Employment tribunals: costs

‘In the Employment Tribunals Act 1996 (c. 17) in section 13 (costs and expenses), after subsection (2) there is inserted—

“(3) The losing party in any proceedings before an employment tribunal shall bear the costs of the winning party.

(4) Up to 25 per cent. of any claim can be awarded to the defendant as a penalty on the claimant in the event that the claimant’s action is deemed vexatious.”.’.—[Mr. Djanogly.]

Brought up, and read the First time.

I beg to move, That the clause be read a Second time.

We now go back to the first part of this Bill, dealing with employment tribunals. At the start we discussed the procedure of employment tribunals and penalties for non-compliance. I said at the time that it was difficult to have that debate without discussing vexatious claims, not least because we did not have the facts and statistics to make a decision in relation to the procedural aspects, but also because vexatious claims are of most concern to employers. Now we can have that debate in an area where there are more statistics on vexatious claims.

The new clause has two proposed subsections, the first stating that

“The losing party in any proceedings before an employment tribunal should bear the costs of the winning party.”

Since 1999, on average 111,754 claims have been accepted every year by employment tribunals, of which only 15 per cent. are successful; 66 per cent. are withdrawn or settled; and 19 per cent.—some 21,233—are dismissed or unsuccessful. Given that the estimated average cost to employers of defending a tribunal case is about £9,000 and almost 10 days of lost time, it is unsurprising that the CBI reports that a quarter of cases are settled by employers, despite receiving advice that they are likely to win. This pattern is especially true for small and medium-sized companies that are less likely to have internal resources or legal advisers to fight claims on their behalf.

There is another recurring pattern with small businesses, in that tribunal applications are disproportionately high in small employers, particularly those employing between 50 and 249 employees—215 applicants came from a group of employees that employ only 4 per cent. of the work force. Taken together, those businesses that employ fewer than 250 people are respondents in 62 per cent. of cases but employ only 37 per cent. of the labour force.

Business organisations report that there is a culture of settling cases to get rid of them, which is encouraged by the fact that costs are rarely awarded against litigants, and complainants may have relatively few costs of their own. Employers believe that cases are pursued using no-win, no-fee lawyers in the expectation that businesses will settle a claim at a level below what they believe it would cost to defend it at hearing.

Take, for instance, the case of the Law Society in 2001, when it ran up costs of more than £1 million defending itself against claims of race and sex discrimination made by its former vice-president, who had previously been forced to resign after allegations that she herself had bullied and harassed staff. Despite finding that the claimant had indeed created an atmosphere of “fear and dread”, and that she had also lied under oath, a tribunal found in her favour after a six-week trial.

The Employment Tribunal Service reported in 2003-04 that 976 awards of costs had been made—34 per cent. to claimants and 66 per cent. to respondents—out of 30,107 claims that went to a hearing, the average order being £1,859. By 2006-07, that figure had shifted with 509 cost orders being made: 32 per cent. to claimants and 68 per cent. to respondents. The average award was £2,078, but the maximum was £65,000. That means that costs were awarded to employers in fewer than 0.3 per cent. of all cases, with the majority getting less than £1,000. To compound this, the number of cases accepted by employment tribunals has gone up since 2004-05 from 86,000 to 132,000 in 2006-07, an increase of 53 per cent.

The Employment Tribunals (Constitution and Rules of Procedure) Regulations 2001 introduced changes to the employment tribunals rules, including an increase in the maximum amount of unassessed costs that tribunals could award from £500 to £10,000, and the power to make an order for costs in cases where a claim had been misconceived. Rules 39 and 40 set out when an award of costs must and may be made respectively. Employment tribunals must make an award only where a hearing is postponed because a business fails to adduce reasonable evidence as to the availability of the job, or a comparable one, from which the claimant was dismissed or, alternatively,  if the claimant informs the respondent business at least seven days before the hearing that they seek re-engagement. This is a provision that will hardly set the mind of small businesses at ease when they consider the cost of defending themselves.

Rule 40 allows employment tribunals to make cost awards where claimants have brought proceedings and have

“acted vexatiously, abusively, disruptively, or otherwise unreasonably, or that the bringing or conducting of proceedings has been misconceived.”

If that is the case, the employment tribunal must then consider whether it should exercise its discretion to make a costs order. Employment tribunals have been held to have acted erroneously in three cases, because after finding that the case fell in to one of the headings in rule 40(2) they did not then separately consider whether they should exercise their discretion to make a costs award.

The discretion to make such awards in favour of businesses is hampered by this dual procedural hurdle. Can the Minister tell the Committee how often cost orders are made under this provision? The scope of these powers when combined with statistics that I outlined earlier makes me deeply suspicious that employment tribunals are ruling against awarding costs to companies in a disproportionately high number of cases. While I accept that a few small businesses may employ sharp practice and deserve to be brought to book, it is the widespread belief of business in the UK that the tribunals have a predisposition towards claimants and that in any event the system is such that companies are being forced to settle because of the costs of the system.

The Bill seems to be saying that dealing with the procedural issues will solve the problem, which is not at all the case. To that end, my amendment seeks to redress the balance and ensure that businesses are not penalised disproportionately by employment tribunals into paying the costs of claimants. The second part of new clause 5 suggests that up to 25 per cent. of any claim can be awarded to the defendant as a penalty on the claimant in the event that the claimant’s action is deemed vexatious.

The rise in employment claims since 2000 has been almost unstoppable on the back a compensation culture that is spiralling out of control, according to the CBI deputy director-general. He said:

“I visited a company where they had a security camera showing an employee leaving his shift, getting on his bike and falling off outside the factory gates. What he did then was to get up, get on his bike, come back into the company’s gates and fall off again.”

In 2004 the CBI employers association said that 69 per cent. of firms thought more employees were bringing weak and vexatious claims. The CBI now reports that 44 per cent. of respondents to its CBI/Pertemps employment trends survey 2008 felt that weak and vexatious claims have increased over the past year. It goes on to point out that employers believe that far too many weak claims proceed through to tribunal as some tribunal offices are reluctant to use the powers available to them. It is felt that this is an issue of resources, as the existing powers could be used more effectively and consistently with better filtering of claims during the stage at which they are issued to tribunal.

In recent weeks, I have spoken to various organisations that have raised concerns about the record of employment tribunals, especially in relation to vexatious litigants  and the cost of proceedings being disproportionately heavy on small businesses. We must appreciate that we are not talking about large outfits with big human resources departments. Often, those operating small businesses with one or two employees are no more sophisticated than the employees who are bringing the claims.

The Department of Trade and Industry’s “Survey of Employment Tribunal Applications” in 2003 estimated the cost of employment tribunal proceedings to business as £4,362 per business. That does not include the main cost: that of time. On average, about 9.8 days were spent on a claim, 7.7 days of which were the time of directors or senior managers. Further figures for 2005-06 estimated that the average cost to the Exchequer of each claim was £606. Given those figures, the cost for the 19 per cent. of dismissed or unsuccessful cases is about £93 million for employers and £12 million for the Exchequer. Can the Minister give us the preliminary figures for this year?

While I accept that not all dismissed cases are vexatious, a considerable proportion are. An example is the employee who was caught dealing cannabis at work and admitted that he had been doing so for some time. He was dismissed, but claimed unfair dismissal and his notice money. The case went to a hearing but he did not turn up. Nevertheless, the company’s representatives were made to go through the evidence to get the case rejected. Another example is the case of an accountant who claimed under disability discrimination law for a disability of acute anxiety about her work performance, which prevented her from working to deadlines or submitting herself to appraisal. She argued that her employer had not sufficiently adjusted her working conditions to take account of that. At lunch time during the tribunal hearing she disappeared. The case was abandoned, leaving the employer with substantial, irrecoverable legal costs.

Rule 18(8) of the employment tribunal rules, which are set out in schedule 1 to the Employment Tribunals (Constitution and Rules of Procedure) Regulations 2004, enables an employment tribunal to strike out a claim. There are provisions for deposits to be paid and for restriction of proceedings orders to be made against vexatious claimants. It seems strange that the Government have been looking to amend employment tribunal powers when the current rules are so clearly underused. Should they not instead insist that tribunals use those powers more effectively? Many businesses, along with my party, believe that this issue must be dealt with. How does the Minister intend to get tribunals to work more fairly against vexatious claimants and prevent more from trying it on in the future?

The new clause is designed to ensure that vexatious claimants are penalised for wasting the time of the employment tribunal and, more importantly, the employer. I have already noted that the cost to business is in excess of £93 million each year and to the Exchequer, £12 million. Is it not about time that those who cause that out-of-pocket expense start helping towards its repayment?

From experience, I take issue with the hon. Gentleman’s claim that the majority of claimants who fail are vexatious. That is not the case. The majority who fail misunderstand the situation. Some are vexatious, but as he rightly points out, the  rules already exist. For many reasons, I strongly oppose cost orders being made against every losing litigant, which is what he is calling for.

Let us be clear: tribunals are not courts of law. They may be becoming so and that is unfortunate. The purpose of the tribunal system was that a layman could go along and do his stuff. He could explain what happened and the tribunal chair or others would assist. If anything is to be done, and if I were advising the Minister, I would suggest throwing away the tribunal rules and starting again.

The process has become far too complex and that is why it has become so costly. The figures given by the hon. Gentleman for the average cost of proceedings are probably about right because of the complexities. Every time that the rules are changed, they become more complex, more difficult and simply not understandable to the average litigant. For that reason, claims are often brought not because of vexatious behaviour, but because people do not understand the situation properly. That would be my plea. To penalise someone who believes that they have a reasonable claim, of whatever nature, seems to be wrong in principle. It would deter people who had genuine grievances.

I am sympathetic to the small employer, and I realise that requirements create a great burden. In the main part, most or many of them are insured, but when that is not the case, it can be a problem. However, the litigant or applicant, who may have lost a job through unfair dismissal, will not have any resources, unless they can persuade the citizens advice bureau to take on the case for them. Incidentally, yesterday I wrongly took the lead from an Opposition Member in saying that citizens advice bureaux do not assist employers. Citizens Advice has written to me today to say that it is very happy to help small employers, as well as employees, in seeking legal advice.

I very much hope that the Minister will reject the proposal in all cases, although I agree that, where there is genuine vexatious conduct by either party, it should be properly penalised.

I echo the substance of what the hon. Gentleman just said. When a lay person, who is on a low income and has not been paid their wages, comes to a process, we do not want him to be frightened by potential costs incurred on the other side. That does not mean that costs should never be awarded, but perhaps we should, in looking at this, take a lesson from the small claims court. It could be argued that, if someone has initiated a claim at a lesser level, he should feel invulnerable from costs, but at greater levels the issue becomes much more complex.

One of the things that substantially changed the nature of employment tribunals was when the maximum was increased from £12,000. I do not think that anyone is suggesting that we go back to that, but it did mean that that was the maximum cost that anyone incurred. The question that has to be asked is whether we should look at this from the point of view of costs and the magnitude of the initial claim. If the magnitude of the initial claim is not that great, it allows people to make a commercial decision to concede the claim, rather than  to fight it, which is not necessarily ideal. Obviously, the Government’s proposals to try and resolve things before they go to tribunal is definitely a good one, but we would oppose introducing a general “costs awarded every time” approach.

I welcome the Government’s proposals to deal with most of these matters at an earlier stage. That is absolutely right and proper.

We have, in part, created a blackmail culture. I shall explain what I mean by that from personal experience. I have had the sad opportunity of handling two industrial tribunals, both of which we won. In both of them, the company that I had started was told that it was not at fault and the recipients used lawyers provided by the citizens advice bureau, although I am not saying that that should stop. In fact, we talked to the citizens advice bureau. It was not very helpful. It felt, frankly, that, as a business with 30 or 40 people, we were quite capable of standing on our own. However, businesses that I classify as small, developing ones, do not have human resources departments, and that is where the problems fall hardest in many respects. I agree that, for very small businesses, the citizens advice bureau is very helpful, but, with those bigger businesses, there is a sort of cultural view that they ought to be able to look after themselves.

We were advised by many other business people to pay £2,000 and not to bother with the tribunal, even though I was adamant that we were right and had acted correctly. I felt that that particular blackmail culture was unacceptable. Frankly, it is bad for our commercial and industrial processes. I disregarded the advice, and we went ahead and fought. I am glad that I did, because we won on both occasions. However, we added up the costs of the preparation and of appearing at the tribunal for two days with three witnesses who had to be there on each occasion. The first one cost us £9,000, the second one £14,000. That was a heavy blow to a business in which cash flow was vital; we were not cash-rich, my house was backing the process and we were struggling to grow, which we successfully did.

We need to take note of two elements when considering the provision. The first is the blackmail culture. Do not get me wrong, I am not saying that everybody who goes to an industrial tribunal is a potential blackmailer. That is not the point. Many people have genuine cases and we should recognise that. I am not arguing that all the employers are good and all employees are bad; that is far from the truth. However, we need to recognise the blackmail culture among certain groups of people, and take it into account.

The second element to consider is that costs were not awarded to us. On both occasions, the whole exercise was a sizable demand on our cash flow, and the news that we had spent all that money was not well received by the bank. I got the impression that it may have thought that we should have paid £2,000 and not bothered with the tribunal.

I know that the Minister does not want to want to generate that culture, but I ask him to take that atmosphere into account. I will support the new clause. I do not know whether the wording is correct. I do not know whether there are other ways of doing it. However, I do  know that there is a problem, and we need to deal with it more effectively than we are at the moment, hence my support.

If there is a problem with tribunals being too generous to applicants, that should be addressed by looking at the way in which they reach their conclusions rather than by a financial penalty. The idea that 19 per cent. of applicants could be faced with a bill of, on average, £9,000 when they have just been dismissed is, frankly, terrifying. It is unprecedented in civil law for one to face the prospect of being automatically landed with a huge legal bill if one loses, without the court having any discretion over that. Whether we intend it to or not, that will have an extremely intimidatory effect. I urge hon. Members to reconsider the new clause.

What strikes me about the new clause is that it seeks to reform the current situation rather than the situation that the Bill will create. The thrust of the part of the Bill that deals with dispute resolution is based on a recognition that it has become overly legalistic and over-costly. The figure of £9,000 per case is accurate, as far as I am aware. I agree with my hon. Friend the Member for Hastings and Rye when he says that there may have been a trend for it to become more legalistic. That was not the original intention of the tribunal system, but in some ways that has been the case. However, it is certainly not universal; there are still plenty of circumstances where people are unrepresented and argue their own cases.

The clauses that we discussed earlier in our proceedings about earlier dispute resolution, about removing the three-step procedures introduced a few years ago and about increasing the role of ACAS, with Government funding of up to £37 million over the next few years and the lifting of the time limits on its interventions, will all have an impact. The Government’s impact assessment says that this Bill and those measures could save business up to £170 million or more.

Will the Minister set out how those measures will have an impact on dealing with vexatious claims?

There will be a greater opportunity to resolve claims earlier. My problem with the new clause is that it strikes at an access-to-justice point. It has been a long-standing belief of this Government and previous Governments that individuals should have the ability to enforce their rights through a system that provides access to justice for all, regardless of status or background. The tribunal system provides this access to justice, in part through the principle that—other than in limited circumstances, which I will come to—parties are responsible for their own costs. In this way, those without the resources to afford costly legal representation can still try to take action to enforce their rights.

As has been commented on by my hon. Friends the Members for Broxtowe and for Hastings and Rye, were we to abide by the new clause and award costs automatically against the losing party, that would not only set employment tribunals apart from other tribunals where such general powers do not exist; more importantly, it could seriously deter individuals from bringing claims to tribunal when  they may have a good case, for fear of being left with a very large bill if they are unsuccessful. We must also consider how such a proposal would have a disproportionate effect on people. The introduction of costs against the unsuccessful party automatically is more likely to deter claimants from pursuing action, rather than respondents.

I accept the point made about small businesses not always having the greatest resources. That is why the other measures in the Bill will be of significant help to small businesses and address this situation. However, if there was an automatic award of costs against a losing party, employers could use that possibility as a tool to dissuade employees from bringing a claim in the first place. There is an important access-to-justice argument here.

The hon. Member for Huntingdon asked me about vexatious claims. There are measures in place to deal with those. There are already pre-tribunal hearings where claims can be struck out, which happens in about 2 per cent. of cases. One could argue that the 2 per cent. figure means that there are fewer vexatious claims than we think, because the tribunals are looking at them and striking that percentage out. Alternatively, one could take the view that they should be striking out more, but there is a process in place for striking out such claims.

Does the Minister recognise that a lot of these claims do not even get to first base because it is felt that it is easier and cheaper to pay a small amount of money out, rather than face the problems of a tribunal and the whole ACAS process? Does the Minister agree that that is an injustice, as well?

I am not sure about the point that the hon. Gentleman makes. The point that I am trying to make is that there is a process in place to strike down vexatious claims before they get further on in the procedure. There is also a process whereby a deposit of £500 can be charged if the case is judged to be weak at first glance, and costs awarded. In 2006-07, 343 cost awards were made, so it does happen in some cases.

Is the problem not that for some small businesses, the fear of an order for costs against them would create an incentive to settle unnecessarily, because they would be fearful of substantial costs as well as the award?

That is a valid point. As I said, I agree with the hon. Member for Northampton, South when he reminds us—as he has done several times—that the resources available to small businesses in terms of time, human resources and money are limited. That is why the overall dispute resolution reforms in the Bill are important and advantageous to business.

Will the Minister look at the issue of a small claims track? The costs need not be so great, because people know that if they lose, they will not lose that much and they can do it for themselves.

I think that the reference was to caps on awards, and that is a more complicated picture. Costs of up to £10,000 can be awarded if the judge or tribunal believe that the claimant or representative has  acted vexatiously. The new clause on vexatious claims mentions a 25 per cent. variation, but putting a value on a vexatious claim is difficult—by its nature it is worthless, so how can we value it? Not every claim will have a cost value. I imagine that the 25 per cent. figure relates to the fact that earlier, we talked about varying the awards up or down by 25 per cent. However, that is for when we have an award. At this early stage we do not have an award, so concluding what 25 per cent. might be would be difficult in practice. There is no requirement for claimants to give a statement of loss on their claim form. If one is given, it is often judged not to be realistic. For example, some discrimination claims have no value placed upon them; it is simply alleged that the claimant has been discriminated against.

The figure is 25 per cent. of any claim, rather than 25 per cent. of any award.

That is my point. I did mention that that there was no requirement for claimants to put a value on their claims. It is difficult to say what there should be 25 per cent. of, and that makes the measure difficult to implement in practice, were we to choose to do so.

I acknowledge that there are probably vexatious claims in the system, and it is important to have a process to deal with them. We have a pre-tribunal hearing process in place and if we can improve that, we should. It would be an error—quite an important one—for us to agree to a wholesale change in the way that the tribunal system has operated for years under the governance of both parties, when the principle has been for people to bear their own costs. It is possible to award costs in some cases, but making that automatic would have implications for access to justice. That would be wrong and would not take into account the other changes that we make to dispute resolution. I therefore ask my colleagues to oppose the new clause.

As my hon. Friend the Member for Northampton, South said, the number of cases grows more significant. The number of vexatious cases is rising—of course, not all claims are vexatious and I am sorry if I gave that impression during my earlier remarks. As the Minister rightly said, there are powers to make cost orders and to have deposits paid, but in reality the tribunals do not use those powers to the extent that they should. The Minister says that his reforms will clear up the problem. If they work, they may simplify the system and hopefully that will reduce the level of cost. However, I do not see how they will stop the vexatious claimant. This is a huge area of concern for business, and from what the Minister says, I do not feel that he has reflected on the frustrations felt by businesses about what exists out there. I appreciate that the drafting of the new clause may not be perfect, and I will withdraw it on the basis that I may return to it at a later stage. I therefore beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.