Government proposals to regulate contingency fees will drive lawyers out of the market and leave 500,000 people a year without legal representation, employment lawyers have warned.

Draft regulations published this month by the Ministry of Justice propose a 25% cap on the proportion of a client’s damages a legal representative can take as payment.

The regulations will force legal advisers to be more transparent about how charges are calculated, what the client’s liability for expenses will be and what other funding options are available. The proposed rules will also allow the client to withdraw from a contingency fee arrangement at any time, provided they pay the legal representative’s ‘reasonable costs’.

Julie Morris, employment partner at national firm Russell Jones & Walker, said the proposals were a response to the perceived abuse of contingency fee arrangements in multi-party actions. However, she said lawyers bringing large-scale multi-party actions often took only 25% of compensation as payment, and would therefore be unaffected by the cap, whereas lawyers dealing with individual actions were typically paid 33% of compensation, and sometimes up to 50%.

‘The 25% cap on damages payable as fees is too low for individual actions,’ she said. ‘Employment discrimination claims are very subtle to prove and many fail. You need a bigger success uplift to compensate for the cases you lose – or face going out of business.’

Kerry Underwood, senior partner at Hertfordshire firm Underwoods, said: ‘The 25% cap will kill off the market overnight and leave a vulnerable section of the community deprived of access to justice.’

He said that, according to Employment Tribunal Service figures, 160,000 claims were issued each year and many more settled prior to issue. ‘This adds up to 500,000 people a year, many of them bringing sex, race and disability discrimination claims. All of them will go unrepresented if the proposed cap is enforced.’

Sole practitioner Dean Morris, of West Midlands firm Morris Legal, said 90% of his employment work is carried out under a contingency fee. Non-lawyer competitors could undercut him because they have fewer overheads, he said. ‘As lawyers, we have all the additional costs of indemnity, continuing professional development, practising certificates and regulation,’ he added. ‘Capping our work at 25%, with the high proportion of cases that are lost in tribunal, will drive us out of business.’

Employment Lawyers Association spokesman Stephen Levinson said: ‘The new proposals will bring in regulation for all, but how will it be enforced? These other providers have no professional body like the Solicitors Regulation Authority. There should be a level playing field in the interests of consumers, with the same rules applying with equal rigour to everybody.’

An MoJ spokesman said the government was addressing the lack of regulation in damages-based agreements to protect consumers.