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Compensated no-fault dismissals: removing employment red tape for small business?

Jun 11, 2012

The government is looking at relaxing employment legislation for employers with fewer than 10 employees by introducing the concept of “compensated no-fault dismissals” which are already used by other countries. The process is at a very early stage but it is already causing considerable debate. 

 What is a compensated no-fault dismissal?  

The proposal is that businesses will be allowed to dismiss under-performing or unwanted employees (without having to identify any fault on the part of the employee) by paying a set amount of compensation.  The idea is that small companies will be more inclined to take on workers without risking the cost of an unfair dismissal claim if the relationship turns sour.  The government’s aim is to stimulate enterprise and the employment market.  

What are the pros and cons?  

Germany, Australia and Spain already have similar schemes and the results have been mixed. In Spain employers of any size still fall within unfair dismissal laws but they have the power to dismiss an employee at will, provided they make a substantial severance payment – in a similar fashion to the new UK proposals. As a consequence compensated no-fault dismissals have become the norm in Spain but it is unclear if they have had the desired effect of helping businesses grow.   For the moment it is uncertain whether or not the government’s proposed changes would help the UK economy.  Despite this, I can think of several clients who would welcome any relaxation of employment legislation and the benefits certainly appear attractive.  However as employment law has developed over the past few decades changes designed to reduce litigation or help employers have often led to unintended consequences.  

Most of us can recall the government's attempt to simplify disciplinary and grievance procedures a few years ago which caused so many disputes over how the changes should be applied that they were scrapped shortly afterwards.   It is also worth nothing that recent government research found that dismissals and the threat of unfair dismissal are not in the top 10 reasons deterring businesses from taking on staff.  The full list makes for interesting reading:  

1. Health and safety

2. Maternity/paternity leave

3. Tax

4. National minimum wage

5. National insurance

6. Employer’s liability insurance

7. Working time regulations

8. Sickness absence

9. Time off to train

10. Discrimination  

What next?  

We are still at a very early stage in the consultation process. Early reports suggest that business groups appear to be questioning how the new proposals would help the economy. The Chartered Institute for Personnel Development has said that the suggested reforms are “objectionable and unnecessary. There is no evidence that no-fault dismissal would make a positive contribution to economic growth in the UK by encouraging the smallest firms to recruit more employees. Indeed, by increasing job insecurity and reducing employee engagement it would be more likely to damage growth.”  We follow all employment law developments so watch this space. 

What are your views? If you are an employer and you would like to discuss any legal or HR issues then please feel free to contact me.