With claims from disgruntled staff mounting, many employers are baulking at the high costs of a legal defence. So should you just settle? A major report on employment tribunals starts by looking at the costs to organisations
Nigel Brown, head of employment relations at Axa Insurance, is typical of many personnel professionals in being proud of his procedures. Having well designed internal procedures, and sticking to them, is an integral part of good employment practice, he believes. It means that things can be sorted out internally with relatively little fuss.
But it also means that if ever Axa Insurance receives a tribunal claim, the company would fight it unless there was an overpowering reason not to. Brown says, “We try to avoid cases by having good procedures but we would choose to fight them rather than settle, and expect to win. The best defence is to be prepared to fight.” There have been five claims in five years, all of which Axa has won.
According to the CBI, this stance is being taken by more companies when faced by the seemingly inexorable growth in the number of claims going to employment tribunal. Rather than attempt to persuade an employee who decides to pursue a claim to accept a couple of thousand pounds to go away, which is invariably the cheapest option, they make it known that they will defend all claims on principle. Deterrence is the name of the game. The employee has to reckon on facing the best lawyers corporate cash can buy. “It does all mean that employment law becomes more complicated, which is regrettable,” says Brown. “But on the other hand no employer welcomes a reputation for being easy to get money out of.”
The nuisance factor
Many employers will have sympathy for this view. With an awful lot of employment law around – more than 50 bits of legislation under which to pursue a tribunal claim – a familiar complaint is the “nuisance factor” of applications. Business lobbying organisations think some employees try it on for settlement money. For employees, tribunals are free; for employers, there is always a cost. According to calculations made by the Institute of Directors, employers paid out £7.5bn in compensation and settlements in 1999.
Of all the claims dealt with by tribunals, the Employment Tribunal Service annual report says applicants win in just 12 per cent of cases. Employers have a good record – a logical reason for taking a principled stand. It may ratchet up the amount of brinkmanship, of psychological intimidation, in the tribunal process and it may clog up the system, but work is an emotional arena and precedents matter.
“Justice should not be a game of chicken,” says Dominic Johnson, head of employee relations at the CBI. “But there are a number of employees who understand the law and understand the incentive for employers to settle. Many cases involve several jurisdictions and are therefore costly to fight. It is an unfair manipulation of the system, but unfortunately it is becoming more legitimate for employees to behave in this way.”
Axa is a big company and can afford its policies. But it remains a rare and novel response to the boom in employment law. Some 33 per cent of tribunal claims are withdrawn and a hefty 39 per cent of claims are settled with the help of Acas.
Within some sectors there is a clear preference for settling most claims. Take small businesses, which are said by many organisations including Acas, the TUC, the CBI and the CIPD, to account for a lot of claims because they do not have the resources to keep up with the relentless twists and updates of employment law.
Despite vociferous complaints from the Federation of Small Businesses about the burden of red tape on business, it would appear from the figures that members are not exactly staggering under the weight of IT 1 forms. Abbey Legal Protection, which runs the FSB’s legal arm, deals with 400 claims a year from the federation’s 155,000 members – and 80 per cent are settled for an average pay-out of about £2,000. Of the few cases that do go to tribunal, the firm claims to win 90 per cent.
“Applicants seem to feel there is a pot of gold at the end of the litigation rainbow,” says Murray Fairclough, head of legal services at Abbey. “There are a lot of frivolous or vexatious cases, as evidenced by the fact that they disappear right at the start for a nominal sum of £100 or two or three days before a hearing when the applicant realises they have to give evidence.” However, while the bitterness is understandable, it has to be asked what kind of message those figures send. If 80 per cent of applications are being settled, either there really is a pot of gold at the end of the rainbow or small businesses routinely break the law. Or both.
Here we have two extremes, neither of which was meant to happen. Fighting all cases is expensive, irrespective of whether any compensation is awarded. Settling may be cheaper and easier, but damaging in the long term. It is a sign perhaps of just how much tribunals have evolved since the 1960s, something which Sir Andrew Leggatt’s review – set to report at the end of March – is well aware. That said, pretty well everybody who uses tribunals is in favour of retaining them. Only two out of 110 responses to the review (which is dealing with all tribunals, not just employment) felt they should be scrapped. Getting rid of them and moving to Euro-style labour courts would be “a disaster”, according to CIPD employment relations adviser Mike Emmott.
And yet the calculus of whether to defend a tribunal is often perceived as having little to do with justice. Even though everything may have been done by the book and the sense of being “in the right” within a personnel department may well be very strong, politics and psychology play a complicated role.
For a start, there is the media. Media interest is a frequently cited reason for avoiding going to a tribunal – a point which applies especially to discrimination cases. Tribunals attract qualified privilege. Applicants can make allegations and they can be reported, except in cases of sexual misconduct or some disability cases, where chairmen may issue restricted reporting orders. But newspapers are under no obligation, other than a sense of professional objectivity, to report the defence or the actual judgement. Judgements are interesting only if there is a lot of money awarded in compensation, an important precedent is involved or the chairman’s remarks are strong enough to attract attention in their own right.
Reputation is priceless. Mark Solon, director of Bond Solon, believed to be Britain’s first witness training company, reckons many tribunal cases are settled because employers do not want to be cross-examined. “Even if they have strong cases, they are settling because they do not want their laundry washed in public. It is the hidden costs, rather than the direct costs that are the problem and there are major PR consequences to tribunals. But then, if you pay people to go away, they keep coming back.”
There is an argument that part of the reason the press is so interested in tribunals is that employers are notoriously tight-lipped. In the eyes of a journalist, the reality of life at work exposed by tribunals can jar splendidly with a company’s public pronouncements.
How do we know about the Ku Klux Klan graffiti and climate of racial violence at Ford’s Dagenham plant in Essex? Sukhjit Singh Parmar’s employment tribunal. There are other subtle pressures exerted on employers to keep employment rights trouble hidden, too, such as cheaper insurance premiums. Insurers would always rather settle than fight. Yet any company with a good industrial relations reputation can enjoy discounts. Charles Wright, general manager of DAS Legal Expenses Insurance, which insures 105,000 employers from McDonald’s franchising to small florists, says, “If there is a business with a long and noble history of not having any employment problems, that will affect the discounts available.”
Aside from the cost of management time, the most important consideration is the need for lawyers (see panel, above). “Need for” is perhaps an exaggeration, as there are plenty of employers appearing before tribunals without representation, but for many personnel departments, lawyers are fast becoming seen as vital for damage limitation. Some solicitors grumble that their clients in HR departments are so spooked by the litigious climate, they seem to need “hand-holding” in everything they do.
Axa’s Brown says there is little doubt that companies will be more successful at a tribunal or in negotiating a favourable deal if they use lawyers. It is perhaps ironic that, despite years of complaint from businesses about the tribunal system becoming the play-thing of lawyers and their captious arguments, if there is a worst offender in legalising the process, it is probably employers.
Even with the significant growth of no-win, no-fee solicitors and many staff having household insurance which can cover them for legal fees in the event of an employment dispute, Rita Donaghy, the chair of Acas, says, “Most people going to tribunal are not represented.” Barry Mordsley, a long-serving tribunal chair and a partner in law firm Salans, Herzfeld and Heilbronn, says that of the applicants bringing cases before him, only a quarter have lawyers in tow. For employers, he puts the figure at about half.
One employee-sponsored source on the Employment Appeal Tribunal, who asked not to be named, adds, “The use of lawyers in the tribunal system often means the employees just don’t stand a chance. It puts the employee instantly at a significant disadvantage.”
If the employer is insured against tribunal claims, as many are, the insurer, pathologically risk-averse as they are, may insist on a barrister for the day as well. Daniel Barnett, a barrister who also runs an Internet bulletin on employment law, says he has occasionally represented an employer who he felt had engaged him to put staff off their claims.
If it is a complex case, brought under several heads of claim, or perhaps a discrimination claim where compensation is uncapped, a barrister is more likely to be appointed, he adds. But barristers as weapons in tribunals? It is a long way from the original conception of the Donovan Commission of 1968.
As claims keep rising and lawyers rub their hands in glee, it is perhaps worth reflecting on the commission’s famous words which brought tribunals into existence: “To make available to employers and employees, for all disputes arising from their contracts of employment, a procedure which is easily accessible, informal, speedy and inexpensive.”
The cost of tribunals
Tribunals can potentially do significant financial damage to an employer. A maximum award on a basic unfair dismissal (43 per cent of all cases) is now £50,000, while discrimination awards are uncapped. But in practice they generally revolve around far smaller sums. We do not have official figures on settlements because they are normally confidential, but it seems that a reliable average across Britain for settling a tribunal claim is £2,000. Some can be settled for as little as £250.
The median compensation award for unfair dismissal claims that go all the way to tribunal is £2,515, according to the ETS annual report. For race discrimination (2,499 cases), the median figure is £2,378 and for sex discrimination (3,809 cases), the median award is £2,180. Small difference, then, among average sums in pure cash terms. But as soon as an employer receives an IT 1 form, the meter starts ticking. Some applicants may settle quickly, for a variety of reasons, which reduces costs. But it is common for settlements to come in the run-up to a hearing, after considerable work has been done by managers and their lawyers.
Rates for lawyers will vary given the nature of the firm, and who is overseeing the case: a junior employment solicitor might cost about £110 an hour; a senior partner can cost as much as £400 an hour. Outside London, legal firms generally advise their clients to expect to pay anything between £2,500-£5,000 in legal costs for a basic unfair dismissal claim. For race, sex and in particular disability, it will cost more – £10,000 is easily possible – because the hearings are longer with the need for more, and often expert, witnesses.
London firms tend to cost rather more: between £4,000 and £6,000 for an unfair dismissal. If using a barrister, the cost will be about £1,000 a day.
However, these figures should come with a health warning. Unfair dismissal is the single biggest issue at tribunal, but many cases are brought under several different jurisdictions. Extrapolating figures from the Acas annual report, some 60,091 applications are under several different heads of claim – which will automatically add to the cost.
It is possible to avoid lawyers and engage one of the new breed of HR advisory firms which can do advocacy work as well (see page 26). These tend to be cheaper: £3,500 is a maximum for unfair dismissal and the lowest can be as little as £650.
The most significant cost of tribunals is almost certainly the management time they take up – whatever the employer decides to do. Witness statements need preparation, daunting bundles of documents must be in order, obscure information winkled out. The cost is near impossible to calculate. Some personnel departments estimate it can take up to two weeks’ solid work to prepare a case. Inevitably, because the stakes are so high, it means significant input from personnel directors. On receiving an IT 1 form, employers have 21 days to prepare their response, known as an IT 3. Again, race and sex discrimination claims are the trickiest because respondents have to fill in a questionnaire seeking highly detailed information on personnel policies in these areas. Failure to furnish the tribunal with accurate, detailed data will almost certainly draw the chairman’s ire.
Employers can also reckon on quite a bit of hanging around when the tribunal is finally heard. There is never any clear timetable about when certain witnesses will be called.
Finally, scheduling tribunal hearings can be a long wait. Some 88 per cent of cases get to a first hearing within the target 26 weeks, although there is regional variation. Bristol and Exeter are the quickest to hear applications in the country; Birmingham and Shrewsbury are the slowest. The Scottish tribunals are slowest to reach decisions. They reach decisions within four weeks of the final hearing on only 71 per cent of occasions, against a national performance of 84 per cent.