As part of the Government’s programme of reforms to grow business BIS has called for evidence on the controversial compensated ‘no fault dismissal’ for small (10 employees or fewer) businesses. BIS noted that small businesses have the highest rate of turnover and that minimal employee protection tends to result in more hiring and firing. It is this phenomenon that the Government fervently hopes will kickstart some economic growth at the smaller end of business. At the same time, the Enterprise and Regulatory Reform Bill has been published, proposing a mandatory conciliation process before claims are brought and a power to vary (upwards or downwards) the maximum compensatory award for unfair dismissal.

Adrian Beecroft’s report (prepared last year but recently publicly released and covered in our last blog) emphatically endorsed the approach of no fault dismissal and the BIS research studied relevant procedures introduced in Germany, Australia and Spain, each of which exempt small businesses from certain aspects of unfair dismissal regulation.

It is, we think, fair to say that the surveys are neither conclusive nor are they easily referable to our legal system in the UK. Germany and Australia have tinkered with reforms that have left them with exemptions for small employers with fewer than 10 and 15 employees respectively and Spain’s employee dismissal exemption is not targeted just at small businesses but all employers.

The rationale behind the reforms in Spain was to rebalance power towards employers and reduce the numbers of temporary workers. Spanish employers can dismiss and pay statutory dismissal compensation (for a dismissal based on ‘economic’ reasons) within 48 hours of a dismissal letter. The result has been a significant increase in the number of compensated dismissals.

It seems to us that therein lies the rub. There appears to be no persuasive data that indicates that economic growth results from the introduction of compensated no fault dismissals. What has happened is that the new option becomes the habitual means of dismissing staff. As the BIS research itself notes, in Spain ‘unfair dismissal [became] the norm rather than the exception’. Further, the BIS report was unable to identify growth in employment and productivity in Germany and Australia.

Is this the kind of work culture that we would welcome for the UK? A combination of a lack of employee confidence and no guarantees for growth seems to be a dangerous path to follow. The existing system in the UK for unfair dismissal may be imperfect but a system that encourages the ‘buying off’ of employees’ rights seems a commoditisation too far. Together with the ability of the Secretary of State (subject to the ERR Bill being passed) to order a downward variation of the unfair dismissal compensatory award cap, it would appear that job insecurity and a lack of employee confidence will be the most likely outcomes should these proposals come to fruition.