The Employment Tribunal Rules implemented in 2013 went wider than simply introducing fees.  As a package, I would argue that they have shifted too much of the risk of bringing a claim onto the claimant.  In particular, the increase in the maximum cost order from £10,000 to £20,000 has made it more attractive for employers to make unwarranted costs threats in an effort to force employees to drop their cases or settle on unfavourable terms.  My proposal seeks to remedy that by allowing tribunals to order an uplift in compensation where an employer makes an unreasonable costs threat and goes on to lose at tribunal.

Prior to July 2013, the main financial risk a claimant faced at tribunal was a costs order, which could be made if the tribunal found that the party or their representative had in conducting proceedings ‘acted vexatiously, abusively, disruptively or otherwise unreasonably’ or if their bringing or conducting of the proceedings had been misconceived.

The maximum costs order the tribunal could make was £10,000. The tribunal also had the power to order a party to pay a deposit of up to £500 if at a pre-hearing review it was held that their arguments had little prospect of success.

The Rules introduced in July 2013 widened the scope and potential scale of costs orders: the maximum costs order was increased to £20,000 and the tribunal gained the power to make a costs order where the party’s claim or response has no reasonable prospect of success. The maximum deposit order was increased to £1,000.

Whilst costs orders can be made either way, they tend to be made against a losing claimant and on the request of the winning respondent. Even when the maximum costs order was £10,000 there was evidence that costs warnings were being used to try to pressurise employees to withdraw their claims. This was acknowledged by the Government’s Resolving workplace disputes consultation in January 2011:

Anecdotal evidence suggests that in many cases, where the claimant is unrepresented, respondents or their representatives use the threat of cost sanctions as a means of putting undue pressure on their opponents to withdraw from the tribunal process. We would welcome views on this and any evidence of aggressive litigation.

In fact Citizens Advice published a paper in 2004 illustrating the extent of unjustified costs threats.  They reiterated these concerns in their response to the 2011 consultation.  They were not alone: Cloisters (whose members include three past chairs of the Employment Law Bar Association) noted that:

Regrettably, members of chambers have seen the oppressive use of costs threats by some respondents or their representatives.

Unite, the union, wrote:

The Union has no doubt that where the claimant is unrepresented the threat of costs sanctions is used by some respondents as a means of putting undue pressure on the claimant.

ACAS reported that:

…a few representatives make almost universal use of this tactic when faced with unrepresented claimants.

Organisations representing employers acknowledged the practice too.  EEF, the manufacturers’ organisation, stated that they were:

…aware that some respondent representatives use cost warnings as a standard tactic in defending claims.

They added that they did not support the practice.  Indeed they thought it counter-productive.

Given the widespread reporting of costs threats, and the concerns raised by organisations representing both employers and employees, it is unfortunate that the Government responded by doubling the maximum costs award – without including any protection for claimants.

£20,000 is a terrifying sum of money to most people and whilst a tribunal has to consider a party’s means when making a costs order, they are construed fairly widely.

Given the prevalence of respondents’ threats, one might think that tribunals regularly make costs orders.  But they are made less than 1% of the time. In 2013/14 the median costs order was £1000.  As the Citizens’ Advice Adviceguide website notes:

Your employer’s representative may say they will apply for you to pay costs but, usually, they are just trying to scare you into dropping the case or accepting a low offer of settlement.

So there is little to stop a respondent or their representative from making a cost threat, even where the claim has obvious merit.  The risk is that employees with legitimate claims are being put off getting justice because of cost threats that are not made in good faith.

Whilst tribunal awards are meant to be compensatory, there is a precedent for increasing awards where there is unreasonable behaviour: where a party unreasonably fails to comply with a relevant ACAS code of practice, the tribunal can order an uplift or downlift of up to 25% in compensation awarded.

So it would not be a huge departure from existing practice to allow the tribunal to order an uplift to compensation where a respondent has made an unreasonable costs threat.  The test should be a mirror of the test for making a costs order – that is to say the respondent’s costs threat must be found to be vexatious, abusive, disruptive or otherwise unreasonable or misconceived, or had no reasonable prospect of success.  This is a relatively high bar.  Just as a claimant who loses does not automatically have to pay the respondent’s costs, a respondent who loses should not have to pay an uplift simply because they have made a costs threat.  The respondent should have acted unreasonably before the uplift kicks in.

This modest reform is likely to have several effects, almost all of them beneficial.  There would likely be a reduction in the number of costs threats being made by respondents and their representatives.  All other things being equal, this might result in more cases going to a hearing as claimants would be less likely to drop otherwise meritorious cases in response to a costs threat.

However, adding an element of risk to costs threats may in fact encourage more early settlements.  Losing the opportunity of a ‘free hit’ on costs threats would likely focus the respondent’s mind on the hearing at an earlier stage and lead them to conclude that it is better to try to settle early.  Claimants may also be more receptive to settlement offers – as a number of responses to the Resolving workplace disputes consultation noted, costs threats can be counter-productive, antagonising claimants and making them more determined to see the case through to a hearing.

A reduction in the prevalence of costs threats might also mean that claimants would be better able to recognise and respond appropriately to genuine costs threats.  There would likely remain an element of bluff in the system, but it would no longer be a risk-free bluff.

The question of whether a costs threat is unreasonable should be a question of fact for the tribunal, as should whether a communication constitutes a costs threat.  A respondent who provides general information about costs should not be considered as making a costs threat, but the need for respondents to do this would be reduced if at the same time the ET1 form was amended to give claimants more information about the risks of costs.

If a communication is made and the claimant or their representative thinks it may be an unreasonable costs threat, they should be able to put the respondent on notice that should they win, they will ask the tribunal for an uplift. The respondent would then have an opportunity to withdraw the communication. If the respondent withdraws the communication they would be not be able to use it at a later stage as evidence that the claimant had acted unreasonably.

One potential pitfall of this approach is that claimants may start to disregard the risk of being ordered to pay costs because respondents and their representatives will become overly cautious about making warnings.

There are two answers to this.  First, the amended tribunal rules should be drafted in a way that makes clear that a costs threat is not automatically unreasonable just because the party who made it goes on to lose.  Second, an amended ET1 form would provide factual information about the circumstances in which a claimant might have to pay costs.

Whilst any law reform has potential risks, the benefits of this approach are potentially substantial – more cases settling early, more ethical behaviour, less mistrust between employers and employees, and increased confidence in the justice system for claimants.

It simply cannot be right that a claimant who is unfairly dismissed can be effectively compelled to drop their case because of an intimidatory costs threat.  These claimants are being doubly let down, by their employers and by the justice system.  That is why we need this reform.