Article from Solicitors Journal:
Having found that it could not politically do away with unfair dismissal outright, the government now wants to – quietly – make it worthless, says Anya Palmer.
The government’s employment law review is now halfway into its second year. The qualifying period to bring a claim for unfair dismissal has already been doubled from one year’s service to two, from April, and there are plans to introduce fees for tribunal claims with the obvious intention of deterring claims (see ‘Fire away’, Solicitors Journal 155/38, 11 October 2011). But the business lobby – notably the British Chambers of Commerce, the CBI and the Institute of Directors – wants more.
For months now the business lobby has been pushing for the proposal by millionaire Tory donor Adrian Beecroft to replace the right to claim unfair dismissal with a no-fault compensation scheme. That proposal was rejected for political reasons in November 2011, and was replaced with a more limited proposal to introduce a no-fault scheme for very small businesses employing fewer than ten people. A consultation or ‘call for evidence’ was set up. Business secretary Vince Cable made little secret of the fact that he did not believe there was any evidence to show that making it easier to fire would make employers more likely to hire, even for small employers, but said he was willing to look at whatever evidence people put forward.
The ‘call for evidence’ was due to end on 8 June, but even before it ended the press had been briefed that the small business proposal would not go ahead. On 21 May the government finally published the Beecroft report, apparently forced into doing so by freedom of information requests from The Guardian and shadow business secretary Chuka Umunna. By the time it was published, the political correspondents were reporting that the no-fault dismissal proposals would be quietly shelved (in theory they had already been shelved back in November for all but the small employers). The outcome: Vince Cable and Nick Clegg got to look good for standing up for workers’ rights, and the Tories got to salvage some of the damage done by Downing Street, having secretly commissioned this report from a major Tory donor in the first place. The press then lost interest. The dogs bark, but the caravan moves on. Is that an end to the matter? Hardly.
On Thursday 24 May the government quietly published the Enterprise and Regulatory Reform Bill, which deals among other things with employment law reform. The bill contains a number of dubious proposals for employment law procedure. For example, it proposes compulsory conciliation by ACAS before any claim can proceed. Any employment lawyer with more than three years’ PQE can tell you that this will not deter claims any more than compulsory grievance procedures did between 2004 and 2009, and will simply increase costs. But I want to focus here on the proposed changes to compensation for unfair dismissal, because my concern is that, having found it politically impossible to simply do away with unfair dismissal, the government wants to gradually make it worthless instead.
An employee who is dismissed, provided they have two years’ service (there is no service requirement if they can prove discriminatory dismissal but I am talking about ordinary unfair dismissal). If they establish unfair dismissal, there are two elements to the award that they will get: a basic award and a compensatory award.
The basic award is equivalent to a redundancy payment. It is not high: this year it is a week’s pay capped at £430 for each year of service aged under 41 and £615 for each year of service aged over 41. The number of years of service is capped at 20. The minimum award is £860 for two years’ service, and the maximum possible award is £12,090.
Compare this to many countries in Europe where a redundancy or dismissal payment will be a month’s pay (or even 1.5 months’ pay), uncapped, for each year of service and it is readily apparent why it is said that Britain actually has one of the most flexible labour markets in the developed world.
The compensatory award is based on loss of earnings and is currently capped at £72,300. Large awards are rare – the median award last year was only £4,600. But for an employee who does suffer substantial loss and can prove it, their loss is arbitrarily capped at that amount.
It is obviously unfair that compensation for unfair dismissal is capped at all. A claimant who wins their discrimination case does not have their compensation arbitrarily capped. Nor does a claimant who wins a personal injury claim. So why should compensation for ordinary unfair dismissal claims be capped? But capped they are.
In 1998 Labour set out a principled case for removing the cap in a white paper called Fairness at Work, but the business secretary at the time, Peter Mandelson, backtracked and compromised by raising the cap from one arbitrary figure (£12,000) to another arbitrary figure (£50,000) and index linking it. That is the origin of the current figure of £72,300.
The government is consulting on a wide range of measures as part of the employment law review, but there has been no consultation on changing the level of compensation. The proposal to reduce compensation simply appeared unannounced in clause 12 of the Enterprise and Regulatory Reform Bill.
Proposed power to reduce compensation
Clause 12 provides that the secretary of state may by statutory instrument vary the limit of the compensatory award to be:
(a) a specified amount of between one and three times median annual earnings; or
(b) a specified number of weeks’ pay (but not less than 52) – or the lower of the two.
Median annual earnings are currently £26,000, so, assuming whole numbers are used, this would give the secretary of state power to limit compensation to either £26,000, £52,000 or £78,000 under limb (a), or to limit it to a specified number of weeks pay (at least a year) under limb (b), or to apply the lower of the two if both (a) and (b) are used.
To set the cap at £26,000 would in real terms be returning it almost back to where it was in 1999 when the Labour government raised it.
Logically I assume that this government intends to go for the lower limits and to use both limits and the ‘lower of the two’ provision so that in short order compensation can be reduced from its present level of £72,300 to, for example, £26,000, or a year’s salary if less (as £26,000 is the median, nearly half the population would earn less than that so the limit would then be even lower in their case).
If that is done then someone earning £52,000 would not be able to recover more than six months’ loss even if it reasonably takes them nine months to find another job. And someone earning £20,000 could not recover more than £20,000 even if they reasonably suffer a £26,000 loss.
This is about as arbitrary as it gets, and the ‘lower of the two’ provision makes it perfectly clear whose side the government is on here. No principled case has been advanced for empowering the government to impose these arbitrary limits.
Clause 12(3) provides that the amount of the limit in limb (a) may vary in relation to different descriptions of employers. So it may be that there will be a compromise for the lifetime of this government: compensation could be limited to three times median earnings for large employers, two times for medium employers and a multiplier of one for small employers. However, given the direction in which the Conservative party’s sympathies lie, it’s not unreasonable to suppose that if they were to win the next election they would simply reduce the limit across the board.
The Enterprise and Regulatory Reform Bill was due to have its second reading on Monday 11 June. So far this proposal has passed entirely without comment in the national press, with the exception of a piece I wrote for the (online only) Guardian Law. Apart from that there has been no coverage even in the legal press until now. The government has not been called on to defend this proposal. We do not even know if Labour will oppose it. Chuka Umunna was very vocal on Twitter about no-fault dismissal, so I asked him on Twitter where he stood on these proposals. He has not replied.
A concrete example
To give an example of why the arbitrary cap is so unfair, let me give you the example of a case I did in 2004. The claimant was a lift engineer who had worked for his employers for 38 years, since 1965. He was unfairly blamed by his employers for an accident which was nothing to do with him. The tribunal’s findings were clear. He was blameless. The tribunal ordered reinstatement. The employer refused to reinstate him.
The claimant did an excellent job of mitigating his losses, setting up as self-employed so that his loss of earnings was minimal. But he could not mitigate the damage to his final salary pension scheme. His net losses were valued at £121,000. The tribunal was only able to award him £53,500 (the limit at that time). To add insult to injury he had to pay tax on his award to the extent that it exceeded £30,000.
I would be interested to know what justification Nick Clegg or Vince Cable can offer for agreeing to extend this arbitrary cap, other than the obvious one that it helps keep them in government.