Getting the sums right

Employment awards are on the up.  But
how and why do tribunals arrive at the figures they do?  Mary Clarke delves into this mysterious
science and gives some practical tips on how employers can minimise the damage

Aggrieved staff are winning more compensation than ever. Official figures
show that while unfair dismissal compensation stayed roughly at the same level
last year, race and sex discrimination awards increased significantly.

Trade unions reported their highest levels of compensation ever in the last
TUC trends survey, with record settlements of up to £500,000 in race
discrimination, breach of contract and wrongful dismissal cases. The highest
settlement previously recorded was £55,333.

There are clearly a number of influences at work. First, there has been a
significant rise in tribunal claims: the TUC registered 5,157 new cases between
October 1998 and October 1999 compared with 1,533 the previous year, suggesting
unions are becoming increasingly confident about using tribunals to support
their members and increasingly successful in doing so.

In June 1999, the Government reduced the qualifying period for claiming
unfair dismissal rights from two years to one and in October increased the
maximum compensation in unfair dismissal claims from £12,000 to £50,000. The
DTI predicts an increase of between 10,000 and 14,000 unfair dismissal cases a
year as a result of these changes alone.

But what about the tribunals themselves? How do they arrive at the figures
they award? Are they becoming more generous towards wronged employees? Many
employers find the way they compensate for unfair dismissal and discrimination
mysterious and perplexing. But while in many cases it may look more like an art
than a science, there is a method to calculating the amounts.

Tribunals must exercise their discretion in awarding compensation
"judiciously" and on just and equitable grounds. The awards are
designed not to punish employers but to compensate staff. They can now award
compensation of up to £56,900 in an unfair dismissal claim. In race, sex, or
disability discrimination claims or other specially protected claims such as
whistle blowing, compensation is uncapped.

Although non-money awards are available, such as reinstatement, or
re-engagement – where the tribunal orders the employer to take back the
employee either in a new or the same job – cash is usually the preferred award
for applicants and the one most frequently given by the tribunals.

Reinstatement was awarded in only 28 cases in 1998-9 – about 0.1 per cent
all unfair dismissal cases. Tribunals can also make a "declaration"
about the rights of the parties.

Unfair dismissal financial awards are divided into a basic award, calculated
like a redundancy payment based on age and length of service (maximum £6,900),
and a compensatory award. For dismissals made before 25 October 1999, the cap
on the compensatory award was £12,000 and after that date it rose to £50,000.
The full impact of this hike in awards has not yet emerged because statistics
for the past year are not yet available. It remains to be seen exactly how much
it will influence tribunals into increasing levels of compensation.

Anecdotal evidence suggests the rise in the ceiling to £50,000 has already
affected employee expectations – see "Raised expectations" on page 10
– making it more difficult for employers to settle claims before any hearing
takes place, even though for lower-paid employees the increase is unlikely to
have any major impact.

The case study shows how tribunals approach the award of compensation, by
assessing losses from the date of dismissal to the date of hearing and then
projecting future loss until the employee might be expected to return to work
or achieve a similar sort of income. The employee must give credit for benefits
and other earnings in this calculation. The amount of future losses varies
depending on the type of work the employee did and its availability in the
employee’s area.

It is useful to look at the statistics published for the year 1998-9, which
show that hardly any claimants were awarded sums approaching the then maximum
of £12,000. The median award was £2,388 and only 14.8 per cent of successful
claimants received more than £9,000. These figures suggest that the effect of
the rise in the ceiling to £50,000 will be limited.

But the case study "The senior employee", on page 12, shows the
sort of claim that could be changed dramatically by the increased limit. It is
likely to hit hardest where an employee is older and/or reasonably highly paid
or has valuable pension rights. Employees who can demonstrate to a tribunal
that they may not work again are the ones most likely to benefit from the
increase.

The £12,000 cap made the tribunal largely irrelevant for this sort of
applicant, but now it is certainly worth their while to bring a claim. Given
that it is extremely rare to have to pay anyone’s legal costs other than your
own in the tribunal, this venue will be much speedier and cheaper than the
normal courts.

The "senior employee" case study shows the pitfalls of ignoring
the possibility of the senior employee bringing a claim. Although tribunals
take into account any voluntary or ex-gratia payments from the employer, they
are "top-sliced", as the example demonstrates.

This means employers would be wise not to pay any ex-gratia element unless
they do so under a binding agreement that the employee will take no claim to
the tribunal after the payment has been made, reached via either a compromise
agreement under section 203 of the Employment Rights Act 1996, or a COT3
agreement brokered by Acas.

Tribunals have the power to award unlimited compensation in discrimination
claims (see "Punishing" the employer, above) and the figures for
1998-99 show median awards for sex claims of £4,044 and race of £5,000 – far
higher than the awards for unfair dismissal. The tribunals have to try to put
the employee in the position he or she would have been in if the discrimination
had not occurred.

Often this comes down to a question of probabilities: if a woman is sacked
because she is pregnant the tribunal has to look at the likelihood that she
would have returned to work after the baby and award compensation on that
basis.

As well as compensating the victim of discrimination for actual loss of
income, the tribunal can also compensate for injury to feelings. Following the
recent case of Sherriff v Klyne Tugs, 1999, IRLR 481, it may also compensate
for personal injury resulting from the discrimination. The level of
compensation for injury to feelings will depend on the nature of the
discrimination – how long it lasted and how the employee reacted to it. But the
cost of injury to feelings is rising as tribunals increasingly take on board
medical evidence on conditions such as post-traumatic stress disorder.

The closest tribunals get to "punishing" the employer through
damages is to award "aggravated" damages. In case study 3, £10,000 of
such damages were awarded because of the company’s attitude to the complaint.
If advisers are aggressive or unreasonable in their conduct of the case for the
respondent company, this can also lead to an award of aggravated damages.

Acas has a statutory duty to conciliate in employment claims and performs a
useful and free form of alternative dispute resolution. It is always advisable
to maintain a dialogue with Acas from the outset of any claim – views on
settlement can change in the course of a tribunal claim and Acas can be a
valuable source of information.

Legal regulation of employment relationships is tight and employees are
increasingly familiar with their rights. Free or inexpensive sources of advice
and representation are now readily available: statistics suggest that employees
represented by their unions achieve significantly higher awards than those who
go it alone and that employers are more likely to lose if they have no
professional representation. Employers would therefore be advised to avoid at
all costs unequal representation where the employee has union or legal backing
and the employer has none.

Mary Clarke is a partner in the HR group of DLA

Raised expectations

Mr S delivered parcels for a small transport company. He was dismissed
without notice for gross misconduct following an investigation into suspected
theft.

He bought a claim for unfair dismissal, claiming the investigation was
inadequate and that the company had not followed its own procedures.

Initially, he said he wanted to go to the tribunal to clear his name but as
the hearing date drew closer his confidence in winning rose and the money
became more important – the maximum £50,000 would be a useful sum.

Mr S is aged 24 and earns £15,500 gross per year. He has no other benefits.
The tribunal decided there had been significant procedural shortcomings in
dealing with the dismissal and that it was unfair. But Mr S was shocked when
his compensation was assessed at £2,290.

He is young and mobile and had no difficulty getting another job; he had
started work with a larger company within six weeks of his dismissal, earning
£15,600 gross. His compensation was therefore calculated as follows:

Basic Award                                                                            3x1x230
= £690
Loss of earnings from dismissal to date of securing new job       £1,400
Loss of statutory rights                                                              £200
Total                                                                                        £2,290
(Figures are all gross for simplicity)

The senior employee and "punishing" the employer

The senior employee: Mrs A, 56, worked as a senior marketing
executive until she was dismissed.

She earned £60,000 a year, had a company car worth £10,000 a year, private
health insurance and a pension to which the company contributed £6,000 a year.

The employer’s reason for dismissing Mrs A was that she no longer fitted the
company’s youthful and dynamic profile. She was entitled to six months’ notice
and the company paid her in lieu of notice with all benefits.

She received a cheque for £50,000 made up as:

Salary               £30,000
Car                  £5,000
Private health    £1,000
Pension            £3,000
Ex-gratia          £11,000
Total                £50,000

Mrs A applied to the tribunal. Her employer argued that her claim was
vexatious because she had already had a payment worth the maximum award. Not
so, the tribunal said. It calculated she would suffer four years’ lost income
and benefits equal to £312,000 until her retiring age of 60.

The tribunal decided there was a 25 per cent chance she would not have
stayed with the company for four years so her gross loss was cut by that amount
to £234,000. She had received £50,000 already which reduced the loss to
£184,000. The tribunal therefore gave her the maximum £50,000.

"Punishing" the employer: Mrs C, 40, had worked in an electronics
factory for 16 years. She earned £12,000 a year.

She was sexually and racially abused by a manager for the last three years
of her employment and as a result suffered from a depressive illness which
prevented her from working. She is currently undergoing treatment for severe
mental illness.

She applied to the tribunal claiming constructive dismissal and
discrimination and was awarded £123,680 plus interest at 8 per cent, including
£20,000 for injury to feelings.

Before resigning, Mrs C had complained about her treatment to other managers
who advised her if she didn’t like it she "might as well go". This
was despite the company having an equal opportunities policy. The tribunal
awarded £10,000 aggravated damages because of the cavalier way the company
conducted the case and its refusal to acknowledge any problem. Mrs C’s hurt
feelings award reflected the gravity of the company’s treatment of her.

Her losses were calculated thus:

Basic award     £3,680
Loss of earnings from date of termination to hearing       £21,000
Future loss of earnings  £54,000
Hurt feelings     £20,000
Loss of pension rights   £15,000
Aggravated damages    £10,000
Total    £123,680

Keeping claims to a minimum

– Train staff in policies and procedures, especially equal opportunities

– Think twice before dismissing, especially the older, higher paid and/or
more long-serving employee

– Consider early settlement to avoid hearing costs and publicity

– Never give termination payments without a compromise agreement or Acas
COT3 form

– Keep in touch with Acas

– Remember that tribunals can award aggravated damages

– Avoid compensation hearings in the tribunal – do your best to settle
beforehand

– In claims which involve personal injury check the drafting of your
compromise agreements

– Use voluntary severance agreements to eliminate tribunal risks

– Use experienced advisers, especially where high awards are at stake in
race, sex or disability discrimination claims

Highest awards

Highest awards in union-backed cases 1998-99

Category                                 Union  Award  

Race discrimination                   IPMS   £500,000

Breach of contract                    MSF    £500,000
Wrongful dismissal                    FDA    £300,000

Sex discrimination                     FBU    
£70,000
Redundancy/discrimination        MU           
£30,000
Unfair dismissal EIS      £8,500 

Source: TUC Focus on Employment Tribunals

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