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The Power of Employment Tribunal to Impose Financial Penalties on Employers

24th April 2014

The Enterprise and Regulatory Reform Act 2013 (ERRA), which received Royal Assent on 25 April 2013, came into force on 6 April 2014 and gives Employment Tribunals the discretionary power to impose financial penalties on employers who lose their case.

Prior to 6 April 2014 Employment Tribunals had no powers to penalise employers for breaches of employment law, and therefore employers could expect an order of only compensation quantified by damages, which could be uplifted depending on the circumstances. However, from 6 April 2014 Employment Tribunals are able to order employers to pay a financial penalty of between £100 to £5,000, as well as the compensation, where it loses a claim and where there was one or more "aggravating features".

Although originally planned as an automatic levy, the imposition of financial penalties will be completely at the tribunal’s discretion. However, the tribunal has much less discretion over the amount of the penalty, which must be 50% of the amount of the compensation awarded (subject to a cap of £5,000) with a 50% discount for employers who pay within 21 days of the tribunal’s decision. The most interesting thing about this penalty is that rather than acting as an additional award to the employee, the employee will not actually receive a penny, as it will all be paid to HMRC.

The term “aggravating feature” is not explained or defined in the legislation. It is suggested that penalties should be imposed where the breach involves unreasonable behaviour (such as negligence) or prolonged behaviour, and that genuine mistakes by the employer would not incur a penalty. When the final version of the legislation was published, the Government seemed to have significantly broadened what it considers to be an “aggravating feature”.

The notes to the legislation set out a non-exhaustive list of factors which a tribunal may take into account in deciding whether to impose a financial penalty. This includes the size of the employer, the behaviour of the employer and employee, and the duration of the breach. The notes also state that a tribunal may be more likely to find that the employers had aggravating features where: the action was committed intentionally or with malice; the employer had a dedicated HR team; or the employer had repeatedly breached the employment right concerned.

One may argue that these factors would only apply to large employers and therefore small to medium employers need not worry, but it remains to be seen to what extent tribunals will take account of the factors set out in the explanatory notes or what other factors tribunals might consider to be “aggravating”. This means that until tribunals start to use the new power and there are decisions clarifying what “aggravating features” are, employers facing tribunal claims will, for the time being, also face an even more uncertain outcome.

This movement in employment law has come as a bit of a surprise to the profession as the majority of past reforms have been somewhat employer friendly. The new financial penalty will place additional burdens on employers as the possible threshold for “aggravating features” could be used somewhat liberally by the tribunal, and the penalty is high enough to hit employers hard, especially when on top of compensation. This new penalty, some might consider, gives Claimants an upper footing to apply pressure on employers to settle claims and/or attempt to raise the settlement figures in ‘without prejudice’ negotiations.