Unfair dismissal plans likely to make paying off senior managers more affordable
Consultant editor Darren Newman explains why paying off underperforming senior managers could become an attractive option under the Government’s plans to reduce the maximum unfair dismissal compensatory award.
By now we should be getting used to well-trailed announcements of employment law reforms that turn out to be less extensive than advertised. On Friday 14 September 2012, Business Secretary Vince Cable announced measures to “streamline employment law”. This turned out to be something of a re-hash, with most of the measures having already been published in the Enterprise and Regulatory Reform Bill or set out in earlier consultations. Once again, the internal pressures of the coalition have led to a mismatch between the rhetoric used and the measures proposed.
On TUPE, for example, the Government has responded to the initial call for evidence on reform, but not with any actual proposals. There will now be a further period of stakeholder engagement and consultation. I suspect that we can now put this subject to bed for the remainder of this Parliament. Time is running out and it is unlikely that any new proposals could be formulated, drafted and implemented before the next general election.
I want to focus on two areas (already dealt with in the Enterprise and Regulatory Reform Bill) where change is certainly coming: compensation for unfair dismissal and the promotion of “settlement agreements”. When the Bill was initially published, little emphasis was placed on the new powers to review the compensatory award for unfair dismissal. In this latest announcement, however, they take centre stage. Although technically all that has been announced is another consultation exercise, it is clear that the Government is looking to reduce the maximum compensatory award payable. It is proposing that, in line with the Bill, there will be a new cap of 12 months’ pay or a fixed sum (whichever is the lower). The level of that fixed sum will be decided after consultation, but it seems likely that it will be toward the lower end of the scale permitted under the Bill and could be as low as £26,000.
Since the lower of the two limits would apply in each case, an employee who earned £35,000 could recover a maximum of £26,000 through the compensatory award, and an employee who earned £18,000 could recover £18,000. However, the Government is at pains to stress that most cases already result in awards that are considerably less than the new limits being discussed. Its argument is that this is not about cutting compensation, but about encouraging more realistic expectations on the part of claimants.
While it is true that the median award for unfair dismissal is below £5,000, this does not tell the whole story. Cases that get as far as an award of compensation by an employment tribunal are atypical. Most cases settle before this point, and we have no way of knowing how many cases settle with an immediate pay-off without a tribunal claim even being brought. It is on these cases that the impact of the cut in compensation will be felt most.
Let’s assume that an employer wants to dismiss a senior manager who earns £85,000. Of course, that can be done fairly and with no pay-out at all, provided that there are reasonable grounds and the employer follows the appropriate procedure. However, dispensing with this would be an expensive route to take. Under the current arrangements, an unfair dismissal compensatory award of £72,300 would be perfectly achievable for the manager. Any compromise agreement would probably have to be of that order of magnitude in order to persuade the employee not to proceed with a claim. The employer might be willing to pay this, but the law as it stands is a deterrent against the unfair dismissal of senior managers.
However, if, as seems likely, the maximum unfair dismissal award becomes the lower of £26,000 or one year’s pay, the situation would be radically different. The approximate amount that the employee in our example might expect to receive under a compromise agreement would be £26,000, less than six months’ pay, making it much more affordable. The reduced compensation limit would also make bringing an unfair dismissal claim a much less attractive option for the manager.
The result of a dramatic cut in unfair dismissal compensation along the lines being proposed will effectively be to take a large swathe of professional and managerial staff out of the scope of unfair dismissal law. It won’t necessarily reduce tribunal claims, but it will make a lot of managers and professionals considerably less secure.
This is perhaps the context in which we should see another reform contained in the Bill: the promotion of “settlement agreements”. Leaving aside the new name for “compromise agreements”, the important change is the extension of the “without prejudice” rule to allow employers to make offers of settlement to employees on a without prejudice basis even when there is (as yet) no dispute between the parties. The Government is consulting on how such offers can be made without “improper” conduct on the part of employers, and Acas is to produce a code of practice on the issue. At least, that is the plan: it will be interesting to see what sort of guidance the Acas council, which contains both employer and trade union representatives, will feel able to endorse.
There is something about the Government’s emphasis on paying off underperforming employees that sits uneasily with the Acas ethos. Surely the focus should be on good performance management and fair treatment rather than simply giving employees money to go away quietly. The fact that the Government is also planning to reduce the amount of money that employees can expect to be given in such circumstances only serves to add to the sense of unease that I’m sure many at Acas will feel about this proposal. I predict that the drafting process of this new code of practice will be somewhat fraught.
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