What a costs warning letter from your employer means – and how to respond

Sending a costs warning letter is a tactic employers often use during Employment Tribunal proceedings. 

It’s an intimidating move designed to persuade employees to drop their case. However, in reality, receiving a costs warning letter rarely results in the threatened consequences.

Here, we’ll explain everything you need to know about receiving a costs warning letter from an employer. We’ll cover what the letter is, what happens when an employer sends one and what receiving one could mean for you in a Tribunal case.

What is a costs warning letter?

A costs warning letter is a letter (sometimes an email) that one party in a Tribunal claim sends to the other. It warns that the recipient may have to pay the sender’s legal costs if they continue with their claim or response. 

The letter argues that the recipient has broken Rule 74 of the Employment Tribunal Procedure Rules 2024. There are a few different situations where this may apply, for example where:

• the other party behaves “vexatiously” – this means they’re using the Tribunal system to abuse or annoy the other party – or they’re making a pointless claim that wastes time
• the other party’s case has “no reasonable prospect of success” 
• the other party acts disruptively or unreasonably during the proceedings.

You’ll find the full list of rules in relation to costs orders in part 13 of the Procedure Rules, which serves as the government’s rulebook for Employment Tribunals. 

The letter warns that, if the other party continues with the case, the sender will ask the judge to order the recipient to pay their legal costs. Both the claimant and the respondent can send a costs warning letter to the other party.

Why would an employer send a costs warning letter?

Officially, an employer will only send a costs warning letter if they believe the claimant has broken one or more of the grounds under Rule 74 in the Procedure Rules.

But some employers send a costs warning letter in response to any Tribunal claim made against them. Why? Because they know most employees will feel intimidated and may withdraw their claim as a result. 

However, receiving a costs warning letter only very rarely results in claimants having to pay the employer’s legal costs.  

For that to happen, the employer would have to: 

• Make a costs application – this means sending a formal letter or email to the Tribunal that follows the warning issued in the costs warning letter
• Persuade the judge that you have broken the rules on one or more of the grounds listed in Rule 74.

Employment Tribunal data suggests that this only happens very rarely. In 2017, the judge only agreed to award costs to the employer in 6% of relevant cases. 

What happens when an employer sends a costs warning letter?

If your employer sends a costs warning letter, they'll send it directly to you, either by email or post. At this stage, the tribunal is not involved, and the letter is purely a communication between the two of you.

A costs warning letter is often sent with the heading: “Without prejudice save as to costs.” This means that:

• the Tribunal won’t refer to the letter at this stage in the proceedings
• you should not disclose the letter – or refer to it in Tribunal proceedings – unless and until there’s a costs application for the judge to consider.

The letter will outline which aspects of the Employment Tribunal Procedure Rules you are accused of breaking.

The costs warning letter itself doesn't trigger any formal action in the Tribunal process. However, it signals that the employer may make an application for a costs order in the future.

What should you do if an employer sends a costs warning letter?

If you receive a costs warning letter, you can either ignore it or respond to it. As there's no obligation to reply, ignoring the letter is a valid choice. However, responding to the letter can be beneficial.

Drafting a reply allows you to respond to your employer's arguments for submitting the letter. This may discourage them from taking further action. If the employer escalates the matter, you'll be in a stronger position to respond if you've already replied to the costs warning letter.

If you do choose to respond, focus on addressing the specific concerns outlined in the letter. If the employer has said your claim has no reasonable chance of success, for example, make it clear in your response why this is not the case. You do not need to include evidence or lots of detail - keep your response brief.

What happens if an employer follows up a costs warning letter with a costs order application letter?

Unlike a costs warning letter, a costs order application letter is sent to the Tribunal. The employer will send the letter to the Tribunal - under the Tribunal rules, they should also copy you in. You'll then both be able to present your arguments to the Tribunal.

To prepare for this stage, gather evidence and prepare your rebuttal to the arguments made in the costs order application. If you replied to the initial costs warning letter, you can submit it as part of your response. At this stage, they may also consider the arguments the employer made in their initial letter.

The judge will assess whether your employer's concerns are valid, taking both sides’ arguments into account.

In making a decision on the costs application, the judge will consider your financial position and whether you have the means to pay. 

As a costs warning letter can be sent by either party to the other, it follows that either can go on to make an application for a costs order. If you want to take this action as the claimant in an Employment Tribunal case, we have a template to help you send an application for costs order letter to the Tribunal (copying your employer).

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