February 25, 2015

Employment Tribunals - EPL Insurance and the Changing Employment Landscape

Charles Urquhart and Catherine Pitt look at the reasons explaining the recent downward trend of employment tribunal claims, and consider what the future holds.

Quarterly tribunal statistics published in the UK in December 2014 confirmed 61% fewer claims were received between July and September 2014 than during the same period in 2013: a staggering decline. Last year and 2013 also witnessed the introduction of pre-claim conciliation and landmark decisions relating to holiday pay. We explore how these changes may affect employment practices liability (EPL) insurance.

The causes of this downward trend are twofold: the introduction of tribunal fees on July 29, 2013, which was then compounded by the introduction of mandatory pre-claim conciliation on May 6, 2014 (which involves prospective claimants approaching Acas and obtaining an early conciliation certificate before they can bring a tribunal claim).

Two recent judicial challenges to the fee regime by Unison were unsuccessful and it is not envisaged the pre-claim conciliation rules will be withdrawn any time soon. Therefore, at the moment it seems unlikely this trend will be reversed unless the government introduces a radically different system after the general election.

For the time being at least, these changes appear here to stay. This may well have an impact on EPL policy pricing and the downward adjustment of premiums to reflect the reduced number of claims. There may also be a drop in the number of businesses purchasing the cover at all if they perceive the risk of claims to be reduced.

Insurers should revisit their policy offerings and consider whether tribunal fees, which may be refunded to successful claimants or incorporated into settlement offers, are covered. For a single claimant who has paid both the issue and hearing fee, this could be between £390 ($605) and £1,200. Insurers can also expect an increased appetite for settlement at the pre-claim and pre-hearing stages (before the fees are due), which should be factored into any strategy.

Mandatory pre-claim conciliation is proving an attractive option for employees, especially set against the prospect of paying a tribunal fee to issue a claim. Insurers can therefore expect earlier notification of prospective claims and should consider whether the pre-claim stage is covered under their existing policies.

The maximum compensatory award for unfair dismissal is now capped at the lower of the statutory cap and 52 weeks’ pay. This gives more certainty over likely awards and is an additional factor for insurers to consider when setting reserves. However, this could arguably result in more automatic unfair dismissal, whistleblowing and discrimination claims (which have uncapped compensation) being brought.

Finally, recent decisions have confirmed holiday pay should include overtime and commission. Some employers have therefore been underpaying holiday and the potential liability for backdated holiday pay claims is significant. Even if the claims themselves are not covered, insurers will need to establish whether the legal costs of defending them are.

So what is next? We are expecting a number of key developments in 2015, including an appeal hearing on Unison's challenge to tribunal fees, further decisions on holiday pay and equal pay group actions in the private sector. With the forthcoming general election in May, however, there is less certainty than usual as to what the year will hold for employers.