The delinquent employers’ dilemma: settle or dissolve?

June 2016, Eva Herman

Employment rights in the news

Last week two very interesting (from Unpaid Britain’s perspective) stories hit the headlines. In the first, Mike Ashley, owner of Sports Direct, admitted that 15 minutes of pay was deducted from workers who arrived at work even a minute late. This is a high-profile example of the low-level “gaming” of employment contracts which Unpaid Britain is studying.  The second story saw former Chelsea FC doctor Eva Carneiro  accept a settlement from Chelsea shortly before she was due to testify to an Employment Tribunal (ET). The latter story illustrates a particular phenomenon which we have been examining, as this blog will attempt to explain.

The Employment Tribunal

Since March 2016 we have been analysing Employment Tribunal cases brought before London and Watford tribunal offices for unauthorised deductions from wages. This has so far involved a two week stint at the Bury St Edmunds employment tribunal registry. Even though employment tribunal judgements are public records they can only be accessed via terminals located in the basement of Bury St Edmunds county court. There, surrounded by disintegrating boxes containing paper copies of ET judgements, we went about selecting a random sample of judgments from London for the years 2012 and 2014 (before and after the introduction of fees). Details (parties, jurisdictions, general outcome) of the judgements had to be copied from an old computer screen onto our laptops (no digital downloads!). Then we had to find and scan the paper copies of the judgements. This was a lengthy task; many copies of the judgement are mis-filed and some are absent.

Companies House

Back at Middlesex, we reviewed the Companies House databases for the respondent companies named in the judgements. We sought to identify the company’s status, sector and identity of their directors. Companies House has two database systems, of which Beta is the more detailed. However many of the companies don’t appear on it especially if they had been dissolved a few years previously, so a constant transition between Beta and the second (WebCheck) is required.

Half way through this process we decided to examine our findings so far, and they suggest something very interesting about employers who settle.

Preliminary Findings[1]

What is interesting is the marked difference between the status of companies for the different outcomes of claims. Where the case has been “dismissed on withdrawal”, dismissed on settlement (as in the Carneiro case) or fails at a hearing the company is most likely to be still active. Where there is a default judgement (usually occurring when the respondent i.e. the company doesn’t respond to the claim or appear at the Tribunal) or the workers’ claim was successful the company is most likely to be dissolved through insolvency or other means.  What does this reveal regarding these companies intention, or the prospects of workers recovering their wages?

Dismissal on Withdrawal

21% of outcomes out of our preliminary sample were “dismissed on withdrawal”, meaning the “claimant informs the Tribunal through writing or in the course of a hearing that the claim or part of the claim is withdrawn”, following which the Tribunal issues a judgement ruling that the claim is dismissed. This leaves the actual outcome in terms of whether the worker was successful in getting their money unknown.  A case might be settled informally, or in cases such as that of Eva Carneiro a settlement was reached during proceedings and be classified as dismissed on withdrawal. Members from the Unpaid Britain project’s Advisory group call this type of settlement “napkin cases”, when a settlement is agreed and in some cases scribbled onto a napkin just before or during a hearing. However a dismissal on withdrawal could also occur where the claimant no longer wanted to pursue the case, (for reasons such as stress or feeling that the claim might not succeed).

Settlement

Where settlements take place, it may be assumed that the worker received  at least some of their money, but judgements stating that a settlement has occurred are the smallest group amongst our sample. We had many more cases classified as “dismissed on withdrawal”, and  wanted to investigate the likelihood that these had  been withdrawn due to a settlement occurring (this had been suggested to us by legal advisors). To do this we chose to compare the status of respondent companies where we know a settlement has occurred with that of those in cases withdrawn on dismissal. We found the Companies House status of respondents in cases dismissed on settlement to be very similar to those dismissed on withdrawal, with around 80% of companies still being active.  This is in contrast to the profile of other groups of respondents.

Default Judgements and successes

Looking at cases that were Default Judgements the majority of companies appear to have been dissolved, with only a small minority still active. This may not be that surprising: if they are about to be or are already insolvent, employers may be unable or reluctant to defend the case. However where the claim was heard and succeeded (the most common outcome) the majority of respondent companies are now either dissolved or insolvent – only around 30% are still active. Research done by the Department for Business Innovation and Skills  in 2013 found that only 32% of claimants whose unpaid wage claims were successful were paid in full. Larger companies were more likely than small ones to pay awards, and this may be explained by widespread use of insolvency and limited liability to evade payment.

Failed claims

In cases which were heard, but the claim failed, our preliminary findings show that 94% of respondent companies are still active.

What the findings suggest

These findings suggest to us that the majority of cases that are “dismissed on withdrawal” are actually settled before or during the hearing.

One further hypothesis is that if an employer expects to pay the money to their workers they are likely to settle before the hearing, only going ahead with a hearing where they are confident of winning. Settling reduces litigation costs for employers, especially if the unpaid wages claim is linked to other claims such unfair dismissal or discrimination.  Cases classified as being dismissed on withdrawal leave no evidence of guilt of non-payment. This enables the employer to maintain their image both in terms of brand as well as to other employees. Thus systematic non-payment of wages can carry on unnoticed/unchallenged.

Where employers have no intention of paying, however, they may simply fail to defend, leading to a default judgement, or go to a hearing and use insolvency and limited liability to protect directors from any personal cost. It could also be that losing the ET case pushes the company into insolvency, but given that most unpaid wages claims are for few hundred pounds, this could only apply in a minority of cases.

Although we still have a lot of work to do to understand the phenomenon of non-payment and employment tribunal claims, these preliminary findings are consistent with there being a group of employers who “game” the system with apparent impunity.

For the time being we will keep you all updated. Any comments on this blog or our research are as always greatly appreciated.

[1] The preliminary findings are based on 205 cases including unpaid wage claims, predominantly made in 2012, and for which the respondent company’s identity has been located at  Companies House. The most common outcome in these cases is that the case has been “dismissed upon withdrawal”.