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19th March 2014

Financial penalties in the Employment Tribunal – employers beware

Introduced by the Enterprise and Regulatory Reform Act, this latest significant change to the Employment Tribunal system, which allows Employment Tribunals to impose financial penalties on losing employers in certain circumstances, will take effect from 6 April 2014.

The financial penalty regime will therefore apply to all claims presented on or after this date.

A perhaps unforeseen consequence of note is that employers who, before 6 April 2014, take action which could give rise to an Employment Tribunal claim, may still find themselves liable for a financial penalty in the event that claim is commenced on or after 6 April (subject of course to the usual three month limitation period). The financial penalty regime therefore has a limited retrospective effect.

When can a financial penalty be imposed?

Where an employer loses a case in the Employment Tribunal, the Tribunal will have discretion to impose a financial penalty in the following circumstances:

  • the employer’s breach of the employment rights in question has “one or more aggravating features”; and
  • even if a financial award (such as compensation for unfair dismissal) has not been made to the employee.

The chief concern arising out of the new regime is the distinct lack of clarity as to what amounts to an “aggravating feature”. This is not defined in the legislation, the government’s position being that it is a matter of discretion for the Employment Tribunal taking into account any factors it considers relevant.

The government’s explanatory note to the new legislation did however indicate that:

  • Employment Tribunals should only take into account information of which they have become aware during consideration of the claim;
  • non-exhaustive factors with may be considered are the size of the employer, the duration of the breach and the behaviour of the employer and employee;
  • Employment Tribunals may be more likely to find aggravating features where actions were deliberate or committed with malice, the employer has a dedicated HR team or it repeatedly breached the right concerned; and
  • Employment Tribunals may be less likely to find aggravating features where the employer has only been in operation for a short period of time, has a limited HR function, is a micro business or the breach was a genuine mistake.

This poses the question as to whether losing employers with well resourced, dedicated HR departments are likely to find themselves more at risk of a financial penalty for this reason alone.

What level of financial penalty can be imposed?

Financial penalties are subject to minimum and maximum limits of £100 and £5,000 respectively. In deciding whether to impose a financial penalty, Employment Tribunals must have regard to the employer’s ability to pay. Where a financial award has been made, the penalty imposed must be 50% of the amount of that award (subject to the minimum and maximum limits and certain limited exceptions). Where no financial award has been made the level of the penalty is at the discretion of the Employment Tribunal (subject to the minimum and maximum limits) and the Tribunal must have regard to the employer’s ability to pay when exercising that discretion.

Much like a parking fine, the employer will only be required to pay 50% of the financial penalty if they make the payment within 21 days. Payments are made directly to the Secretary of State, who will pay the money into the Consolidated Fund (the government’s general bank account in the Bank of England).

Conclusions

It remains to be seen how Employment Tribunals will approach the question of what amounts to an “aggravating feature” and therefore what kinds of scenarios are likely to attract a financial penalty for losing employers. However, the risk of incurring a financial penalty is a consideration which all employers will need to take into account for claims commenced on or after 6 April 2014, when weighing up the merits of reaching a commercial settlement as opposed to defending the claim to a final hearing.

For more information, please contact Nick Hall on 01604 463375 or click here to email Nick.

For more information on our Employment services click here.

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