HSE proposals to recover costs from employers examined
Howard Fidderman looks at government-instigated proposals that are likely to change the relationship between employers and the Health and Safety Executive.
On this page:
Box 1: Proactive inspections and cost recovery
HSE consultation
Recovering HSE costs
Box 2: Micro-businesses and start-ups
Local authorities excluded
Box 3: Boreholes and licensing regimes
What costs will be recovered?
Table 1: Estimated cost for dutyholders of fee for intervention
Breaking down the recovery
Box 4: Micro-organisms
No independent appeal
Box 5: Major hazard recovery
Incentive for employers to improve standards
How much will HSE recover?
Box 6: Other charging possibilities
Potential changes in HSE inspector behaviour
Implementation timetable.
The Health and Safety Executive (HSE) has published proposals that will place it under a legal duty to recover its costs from employers that it deems have committed material - but not technical - breaches of health and safety law. From April 2012, a new "fee for intervention" will see the HSE recover costs throughout Britain for all formal written interventions, excluding those relating to prosecution (which have always been recoverable through the courts in England and Wales). The HSE emphasises that its consultation is about the detail, not the principle, of cost recovery and that its inspectors will have no discretion whatsoever in its application. The changes will not introduce any new legal duties and employers that are not at material fault will not face cost recovery.
The HSE believes its proposals (PDF format, 447K) (external website) could bring in as much as £43.6 million a year - although it cautions this is very much at the upper end of its estimates. Even a smaller amount, however, would go some way to offsetting the four-year cut of 35% in the Government's funding of the HSE (the SR10 settlement), which started in April 2011, when the total grant fell to £198.7 million, having been £227.7 million in 2009/10.
Gordon MacDonald, currently moved sideways from his usual job as head of the HSE's hazardous installations directorate to run the fee for intervention programme, emphasises, however, that "there are no targets for the amount of costs to be recovered. If there is a shortfall from any planning expectations, the HSE will have to live within its means." The HSE, he told HSB, will decide on its intervention programmes in its normal way determining where its priorities lie based on delivering health and safety outcomes, and estimate the costs it anticipates recovering, which will be built into the budgets. "With experience," he adds, "the costs will become more predictable and reliable."
The principle of extending cost recovery to most employers was announced on 21 March by Chris Grayling, the minister for employment at the Department for Work and Pensions (DWP), as part of a package to reform further the UK's health and safety system, building on Lord Young's review, Common sense. Common safety. In addition to cost recovery, the DWP's "Good health and safety - good for everyone" heralded: a review of health and safety regulations, which is being carried out by Professor Ragnar Löfstedt; and a one-third reduction in the number of proactive inspections that the HSE carries out, amounting to 11,000 fewer inspections a year (see box 1), as well as 68,000 fewer inspections by local authorities (LAs).
Box 1: Proactive inspections and cost recovery The HSE will reduce its proactive inspections by one-third "through the better use of intelligence to target inspections towards higher-risk industries and dutyholders where there is information indicating that they may be operating in material breach of health and safety law or that there are higher risks arising from the work being carried out". The HSE has "worked in consultation" with the Government to identify three categories of industry:
Although the fee for intervention from proactive inspections will therefore be confined to the first category, it could arise from reactive visits in any of the categories. The HSE adds that these categories will "inevitably change in their composition over time". |
HSE consultation
Before DWP ministers issued "Good health and safety", they considered, but rejected as "neither realistic nor fair", recovering costs from all dutyholders, whether compliant or not. Within this framework, the HSE's consultation document considers seven options for how it might recover costs, although the first option - doing nothing - is not really an option at all given the minister's 21 March pronouncement. The impact assessment (PDF format, 1.31MB) (external website) accompanying the consultative document is also clear that doing nothing would be problematic given the 35% cuts: "Without any costs being recovered, even if frontline areas are given priority over others, it is very likely that these savings would translate into a lower level of intervention and enforcement, including fewer incidents and complaints being investigated. This would be expected to result in a decrease in health and safety standards throughout Great Britain, with the ensuing costs to society."
It has been the HSE's policy for some time to extend the activities for which it can recover its costs, says MacDonald. The current proposal, he explains, came out of discussions between Grayling and the HSE over the response to the SR10 settlement. This culminated in the minister's statement on 21 March, which included cost recovery and was agreed across government, and, says MacDonald, is why the policy is a "given".
Recovering HSE costs
Doing nothing aside, the remaining six options share the core principle that the HSE should recover costs only where there has been a material failure by the dutyholder. The DWP had already justified such cost recovery on the basis that "it is reasonable that dutyholders that are found to be in serious material breach in standards - rather than the taxpayer - should bear the related costs incurred by the regulator in helping them put things right. A cost-recovery principle will provide a deterrent to those who would otherwise fail to meet their obligations and provide a level playing field for those who do."
The HSE adds that recovering costs for health and safety regulation is in line with Treasury guidelines on "Managing public money" and the "polluter pays" principle in environmental legislation, which allows "higher-hazard operations to take place while ensuring the beneficiary 'risk creators' are liable for attendant regulatory costs".
The six options differ depending on whether or not cost recovery extends to LA enforcement, micro-businesses and new start-ups, as well as whether or not the HSE should charge operators of boreholes (which would not be related to fault). The HSE's preferred option (no.6) would exclude LAs, but would recover costs for material faults from most micro-businesses and start-ups, as well as for borehole notifications and lower-risk biological containment facilities. Boreholes, advises the HSE, "have similarities to some HSE-regulated high-hazard sectors where cost recovery already takes place", ie cost recovery will not be premised on material fault, although it will additionally be levied for fault. Nor will there be changes to existing cost recovery in the major hazards areas, except for lower-tier sites under the Control of Major Accident Hazards Regulations 1999.
In practice, most of the costs recovered under the fee for intervention proposals will arise in two ways:
- proactive inspections in "comparatively high-risk areas", such as construction, high-risk manufacturing, and waste and recycling. This is the only non-major hazards category where such inspections will continue as a result of the one-third cut in proactive inspections; and
- reactive visits - regardless of sector - following a complaint, incident or injury. The HSE is emphatic on this point: "No areas of industry will be exempted from maintaining good standards of health and safety. Employers who do not take seriously the protection of their employees, or those affected by their work activities, will still face intervention by HSE. HSE will continue with reactive work across all categories of industry investigating incidents and following up complaints." There will, insists MacDonald, be "no no-go areas".
Box 2: Micro-businesses and start-ups Businesses with fewer than 10 employees and "genuine new start-ups" would, under the HSE's favoured option, generally be covered by the cost-recovery proposals, despite the announcement earlier this year by the Department for Business, Innovation and Skills that such businesses would be excluded from all new domestic regulations for three years (external website). Ministers have agreed, however, that the moratorium will not apply to cost recovery, with the exception of self-employed dutyholders, who will not have to pay costs unless the conduct of their undertaking exposes any worker or member of the public to risks to their health or safety. (Although the HSE does not expand on the likely impact of this exemption, it is difficult to envisage the HSE inspecting or investigating (and therefore charging) self-employed workers other than those who may have endangered workers or the public.) |
Local authorities excluded
The HSE's favoured option currently excludes LAs from the cost-recovery proposals, even though they face a 28% cut in funding over four years. The HSE is, however, using the public consultation to elicit further information from LAs on how they might implement a cost-recovery scheme. There are, advises the HSE, "differing views" among the 430 LAs and mandating them to recover costs "is a complex question". MacDonald explains that the HSE does not want to compel LAs "against their wishes" because they have different funding sources and responsibilities and answer to different government departments. Nor, MacDonald points out, are LAs the only health and safety enforcing body excluded from the cost-recovery proposals: fire authorities and the Office for Rail Regulation are also not covered, for example.
The HSE does provide estimates of the costs that LAs might recover. LAs spend 265,000 days a year on health and safety regulation that are not currently subject to cost recovery, which could potentially allow them to recover £15.9 million a year, amounting to £137 million over 10 years at today's prices, allowing for 10% non-payment of invoices. The total includes £500,000 a year for Health and Safety Laboratory (HSL) services to LAs.
It is feasible that the final proposals could be amended to require or allow LAs to recover costs from 6 April 2012, should the consultation responses deem that appropriate. Unfortunately, the HSE has restricted its specific questions on LAs to LAs, which means that other organisations and individuals that have a legitimate interest in the issue may refrain from comment - for example, employers with multiple outlets that have an LA and the HSE as their enforcing bodies. MacDonald suggests that non-LAs use the consultative document's general questions to submit their views on LAs.
Box 3: Boreholes and licensing regimes The HSE's favoured option envisages recovering costs from dutyholders that notify the regulator of an intention to operate an onshore borehole. Much as it does with the other permissioning regimes below, the HSE assesses notifications - to ensure adequate design - and then verifies safe operation through inspection. The difference, however, is that it does not currently charge for its boreholes work. The HSE therefore proposes recovering all its costs for the time spent assessing notifications, including any verification inspections, as well as office-based work in gathering information, and writing documents. The HSE estimates its hourly rate at £256, which is its offshore rate and almost twice what it is suggesting for its fee for intervention scheme: the reason, it explains, is that assessment requires specialist knowledge with detailed knowledge of the industry. The HSE's existing charging, approval and notification arrangements for other high-hazard activities - asbestos removal and the manufacture and storage of explosives, for example - will continue unaltered. The HSE's wider fee for intervention proposals would, however, result in it recovering costs for additional interventions for material breaches not covered by the technical assessment it already carries out (although it reassures dutyholders that they will not be double-charged). |
What costs will be recovered?
Where HSE inspectors find a potential breach, they will continue to use the HSE's Enforcement policy statement (PDF format, 120K) and Enforcement management model (PDF format, 132K) (external website) to settle on one or more of four types of action:
- verbal advice;
- email or letter;
- enforcement notice; or
- prosecution.
Although there will be no change to this process, the HSE proposes recovering costs "where, in the opinion of an inspector, a material breach of law has occurred such that a requirement to rectify it is formally made to the dutyholder in writing". The HSE reassures dutyholders that these decisions will be "independent of whether HSE will subsequently recover costs as a result of any decision taken". Nor will the scheme "generate a profit" as it will be restricted to "the costs incurred by the regulator for the work".
In practice, cost recovery will apply to the middle two formal written categories, ie to all action after verbal advice up to the point where a decision is taken to prosecute. The HSE provides three examples of when it would and would not recover costs, and may produce more eventually. MacDonald cautions, however, that it wants to avoid a compendium of possible scenarios.
Dutyholders will pay for "each intervention that relates to the identification of a material breach and all subsequent regulatory work up to the point where regulatory intervention in relation to the breach has been concluded". This will include specialist assistance, the drafting and issuing of improvement or prohibition notices and office-based work in gathering information and evidence, phone calls, and writing emails, letters, reports and visit records.
The HSE estimates its hourly rate for recovery at £133 (corresponding to a daily rate of £984, based on a 7.4-hour day), which is an average covering salary costs and all the support overheads, such as IT, accommodation and travel expenses. The HSE provides potential costs for four levels of intervention (see table 1, ranging from £750 to thousands of pounds, although it cautions that charges will depend on individual circumstances.
Payment will be by 30-day invoice: charges will be made on a monthly basis rather than collating all costs into a single invoice. Normal credit control action will apply to non-payment, with reminders and, ultimately, a court application.
The HSE is not proposing amending the provision in the HSW Act that prohibits fees being levied on employees, even where they are at material fault, although it warns they will still face potential enforcement action. Nor will an employer be subject to cost recovery if it has discharged its duties and it is solely the employee who has committed a breach.
Table 1: Estimated cost for dutyholders of fee for intervention |
|
Intervention |
Estimated averaged costs recovered |
Inspection with no action taken |
No costs will be recovered |
Inspection that results in a letter |
Approximately £750 |
Inspection that results in an enforcement notice |
Approximately £1,500 |
Investigations |
Ranging from approximately £750 through to several thousands of pounds and, in extreme cases, tens of thousands of pounds |
Source: HSE. |
|
Breaking down the recovery
The HSE envisages fee for intervention working through three operational directorates:
- The greatest contribution would come from the field operations directorate (FOD), which deals with manufacturing, agriculture, construction and services. With 54,000 frontline days spent each year on inspection, investigation and enforcement (excluding prosecution time), the HSE estimates finding a material breach where costs would be recovered in approximately 70% of investigation days and 65% of inspection days. This would yield £38.5 million, plus £4.9 million from assistance provided by the HSL, totalling £43.4 million. Allowing for a 10% rate of unpaid invoices after attempts at debt collection, FOD would recover £39 million a year, equating to £336 million over 10 years at today's prices.
- There are more than 4,000 days not currently subject to cost recovery by the hazardous installations directorate, which deals with oil and gas, chemicals, explosives, pipelines, mines and biological agents. The HSE estimates half of these days relate to interventions following a material breach. In addition, £2 million would be recoverable for HSL assistance, which means that, allowing for unpaid invoices, £3.7 million would be recovered (more than half from chemical manufacturing and storage), amounting to a 10-year present value of £32 million.
- The HSE anticipates recovering the costs of 770 out of 1,240 days worked by the corporate science, engineering and analysis division (CSEAD), which provides specialist inspectors dealing with radiation, noise, vibration, occupational hygiene, electrical and process safety, medical and human factors. This would yield £762,000 a year, as well as £100,000 in HSL support, all of which would be recoverable. In total, after unpaid invoices, CSEAD would recover £776,000 a year and £6.7 million over 10 years.
Box 4: Micro-organisms The HSE's cost-recovery proposals will apply in principle to lower-risk biological containment facilities (containment levels 1 and 2); in practice, however, such facilities are unlikely to receive a proactive inspection because the HSE will be targeting higher-risk activities. The proposals will not apply to high-hazard biological containment facilities (ie containment levels 3 and 4): the forthcoming single regulatory framework for handling human and animal pathogens and genetically modified organisms will allow the HSE to recover the costs of all its activities at such sites. The HSE believes the Government will implement the framework "within a relatively short time" - the impact assessment advises October 2012, although 2013 is more likely - and it does not want dutyholders to face two different cost-recovery schemes within months of each other. |
No independent appeal
The HSE advises that it will "implement a robust queries and disputes resolution procedure. The aim would be to resolve all queries or disputes promptly, fairly and in a transparent way." The HSE will meet the cost of resolving "queries" - for example, the composition of the costs. Unresolved issues, however, become "disputes", which might involve the "propriety" of the costs or the enforcement decision itself. The HSE favours a two-level process in which the dispute is considered by:
- a principal inspector with operational experience (level one); and
- if unresolved, an HSE senior manager (level two).
Where a dispute is not upheld, the HSE is proposing to recover the costs of the dispute, "to focus on assisting dutyholders with genuine disputes". Where a dispute is upheld, the costs will "either be offset against any outstanding HSE invoice (if applicable) or refunded in full".
The HSE's costs for an appeal will be the standard £133 hourly rate multiplied by the number of hours taken to resolve the dispute. The impact assessment assumes a query or dispute should not require more than two hours of a dutyholder's time: using £29.20 for the cost of a company director's time, the cost should therefore be less than £60 (whereas the cost for the HSE is £266, based on £133 an hour).
Currently, there is no external appeal against the senior manager's decision. MacDonald told HSB that the HSE is keen to consider practical alternatives and accepts that the system needs to be perceived as "robust and fair". He points out, however, that while third-party involvement in an appeal would provide independence, it would also bring further costs. He added that the HSE would consider HSB's suggestion - if there are submissions to this effect - that the HSE should not impose the costs of an unsuccessful appeal on the appellant if the appeal is reasonable or raises important issues.
Box 5: Major hazard recovery The HSE currently recovers most, or all, of its costs for regulating licensed nuclear sites, offshore gas and oil production, and for certain onshore chemical manufacturing and storage sites under the Control of Major Accidents Hazards Regulations 1999 (COMAH). The HSE's preferred option will not change this situation, except it will result in cost recovery for material breaches of all health and safety law at:
There are no proposals "at present" to allow the HSE to recover costs arising from off-site emergency planning at COMAH sites. |
Incentive for employers to improve standards
As well as bringing in much needed revenue, cost recovery will also result in negligent employers paying more for their material failures. Employers pick up a considerably smaller bill for their health and safety failures than society does; indeed, the HSE notes that "a pure cost-benefit calculation on the part of the employer would, in many cases, lead to health and safety management choices that would not be optimally 'efficient' for society as a whole." The HSE adds that cost recovery will help "provide a level playing field for dutyholders that comply with the law, making it less likely that they will be undercut by those who lower their costs by not doing so".
The HSE also hopes that a fee for intervention will "improve health and safety standards, by increasing the incentive to improve for those who do not comply with health and safety legislation". The HSE has not, however, been able to quantify the benefits from the avoidance of work-related injuries and ill health. MacDonald cautions that while he is confident the threat of costs could be helpful in expediting remedial action once an inspector has found a material fault - "another facet of getting it right and putting it right quickly" - there is less evidence of the potential of cost recovery to provide a more general incentive.
The HSE attributes its optimism around incentives to behavioural theory that people: are influenced by "the way choices are presented to them; care more about losses than gains; and care about fairness and reciprocity". Loss aversion, the HSE argues, would therefore "make cost recovery a particularly powerful incentive to improve, as even if the expected value of what would be recovered from any individual dutyholder is low (considering the low chance for a particular dutyholder of receiving an inspection), the aversion to suffering the immediate losses resulting from the intervention finding a material breach would provide a strong incentive to comply with the law. This proposal would also satisfy individuals' preference for situations that are fair. Those that comply would not be affected by this proposal, other than by seeing that competitors, who are gaining competitive advantage, are paying the costs of their regulation."
The HSE refers also to a forthcoming research report on the feasibility of using economic instruments and incentives to "internalise" the costs of health and safety by linking health and safety management with insurance premiums, subsidies, taxes and tradeable permits. Internalising some of the "existing externalities" by increasing the costs to employers of breaching their legal obligations would, states the HSE, mean "the expected cost of breaking the law would increase, providing incentives for better health and safety standards." Recovering costs might, hopes the HSE, contribute to this internalisation.
How much will HSE recover?
There are, however, unquantifiable and uncertain factors that are likely to reduce the amount of money the HSE recovers or the net benefits. These, the HSE states, include "potential changes to inspector and business behaviour, the level of familiarisation, the extent of challenge to invoices, the level of bad debt, and the speed with which the new systems will bed in. These uncertainties will be addressed through consultation, continued analysis of available information, and a 'dry run' test of the proposed cost recovery scheme."
Thus, should the incentive effect above work, HSE revenue might as a result fall: "Depending on how effective an incentive to improved compliance cost recovery proves to be, this could affect our estimates of how much would be recovered. The stronger the incentive, the more health and safety standards would improve, but at the same time the fewer material breaches would be found in inspections and investigations, and the fewer costs would be recovered."
There are also unquantifiable potential costs: although the consultative document does not explore in detail the possibility that charging could change for the worse the relationships between inspectors and dutyholders, MacDonald told HSB the HSE had considered the potential for this eventuality when formulating its proposals. The current relationship, he says, is a broad church, with action ranging from informal advice to formal enforcement. The HSE is also "aware" that relationships will be harder if organisations perceive the charging as unfair. "What we don't want is for employers to bury or suppress problems. These are not illegitimate fears and the HSE is well aware of them; we hope that such fears will be dispelled when businesses see that inspectors' proportionate approach and risk-based decision making is unchanged by charging."
MacDonald also rejects the notion that the proposals will have a particularly negative effect on small and medium-sized businesses (SMEs), rendering engagement more difficult; put simply, paying an HSE bill for a few hours' work is likely to be disproportionately problematic for an SME compared with a large organisation. Engagement with SMEs, MacDonald points out, "spans a range of methods", with increasing amounts of information online, "and this is as much a relationship as visiting them". He adds that while there is no direct relationship between small size and risks, it should be a "simple process for most SMEs to identify and rectify shortcomings, and they will not want to make this a long, drawn-out process". The HSE, MacDonald insists, "wants to see swift material actions". The ability to pay will not, he emphasises, be a factor in the HSE's decision to recover costs.
Box 6: Other charging possibilities In addition to the fee for intervention proposals reviewed in this feature, the HSE is also considering the possibility of charging for non-statutory advice. Gordon MacDonald, the HSE's fee for intervention programme director, told HSB that the HSE is "exploring these options on a number of fronts and will develop a policy framework". There is, he says, a "need to narrow down the options". He cautions that the HSE does not want an "open for business" sign and that it needs to work its proposals through in the context of its priorities, ie "it will not go down the route of doing something merely because it brings in revenue." There may, however, be some instances where charging for advice might facilitate improved health and safety outcomes. He cites, as an example, the submission by a property developer of a proposal for a development near a major hazards installation. The HSE's advice to the local authority may be "against" but, if it could charge for its advice, it may be able to sit down with the developer and explain how the risks could be mitigated. This process, he emphasises, is "deceptively simple" and the HSE needs time to work through it. |
Potential changes in HSE inspector behaviour
The HSE notes too some uncertainty about the estimates of the percentage of HSE activity - and particularly the number of proactive inspection days in FOD - that will be linked with material breaches. The estimate is based on a sample of 600 investigations and inspections from a year when the sector mix for preventive inspections was different to what it will be in 2012.
Uncertainty also rises from potential changes in inspector behaviour. "The assumption underlying the current impact assessment is that inspectors will continue to behave as they have in the past, in terms of the enforcement decisions they make faced with a given situation. However, it is possible that the knowledge that costs will now be recovered from dutyholders found to be in material breach may affect the decisions inspectors make." Conversely, it is possible that the recovery of costs might mean "regulators work in a more efficient way, spending only as much time as strictly needed on a particular intervention. This would allow more investigations to be carried out, potentially improving health and safety standards."
The HSE is addressing these scenarios in its implementation plan: "Special attention will be paid to performance management and assurance programmes to ensure decision making is in line with the "Enforcement management model" and the principles of the "Enforcement policy statement". We plan to use the 'dry run' test to assess the extent and nature of any behavioural change in practice."
Implementation timetable
MacDonald told HSB that the HSE's senior managers have been talking throughout 2011 to its inspectors and other staff about expanding cost recovery; staff have also been exchanging views on the intranet site, and the HSE is now developing guidance and looking at its training materials. "There is," MacDonald acknowledges, "a spectrum of views and concerns, but also a recognition that the decision has been taken and an acceptance of the underlying arguments."
The consultation exercise ends on 14 October; the same month will see the start of the two trials ("dry runs") in the HSE's southeast and northeast regions. The trials will look at:
- the back-office work in terms of how the inspectors will input the paperwork for invoices and how the HSE will raise and process the invoices; and
- the reactions of those charged (although no money will actually change hands in the trials).
At the same time, officials will examine the responses to the consultative exercise and present a paper to the HSE Board by the end of the year. Subject to ministerial approval, the proposals will be included in the Health and Safety (Fees) Regulations - an annual measure made under s.43(2) of the HSW Act that sets tariffs for certain types of work undertaken by HSE inspectors. In the past, this has been restricted mainly to specific major hazards industries and some licensed or approved activities; the 2012 Regulations will additionally place a duty on the HSE to recover the costs of its regulatory activity under health and safety law. The Regulations - and fee for intervention scheme itself - should come into force in April 2012. The HSE advises that it "is not expecting to engage in a wide-ranging campaign communicating the scheme".
Howard Fidderman is a freelance journalist and editor of HSB.
