The limit on compensation for unfair dismissals is currently set at
£53,500. But why is there a limit at
all? To be truly effective,
compensation should be limitless
While most HR practitioners will now be familiar with the thrust of the
Government review of the Employment Relations Act 1999, (ERA), perhaps it’s
time to read the small print. The main part of the review – available on the
DTI website – deals with headline issues in collective labour law, such as
trade union recognition, and reaction to the European Court of Human Rights’
decision in Wilson and Palmer on the use of ‘sweetener’ payments as an
inducement to enter individual contracts.
In chapter five, however, there is a discussion on compensation for unfair
The ERA lifted the maximum limit on compensatory awards from £12,000 to
£50,000 (subsequently increased in line with inflation to £53,500). The
Government thinks this ostensibly large hike has proved satisfactory. It
records just a marginal increase in applications for unfair dismissal, and the
median award for unfair dismissal has risen from just £2,482 to £3,180. On this
evidence, the new ceiling affects very few claimants.
There is one caveat made to this conservative review. In the case of
reinstatement or re-engagement, an additional penalty award of 26-52 weeks’ pay
may be ordered (allowing for a maximum additional award of £13,520), but this
is hardly a dissuasive sanction. Therefore, it is suggested that employers
should suffer a significant penalty for breach of a re-employment order, as, in
effect, a contempt of the tribunal is involved.
Fine stuff. But what is the justification for limiting unfair dismissal
compensation to £53,500. The current limit is equivalent to the ceiling on
unfair dismissal compensation in 1971. Long before the ERA, the value of
compensation had been eroded by years of inflation, untracked movement in
prices and the failure of ministers to intervene.
There are powerful arguments for abolishing the limit. First, no limit
exists in relation to sex, disability or race discrimination, ‘whistleblowing’
unfair dismissals or health and safety-related unfair dismissals.
There are also strong reasons why a limit on unfair dismissal compensation
is unlawful if the claim results from legislation implementing a European
Community obligation. A good example is a transfer-connected dismissal under
the Transfer of Undertakings regulations (TUPE). Under Regulation 8 of TUPE, a
transfer-connected dismissal is automatically unfair unless for an economic,
technical or organisational reason. This derives from article 4 of the 1977 EC
Acquired Rights Directive.
Awards in keeping with European law should be both effective and dissuasive,
and the current compensation regime for unfair dismissal fails to meet this
The prohibitory nature of article 4 of the Acquired Rights Directive has
been insufficiently implemented in the form of non-pecuniary remedies. Thus the
courts have decided against the availability of injunctions to restrain
non-compliant transfers of undertakings. Finally, statutory reinstatement or
re-engagement orders are all too infrequent. So, in UK law, it all boils down
to whether the compensatory award – in effect, the principal remedy for breach
of European obligations under TUPE – is effective and not merely symbolic.
Two claimants are running test cases where losses were £89,000 and £94,000.
They argue that the current unfair dismissal compensation cap fails to
effectively remedy their losses and implement the Acquired Rights Directive.
Their argument is a compelling one.
By John McMullen, author of Business Transfers and Employee Rights