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New cap on unfair dismissals

11 March 2013

The government’s project to roll back employment protections, in a bid to help struggling businesses in a difficult economy, continues apace.

The Enterprise and Regulatory Reform Bill is expected to receive Royal Assent this spring. It will place a cap of twelve months’ pay on an unfair dismissal compensatory award for amounts less than the current statutory cap of £74,200. Successful claimants will still be awarded a ‘basic award’ in addition, if they have not already had a statutory redundancy payment.

Although this solution does provide greater certainty for both parties in the employment relationship, which was the government’s stated aim, it seems an opportunity missed. A cap at the level of national median pay, currently £26,000, had previously been mooted. This would arguably have created more employment opportunities by giving employers the confidence to engage staff in the knowledge they will not be saddled with an expensive severance bill should the relationship not work out.

The forthcoming changes will have little effect in most cases, since it is unusual for a claimant to be awarded more than a year’s future loss of earnings, despite awards having risen in recent years due to the difficult jobs market.

Because of this, a year’s pay is a common starting point for employees in their severance negotiations with employers. Therefore, the new cap is unlikely to have any great effect in facilitating severance negotiations, other than to limit the expectations of some departing employees who might otherwise have made exorbitant demands. Such employees are, however, still likely to try to raise the bar by alleging discrimination, whistleblowing, or other circumstances for which compensation is not capped.

Senior employees are unlikely to be affected as a year’s pay for them is likely to be in excess of the current statutory cap of £74,200. These higher earners will continue to rely more on their breach of contract claims – for notice pay, bonuses and suchlike.

It does seem high time that the £25,000 cap on tribunal awards for breach of contract is lifted. Larger claims can of course still be pursued in the civil courts, however the stakes are much higher both for employee and employer, as the loser will end up paying the majority of the winner’s legal costs (unlike in the employment tribunals).

Business secretary Vince Cable has made it clear he does not intend to implement Adrian Beecroft’s idea of ‘compensated no-fault dismissal’. However, the new legislation will make it easier for employers to instigate severance negotiations. Employers often feel nervous about raising the subject of severance for fear of triggering a constructive dismissal claim. Characterising a proposal as ‘without prejudice’ will not help you, unless there is already an existing dispute you are trying to settle.

The new legislation will render an offer of settlement inadmissible as evidence to an employment tribunal in any subsequent unfair dismissal claim – effectively extending the existing ‘without prejudice’ regime to situations where no formal dispute has yet arisen. This is not a remedy though; the fact that settlement has been offered will still be admissible evidence in a breach of contract claim. The new rule is also less useful for senior executive severance.

The new legislation will also introduce a template ‘settlement agreement’, which will be effective to waive employment claims once an agreement has been reached. This non-compulsory template may suffice in simple cases, but we foresee a need for legally drafted agreements in more complex cases. This is particularly so for senior employees, where there may be future contingent payments, restrictions on competitive activity, and so on.

As always, if you need commercial and pragmatic employment law advice, we’re here to help so please get in touch.

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Matthew Clayton MA LLM (Cantab), CIPP/E
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Mathew Clayton
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