Legal opinion: Reform of compensation for unfair dismissal

Christopher Fisher and Purvis Ghani from law firm Mayer Brown look into the proposal to give the Secretary of State for Business, Innovation and Skills the power to change the compensatory award for unfair dismissal.

Against the backdrop of the controversial Beecroft report proposals and pressure to deliver an effective economic growth strategy, the Government recently published its Enterprise and Regulatory Reform Bill. The Bill contains a number of employment-related measures aimed at creating “strong, sustainable and balanced growth” in the UK economy. While the proposed changes to compromise agreements, dispute resolution, fines on employers and whistleblowing claims have been widely reported, arguably, the most significant measure in the Bill is the proposal to give the secretary of state power to change the compensatory award for unfair dismissal.

The Bill provides the secretary of state the power to change the maximum compensatory award for unfair dismissal, which is currently £72,300, to:

• a specified amount, which must be within one and three times the national median earnings (median earnings in 2011 were in the region of £26,000);
  
• a specified number of weeks’ pay, which is not less than 52 weeks; or
  
• the lower of the above two figures.

Employment tribunals have a wide discretion to use compensatory awards to compensate employees for their loss, based on what is just and equitable. Within the statutory cap, tribunals are entitled to look at a wide range of considerations including loss of pension rights and loss of immediate and future earnings.

Depending on where any new cap is set, the implications could be significant. For very high earners, if a cap of 52 weeks’ pay or more were implemented, awards could obviously go up (compared with awards currently capped at £72,300), although such executives will still be under a duty to mitigate their losses. So, if they have lengthy notice periods, an additional year’s pay for unfair dismissal is unlikely.

Conversely, if the cap were revised down to a single multiple of median earnings, then lower and mid-level earners would lose out. Unlike the high earners, these employees’ notice periods are less likely to provide significant compensation in themselves and would currently look to the unfair dismissal award to cover their additional losses. In the current economic climate, claims for a year’s future loss of earnings are not unusual, but a cap of £26,000 will not come close to providing that level of compensation for many.

One thing seems certain if the cap is revised downward to any significant degree. While unfair dismissal awards may go down, employees will be all the more encouraged to look for claims where the cap will not apply, such as discrimination claims, particularly given the fact that such claims will also not be subject to the recently extended qualifying period for unfair dismissal claims (two years’ service for joiners after 5 April 2012).

It is also worth noting that, under the current proposed measures, there is the possibility of setting different maximum compensatory awards for different employers. There is currently no guidance on the basis for which such decisions would be made by the secretary of state; it could be anything that can distinguish an employer, such as size or industry sector. As such, there is a possibility that the cap for certain sectors, in which wages are often markedly different to the national average, may not be limited in the same way. There is, however, no certainty of this, and given the Government’s intentions behind the Bill are focused on business growth, there may be good reason to assume that the approach will be consistent for all employers.

Christopher Fisher is a partner and Purvis Ghani is a senior associate in the employment group at Mayer Brown