Unfair dismissal

The Government's modification from day-one rights to a six-month qualifying period acknowledges employer concerns about hiring risk, but creates its own implementation challenges.

Employers may be tempted to dismiss underperforming staff just before the six-month threshold - precisely the "cliff-edge" behaviour the initial period regulations aim to prevent. This could lead to employers being forced to make a decision about an underperforming employee in circumstances where remedial action (training or performance management processes) has not yet had a chance to deliver results. Employers will need to be proactive with their probationary periods, ensuring concerns are addressed quickly and effectively.

More significantly, the wholesale removal of the cap on compensation for unfair dismissal will be enormously significant to higher earners and employers alike. While it may make for simpler claims, as employees are less likely to shoehorn claims of whistleblowing or discrimination into their tribunal applications to avoid the current cap of around £118,000, there is a real risk that employers looking to dismiss anyone in their senior leadership team will hesitate before doing so. As was mentioned in the House of Lords debate shortly before they eventually approved the Bill, this will have the effect of granting the directors of failing water companies a windfall if they are dismissed. Few companies will be willing to undertake a lengthy 'fair' performance procedure prior to deciding to terminate the employment of the CEO of a business in significant trouble. But they will now be faced with the possibility of a seven figure claim if they fail to do so.

The removal of the cap, however, will not only affect the directors of the largest companies: it will also mean that employees in schools and local governments who may be approaching retirement will be able to claim very significant compensation for the loss of their defined benefit pension schemes. Similarly, anyone with share options will now have more incentive to bring a claim: in the past, the value of the options may far outstrip the cap. As a result, remedy hearings may become significantly more complicated, with expert evidence required for the valuation of both pension loss and share options.

It is not yet clear whether the removal of the cap will apply to dismissals that occur prior to the Act taking effect, but in our view it is unlikely that this will be the case for two reasons. First, it would be unfair for employers who made a decision as to whether to dismiss based on the likely costs they would face to now be confronted with significantly increased liability. Certainty is important for business. Second, compensation caps change yearly and the new caps have always applied only for dismissals that take effect on or after the date on which the compensation changes. Presumably, this will be no different.

Finally, there is a real risk that the prospect of an unlimited cap on compensation will have a chilling effect on recruitment. Employers who had previously been able to take a commercial view as to the limits of the risk of hiring someone new may be very worried that a bad decision could lead to an award of damages that could be fatal to a small or medium sized business. Even if the reality is that the average award for unfair dismissal is in the low thousands, the prospect of unlimited damages for failing to follow a fair procedure will spark fear in the hearts of many employers.