Ending the employment relationship – an unfair change for employees?

29 OCTOBER 2012

In its consultation paper ‘Ending the Employment Relationship’ the Government has announced a further package of reforms which aims to “remove unnecessary business burdens and obstacles to growth", and "support a fair, flexible and effective labour market”. Viewed as an attempt to address the perceived imbalance between employers and employees when terminating the employment relationship, the changes seek to:

  • Increase an employer’s flexibility to deal with workplace issues;
  • Decrease the costs of resolving disputes and reduce the burden on employment tribunals;
  • Promote economic growth by reducing the reluctance of employers to hire new staff; and
  • Reduce unnecessary and complex regulation that has damaged flexibility and increased administration.

This article considers the potential impact of the proposals on the law of unfair dismissal and whether they are fit for purpose.

Unfair Dismissal Cap

The Government has confirmed that the maximum compensation which can be awarded for unfair dismissal will be reduced. Although it is not yet clear what level such a claim will be capped at, there is to be a reduction in respect of the compensatory award from the current maximum of £72,300, to the lower figure of either, an individual's annual net salary or between one and three times the national median average earnings, (presently at £26,200). It is thought that the level of the current cap deters businesses from taking on new staff because they fear large unfair dismissal claims.

The reduction is felt by many to be a further erosion of an employee’s rights and to be a means of arbitrarily devaluing genuine claims where employees have been treated unfairly. In light of the latest Ministry of Justice Employment Tribunal statistics it seems that this view may be misguided. The figures released on 20September 2012 show that the median compensation payout for unfair dismissal is just £4,560 and that only 2% of unfair dismissal awards exceed £50,000. This goes someway to undermine the current proposal as it highlights the fact that very few awards approach the existing cap of £72,300. Although the measures may finally give employers some certainty that they will not be hit by exceptionally high payouts, it seems unlikely, given the average compensation award, that the suggested proposal will in fact reduce that already granted in practice.

It must also be questioned whether the proposals are likely to deter those pursuing claims or generally reduce the number of cases being presented to an Employment Tribunal. The MoJ statistics, covering Employment Tribunal and Employment Appeal Tribunal activity during the period from 1 April 2011 to 31 March 2012, show that 186,300 claims were accepted during that time. This is a 15% decrease on the previous year and a 21% fall on 2009/2010. There were 46,300 claims for unfair dismissal.

Many employees seeking to bring a genuine claim against their employer will do so seeking recognition of, and vindication for, the alleged mistreatment suffered by them. To accept that such claims are brought lightly would be undeserved. Recourse to protracted legal proceedings is unlikely to be the desired outcome for those concerned with securing further employment. It follows that these employees are likely to pursue such claims regardless of the eventual compensation recovered. It is thought however, that the proposed reduction may dispel any unrealistic perception of those who are misled by the maximum figure that is currently available. Again, in reality reducing the cap alone may not actually help employers deal with those who have unrealistic expectations about the value and strength of their claim.

It also seems unlikely that the proposed reform will instil the confidence required to encourage employers to dispose of their work force or to take on new recruits.  Firstly, it must be remembered that this cap does not apply in every case, for instance where the unfair dismissal is for whistle blowing or for raising certain health and safety concerns (per s.124(1)(a) Employment Rights Act 1996). Furthermore, it seems naive to think that, even if the cap is set significantly lower, employers would be encouraged to dismiss employees and take the hit at the capped amount. If that was the case, based on the average figures currently awarded, the problem sought to be rectified by the Government would not be a problem at all.

It is difficult to see how the proposal will deliver a realistic benefit to employers. In a number of unfair dismissal situations, an employee can of course seek alternative means of redress, for example by claiming discrimination, which would enable them to obtain significantly higher awards than available for unfair dismissal as the compensation is uncapped. The largest sum awarded in a race discrimination claim in 2011/2012 was £4,445,023. Very high awards were also made in disability and age discrimination claims.

Settlement Agreements

Employers and employees can currently settle disputes and end the employment relationship by way of a Compromise Agreement. Such agreements allow for a severance payment to be made to the individual by the employer, in return for not pursuing any claim in an Employment Tribunal. At present, where no dispute exists, any without prejudice discussions or offer of compromise can be disclosed in subsequent proceedings and utilised to demonstrate that any later dismissal is unfair.

The proposed measure elaborates on current practice, with one main difference: offers and discussions of a proposed settlement instigated by an employer cannot be used, or referred to, in later unfair dismissal claims. This allows parties to enter into negotiations in circumstances where there is no dispute and provides employers the freedom to approach an employee about terminating the employment relationship without any prior disciplinary process.

Although the use of Compromise Agreements is now thought to be commonplace, their exact operation is unknown owing to their confidential nature. It is envisaged that the further use of Settlement Agreements will continue to facilitate negotiations between parties and thereby reduce the potential for recourse to an Employment Tribunal and the associated costs. However in order to work effectively parties need to be able to easily identify and agree whether a conversation was protected or not and it is thought that defining the parameters of a “protected conversation” could lead to an increase in litigation. Any template, model agreement or guideline tariff is unlikely to support employers to any significant extent because much will depend on the circumstances of each business and the individual employee.

Settlement Agreements offer the employee not only a financial benefit, but the added advantage of securing a favourable reference. However the use of such agreements can only reduce the number of claims to an Employment Tribunal if satisfactory agreement can be reached. Although employees cannot be forced to accept any offer, it is open to abuse by employers who seek to take advantage and place undue pressure on employees to sign away their rights.

It seems that employers who are incapable of successfully coming to agreement with difficult employees under the current regime are unlikely to enjoy greater success through the use of a Settlement Agreement. Consequently it is hard to be confident that this proposal will achieve both the flexibility and certainty desired.


It seems contrived to think that forfeiting people's rights at work is the best way to bolster consumer confidence and get the economy moving again. The legislation is designed to protect against dismissals that are unfair. Mechanisms already exist within the current regime to enable employers to remove unproductive workers, provided they do so in a reasonable manner.

It is difficult to see how collectively the proposals will provide employers with the certainty required to deal with workplace issues and disputes. Given the compensation currently awarded, the position of many employees is likely to stay unchanged. Although it remains to be seen whether the reduction in the cap has the desired deterrent effect to reduce the number of unfair dismissal claims, the proposed measures do not alter an employee’s ability to bring a claim where it is necessary.  

Leah Pollard (pupil).