Government targets “compensation culture” by reducing caps on unfair dismissal awards

Out-Law News | 17 Sep 2012 | 11:37 am | 3 min. read

The Government’s latest announcements on employment law reform, including a major reduction in the level of compensation that can be awarded if a worker is successful in bringing a claim for unfair dismissal, target the “compensation culture” that the current system encourages, an expert has said.

Employment law expert Christopher Mordue of Pinsent Masons, the law firm behind, said that the overall package of reforms that has emerged in the past few months has ultimately shown a “significant tightening” of the laws relating to unfair dismissal. Previous announcements have seen the length of time a worker must be employed for before being eligible to bring an unfair dismissal claim doubled to two years and the introduction of fees to bring a case to an employment tribunal from next year.

“At the moment access to the tribunals is free and employees often have unrealistic expectations of how much they are likely to be awarded if their claim succeeds,” Mordue explained. “This not only encourages claims but frustrates attempts to settle cases at realistic levels. Capping compensation for unfair dismissal is intended to reset these expectations around large payouts and encourage claimants to focus on settlement by making it less worthwhile for them to pursue a claim to a conclusion.”

The average unfair dismissal award made by tribunals tends to be between £5,000 and £6,000, Mordue said, “massively below” the current maximum award. This meant that in practice the actual impact of the seemingly “radical” proposals would be limited.

The Government is consulting on two ways the compensation cap, currently £72,300, could be reduced: either an unspecified smaller upper limit or a cap of up to 12 months of the dismissed worker’s pay. The consultation also considers how settlement agreements, allowing employers and their workers to end employment relationships in a “fair and consensual” way, could work in practice; while a further consultation contains proposals to streamline employment tribunals and make it easier for judges to dismiss weak cases before they proceed to a full tribunal hearing.

Business Secretary Vince Cable said that the latest announcements would make it easier for small businesses to hire staff while continuing to protect workers’ rights.

“Our starting point is that Britain already has very flexible labour markets,” he said. “That is why well over one million new private sector jobs have been created in the last two years, even when the economy has been flatlining. But we acknowledge that more can be done to help small companies by reducing the burden of employment tribunals, which we are reforming, and moving to less confrontational dispute resolutions through settlement agreements.”

Settlement agreements, also known as ‘compromise’ agreements, are already available to employers in some circumstances. The Enterprise and Regulatory Reform Bill, currently before Parliament, extends their use and legally protects any offer or related discussions from being used as evidence in a future unfair dismissal tribunal. Under the new system Acas, the publicly-funded conciliation service, would provide a code of practice on how the agreements will work.

However, employment law expert Christopher Mordue said that the new proposals came across as “a flawed solution to a problem which doesn’t really exist”. A new statutory code of practice would, he said, introduce the risk of “a new level of legal bureaucracy” into everyday HR conversations with the potential for additional disputes between employers and workers over whether the rules had been followed.

“The idea of the reforms is to make it easier to offer employees an exit package without that offer being used against them in subsequent legal proceedings if it is not accepted,” he said. “These conversations are already typically protected by the ‘without prejudice’ rule - the proposals are aimed at closing a small loophole where these discussions are not protected if there is no dispute between employer and employee when the offer is made. That is not a real or insurmountable problem for employers in practice and hardly a burning issue crying out for reform.”

He added that, as the proposed protection only applied in relation to unfair dismissal claims, offers could still be relied on as evidence that the employer was discriminating against the employee - for example, that the employer was trying to get the employee to leave because of previous allegations of discrimination or ‘whistleblowing’ disclosures.

“The same problem also applies to conversations with older employees - if the employee argues that the employer is trying to force him or her to retire, the conversation can be relied on in an age discrimination claim,” he added. “The Government has previously positioned ‘protected conversations’ as a solution for employers afraid to tackle under-performing employees or to ask older employees about their retirement - however, this announcement effectively acknowledges that that idea was inherently flawed from the start.”

As part of the announcement, the Government also confirmed that it would not be taking forward compensated no-fault dismissal for companies with ten staff or fewer, as proposed by Adrian Beecroft in his report on employment law reform earlier this year. It also plans to consult on changes to the Transfer of Undertakings (Protection of Employment) (TUPE) rules to make them more efficient, following its call for evidence on the existing rules earlier this year.