Why the employment law review won’t work

September 18, 2012

–Ben Stepney is a solicitor in the Employment Team at Thomson Snell & Passmore.–

The most significant of Business Secretary Vince Cable’s 14th Septmeber proposals as part of the government’s Employment Law Review is the dropping of “no fault dismissals”, as proposed by Adrian Beecroft in his government commissioned report. This would have enabled small businesses to bypass the unfair dismissal rules by making a relatively modest compensation payment to the employee, which could have seriously undermined the relationship of trust and confidence necessary for an effective employment relationship, as employees would know that they could lose their job at a moment’s notice without the employer being required to have a valid reason for doing so.

The consultation proposes to reduce the cap on compensation awards in unfair dismissal claims, currently £72,300. It proposes reducing it to 12 months’ pay. The consultation acknowledges that there are very few unfair dismissal awards that exceed the average annual wage, so few individuals would be affected by the change. If this is the case, then the proposed change is going to make little difference except to restrict access to justice in those cases where an employee may justifiably be entitled to compensation in excess of a year’s pay.

The government wants to encourage greater use of compromise agreements, which are to be renamed ‘settlement agreements’. The government will give employers greater freedom to have discussions with an employee about terms on which their employment can be terminated by making evidence of such discussions inadmissible in unfair dismissal cases.  Although the employee is not obliged to agree to any offer made, I cannot see how an employment relationship can continue after such a conversation has taken place. Having been told by the employer that it is willing to pay them to leave, the employee will be left feeling demotivated and insecure about their job.

This reform does not deal with employers’ complaints about not being confident in knowing what they can and cannot do when ending the employment relationship. Instead it will effectively normalise, on a legal footing, what already happens often in practice, with employers choosing to ‘pay off’ an underperforming employee under a compromise agreement by offering them compensation above that which they would otherwise be legally entitled to, rather than dismissing them and paying the statutory minimum (in cases of poor performance, this is usually just notice of termination). This will not benefit small businesses who do not have the spare cash to pay the employee a lump sum compensation payment in return for the employee signing a settlement agreement.

It remains to be seen whether these changes will encourage more employers to recruit. The unfair dismissal compensation cap was significantly raised in 1999 and this did not lead to a sudden drop in recruitment. I cannot see why a proposed reduction in the cap now would lead to an increase in recruitment, as the government hopes. More use of settlement agreements will give employers a mechanism for terminating employment without the possibility of an employment tribunal claim, but this could be costly as employees will need to be offered enough money to convince them to sign up.

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