Unfair Dismissal (Variation of the Limit of Compensatory Award) Order 2013

Lord Popat Excerpts

Monday 15th July 2013 Grand Committee

Moved by

[Lord Popat]

That the Grand Committee do report to the House that it has considered the Unfair Dismissal (Variation of the Limit of Compensatory Award) Order 2013.

Relevant documents: 4th Report from the Joint Committee on Statutory Instruments, 6th Report from the Secondary Legislation Scrutiny Committee.

[Lord Popat]

My Lords, I beg to move that the Unfair Dismissal (Variation of the Limit of Compensatory Award) Order 2013 be considered by the Committee.

This draft order introduces an additional limit on the compensatory award for unfair dismissal, which is based on 52 weeks of an individual’s pay. This limit will exist alongside the existing overall limit, currently at £74,200, with the applicable cap in individual cases being the lower of the two caps. This order is an exercise of the power found in Section 15 of the Enterprise and Regulatory Reform Act 2013. The power allows the Secretary of State to vary the limit on compensatory awards for unfair dismissal in certain ways.

There are two ways in which the limit can be varied. This first is in the order before us today: the introduction of a cap based on an individual’s pay, provided that this cap is no less than 52 weeks’ pay. The second way is to change the overall level of the cap. This power is also limited. The overall level of the cap cannot be less than median annual earnings or more than three times median annual earnings. The current overall limit of £74,200 falls within this range. We do not intend, at this time, to use this aspect of the power in Section 15 to change the overall limit further.

The purpose of this order is to address the effects that the recent rapid increase in the limit has had. The current cap stands at £74,200, greatly in excess of the average unfair dismissal award of less than £5,000 which includes both the basic and compensatory elements of the award. The potential, however unlikely, for high awards creates unrealistic expectations among both employers and employees. The uncertainty that this potential creates for employers can discourage them taking on new staff while claimants may believe that if they pursue the claim, rather than accept a settlement, they will receive large sums.

I am sure that noble Lords will agree that it is important, particularly if we are to achieve our shared objectives of growth and increased early dispute resolution, to manage expectations about the level of tribunal awards. The Government consulted on the unfair dismissal compensatory award cap through the Ending the Employment Relationship consultation. Following analysis of responses to the consultation, the Government are not minded to change the overall specified cap but have decided that it is appropriate to introduce a cap based on an individual’s salary to run alongside the overall cap. The Secondary Legislation Scrutiny Committee highlighted this decision in its 27 June report, and I am thankful to it for providing the opportunity to put to rest any concerns about the consistency of the Government’s approach to consultation.

As the committee pointed out, statistically speaking, there was not unanimous support for or against any option. Half of respondents were in favour of the cap before us today and 45% were not, while 37% felt the overall cap was appropriate, and 39% felt it was not. If these numbers were the only evidence that we had from the consultation, our decision would indeed be inconsistent. However, these data are only a part of the evidence we received. As we have only 30 minutes today, I will refer to only a few key points.

First, among respondents who opposed the pay-based cap, almost 40% opposed any cap at all on rewards. Noble Lords will appreciate, however, that all Governments have agreed that it is necessary to have a limit on compensation for unfair dismissal. Secondly, as our government response clearly stated, very few respondents made any suggestion of an alternative level for the overall level of cap. Of the 26 respondents who suggested an amount, eight suggested £26,000, six suggested £78,000, five suggested £52,000 and three suggested £50,000. The remaining four suggested amounts in the range of average annual earnings and three times that amount. Moreover, these suggestions were not backed by supporting evidence. Without support or evidence, the Government chose not to initiate a legislative change to the overall cap at this time. I am sure noble Lords will agree that we do not want to choose a new cap arbitrarily.

Thirdly, a key component of consultation analysis is to consider the quality of evidence provided. We were, on balance, convinced by respondents’ arguments for a salary-based cap; it is a tailored approach to unfair dismissal awards that is fair to claimants. It is right that the cap is based on pay because the compensatory award is meant to reflect loss caused by the employer’s actions in dismissing the employee. Since the compensatory award is based on financial loss, it makes sense to link it to the individual’s pay. Let us also not forget that this change is about correcting perceptions.

We estimate that only 0.25% of people who bring an unfair dismissal claim receive an award which exceeds their annual salary. This estimate is based on the total award, that is, both the basic and compensatory awards combined, so the number affected by limiting the compensatory element of the award would be likely to be even lower. This order has no effect on the basic award, which is currently capped at £13,500.

The Government are committed to promoting growth in the UK economy and take the view that this cap will facilitate that growth while still being fair to individuals who have been unfairly dismissed. I commend this order to the Committee.

[Lord Monks]

My Lords, I thank the Minister for that explanation of the Government’s position. I note that he did not address much the report of the Secondary Legislation Scrutiny Committee, which criticised the Government for inconsistency in the way that they have conducted the consultations and come to their conclusions. This is partly because the last time this issue was considered the Government were not enthusiastic about a pay-based cap but they have changed their position in the intervening period. That is an argument with the Secondary Legislation Scrutiny Committee. Perhaps the Minister will find an opportunity to explain the Government’s view on that point a little more. However, on the substance of the issue—

--- Later in debate ---

[Lord Young of Norwood Green]

My Lords, we have had a fair amount of consensus this afternoon on previous statutory instruments but I think that this is the one where we part company, as we have signalled in previous debates on this issue under the Enterprise and Regulatory Reform Act. If there was one move that the Government made that we firmly endorsed, it was to encourage the mediation process through ACAS. We supported that; we thought that it was constructive and sensible. If only the Government had pressed the pause button after having done that and had waited for a period of time to see its effect, that would have been profoundly important. However, the Government were not satisfied with that. As my noble friends have commented, they have gone on to introduce a number of other significant changes. One change was increasing the period of service required before a claim for unfair dismissal could be entered from one year to two years, and my noble friend Lord Monks has referred to that. That is a profound change in itself.

The consultation process that the Government went through was, as someone somewhere else said, “a damn close run thing, Carruthers”. The figures are really quite marginal. In some cases, they swing the other way on whether or not there should be caps. As my noble friend Lord Monks said, the Secondary Legislation Scrutiny Committee itself pointed out in paragraph 20 of its report:

“It is of course for Government to decide on policy-formulation in the light of consultation responses. We note, however, that there was a lack of consensus on both the key issues relating to compensation for unfair dismissal canvassed in the 2012 consultation process. In the case of the overall cap, the Government saw this as reason to make no change. By contrast, an even division of opinion among respondents has not held the Government back from implementing its proposal to introduce a pay-based cap. It is hard to see these outcomes as demonstrating consistency in the Government’s response to consultation”.

We welcome the Government’s response on that point. However, we cannot help feeling that the lower paid will again face the consequences of this and that it will have an impact on older workers, who may have longer service with an employer.

We do not believe that this will address the real issue. Unfortunately—my noble friend Lady Donaghy is right—this is based on perception, as the Government have admitted, and on the wide publicity that has been given, not only in the tabloids but in the broadsheets, to the one or two cases which return significantly large figures. This is an ill-conceived proposal and we would like the Government to think again. However, in any event, I welcome the Minister’s response.

[Lord Popat]

My Lords, I thank noble Lords for their valuable and detailed comments during this short debate.

The order focuses on giving adequate recompense to those who have been unfairly dismissed while also providing certainty for business on its potential liability. It will bring expectations more in line with the likely amount of award that can be expected in an unfair dismissal claim at tribunal. Secondly, it will enable employers to hire with more confidence, as this individualised cap will reassure them about potential liabilities.

A number of points were raised which I should like to address in my remaining time. The noble Lord, Lord Monks, referred to reducing the cost to employers. We estimate conservatively that, as I said earlier, only 0.25% of unfair dismissal claimants might be affected by the cap. This is about allowing employers and employees to take informed decisions on how to resolve disputes. If they know in advance the likely outcome of a tribunal, it will help the two parties to settle in advance.

The noble Lord, Lord Monks, also said that the Government were inconsistent in their approach to considering the consultation response. As I said in my opening remarks, although there was not unanimous support for any single option, when considering the totality of the evidence and not only the bald figures that we received from this information, the Government were convinced by the response argument for a salary-based cap. The cap applies to many different circumstances. A pay-based cap is a more individualised yet clear method of ensuring that parties know the potential level of award while still fairly compensating claimants.

The large gap between the expectation and the reality is a problem for both employees and employers. It is unfair to allow a situation where the mis-sold promise of big pay awards means that individuals make decisions based on flawed assumptions. We want to ensure that individuals can make informed and intelligent decisions based on more realistic information and an assessment of likely awards. This is not about pushing the parties down any particular route; it is there to help them.

A number of other issues were raised on the same subject. The order will give business clarity about the potential cost to employers in cases where they have to fire employees. Certainty is very important for employers when they employ people. It is also important that we do not give unrealistic hope or expectation to employees who are unfairly dismissed. The order clarifies the position for both parties.

We are competing in the global world and it is important that our employment legislation is clear-cut. This order is clear-cut for both employees and employers. I hope that I have covered all the points raised. If I have not, I shall be happy to write to noble Lords.

[Lord Young of Norwood Green]

My Lords, the Minister said that a pay-based cap will make the system more consistent. It may make it more consistent, but is it fair? The impact for someone on lower pay of losing their job can be far higher than on someone on a significantly higher pay rate. It is not just consistency that you look for when making this kind of legislation, it is whether it treats people fairly. The Minister did not address that issue and I would welcome his views on it.

[Lord Popat]

My Lords, as I said earlier, 0.25% of cases at the tribunal for unfair dismissal have resulted in compensation of £74,200, but 90% of the cases that have gone to the tribunal have resulted in compensation of just under £5,000. Therefore, even somebody on the minimum wage will probably be able to get the right level of compensation. All parties recognise the need for a cap. As I said earlier, the median award is £4,560, which is below the median salary. Therefore, for 99.75% it is quite reasonable for low-paid people to have this cap or the maximum of £74,200.

[Baroness Donaghy]

I was making a general point about the Government allowing, if you like, propaganda about excessive amounts of money to simmer around in the pot, whereas we all know that the reality is that the award figure is very low. I should have mentioned earlier that, even when the minority of the minority of the minority are awarded compensation, 40% of them do not receive it. They have to either accept nothing or go through the civil courts to chase the employer for the award. Therefore, the talk about caps and limits and about putting employers off employing people goes along with the propaganda about large amounts of money, when the reality is that those amounts are small and 40% of them do not get paid. Does the Minister not feel that he could at least put forward a consistent point of view about this and not put a cap on the pay-based awards?

[Lord Popat]

The noble Baroness raises a very important issue. This large amount of £74,200 has been in place for some time. We are trying to clarify matters, and the most reasonable or most equitable way of doing this and of speeding up the tribunal process or the agreement between employers and employees is to bring in a cap of either 12 months’ salary—which is quite reasonable because it gives the employee 12 months to find an alternative job—or £74,200. As I mentioned earlier, 95% of the awards given in the past have been settled for less than the median of £4,560. We have put information on median awards on ET1 claim forms to help to address issues of perception. We are also improving the guidance to help employers and employees to have better information.

The Government have given due regard to the comments of the Secondary Legislation Scrutiny Committee and have concluded that the order meets the requirements of the Act. I commend it to the Committee.

Motion agreed.