Tuesday, September 17, 2013

Will it be cheaper to dismiss employees?

Cap on Unfair Dismissal Compensation Award Reduced
Where a tribunal finds that an employee has been unfairly dismissed, they make an award of compensation to the ex-employee which the employer must pay.  There are two parts to the award:

The Basic Award - this is calculated in a similar manner to statutory redundancy payments and is linked to age, length of service and pay.

The Compensatory Award - this is calculated as the loss of earnings suffered by the ex-employee due to the unfair dismissal and may include an element for future loss of earnings (which is estimated by the tribunal taking into account the evidence provided relating to the job market, etc.)

The Compensatory Award has always had a cap which has been increased each year in line with inflation.  It is currently £74,200.  However, this has now been restricted further so that it will be limited to 52 weeks' pay or the maximum cap (£74,200), whichever is lower.  The maximum cap will continue to be increased year on year, but the 52 week restriction is unlikely to be altered.

In the vast majority of cases, therefore, compensation will be limited to a year's pay. In reality most compensation awards only amount to a few thousand pounds, so there is unlikely to be much real impact.  However, this could still be good news for employers. If you ever wish to broker a settlement agreement with a problem employee (see last months update on Confidentiality of Termination Discussions), it is useful to be able to have this 52 weeks compensation backstop in mind during negotiations.  Some employees see the headline £74,200 figure and have very unrealistic expectations in negotiations in terms of what they believe to be a reasonable settlement sum.  Whilst a year's pay is still likely to be far too high in most negotiations, it at least sets a much more realistic upper limit. 

New Provisions for Settlement Agreements and Confidential Discussions

The 29th July brought new legislation into force which provides protection to employers who want to have a frank discussion with an employee about negotiating their termination of employment under a settlement agreement (formerly known as a "compromise agreement").

Previously it was quite risky for an employer to open this sort of discussion; there was always the chance that the employee would be able to claim they had been constructively dismissed, as they could argue the employer had made it clear they wanted to get rid of them.  From now on, this sort of discussion would be inadmissible in a claim for constructive or unfair dismissal. 

As you would expect, there are rules that the employer needs to follow in order to be protected, and these have been set out in a new Code of Practice from ACAS.  The key thing is that the employer should avoid confronting the employee with a "take this offer or you will be sacked" approach! 

It is worth noting also that this does not provide any protection if the employee were to claim under discrimination legislation or if they claimed unfair dismissal in a number of special cases (e.g. in relation to whistle blowing).