The letter arrives on a Tuesday. An ex-employee has filed an ET1. You have 28 days to respond, a legal bill that starts running immediately, and documentation you have not looked at in three years. Defending the claim will cost between ten and eighteen thousand pounds in legal fees before any award is counted. 

That figure assumes the employer wins. If the claim succeeds, the average unfair dismissal award in 2023/24 was £13,749 on top. Discrimination claims carry no compensation cap. From 1 January 2027, the Employment Rights Act 2025 removes the statutory cap on compensatory awards for ordinary unfair dismissal entirely. A dismissal that would previously have been capped becomes open-ended. 

This guide explains what an employment tribunal costs, how claims start, what the ACAS process requires, and what SMEs can do to reduce their exposure before a claim arrives. 

What does an employment tribunal cost a UK employer? 

The employment tribunal costs UK employers face have several components. Most SMEs underestimate the total because they focus on the potential award and miss the cost of mounting a defence. 

Legal fees 

A defended unfair dismissal claim typically costs between ten thousand and eighteen thousand pounds in external legal fees if it proceeds to a full hearing. Discrimination claims, whistleblowing cases, and TUPE disputes can reach thirty thousand to fifty thousand pounds or more. These costs fall on the employer whether the outcome is favourable or not. There is no costs recovery mechanism that makes a defended claim cost-neutral. 

Tribunal awards 

The average unfair dismissal award in 2023/24 was £13,749. For discrimination claims, compensation is uncapped. From 1 January 2027, the Employment Rights Act 2025 removes the statutory cap on compensatory awards for ordinary unfair dismissal, currently the lower of £118,223 or 52 weeks’ gross pay. A dismissal that would previously have been capped carries open-ended financial exposure from that date. 

Management time 

A defended claim typically absorbs the equivalent of fifteen to thirty days of senior management time across investigation, document collection, correspondence with advisers, and hearing attendance. At a conservative five hundred pounds per day for a director or senior manager, that is seven thousand five hundred to fifteen thousand pounds in opportunity cost sitting entirely outside the legal fee estimate. 

Employment tribunal costs hearing: who pays? 

Unlike civil courts, employment tribunals do not routinely order the losing party to pay the other side's costs. Each side generally bears its own costs. A costs order can be made where a party has acted unreasonably, for example by pursuing a claim with no reasonable prospect of success or by failing to comply with tribunal orders, but these are the exception. Do not plan your approach around recovering costs from the other side. 

How employment tribunal claims start 

Understanding how claims start is the first step in managing them. The most common claim types for UK SMEs are unfair dismissal, wrongful dismissal, unlawful deduction of wages, and discrimination under the Equality Act 2010. 

The trigger 

Claims most commonly follow a dismissal: redundancy, a conduct or capability dismissal, or a resignation the employee treats as constructive dismissal. They also arise from grievances that were mishandled or ignored, from changes to contractual terms the employee did not agree to, and from pay disputes. The common thread in most SME claims is a documentation gap: the employer did the right thing operationally, but cannot produce the paperwork to show it. 

ACAS early conciliation 

Before an employee can file a claim at the employment tribunal, they must first notify ACAS. This triggers early conciliation, a voluntary process in which an ACAS conciliator attempts to facilitate a settlement between the parties. Early conciliation lasts up to six weeks. Either party can decline to engage, but the notification step is mandatory and the limitation period is paused while conciliation is underway. Around a third of cases notified to ACAS are settled or withdrawn at this stage. Engaging constructively at this point, even without any admission of liability, can avoid the cost and disruption of a full hearing. 

Why documentation gaps create claims 

Most tribunal cases that proceed to a full hearing do so because the employer cannot produce adequate records. An undocumented investigation, a disciplinary hearing with no written outcome, a dismissal letter that does not state the reason, or a grievance that was acknowledged but never formally resolved: each of these gaps makes a defence significantly harder. From October 2026, employees will have six months, up from three, to bring a claim, giving a grievance twice as long to develop before it surfaces at the tribunal. 

Unfair dismissal UK cases: what makes a dismissal fair or unfair? 

Unfair dismissal is the most common claim type in employment tribunal cases involving UK SMEs. It is also the most preventable. 

The five potentially fair reasons 

Under section 98 of the Employment Rights Act 1996, a dismissal is only potentially fair if it falls within one of five categories: capability or qualifications, conduct, redundancy, statutory illegality such as the loss of the right to work in the UK, or some other substantial reason. Every dismissal must map to one of these. A dismissal that cannot be brought within any of the five is automatically unfair, regardless of how the process was handled. 

The fair dismissal procedure UK employers must follow 

Having a potentially fair reason is necessary but not sufficient. The dismissal must also follow a fair procedure. The ACAS Code of Practice on Disciplinary and Grievance Procedures sets the standard. For conduct and capability dismissals, a fair procedure includes a thorough investigation, a written invitation to a disciplinary hearing with adequate notice, the right to be accompanied, a reasoned decision communicated in writing, and the right of appeal. A tribunal applies the band of reasonable responses test to the procedure as a whole, not to each step in isolation. Procedural failures do not automatically make a dismissal unfair, but they significantly increase the risk and attract a 25% uplift on any award where the ACAS Code was not followed. 

January 2027: the qualifying period drops to six months 

Currently, employees need two years of continuous service to claim unfair dismissal, with limited exceptions. From 1 January 2027, the Employment Rights Act 2025 reduces this to six months. Businesses that have relied on the two-year window to manage early-stage performance issues or poor hiring decisions will lose that buffer entirely. Dismissal procedures need to work from month six, not month twenty-four, and the documentation to support them needs to be in place from day one. 

What is ACAS employment law? 

ACAS, the Advisory, Conciliation and Arbitration Service, is an independent public body that provides guidance, training, and conciliation services to UK employers and employees. 

What ACAS does 

ACAS publishes Codes of Practice approved by Parliament. The most significant for SMEs is the Code of Practice on Disciplinary and Grievance Procedures. Employment tribunals are required to take this Code into account when assessing whether an employer acted reasonably. Non-compliance can result in a 25% increase in any compensation award. ACAS also operates a free advisory helpline, provides early conciliation, and offers paid employer training and advisory services. 

What the ACAS Code requires in practice 

The Code does not require a perfect process. It requires a reasonable one, consistently applied and clearly documented. For most SMEs, the gap between current practice and ACAS compliance is primarily a documentation gap, not a process gap. The investigation notes, hearing record, decision letter, and appeal outcome do not need to be lengthy. They need to exist, be contemporaneous, and be consistent with each other. 

Early conciliation in more detail 

Early conciliation is mandatory before any employment tribunal claim can proceed. The employee notifies ACAS, a conciliator contacts both parties, and the process runs for up to six weeks. If a settlement is not reached, ACAS issues an early conciliation certificate and the employee may file an ET1. Employers who engage constructively at this stage, with a clear view of the strengths and weaknesses of their position, are better placed to reach a commercial settlement than those who decline to engage. 

Contract of service vs contract for service: case law and misclassification risk 

The distinction between a contract of service, which is an employment contract, and a contract for services, which is a self-employment arrangement, determines which employment rights apply. Misclassification creates simultaneous exposure to HMRC and to the employment tribunal. 

The legal tests 

Employment tribunals apply a multi-factor test to determine employment status. The key questions are: is there mutuality of obligation, meaning is the employer obliged to offer work and is the individual obliged to accept it? Does the employer control how, when and where the work is done? Must the individual carry out the work personally, without sending a substitute? No single factor is conclusive. The tribunal looks at the substance of the working relationship, not the label the contract applies to it. 

Significant case law 

The consistent principle in the leading cases is that tribunals look past the written label to the reality of the relationship. In Autoclenz Ltd v Belcher [2011], the Supreme Court held that the written terms of a contract do not determine worker status where the reality of the working relationship is different. In Uber BV v Aslam [2021], the Supreme Court found that Uber drivers were workers notwithstanding contracts stating they were independent contractors. In Pimlico Plumbers Ltd v Smith [2018], the Court of Appeal found a plumber to be a worker despite a contract describing him as self-employed. 

The cost of misclassification 

A misclassified contractor who brings a tribunal claim can claim unfair dismissal, accrued holiday pay, including back-pay for years it was not taken, and other statutory entitlements. HMRC can separately raise assessments for unpaid employer National Insurance contributions and income tax. The combined exposure from a single misclassified relationship can run to five or six figures. 

Responding to an employment tribunal claim: what to do when the ET1 arrives 

If a claim has been filed, time is critical. The process is more manageable if you know what to expect. 

The ET1 and the ET3 

The employee's claim is set out in the ET1 claim form. Once filed, the tribunal sends the employer a copy and a 28-day window to file an ET3 response. The ET3 must set out the employer's response to each allegation and state whether liability is disputed. Missing the 28-day deadline is serious: the tribunal can proceed to judgment without hearing the employer's case. 

What the ET3 should include 

The ET3 should clearly identify which claims are contested and the factual grounds for contesting them. It should not overstate the case or introduce arguments that cannot be evidenced. The ET3 is a legal document and the starting point for the tribunal's case management. Material not raised in the ET3 can be difficult to introduce later in the proceedings. 

Case management, disclosure, and the hearing 

After the ET3 is accepted, the tribunal issues a case management order setting out the steps required before the hearing: disclosure of documents, exchange of witness statements, and any preliminary hearing to resolve jurisdiction or liability issues. A full hearing may be determined by an employment judge sitting alone or by a panel of three. The majority of tribunal claims settle before the final hearing. Settlement is not an admission of liability. Given the combined cost of legal fees and management time, a commercial settlement is often the right decision even where the employer believes the claim has limited merit. 

How to reduce your employment tribunal exposure 

Tribunal claims are not random. The same documentation gaps, process failures, and misclassification errors generate the majority of claims against UK SMEs. 

Keep contracts and handbooks current 

A contract written before 2024 is missing at least four statutory updates: day-one flexible working from April 2024, carer's leave from April 2024, neonatal care leave from April 2025, and the SSP changes of 6 April 2026. A handbook not reviewed since 2023 does not reflect the October 2024 positive duty to prevent sexual harassment. Outdated documentation is the most common source of avoidable tribunal exposure for UK SMEs. The Employment Rights Act 2025 raised the compliance bar. Pre-2025 documentation carries a risk that has not yet surfaced. 

Follow the ACAS Code on every case 

The ACAS Code applies to every disciplinary and grievance situation, regardless of how minor it appears at the time. A written investigation, a properly constituted hearing, a reasoned decision in writing, and a right of appeal are not bureaucratic formalities. They are the foundation of a defensible process. The SME that can produce this paperwork is in a fundamentally different position at tribunal from the one that cannot. 

Document everything and train your managers 

Most tribunal claims start with a manager who avoided a difficult conversation, mishandled a return-to-work interview, or dismissed without following a process. Brief, contemporaneous notes taken at every stage of a disciplinary or grievance matter cost almost nothing to produce. They are worth considerably more than their length suggests when a claim lands twelve months later. 

Frequently asked questions 

What does an employment tribunal cost a UK employer? 

A defended unfair dismissal claim typically costs between ten thousand and eighteen thousand pounds in external legal fees if it proceeds to a hearing. Management time of fifteen to thirty days adds a further seven thousand five hundred to fifteen thousand pounds in opportunity cost. The average unfair dismissal award in 2023/24 was £13,749. From January 2027, the compensatory award cap is removed, meaning a mishandled dismissal can carry open-ended financial exposure. 

Who pays the costs at an employment tribunal costs hearing? 

Each side generally bears its own costs. Employment tribunals do not routinely order the losing party to pay the winner's costs. A costs order can be made where a party has acted unreasonably, but this is the exception rather than the rule. 

What is the process for responding to an employment tribunal claim? 

You have 28 days from receipt of the ET1 to file an ET3 response. The ET3 sets out your response to each allegation and whether you dispute liability. Missing the deadline risks a default judgment. Seek legal advice promptly on receipt of a claim. 

What is ACAS employment law and why does it matter for SMEs? 

ACAS is the Advisory, Conciliation and Arbitration Service. It publishes the Code of Practice on Disciplinary and Grievance Procedures, which tribunals must take into account when assessing whether an employer acted reasonably. Failure to follow the Code can result in a 25% increase in any compensation award. ACAS also provides the mandatory early conciliation step that precedes every tribunal claim. 

What is the difference between a contract of service and a contract for services? 

A contract of service is an employment contract, giving the individual the full range of employment rights. A contract for services is a self-employment arrangement. Employment tribunals look at the reality of the working relationship, not the label the contract applies to it. Misclassification of an employee or worker as self-employed creates simultaneous exposure to employment tribunal claims and HMRC assessments. 

 The HR Doctor | Compliance Confidence Kit 

The employment tribunal costs UK employers face are not a future risk. It is a present one, and from January 2027, it increases significantly. The qualifying period for unfair dismissal drops to six months, the compensation cap disappears, and employees have twice as long to bring a claim. The businesses that keep their tribunal exposure low are not the ones that are lucky. They are the ones whose contracts reflect current law, whose processes follow the ACAS Code, and whose managers know what to document. If your documentation is not where it needs to be, the Compliance Confidence Kit is the structured way to find the gaps and close them before a claim makes the decision for you. Book a free 30-minute discovery call with The HR Doctor or email hello@hrdr.co.uk.