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

Lord Monks Excerpts

Monday 15th July 2013 Grand 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 Monks]

The Minister will be grateful that I do not propose to go through my opening remarks again. I am sure that he has got that particular point. The Division neatly ended a paragraph of thoughts and so I will move on to another: the purpose of the change.

We are being asked to believe that because people can see a crock of gold in this compensatory award at present, the cap has become an expectation which encourages claims and then deters employers from undertaking recruitment because they are afraid that this gathering mass of people will all think that they are going to get their name up in lights with the top award. It seems far-fetched in the extreme to say that the picture being presented is a real one. I instead come to the conclusion, which I would test on the Minister, that this is simply about reducing the amount of money that some employers have to pay to some employees. It is a step at the expense of the employee in favour of the employer.

This is one of many steps that have been taken in this area in recent times, particularly with the raising of the qualifying period for unfair dismissal from one year to two, which took 3 million workers out of the scope of unfair dismissal legislation. That was perhaps the biggest but there have been a number of other changes. I suggest that this is another salami cut into employment rights at work. It is not the biggest—I do not want to exaggerate my case—but it is one under which some employees will lose, while some employers are going to gain from it. I hope that the Minister will acknowledge that that is really what it is about rather than this romantic story that the Government seem to be advancing: that all this reduced compensation will mean fewer claims, which means more employment, to put it in the reverse way from how I put it before. Is this not simply about reducing the amount that employers have to pay to workers who they have unfairly dismissed? Those workers have been not just dismissed but unfairly dismissed.

[Baroness Donaghy]

My Lords, I shall make a couple of points. My noble friend Lord Monks has already referred to the Secondary Legislation Scrutiny Committee’s report. I understand that in the absence of clear consensus on views, sometimes the Government have to take a leadership position, which this Government have done. Unfortunately, it is not a consistent position. I question why the Government have decided not to take action on the basis of no consensus on one issue and to take action on the basis of no consensus on the second issue.