Leaked Number 10 report argues for radical overhaul to unfair dismissal regime

The government should radically overhaul the legislation surrounding unfair dismissal to give public sector bodies and other employers more flexibility to remove underperforming employees, a leaked draft report to Number 10 has suggested.

The report, written by venture capitalist Adrian Beecroft and leaked to the Daily Telegraph, said “the terrible impact of the current unfair dismissal rules on the efficiency and hence competitiveness of our businesses, and on the effectiveness and cost of our public services” was a major issue.

“The rules both make it difficult to prove that someone deserves to be dismissed, and demand a process for doing so which is so lengthy and complex that it is hard to implement,” it added. “This makes it too easy for employees to claim they have been unfairly treated and to gain significant compensation.”

Beecroft said there were three serious problems as a result:

• Many firms and, particularly, public bodies were “reluctant to try to dismiss unsatisfactory employees, and therefore accept inefficiency that they would not tolerate if dismissal of unsatisfactory employees was easier”
• A proportion of employees, “secure in the knowledge that their employer will be reluctant to dismiss them, work at a level well below their true capacity: they coast along”
• Smaller companies in particular were deterred from taking on employees: they would rather stay as sole traders or family businesses than take on the risk of employing unknown quantities.

The draft report claimed that making it easier to remove underperforming employees would not raise the overall level of unemployment, but rather see organisations become more effective as more able employees are recruited.

Beecroft suggested that “to resolve the problem of the unfair dismissal process one could simply say that if discrimination was not involved an employer could dismiss an employee at any time without giving a reason and paying the employee only for his or her contracted notice period”.

The venture capitalist argued that unfair dismissal was a UK concept rather than an EU one, and that therefore there were no legal barriers to this. However, he acknowledged that this would “probably neither be fair to employees nor politically acceptable”.

Beecroft therefore proposed instead the introduction of what he called ‘Compulsory No Fault Dismissal’. Under this approach, dismissal would not be deemed to be unfair if no particular reason is specified but the notice periods and termination payments are the same as those that apply in the case of redundancy.

“This would give certainty to the employer that an employee can be dismissed within a relatively short period at a known cost and with no fear of a referral to a tribunal provided no discrimination is involved,” he argued.

Under the ‘Compulsory No Fault Dismissal’ approach:

• The employee would be given a chance to argue his or her case, “and to suggest (but not demand) that they be given time to improve or be transferred to a less demanding job at a lower wage”
• If no agreement were reached, the employee would receive the same payment they would get if they had been made redundant. “This would generally be more than they would receive if they were dismissed for poor performance on the terms set out in their contract of employment, but if that was not the case then they would receive the contractual payments”
• The employer would still be able to undertake the capability based dismissal process if they felt that was a better route.

Beecroft acknowledged that a downside of the proposal was that some people would be dismissed simply because their employer did not like them.

“While this is sad, I believe it is a price worth paying for all the benefits that would result from the change,” he said. “I believe that employers, many of whom already ‘create’ redundancy situations in order to remove underperforming employees, will accept the higher cost in exchange for the speed and certainty it provides.”

Responding to the draft report, Huw Rolant Jones, partner at Eversheds, argued that employers would see the scrapping of unfair dismissal legislation as “a step too far”.

But he added: “We believe they would cautiously welcome proposals to allow employees to be dismissed without liability for unfair dismissal, upon payment of a lump sum termination payment, if this option was introduced alongside, not instead of, existing unfair dismissal protection.”

Rolant Jones said the reported proposal for Compensated No Fault Dismissals would spare both employer and employee the “difficult and distressing” process of dismissing employees on the grounds of poor performance as well as the costs and other issues associated with protracted litigation.

“Performance dismissals are now in the spotlight, given the government’s removal of the default retirement age, with many employers predicting the number of performance-related dismissals will rise as a result,” he said.

“However, Compensated No Fault Dismissals would not result in compulsory retirement by another name – employers using it this way, for example regularly terminating employees at 65, would run the risk of age discrimination claims.”

The Eversheds partner pointed out that a poor performance dismissal can take months, sometimes years, to happen, as evidence of the incompetence must be collected and reviewed with the employee, training identified and warnings to improve given.

“This costly and time consuming process also adds pressure to colleagues, who often pick up extra work, and is upsetting for the individual involved,” he argued.

“A lump sum termination agreement would provide both parties with certainty as well as a less stressful parting of the ways. The employee is guaranteed compensation without the ordeal and cost of pursuing an unfair dismissal claim against their employer.”

Rolant Jones said the size of a lump sum as envisaged by the Beecroft report would need to be clarified, however.

“Suggestions of an amount equivalent to statutory redundancy pay is likely to meet with strong opposition from trade unions as being too low,” he said. “However, it should be borne in mind that some employees might be better off taking such a lump sum, given that the median compensation awarded for unfair dismissal was £4,591 in 2010/11.”

Rolant Jones suggested that there were many issues that would need to be worked through if the Beecroft proposal was to become law.

“For example, from an employer’s perspective, there may be some reluctance in making any additional payment to employees where they believe that the employee does not merit such payment,” he said. “It also appears unclear as to what the position may be in relation to misconduct and gross misconduct issues, particularly where there may be an overlap with performance issues.”

The proposal has already received a hostile reception from unions. TUC general secretary Brendan Barber said scrapping protection against unfair dismissal would do nothing to boost the economy.

He added: "The clue is in the name. Employers already have plenty of powers to make fair dismissals. Giving them the right to act unfairly may go down well on the back benches, but will horrify employees."