Compensated no-fault dismissals: the case for and against

In March 2012, the coalition Government issued a call for evidence on making the dismissal process “simpler, quicker and clearer” and introducing “compensated no-fault dismissals” for micro-businesses.

Michael Bradshaw, employment partner at Charles Russell, outlines the compensated no-fault dismissal proposal and considers arguments for and against the suggested reform.

Compensated no-fault dismissal

Under present rules, any dismissed employee with the required service may bring a claim for unfair dismissal and require the employer to show that it had one of the five designated reasons for dismissal, followed a fair process, and acted reasonably in dismissing the employee in the circumstances.

Compensated no-fault dismissals would give micro-businesses – those with fewer than 10 employees – the option of bypassing these rules and making a prescribed payout to the employee.

An employee could, however, still bring a claim under other jurisdictions, for example, a claim for discrimination under the Equality Act 2010 or a claim for automatically unfair dismissal or detriment under the Employment Rights Act 1996 and Public Interest Disclosure Act 1998. It would still be open to an employer to dismiss an employee without it being a no-fault dismissal (and without the prescribed pay-out), under the normal rules.

Aims of the proposal

In its call for evidence, the Government identifies a “fear” that businesses have of “the burdens associated with employing someone”. It highlights a perception that “it can be difficult, time-consuming and expensive to end the employment relationship when things go wrong”. The Government believes that the introduction of compensated no-fault dismissals would tackle this and encourage micro-businesses to hire new staff.

The case for includes:

  • The proposal is limited to micro-businesses, and so does not represent a weakening of employment rights on a wider scale.
  • Managing a dismissal process takes time and know-how. In a small business, there are no HR function or layers of management to support this.
  • Similarly, in a micro-business the impact of anyone not delivering is magnified and the business owner should be able to take prompt action to deal with it, and protect the business’s interests.
  • A claim for unfair dismissal can now result in an award of up to £85,200 (the maximum basic award is £12,900 and the maximum compensatory award is £72,300) and this could be very significant for a small business. Chancellor George Osborne spoke of the right to start a business and not be “sued out of existence”.
  • The uncertainty caused by current compensation principles, where an award will depend on a range of factors, which may change over time, in itself fuels disputes.
  • Other European jurisdictions, such as Germany, have similar rules.

The case against includes:

  • The proposal is quite limited and employees could still bring claims for discrimination and automatically unfair dismissals. The Government’s call for evidence confirms that more than half of the unfair dismissal claims brought include such additional elements.
  • In fact, the rules may push employees towards such claims to seek a better payout. These could put a business out of existence. They are more complex and costly and there is no cap on awards.
  • There will be cases and disputes on whether or not a dismissal falls within whatever rules are drafted.
  • Employers, including micro-businesses, have a period of at least one year (or two years if the employee commenced employment on or after 6 April 2012) to assess an employee and dismiss him or her without facing a basic unfair dismissal claim.
  • The principle of assessing the fairness of a dismissal in the context of the particular business is there already, so matters of limited resources and the greater impact of misconduct and poor performance can be accommodated.
  • While George Osborne spoke of the right not be “sued out of existence”, and it is correct that a successful claim for unfair dismissal can result in an award of up to £85,200, the Government’s call for evidence states that the median award in unfair dismissal cases in 2010-11 was significantly lower, at £4,591.
  • The Government’s call for evidence states that the UK is ranked second in the world for ease of dismissal of individual employees; and it also shows that more small employers agree that currents laws are fair than disagree. The document also sets out a table featuring the top 10 regulations deterring businesses from taking on staff. However, the law relating to unfair dismissal is conspicuously absent.
  • It may reduce the appeal of working for small employers, as doing so would entail accepting eroded employment rights. Candidates may opt to take or continue employment with larger employers.


The Government’s call for evidence is expected to deliver views in two distinct camps – small employers and business groups for and employee groups against. Yet, the statistics in the call for evidence do not point to such a strong voice in favour of change among small businesses. The results of a recent government-commissioned survey show that, apart from sole traders, micro-businesses tend to recognise current employment rules as “fair and proportionate”.

Perhaps most significantly, the qualifying period for basic unfair dismissal protection is now two years, if the employee commenced employment on or 6 April 2012. This effectively grants employers – of all sizes – the right to dismiss without fair reason or fair process in this time, as long as they avoid prohibited grounds. It has to be asked what legislation for no-fault dismissals can add to this. Will new rules, which in turn will generate case law on the scope of such rules, really be justified? Employees would still be able to bring other claims even where a compensated no-fault dismissal is used by the employer.

If nothing else, it is political statement and one that prompts a debate on what our labour laws should look like and which rights be should be regarded as fundamental.

XpertHR provides details of the Government’s proposals on simplifying the dismissal process and introducing no-fault dismissals and the Government’s other employment law reforms.

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