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Employment Tribunals – Fees, Costs and Frivolous Claims

31/05/2018 | Noel Deans & Sean Field-Walton
Background and Cost Orders It is old news that in R (on the application of UNISON) v Lord Chancellor the Supreme Court held that the regime of case filing fees for claims brought in the Employment

Background and Cost Orders

It is old news that in R (on the application of UNISON) v Lord Chancellor [2017] the Supreme Court held that the regime of case filing fees for claims brought in the Employment Tribunal was unconstitutional. Generally, comment has regarded this as a success for access to justice.

Employees with meritocratic claims should not be deterred from bringing them because of a fee structure like that which has now been overhauled and which required upfront payments of (generally) between £390 and £1,200. Nonetheless, employees should not be provided with an incentive to bring frivolous claims and to “bet the company” in the hope of receiving an undeserved pay-out.  Regretfully, this is arguably the current reality.

An up front fee regime was always inappropriate and statistics released since the Supreme Court’s decision in 2017 do suggest the fees as they were applied were a barrier to access to justice for individual claimants. However, we frequently act for employers and have seen that the tools available to them to fend off entirely false and opportunistic claims are inadequate.

Options when faced with a frivolous claim

1) Costs Orders

The successful party to proceedings before the Employment Tribunal does not have an automatic right to recover their legal costs from the unsuccessful party as they do in the civil courts. This is often surprising to those of our clients who have not been involved in Employment Tribunal proceedings before. A party may apply for a costs order where the unsuccessful party’s conduct has been unreasonable. This would include pursuing a baseless claim. Sadly, Employment Tribunal judges consistently demonstrate a reluctance to make such orders and when they do their scopes varies quite unpredictably between roughly 20-80% of the costs incurred.

2) Strike Out Applications

A party to proceedings may apply to strike out the other party’s case on a number of grounds. These grounds are set out in Rule 37(1) of the Employment Tribunal Rules of Procedure 2013 (as amended) (the “Procedure Rules”). The most common grounds relied on are that the claim has no reasonable prospect of success and/or that the claim or response is scandalous or vexatious. Just as is the case regarding applications for costs orders set out above strike out applications are rarely successful. This is even more so when the claim includes whistleblowing or discrimination elements because it is established law that in such cases the Employment Tribunal should be extremely slow to award a strike out.

3) Deposit Orders

Another option for a party to proceedings is to apply for a deposit order under Rule 39(1) of the Procedure Rules. These are granted more often than cost orders or strikes outs by Employment Judges but cannot be considered frequent. Furthermore, albeit the award may signal an Employment Judge’s lack of confidence in a claim, the effectiveness of deposit orders are hamstrung by the £1,000 limit on what an Employment Judge can order is paid into the Employment Tribunal.

Meaning for employer respondents

In our experience, the combination of the above often leaves employers in a difficult position. Given the unlikelihood of recovering their costs or successfully striking out a claim an employer is faced with the prospect of incurring significant legal fees (particularly during the disclosure process). In light of this, it is easy to see why an employer may consider that it is best to cut their losses and offer a pay-out even where they know the claims levelled against them to be falsified.

It is certainly correct to recognise the asymmetrical power structures between employers and employees.  However, perhaps it is time to rethink the infrastructure of Employment Tribunals to ensure that employers too are also provided with access to justice and not encouraged to settle false claims. A system which can easily be used to strong-arm employers into making unjustified pay-outs surely cannot be desirable from a legal or policy perspective.

Moving forward

Our view is that the Supreme Court’s decision was correct. However, without encouraging Employment Judges to utilise the powers available to them to dissuade litigants from putting employers to costs in the hope of extracting a pay-out the system does seem loaded in favour of potential opportunist claimants. This is no fault of the Supreme Court’s. It is not their duty to legislate for a supplementary structure following their effective abolition of Employment Tribunal filing fees. Instead, we suggest that in light of the Supreme Court’s decision Parliament should consult on the issues set out in this bulletin. Our expectation is that our observations would be shared.

It may be time to reconsider the position that the unsuccessful party does not have to meet any of the successful party’s costs unless the successful party makes a successful costs application. Perhaps any such rule will need to be a diluted version of the same rule in the civil courts.  Maybe this could be in a rule that costs will follow the claim in an amount that the Employment Judge considers just having regard to all the facts of the case, including the strength of the evidence.

One way or another, the Employment Tribunal system and the practices within it may benefit from a recalibration so that access to justice is preserved for both the employee and the employer.

Our employment department has experience and expertise in all of the above areas.

 If you would like any further information, please contact Noel Deans at noeld@rosenblatt-law.co.uk or on 0207 955 1413.

This article should not be taken as definitive legal advice on any of the subject matter covered. If you do require legal advice, please contact Rosenblatt as above.

Incoming costs for employers – 6 April 2018 and beyond

26/02/2018 | Noel Deans & Sean Field-Walton
The new financial year will bring with it several areas of increased cost for employers. We set out a number of key changes relating to termination payments which employers need to be aware of, below

The new financial year will bring with it several areas of increased cost for employers. We set out a number of key changes relating to termination payments which employers need to be aware of, below.

Payments In Lieu of Notice (a “PILON”)

Whether a PILON is subject to tax and NIC currently depends on the terms of an employee’s contract. If there is a contractual right to make a PILON, any such payment is usually treated as taxable earnings and subject to income tax and NIC. Contrastingly, non-contractual PILONs benefit from a £30,000 tax exemption derived from the current section 403(1) of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”).

From 6 April 2018 this position is changing. Through the insertion of new sections 402A – 402D to ITEPA employers will now be required to calculate the employee’s total basic pay including in respect of notice (whether or not served), and deduct from that sum income tax and both class 1 and 2 NIC. This means that both contractual and non-contractual PILONs will be subject to the usual tax and NIC deductions. HMRC have however confirmed that this change will not be retrospective.

Tax exemption for payments in respect of injured feelings?

Remaining unchanged despite the Government’s updates to the termination payments regime, is section 406B of ITEPA’s general exemption from tax for payments in respect of “injury to, or disability of, an employee”.

Nonetheless, through the insertion of new section 404B(7) to ITEPA payments by employers in respect of mere injury to feelings will not benefit from this tax exemption from 6 April 2018. Although employers will see this as another source of increased expense this change incorporates what has been the case law position since K Moorthy v HMRC [2016] which ended this debate and held that a payment in respect of injured feelings was taxable.

Mounting auto-enrolment obligations

From 6 April 2018, the mandatory contributions to be made by both employee and employer in respect of the auto-enrolment scheme will begin to increase.

The minimum employee contribution will rise from 1% to 3% and the corresponding minimum employer contribution will rise to 2%. These figures will further increase to 5% and 3% respectively from 6 April 2019.

Much commentary has focused on the potential increased cost to employers of complying with their auto-enrolment obligations. We agree that employers are likely to see balance sheets dented more by pension liabilities than at present, but this impact may be softer than anticipated. This is owing to current inflationary pressures which we expect to lead to an increasing number of employees choosing to opt out.

Foreign Service Relief (“FSR”)

6 April 2018 also sees an end to the application of FSR in relation to termination payments made to employees who had worked overseas but received a termination payment during a tax year when they were resident in the UK.  This is despite some trepidation displayed from influential lobbies, including but not limited to the Chartered Institute of Taxation.[1]

As currently drafted, even where an employee (except if exempted) has served the majority of their employment abroad but receive a termination payment during a tax year when they are resident in the UK no FSR would apply and the total sum would be treated as taxable earnings and subject to tax and NIC. Here we see the potential for significant and unexpected liabilities to occur. As a result, it is possible that employers may be expected to increase or “gross up” termination payments to employees now tax resident in the UK but who have previously worked overseas.

Concluding Thoughts

Employers considering dismissals may wish to expedite these processes especially if they want to offer a tax free inducement as a settlement term.

Potential increased tax liabilities for employers may ultimately be minimal. Yet, given the financial and reputational cost of a dispute with HMRC for contravention of these provisions would probably be significantly more costly, employers should actively take steps to prepare for implementation. This should include making sure that the internal payroll and HR functions are fully abreast and trained in respect of these changes.

The proposed changes to FSR in 2019 are an area we will be proactively monitoring. If the Government does not amend the draft legislation as it relates to FSR, employers, particularly those with an international base will need to plan their human resources and dismissal considerations more carefully to avoid unexpected liabilities falling due.

[1] Termination payments: removal of Foreign Service Relief (FSR) for UK Residents Response by the Chartered Institute of Taxation, 25 October 2017

Our employment department has experience and expertise in all of the above areas.

 If you would like any further information, please contact Noel Deans at noeld@rosenblatt-law.co.uk or on 0207 955 1413.

This article should not be taken as definitive legal advice on any of the subject matter covered. If you do require legal advice, please contact Rosenblatt as above.

UK Commercial Property held offshore in HMRC’s sights

24/11/2017 | Philip Alfandary
This year’s autumn budget brings unwelcome news for foreign investors in UK commercial property. With effect from April 2019, capital gains realized by non-residents from disposals of UK commerc

This year’s autumn budget brings unwelcome news for foreign investors in UK commercial property.

With effect from April 2019, capital gains realized by non-residents from disposals of UK commercial property will fall within the UK tax net. This will apply to such gains made by both companies and individuals.

What’s the present position?

Only where a non-resident carries on a trade in the UK through a permanent establishment here will a disposal of UK commercial property attract UK tax on any gain arising (and only then when it is used for that trade).

Otherwise, only gains arising on the disposal of UK residential property held by non-residents can fall into charge to UK tax.

The rate of tax depends on whether the non-resident disposing of the property is a company -in which case the rate is the corporation tax rate, 19% – or an individual – in which case capital gains tax rates apply. To complicate matters, where the residential property is a higher value one and is owned by a company, an alternative rate of 28% can apply.

The changes in detail

Non-UK residents will be brought within the scope of UK corporation tax or capital gains tax (CGT) on gains arising on the disposal of UK commercial property.

  • Additionally, the new regime will apply to ‘indirect disposals’ as well.  This means that where a non-resident company (or other entity) is ‘property rich’-broadly, where 75% or more of its gross asset value is represented by UK immovable property – a sale of an interest in that company can trigger a charge on the non-resident holding the interest.  The charge will apply where the non-resident  holds a 25% or greater interest in the company, or has held such an interest in the past five years.
  • There will be an obligation on certain advisors who have sufficient knowledge of such indirect disposals to report them within 60 days, unless they are reasonably satisfied that the non-resident has reported already.
  • There will be an obligation on certain advisors who have sufficient knowledge of such indirect disposals to report them within 60 days, unless they are reasonably satisfied that the non-resident has reported already.
  • Historic growth in value in such properties up to the point the charge comes into force will be not be taxed. The value of interests in commercial properties will be rebased to April 2019 for the purposes of working out what gain the tax will apply to.

Comment

The proposals represent a significant change in taxing chargeable gains on immovable property, and will create a single regime for disposals of interests in both residential and commercial property.

Commercial property is widely held through offshore vehicles, and this measure will mean that future increases in value from 2019 will become taxable (on a disposal). This will obviously have an impact on how some multinationals hold property. While there will be specific exemptions for certain types of investors, it is likely that existing tax exempt vehicles such as Real Estate Investment Trusts, which are government approved creations of statute, may become more attractive.

The challenge of BREXIT for the financial services industry

29/06/2016 | Bruno Fatier
Today we are starting a series of e-bulletins dedicated to considering the consequences of BREXIT on business in general, starting with the impact of BREXIT on the financial services industry. The

Today we are starting a series of e-bulletins dedicated to considering the consequences of BREXIT on business in general, starting with the impact of BREXIT on the financial services industry.

There is no denying that the financial services industry is now facing challenging times, where threats will be generally more visible than opportunities yet to be explored.

From a financial services regulatory perspective, one main threat ahead is the risk of losing EU passport rights whilst one main opportunity is deregulation, but both threat and opportunity are only potential at this stage, as the decision to leave the EU is not yet effective and nobody knows the extent to which gains and losses will effectively materialise.

From a purely EU passport perspective, the later the decision to leave the EU enters into force the better, as more time will be given not only to enjoy the passporting regime but also to prepare for facing all possible BREXIT scenarios including the least comfortable one where no immediately available equivalent of the EU passport rights will be made available from or towards the UK.

The question of timing is therefore important. In this respect, Article 50 of the European Union Treaty provides for a 2-year notice for exit unless a withdrawal agreement has been reached earlier or “unless the European Council, in agreement with the Member State concerned, unanimously decides to extend [the two-year] period”.  The 2-year notice starts from the date on which the leaving Member State notifies the European Council of its intention (this has not yet been given). From a purely EU passport perspective, as explained above, rushing things would not be the best option.

It is also worth noting that Article 50 (not drafted to be actually enforced but rather to frighten prospective leavers) only says that the “framework” of the future relationships should be taken into account when negotiating and concluding a withdrawal agreement. However, there is no denying that it does make sense that both issues be agreed at the same time as part of the same deal, in order to avoid a black hole in between.

Whether the risk of not relying on a satisfactory equivalent of the EU passporting regime to and from the UK will materialise is uncertain. All depends on the outcome of the negotiations between the UK government and the EU.

If the risk materialises, financial services firms from both sides have a lot to lose, i.e. not only UK financial services firms passporting to the rest of the EU but also EU financial services firms passporting to the UK.

Over the last decade or so, banks, investment firms, asset managers and payment services providers licensed in the UK have been relying a lot on the EU Freedom to Provide Services (“FPS”). Doing business directly out of London has been a dominant trend, with fewer and fewer firms deciding to set up or maintain branches in other EU countries under the EU Right of Establishment (“RE”). Cost, convenience and efficiency have been the key driving factors.

By being stripped of the EU passport to do business across the entire EU market, UK licensed financial services firms would have to rely on locally licensed subsidiaries set up in the EU. The likes of Barclays have already such subsidiaries and would “only” be working on relocating staff and activities on an intra-group basis, subject to seizing sale opportunities. As a general rule, EU branches of UK licensed financial services firms would either have to be closed down or converted into branches of the EU subsidiary chosen to provide services all across the EU (subject to exploring sale opportunities). Smaller firms are likely to be those who will most suffer, as setting up a licensed subsidiary is time consuming, uncertain and costly, as is trying to buy one of the few existing EU licensed businesses available for sale on the market.

EU financial services firms holding a passport to do business in the UK would face similar issues, save that the scale of the reshuffling will be narrowed down to the UK and to London in particular.

The risk of not being granted an immediately available and satisfactory equivalent of the FPS and the RE is only the tip of the iceberg. Below the surface, restructuring of credit syndication or euro trading activities currently centralised in London would need to be carried out. Incidentally but noticeably, one would expect EU supervisory bodies based in London to relocate to a country which will still be part of the EU when the UK effectively leaves it. The EBA is the most visible example of the move ahead.

One should also note that UK licensed banks will no longer be part of the European guarantee deposit scheme once BREXIT becomes effective, which leads to the question whether the UK government will decide to provide better, equivalent or lower protection than that available in the EU.

Whilst losses are still hypothetical and one should not panic at the thought of them materialising, one should also coolly think about the alternative opportunities brought about by BREXIT, including that of deregulation. One should not forget that the financial services industry itself has for years vehemently complained about overregulation in many areas such as regulatory capital, remuneration or investor/customer protection.

However, deregulation does not mean that financial service firms licensed in the UK should stop preparing themselves for complying with EU directives adopted at EU level but yet to be implemented nationally (e.g. MiFID2, AMLD 4 or PSD 2), as the risk of having to comply with them or with equivalent rules when providing services towards EU markets, as part of a possible BREXIT deal, may materialise.

Having said that, opportunities for growing a financial services industry more lightly regulated, turned towards non-EU markets, should indeed be explored as much as the potentiality of losses should be assessed. The current burden of EU regulation on activities turned towards outside the EU should not be overestimated, as EU law does not generally regulate services provided towards non-EU countries as much as it regulates services provided towards the EU. But gaining market shares outside the EU will be challenging as there is no readily available equivalent of the FPS or RE outside the EU and local regulations will continue to apply after BREXIT.

The possibility of enjoying the “best of both worlds” is likely to require restructuring business models to segregate deregulated activities turned towards non-EU jurisdictions from activities turned towards the EU.  As many EU regulations apply on a group basis, businesses structured as groups of companies will need to be revisited.

The FIN TECH sector can be partially protected from, and can even continue growing despite the loss of EU passporting rights from and to the UK, but only to the extent of those technology services the provision of which towards the EU does not require holding such rights. However, one example where EU regulation will be soon regulating a significant number of FIN TECH firms is PSD2 (due to enter into force before the 2-year Article 50 deadline), under which licensing requirements will be extended further to reach payment aggregators, initiators and the like. And one cannot rule out that the EU will threaten, and even seek to further extend the scope of what it is subjecting to licensing requirements in order to protect the EU market from outsiders.

 

 

Brexit – What happens next?

27/06/2016 | Lucy Hamilton-James
Following the outcome of the EU Referendum, this article deals briefly with the formal process of the UK to withdraw from the EU.  The decision of the electorate for the UK to leave the EU is the st

Following the outcome of the EU Referendum, this article deals briefly with the formal process of the UK to withdraw from the EU.  The decision of the electorate for the UK to leave the EU is the start of what could be a long divorce process.  Until that process is complete, the UK will remain part of the EU.

The formal process for an EU member state to withdraw from the EU is contained in a so far unused exit clause – Article 50 – within the Lisbon Treaty.  Article 50 contains 5 short paragraphs which provide guidance as to the steps which must be taken by the withdrawing state and the remaining states to facilitate a withdrawal.

In brief; the first formal step is for the UK to formally notify the EU Council of its intention to withdraw from the EU.  This has been referred to in the press as the “Article 50 Notice”.  The service of the Article 50 Notice will be followed (and quite possibly preceded) by a negotiation period during which the remaining EU states and the UK take steps to reach an agreed form of Withdrawal Agreement.   During this negotiation period, EU laws still apply to the UK which would also continue to participate generally in EU business.  The UK would not however participate in internal negotiations within the remaining EU states regarding their discussions and decisions on the Withdrawal Agreement.  The negotiations themselves will take place between the EU Council and the UK but it is the EU which has the final say on its terms.

The disapplication of the EU Treaties, and thus the actual departure of the UK from the EU, occurs at the earlier of the date of entry into force of the Withdrawal Agreement or 2 years after Article 50 is invoked by the UK having notified the EU Council of its intention to withdraw.  However, Article 50 provides for the extension of that 2 year period should there be unanimous agreement between the EU Council and the withdrawing state for it to be so extended.

Considering the pretty significant function for which the provisions in Article 50 were designed to manage, it is striking how vague it is.  This is likely to be because its actual use was never considered a possibility.  That said, in view of the involvement of 28 countries, including the withdrawing state, and the EU institutions themselves, in the negotiations, the lack of detail could be a distinct advantage in that it will also allow for a degree of flexibility and will likely make the negotiation process easier to manage.  In addition, and from the EU’s internal side of the negotiations the Withdrawal Agreement need only have a qualified majority of the remaining states’ agreement for it to be concluded.

So, where does that leave the UK?  Despite calls by EU representatives over the weekend, only the UK can invoke Article 50 and the timing of that is solely in its gift.  The Prime Minister has indicated that the formal process will not commence until his successor is appointed (the 1922 Committee has today announced that the new leader of the Conservative Party will be chosen by 2 September 2016).  In a speech on 27 June 2016, The Chancellor, George Osborne, sought to provide reassurance by confirming that “In the meantime, and during the negotiations that will follow, there will be no change to people’s rights to travel and work, and to the way our goods and services are traded, or to the way our economy and financial system is regulated.”

While the result of the EU referendum continues to sink in, the posturing and strongly worded rhetoric from the EU has begun but is unlikely to last.  The UK and the EU are perfectly capable of working together and indeed need each other so the threats of punishment on the UK and calls for immediate disengagement being made by certain EU state ministers can be seen for what they are.  It is notable that the Heads of State, including those from outside the EU are quite rightly remaining calm and measured in their responses to the referendum result, however shocking,  which can only help to reassure the public and the markets and ensure that stability is returned sooner rather than later.  Whatever side of the fence they are on, the powers that be are well aware of the unilateral damage that prolonging uncertainty can cause and no one wants that.

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