Capping Compensation

06 June 2012

This is the first, but I suspect not the last, post on the Enterprise and Regulatory Reform Bill.¹

s12 of the of the Bill allows the Secretary of State to change the upper limit of the compensatory award in unfair dismissal claims. The current cap is £72,300.²

If the Bill is passed, the Secretary of State will have two options. Set the cap at a figure based on the median full-time average annual earnings. Or set the cap by limiting each individual claimant to a maximum of X weeks of their weekly wage.

If he takes the first option, the cap must be between the median full-time annual earnings and three times that figure. The 2011 Annual Survey of Hours and Earnings puts this at £25,896. So the cap would currently have to be between £25,896 and £77,688.

If the Secretary of State takes this option, there can be different caps for employers of different descriptions. This could mean any number of things, but the example given in the explanatory notes is that there might be a lower cap for small businesses – which chimes with other recent proposals in relation to no-fault dismissal.

If the Secretary of State takes the second approach, the minimum cap is 52 multiplied by the employee’s weekly wage – effectively a year’s pay. There is no maximum cap. So, at least in theory, there could be a substantial increase in the effective cap under this approach (but I would be fairly surprised if there were). Under this approach there is no option to have different caps for different employers – although by relating the cap to the claimant’s weekly wage there would be different caps for different employees.

What might all of this mean in practice? The employment tribunal statistics put the median unfair dismissal compensation at £4,591, well short of the cap. 89% of awards are below £20,000. And 94% are below £30,000. But these figures include the basic award, which is not included in this cap. The average compensatory award must be significantly less.

So very few awards would be directly affected by these proposals. This does not mean, however, they will not have an impact. The most obvious point is that many cases are settled. The level of the maximum compensation will obviously affect high-value claims where the cap may apply. Based on the average awards, these are almost certainly a small number. But the cap also has a significant influence on other settlement negotiations. Often an employer can be reasonably confident that a high award is unlikely, but it remains a possibility. This increases the value of the claim and pushes up the likely settlement. You might be 95% confident that a claimant will not get more than one year’s worth of wages, but 5% of uncertainty remains and will be reflected in the settlement figure. A lower cap limits the potential downside for a respondent, which will tend to reduce settlement amounts.

There is also the possible affect on tribunal awards over the long-term. Tribunals are only human and human nature inclines us to think that awards towards the maximum of any range are unusual. I suspect the current cap doesn’t have much influence in this way – it is so far from most awards that, most of the time, most of us don’t think about it. If the Secretary of State choses a low cap this will change. It is possible that this will tend to push awards downward.

All of this is, however, pretty minor stuff. For most people, in most cases, reducing the cap will have little impact.

This applies to employers as well as employees. There will be cases where employers will be relieved to avoid a high award or to be able to settle for a bit less. But most of the time it just won’t make any difference. Realistically, the burden of unfair dismissal cases on employers is not the small number of high value claims. Rather, it is the risk of claims and the time, attention, emotional energy etc that they cost when they happen.

The Bill’s aim is apparently to be a ‘a central element in the Government’s aim for strong, sustainable and balanced growth, powered by investment, exports, technology and enterprise’.³ I can’t see this provision making much of a difference to any of that. Leaving aside the question of whether changing employment law can meaningfully alter Gross National Product, the proposal doesn’t change employment law enough to have much of a knock on affect.

That leaves open the question of why the government is doing it. It may be that we simply disagree and they believe that it will a) have much more affect on employment cases and relationships than I do and b) that this will translate into strong, sustainable and balanced growth.

I fear that the real reason is that this is a sort of employment law theatre. A lot of people feel that employees have too many rights and are too litigious. They would like to see those rights limited and litigation reduced. Slashing potential employment tribunal compensation by nearly two thirds sounds a big deal and might please a lot of those people – particularly if they don’t look too hard at the detail.⁴ The fact that it won’t really do very much at all may not be terribly important.

If this is the case, it is profoundly wrong. You shouldn’t muck around with people’s rights to send messages to your supporters – especially when, really, you’re misleading those supporters by claiming that something is more significant than it is. We also shouldn’t forget that, for some claimants, this will make a real and important difference. If you have suffered £50k worth of loss by being unfairly dismissed, being awarded £26k of compensation would be a kick in the teeth. And it would be small consolation to hear that 98% of claimants are not affected.

I also find it rather unfortunate that, elsewhere in the Bill, s13 introduces financial penalties of up to £5k on employers who breach employee’s rights – paid to the government. There is something distasteful about limiting people’s right to compensation, while also grabbing a slice for yourself.

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