Business Secretary, Vince Cable, has announced plans to streamline employment law intending to give firms more flexibility and confidence in managing their workforce and reducing employment law red tape.

The Government plans to consult on reducing the limit on unfair dismissal payments as well as making it easier for tribunals to dismiss weak cases. It has also taken this opportunity to pledge its support for "settlement agreements" to help end employment relationships in a fair and consensual way.

Unfair dismissal compensatory award

As things stand today, if an employee is successful in a claim for unfair dismissal against his/her employer then he/she may receive a compensatory award. A tribunal will then assess both the past and estimated future losses arising from the termination of his/her employment. The compensatory award is currently capped at £72,300 but tribunals rarely make an award anywhere near that amount. The current median award is less than £6,000 and compensation over £30,000 is awarded in only 6% of cases. Further, the full £72,300 was awarded in less than 2% of cases last year.

The Government has now decided to consult on whether to reduce the cap to either the employee's annual net salary or to another lower figure, which may be by reference to the national median average earnings (currently around £26,000). The proposals are intended to make it "easier for firms to hire staff while protecting basic labour rights". However, whilst a reduction in the compensatory award cap may be welcomed by many employers, it does not prevent an employee bringing a claim in the first place. Given that a tribunal will rarely make an award in excess of 12 months' net salary in any event, the changes may not be felt by most employers.

If an employer wishes to dismiss an employee who has obtained two years' service then it must: identify a fair reason for the dismissal; follow a fair process and act reasonably in all the circumstances. If it fails to do so then it may be faced with an employment tribunal claim. Further, even if an employer complies with its duties under UK employment law then it may still face proceedings from vexatious litigants brought with the intention of receiving a settlement payment from their employer.

The proposals do not provide any protection from such employees and employers often incur legal expenses in having to defend cases with no real prospect of success. The proposals to require employees to pay a fee before being able to pursue a claim may deter some vexatious litigants but will be unlikely to provide a complete solution. Conversely, applicants who have a genuine case may be prevented from bringing such claims and an employer will be less likely to enter into settlement discussions as it considers the risk of a claim to be low.

It is also worth noting that the compensatory cap only applies to unfair dismissal cases. Compensation is not capped where an employee can show that an act of discrimination has occurred. Therefore, more employees may argue that they have been subjected to discrimination in order to avoid the cap.

Settlement agreements

Vince Cable resisted pressure to adopt "no-fault dismissal" which was previously advocated by Adrian Beecroft. Instead, the Business Secretary supports a scheme in which it would be quicker and easier to dismiss staff using settlement agreements. However, the concept of an employer and employee reaching an agreed settlement is nothing new and many employers will already be familiar with the use of compromise agreements.

The proposals suggest that an employee will not be required to obtain legal advice before agreeing to a settlement agreement, which is currently required before an employee signs a compromise agreement. Many employers will welcome this and it will be unlikely to cause problems for the majority of departures which are often on terms satisfactory to both parties. However, some employees may be unaware of claims that they could pursue without the benefit of legal advice or feel pressured in to signing an agreement on terms favourable to their employer. A "cooling-off" period and/or an obligation to inform employees that they should consider taking legal advice, would alleviate these risks. It remains to be seen if the Government will introduce these.