Reforms to employment law and the employment tribunal system did not feature in the 2010 Conservative election manifesto. But there was a clear commitment to reducing regulation of small businesses. In recent weeks, it has become clear this commitment has translated into controversial plans for substantial reform to tribunal procedures.

Last week, the Department for Business Innovation & Skills (BIS) announced a consultation on a string of proposals. Heavily trailed in the press, these include: a stronger role for the Advisory, Conciliation and Arbitration Service (ACAS) in pre-claim conciliation; doubling the qualifying period to two years for unfair dismissal claims; and financial penalties, such as the introduction of an application fee to lodge a claim.

Weight liftingThe primary goal is to make it harder for employees and workers to pursue claims in tribunals and to encourage solutions out of court, so that – the argument goes – entrepreneurs can avoid time-consuming and expensive distractions from creating jobs, a key political objective during grim economic times.

A secondary objective, through fees and changes such as removing lay members of the employment tribunals, is to cut expenditure on the system, which has an annual budget of about £80m.

It is only a few years since the government sought to reform perceived weaknesses in the system – an exercise that came badly unstuck. The three-step statutory discipline and grievance procedures introduced in October 2004 aimed to reduce the number of claims by encouraging both sides to settle disagreements through internal procedures, rather than in tribunals. After much outcry because of the complexity of the procedures, in 2007 the government set up a review group, chaired by energy and regulation expert Michael Gibbons. Its recommendations led to the repeal of the three-step process on 6 April 2009. Will this reform effort be any more successful?

Certainly, reform has some powerful supporters. The government’s review of employment laws follows robust lobbying from small businesses represented by the British Chambers of Commerce (BCC) and the Confederation of British Industry (CBI). According to CBI data, the cumulative cost of employment regulation on UK businesses in the period from 1998 to 2009 was estimated at more than £70bn.

Guy Bailey, principal policy adviser on employment at the CBI, puts the case: ‘What our members tell us is that the current system of employment tribunals is one of the biggest deterrents to hiring people. We want disputes to be resolved in the workplace, but, at the moment, the incentives encourage people to seek justice through the tribunal system.’

One such incentive, according to Bailey, is employees’ unrealistic aspirations, fed by press misconceptions, of multimillion-pound awards. The CBI argues this could be tackled by publishing figures on the ET1 form on the median award for different types of claim.

Another more substantive incentive to filing a claim, as the business lobby sees it, is the increased volume and complexity of employment regulation.

Ian Hunter, Bird & Bird’s head of employment, explains: ‘In recent years, there has been a very significant increase in the amount of legislation employers of all sizes have to deal with and it is probably not unreasonable, particularly during an economic downturn, to review whether we have the right balance between employers and employees.’

For the CBI’s Bailey, this has led to ‘a substantial number of weak and vexatious claims’. According to a CBI survey, 45% of employers believe the number of weak and vexatious claims increased in 2010. Furthermore, more than a quarter of employers chose to settle cases, according to the survey, despite being advised that they would win. Reasons include concerns about the consistency of tribunal decisions and the need to contain costs.

The BCC says it costs employers an average of £8,500 to defend themselves, compared to an average of £5,400 to settle. Overall, 58% of all employment cases are settled either through ACAS (39%) or privately (19%), it says. The message from employers is clear; as the CBI’s director general, John Cridland, has remarked, the current system of employment tribunals is ‘broken’.

Numbers gameSo what’s behind this growing pressure on the system? Employment tribunals, formerly known as Industrial Tribunals, were established in 1964 to consider appeals by employers against training levies. Since then, their remit and powers have broadened, and their caseload has increased. Claims rose 56%, to 236,100, in the year to 31 March 2010. This compares to just over 80,000 claims in the year to 31 March 1998.

James Davies, joint head of employment and incentives at Lewis Silkin, points out that, in tough economic times, claims are likely to increase, adding significant costs at a time when the government is seeking to implement large public spending cuts. ‘No doubt the cost is significant,’ he says. ‘But the government needs to be open about the real causes of that.

‘It is obviously politically convenient to focus on spurious claims,’ he notes, adding that the proposed changes ‘would also discourage people with good claims’.

Keith Mizon, director of individual dispute resolution at ACAS, warns that one needs to be cautious in drawing conclusions from the data. ‘You can get a skewed view. To get an idea of what is happening, you have to put the 236,100 claims into some sort of context,’ he explains. ‘The vast majority of those claims are multiple cases. The number of single claims is much smaller.’

Multiple claims rose by nearly 90%, to 164,800, in 2010, while individual claims grew by just 14%, to 71,300.

Clive Howard, employment partner at Russell Jones & Walker, agrees multiple claims are giving a distorted picture. ‘If you strip away the group actions the number of claims that are going through and that are settled is pretty consistent with what one would expect in terms of the economic cycle. I don’t think there is any critical need to reduce the number of claims.’

The multiple claims largely consist of equal pay actions by trade unions against local authorities, after implementation delays in the 1997 NJC Single Status Agreement, and against the NHS, after the introduction of Agenda for Change in 2004, which overhauled the pay system.

Sarah Veale, head of the equality and employment rights department at the Trades Union Congress (TUC), argues that the figures belie claims about the regulatory burden on business. ‘It is not small businesses that are affected by multiple claims,’ she says. She disagrees with the current proposals for reform, urging a ‘more intelligent’ approach that would focus on multiple claims by handling them in a separate division within the tribunal.

Howard accepts there are delays in obtaining hearing dates and that hearings are sometimes cancelled because there are no judges available, but he does not see fundamental flaws in the system that would warrant radical reform. ‘I don’t think the system is broken at all. It is creaking. The response should be that, instead of starving the tribunal system of resources, they should actually increase them.’

Displacement activityOne resource-saving measure proposed by BIS is the extension of the areas where judges would sit alone, to include unfair dismissal. This would reduce lay member involvement.

Victoria Phillips, head of employment rights at Thompsons Solicitors, thinks the proposal is flawed: ‘It is widely recognised that "wing members" bring significant advantages to tribunal proceedings, particularly in unfair dismissal claims, in which the tribunal has to assess the reasonableness of the employer’s actions. This move could lead to an increased number of appeals.’

The plan to extend the qualifying period for bringing an unfair dismissal claim to two years may also simply shift the problem elsewhere. Phillips says: ‘Our own statistics show most claims lodged with employment tribunals are for employees with two or more years’ service, so the proposal to change the qualifying period is being driven by anecdote, not evidence.’ She also cautions that if the government were to increase the qualifying period for unfair dismissal, more people would bring claims under other heads, including whistleblowing, discrimination and the working time regulations, ‘none of which require a qualifying period’.

Lewis Silkin’s Davies concurs, adding that the problems in the system will be made worse by the current proposals, because people will probably bring more complex claims instead. ‘Many employees who perceive, rightly or wrongly, that they have been wronged, bring whistleblower or discrimination claims in place of unfair dismissal claims,’ Davies notes, ‘either because they haven’t the qualifying service to sue for unfair dismissal, or aren’t happy with the cap on compensation, particularly if they are a high earner.’

He adds: ‘It is not in anyone’s interest – tribunal, claimant or employer – for what are really unfair dismissal claims to be repackaged as whistleblower or discrimination claims. Instead of extending the qualifying period, I’d narrow the scope of whistleblower claims so they only covered criminal or regulatory wrongdoing.’

The shift to more complex cases could have a knock-on effect on employers in terms of costs and reputation. Davies explains that, while unfair dismissal cases do not often require lawyers, in discrimination cases employers will want to be defended: ‘Employers do mind very much if they are seen as having discriminated against their employees.’

Jamie Hamnett, employment partner at Addleshaw Goddard, says the scale of damages is not the only issue to be considered: ‘One must never lose sight of the fact that, if the respondent employer loses a discrimination claim, in addition to having to pay the award of damages for the claimant, the reputational impact of losing a discrimination claim can be pretty significant. This potentially includes a significant impact on the share price.’

Indeed, the economic climate, and the increasing awareness of equality and discrimination laws, have already led to a huge increase in discrimination claims, he adds. Discrimination claims have almost doubled in the past five years to just over 38,000, according to official figures.

Many lawyers believe the move to two years will reduce access to justice. Howard is one: ‘Discrimination claims, which are very difficult to prove, are fall-back claims, but these are simply not available or relevant for the vast majority of claimants. Extending the qualifying period for unfair dismissal from one to two years would have a detrimental impact on a whole section of the workforce.’

Entrance feeAmong the other reform proposals is the introduction of a claimant’s fee to lodge a claim. Hamnett believes this is reasonable: ‘The pendulum has swung too far in favour of employee claimants. Looking at introducing some sort of application fee is a very good idea.’ He adds: ‘If claimants bring a claim in the County Court in the small-claim court they have to pay a fee, so I can’t see any reason why the employment tribunal should be any different.’

Bird & Bird’s Hunter agrees: ‘There is no doubt a lot of employers settle claims because of their nuisance value rather than because of the merit they think is attached to them.’ He adds: ‘I don’t think a £30 or even a £100 fee is unreasonable, particularly if you think it is going to get people to focus on whether or not they bring a claim and that’s the key issue here. It would be a shame just to use it as another way of raising tax to fund the tribunals.’

But there is clearly a debate about the size of fees and whether there should be safeguards for those with few resources. For Thompsons’ Phillips, there is a principle at stake: ‘It is fundamentally about access to justice. While a fee may well stop people bringing claims, it doesn’t mean they have not been badly treated or, for example, that they weren’t due unpaid wages. There are a lot of employers who simply won’t pay up until they’ve received a claim form. Fees will penalise the most vulnerable workers and deny them access to justice.’

Then there is the matter of costs awards. In employment tribunal cases, unlike in civil courts, each side bears its own costs unless there are abusive, misconceived, vexatious or unreasonable claims, in which case employment tribunals have the power to make cost orders against the perpetrator. The BCC claims that costs are awarded to the employers in less than 1% of all claims, and the numbers have decreased in recent years. Abigail Morris, policy adviser at the BCC, argues: ‘Tribunal judges do not like awarding costs. We don’t know why this is, and this needs to change. When a claimant has lied or the claim is a vexatious claim, costs must be awarded as a deterrent.’

Hamnett agrees: ‘It would be good to see a proportionate and sensible response by the tribunals to cost applications, and by that I mean they should increase the number of cost awards they make.’

Clearly, the focus of these criticisms is to obtain a better deal for respondents. However, as Thompsons’ Phillips says: ‘In our experience, we see as much reluctance to award costs against employers as against employees.’

Tribunals Service figures seem to support this point. Last year, there were 324 cost orders awarded to respondents, compared to 88 to claimants. In 2006/07 and 2007/08 (2008/09 figures were not compiled) costs awarded to respondents were 343 and 327 respectively compared to 166 and 134 awarded to claimants. For Howard, though, the whole idea of awarding costs is problematic: ‘The whole purpose of the tribunal system is to keep matters very simple, not to have barriers to individuals to pursue their rights.’

BIS appears to have acted upon the concern of businesses that costs awards are failing to act as a deterrent in its proposal to double the cap from £10,000 to £20,000. However, BIS recognises this could constitute ‘a barrier to access to justice for legitimate cases’. It has not, however, proposed changes to judges’ existing powers in relation to costs orders, which it deems sufficient.

Conciliatory noisesOne of the government proposals is for all claims to be submitted to ACAS in the first instance, rather than the Tribunals Service. This would allow ACAS a specified period – up to one month – to offer pre-claim conciliation in all cases.

Central to the proposals is ACAS’s free pre-claim conciliation service (PCC), launched in April 2009. In the first year, ACAS dealt with about 18,500 referrals to PCC and around three-quarters of these potential claims were converted into conciliation. According to ACAS’s Mizon, this resulted in an ‘ET1 avoidance rate’ of about 75%. ‘Probably around 12-13,000 claims that might otherwise be made to an employment tribunal this year won’t be as a consequence of pre-claim or early conciliation,’ he says.

Employers who resolve a potential claim through early conciliation are saving an average of £5,200, according to ACAS. Mizon adds: ‘Pre-claim conciliation has been very effective and successful, and we would like to do more. But this depends on resources and continuing to promote increased awareness and effectiveness.’

But, given that reducing public expenditure is a big driver of the changes, there are concerns about whether ACAS will get the additional funding to expand its role. Mizon says: ‘We are almost wholly publicly funded. We don’t yet know what our budgets will be, but it would probably be unrealistic for us to expect they won’t be affected by the spending cuts.’ The TUC’s Veale adds: ‘If the government is serious about dispute resolution outside of the employment tribunals, it should invest more resources in ACAS.’

Exercising judgementThe BIS proposals include additional and more flexible powers for judges, for example to strike out weak cases. However, some lawyers think employment chairs should make greater and better use of powers already available to them. Costs for both sides, says Phillips, could be significantly reduced if the tribunals used their existing case-management powers more actively, which would result in shorter hearings.

A better use of pre-hearing reviews could also help address problems with the system. Bird & Bird’s Hunter says: ‘It is worth looking at tribunals making better use of pre-hearing reviews at an early stage, looking at the merit of the claim. This would not only weed out spurious claims, but also cases that are not well pleaded. I see that a lot; people make an allegation of some prohibited form of discrimination and, quite frankly, it is not thought through.’

What is clear is that the proposed reforms have turned into a political hot potato. The BCC wants them followed by ‘further deregulatory measures’ as early as the spring budget. The Institute of Employment Rights – a think tank close to trade unions that wants the unfair dismissal qualifying period dropped to six months – says the proposed changes will leave employees vulnerable: ‘It creates a revolving door labour market,’ says director Carolyn Jones.

Some, such as Davies, do not believe that the reforms are radical enough and would advocate, for example, abolishing unfair dismissal law entirely and replacing it with a right to a fixed compensation payment, for example six months’ pay, that kicks in after a probationary period, the duration of which is set by the employer.

He argues this would give both parties certainty over compensation costs, and incentivise the employer to address underperformance before dismissing, while maintaining protection for the employee.

Phillips stresses any change needs to be evidence-based. ‘I don’t think the government should be making policy based on rumour or anecdote.’ She raises the spectre of the 2004 statutory grievance and disciplinary procedures, which, after two years of turbulence and outcry, were reviewed and later repealed. ‘It was,’ she stresses, ‘a complete waste of time.’

Marialuisa Taddia is a freelance journalist