Unfair dismissals: time for a rethink

In responding to the review of the Employment Relations Act 1999, John McMullen sets out the case for a fresh look at unfair dismissal remedies

The Employment Relations Act 1999 (ERA) made some overdue changes to the law governing awards for unfair dismissal.

These included index linking the minimum and maximum on payments and awards, raising the maximum limit on compensatory awards from 12,000 to 50,000 (now 53,500), and simplifying the awards structure in cases where employers have failed to comply with re-employment orders.

Chapter 5 of the Department of Trade and Industry review of the operation of the Employment Relations Act 1999 considers unfair dismissal awards in the light of these changes.

There is much still to do in this area.

Index linking

The review regards the annual index linking of awards against the retail price index as successful and does not propose making any changes to the new system for index linking.

However, it is a matter of concern that, although index linked, the cap on the amount of 'a week's pay' (Employment Rights Act 1996 section 220 et seq) for the purposes, among other things, of a redundancy payment or a basic award for unfair dismissal still remains low.

The failure by the ERA to upgrade a week's pay was, in my view, a mistake.

It means, for example, that the maximum amount of a week's pay is capped at a figure of 260 (section 227 of the ERA 1996) with a resultant maximum redundancy payment of 7,800.

This is not in keeping with the revised compensatory award.

In my view, there are two options.

The first would be to improve the value of a week's pay or to improve the multiple of a week's pay used in calculating a redundancy payment or basic award for unfair dismissal.

The second would be to remove the cap on a week's pay forthwith.

After all, awards under section 190 of the Trade Union and Labour Relations (Consolidation) Act 1992 and regulation 11 of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) carry no upper limit on the amount of a week's pay (section 227 of the ERA 1996).

The review considers the limit on compensatory awards in the light of the ERA (paragraphs 5.4 to 5.8).

It concludes that unfair dismissal cases have increased only marginally since the raising of the limit - from 55,573 applications in 1999/2000 to 56,397 applications in 2001/2002.

It maintains that the small rise suggests the higher awards on offer have not had a significant effect on the total number of claims.

Indeed, the median award has risen by but a small amount (2,482 in 1998/1999 to 3,180 in 2002).

The numbers of claimants receiving the higher maximum are low and the inference drawn is that the current ceiling affects 'very few' claimants.

However, there is some complacency in this analysis.

First, there has been a decrease in registered employment tribunal applications over the past two years generally.

This may distort the analysis of the effect of the new ceiling on unfair dismissal compensation, and may underestimate the number of individuals potentially affected by any increase in compensation limits (including those who have settled cases).

If, as the review says, few applicants hit the maximum award even after the ERA, is it nonetheless fair to exclude individuals who may have losses in excess of 53,500 from receiving their full compensation?

There are two compelling reasons for further review.

First, it can be argued that the current limit of 53,500 is arbitrary.

According to unpublished research by the Law Society's employment law committee, it is in fact only a figure which approximates to the ceiling on unfair dismissal compensation in 1971.

Secondly, no limit exists in relation to sex, disability or race discrimination.

No limit applies either to 'whistleblowing' unfair dismissals or health and safety related unfair dismissals (section124(1A) of the ERA 1996).

It is also strongly arguable that the current ceiling on unfair dismissal is contrary to European law in cases of dismissal where the basis of the right not to be unfairly dismissed arises from European legislation, principally under the TUPE, which implements the EC Acquired Rights Directive 77/187.

A good example is a transfer-connected dismissal under regulation 8 of TUPE.

Under that regulation, a transfer-connected dismissal is automatically unfair unless for an economic, technical or organisational reason (ETO).

This derives from article 4 of the Acquired Rights Directive which prohibits such dismissals unless for an ETO reason.

The prohibitory nature of article 4 of the Acquired Rights Directive has been insufficiently implemented in the form of non-pecuniary remedies.

Reinstatement, for example, is rarely awarded by tribunals.

Therefore, under British law, the remedy in practice for an unfair dismissal contrary to TUPE amounts to the compensatory award.

The question is whether the present (capped) award is effective and not merely symbolic.

In my view, the present level of compensation for TUPE dismissals is incompatible with European law in the same way the limit on sex discrimination was found to be incompatible with community law in 1993 in Marshall v Southampton and South West Hampshire Area Health Authority (No 2) [1994] 1 AC 530.

It is to be noted that two claimants are running test cases through the tribunal system where losses were 89,000 and 94,000.

Their argument is that the current unfair dismissal compensation cap fails effectively to remedy their losses and to implement the Acquired Rights Directive.

Orders and sanctions

A more radical stance is taken in the review on the penalty for failure to reinstate or re-engage following a tribunal order.

At the moment, this kind of monetary award (the additional award) is capped at a figure between 26 and 52 weeks' pay (6,760 to 13,520, using the 260 cap).

The review considers that this is insufficient and that employers should face a significant penalty for what is in effect a contempt of the tribunal.

This is welcome.

There can be no doubt that reinstatement or re-engagement orders are flouted because of the ability to pay a relatively insignificant premium on a standard unfair dismissal compensation award.

However, it is a pity, here, that the review does not take its thinking further.

Whatever the remedy for failure to re-employ, statistics from the Employment Tribunals Service Annual Review 2001-2002 are clear that reinstatement or re-engagement orders are awarded in just 0.1% of cases proceeding to remedy.

More thought needs also to be given to improving this statistic so that reinstatement and re-engagement orders truly form the primary remedy for unfair dismissal.

In this regard, sections 112 to 117 of the ERA 1996 urgently need strengthening to bring this about.

The review singularly fails to address what, for many commentators, is the central issue in unfair dismissal remedies.

Link: www.dti.gov.uk

John McMullen is national head of employment law at Pinsents and a member of the Law Society's employment law committee.

The views expressed in this article are his own