On Friday 14 September 2012 Business Secretary Vince Cable announced potentially far reaching proposals to reform employment law.

These proposals, if enacted, could see significant changes to the value of unfair dismissal claims and the process for settling disputes before Tribunal.

The government has therefore launched a consultation on the following issues:

Unfair dismissal compensation

Currently, there is a cap on unfair dismissal compensation of £72,300. The consultation proposes to reduce this to either:

  • between one and three times median annual salary (currently £25,882 to £77,646);
  • 12 months net salary; or
  • The lower of the above two figures.

The stated rationale for this is that increases in the compensatory award have been disproportionately high in the last 12 years and have significantly exceeded inflation.

A lower cap on compensation will be welcomed by employers as it could lead to a reduction in the awards to employees. However, the impact may not be significant in the majority of cases, since the current average award for unfair dismissal is only £8,924. Therefore, the real impact is only likely to be felt by high earning employees if the outcome of the consultation is that compensation will be linked to median salary.

In addition, a reduction in the cap on compensation could lead to employees bringing additional claims for discrimination, or whistleblowing, for which there is no cap on the compensation that can be received.

Settlement agreements

The government is keen to encourage the settlement of employment disputes. A consultation has therefore been launched on how to make entering into settlement agreements easier. Proposals include:

  • having an ACAS approved model settlement agreement with guidance notes for employers;
  • introducing a "guideline tariff" to help parties set the 'right' amount for a settlement agreement;
  • giving more freedom for employees and employers to discuss terminating the employment relationship without those discussions being used as evidence in a subsequent unfair dismissal case.

Making it easier for employers to discuss the possibility of dismissal will no doubt be helpful. However, it will be interesting to see how the government approaches the "guideline tariff". It is difficult to see how any tariff will be able to accurately reflect the huge variety of individual circumstances which lead an employer to consider terminating the employment relationship.

As such, there is potential for the "guideline tariff" to give employees unrealistic settlement expectations, particularly where the employer would otherwise be in a strong negotiating position.

Employment Tribunal reform

A new consultation has also been launched on the Employment Tribunal system, with a particular emphasis upon discouraging unmeritorious and vexatious claims by employees. Amongst these proposals is a suggestion that a "paper sift" stage could be introduced at the Employment Tribunal. The "sift" would enable Judges to immediately dismiss claims that were clearly unlikely to succeed without the need for an employer to lodge a defence.

In addition, whilst the press release does not address this point specifically, it remains clear that the government will press ahead with the proposal to introduce Employment Tribunal fees.

Further details of this can be seen in our July update (see Related publications).

In addition to these new proposals, the government has also clarified its approach on a number of other areas of potential reform:

  • The concept of "no fault" dismissals for small businesses will not be introduced. All employees with the requisite service will therefore remain entitled to bring claims for unfair dismissal.
  • Consideration of the breadth of TUPE is still ongoing and we can expect further announcements on this in the future.