’s fee of (probably) a few hundred pounds.

If the case is settled outside the tribunal there will be no penalty payable, and this is typically going to make the employer more likely to make an offer (and to make a higher offer) than they otherwise would – even if the claim appears weak. This seems to be contrary to the thrust of the rest of the reforms, which are designed to discourage employees from taking a chance on a weak claim in the hope of a quick payout.

Beyond that, the new rules have the scope to introduce “super settlements”. What if, instead of having a weak case, the employee has a very strong case? The employee might have a very strong case for, say, a statutory redundancy payment, or a protective award. Protective awards are limited to 13 weeks’ pay, but where the employer has made no efforts to consult, and has no excuse, they can typically expect to have to pay the full 13 weeks pay. That would now become 13 weeks pay, plus 25 or 50%, plus the tribunal fee. An employee may well use the threat of that to demand more than 13 weeks pay by way of settlement – to keep the claim away from the tribunal and its powers to make penalty awards.

The proposals do suggest that the award should be automatic, except where there are “special circumstances”. This exception would be welcome, and perhaps ought to apply in cases where the paying party has not actually been responsible for the breach, as may be the case in, say, some TUPE claims or claims against the redundancy payments office.

Finally, although there can be a clear link between the employee’s fee and the funding of the employment tribunals, it would be undesirable for there to be such a link in the case of the penalty payments, for fear of allegations from employers that the award was only made against them because the employment tribunal was short of money.


Thanks for a very interesting post Laurie.

I think this particular proposal is likely to be politically untenable – aggrieved employers will argue that they are already bogged down in a morass of employment legislation and are now funding the government’s plan to reduce the deficit. As you say it will put employers under pressure to settle sooner rather than later and that “blackmail” factor is one of the main criticisms of the current system. I think a Tory-led government might struggle with this one.


by Michael Scutt on 30 January 2011 at 11:53 pm. #

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by Employer vs Employee: The Saga Continues | News | Jobsworth by Michael Scutt on 31 January 2011 at 11:33 am. #

For all the bluster about vexatious nuisance claims in the press, my view is that this consultation is as much about reducing the deficit as it is about saving employers the trouble and expense of claims. The £2bn cuts the MoJ is facing are included as part of the policy background to the proposals.

The following all seem to have a deficit-reduction element to them:

  • Fees for claimants.
  • Fines for employers
  • EJs sitting alone in more cases.
  • Possible suggestion of doing away with wing members in the EAT.
  • A new (no doubt cheaper) class of “legal officer” for routine case management.
  • Witness statements taken as read (therefore shorter hearings).
  • costs orders covering tribunals’ wasted costs.

Greater strike-out powers, plus all the measures to encouraging more (and earlier) settlement (e.g. pre-claim conciliation, early schedules of loss, Calderbank offers) would also have the effect of saving tribunal time and money by cutting down the number of hearings.

On the plus side, if the plans to reduce weak claims (fees, strike outs, advice from Acas etc) actually work, then employers should be less likely to be in the position of being blackmailed by demands for a nuisance payment.

And, while a claimant may well try it on and seek a “super-settlement”, the employer could counter that with a lower Calderbank offer, which the claimant will have to weigh against the risk of incurring further (irrecoverable) legal costs and a potential reduction in compensation at tribunal if they fail to beat the offer. My gut feeling is that these factors could render the “super-settlement” more myth than reality, but I may be wrong.

Given that the proposal of fining employers is about the only “pro-claimant” measure in this consultation, I think the reforms would be very unbalanced if this were to be dropped.

(PLC’s analysis of the proposals is here, and is freely available to non-subscribers.)

by Mark Tarran on 31 January 2011 at 1:10 pm. #

[…] Workplace Disputes” paper. This week I have been looking at and commenting on a number of the […]

by Employment law reform - the consultation | Work/Life/Law on 3 February 2011 at 11:54 pm. #