Unfair dismissal laws only first step on way to labour market reform

The Coalition is already planning to lengthen the qualifying period of employment before people can claim they have been unfairly dismissed from one year to two years. It is also proposing a charge for making an employment tribunal claim. These measures may lead to a small reduction in the number of unfair dismissal claims, currently running at about 50,000 a year.

As the law stands, after the qualifying period, an employee can only be dismissed fairly for misconduct, capability issues, redundancy, legal bars (for example immigration status) or “some other substantial reason”. Employers must follow formal procedures, and failure to do so will usually make even good-cause dismissals unfair.

Employers have frequently complained that these provisions (originally introduced by a Conservative government, incidentally, and owing nothing to European law) tie the hands of employers in dealing with difficult and unproductive staff. Small businesses in particular may be deterred from recruitment because of fears of being unable to get rid of poor workers.

This week venture capitalist Adrian Beecroft created a stir as a result of his leaked recommendation to David Cameron that the whole concept of unfair dismissal should be scrapped. Instead he proposes that businesses should be able to dismiss an employee without giving a reason. Under his plan for “compulsory no-fault dismissal”, sacked employees would be given the right to a hearing and financial compensation, but dismissal would be much simpler and its costs predictable and limited.

The detail of course needs to be clarified, but Mr Beecroft’s proposal has been welcomed by a range of commentators and business groups, including the CBI and the IoD.

Employment protection legislation, of which unfair dismissal is a major component in the UK, has been shown in a range of studies by academics and bodies such as the OECD to have an impact on employment. Countries with heavy protection tend to display higher levels of long-term unemployment, particularly amongst younger workers and other “outsiders”. The United States, which with its legal tradition of “contract at will” has no concept of unfair dismissal, fires workers much more rapidly than is the case in Europe. But it also hires them much more quickly during economic recoveries and its long-term record in job creation has been impressive.

So there is some empirical evidence to support Mr Beecroft. However we need to be cautious in assuming that this proposal will have a major impact if introduced in isolation. For one thing, it is difficult to argue against allowing the worker a hearing. But experience suggests that this is likely to bring problems. At this stage the employee may well go off sick, citing stress. This will delay proceedings, and potentially lay the employer open to a tribunal claim for disability discrimination.

Already many unfair dismissal cases are linked with complementary discrimination claims. Whereas compensation for unfair dismissal is capped at around £70k, there is no limit to discrimination awards. It is predictable that many people sacked under Mr Beecroft’s plan will claim that they were discriminated against. In the UK we now have a very wide range of protected groups, and it will be difficult for a dismissed employee not to fall into one or more such categories. Only this week the scope of protection has been increased by a court decision that a hunt saboteur, sacked from a job at a garden centre by his pro-hunting employer, was discriminated against because of his philosophical beliefs. This new category has been tacked on to laws to protect those discriminated against on religious grounds, a provision originally intended to protect Muslims.

Moreover, although EU law does not impinge directly on unfair dismissals, if there is any suggestion that no-fault dismissals are in fact on redundancy grounds, employers are likely to fall foul of European regulations.

Finally, unfair dismissal law is simply a default position. There is nothing to prevent employers and employees reaching agreement on contracts which lay down procedures for dismissal which go beyond the law. It is predictable that, where unions are powerful, as they still are in many areas of the public and quasi-public sectors, they will negotiate contractual rules which protect their members from dismissal. If so, we will have come full circle, as Geoffrey Howe once told us at an IEA lunch that unfair dismissal laws were introduced to try to replace union involvement in job protection.

So, while free marketeers will want to support Mr Beecroft’s proposals on unfair dismissals, they should be aware that much more needs to be done if there is to be a fundamental change in the way our labour market works.

Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham. He was previously Dean of the Royal Docks Business School at the University of East London and prior to that was Dean of the Westminster Business School. He has also taught at Queen Mary, University of London and worked as an economist in the Civil Service. His research interests are primarily in the economics of labour markets. He has worked with many think tanks, most closely with the Institute of Economic Affairs, where he is an Economics Fellow. He edits the journal Economic Affairs, which is co-published by the IEA and the University of Buckingham.

1 thought on “Unfair dismissal laws only first step on way to labour market reform”

  1. Posted 09/11/2011 at 20:44 | Permalink

    This is almost as bizarre as your Moral Maze suggestion that the roots of the credit crunch lie in Bill Clinton’s mortgage and housing policies (a proposition refuted not only by fiscal conservatives in the US but by the actions of the Bush Whitehouse which extended the same home ownership policies ten-fold––at the behest of a financial sector desperate for the dividends and commissions and convinced its credit default alchemy could resolve the underlying contradictions). As another conservative, RG Rajan, has shown, US job insecurity and volatility is in fact immensely destabilising for both American economics and politics. It impedes innovation and produces the push-me pull-you rage of the Whitehouse-Congress cycle, dominated by the political class’s fear of a desperate and insecure electorate. It is also quite misleading to suggest that the absence of employment protection in the US promotes enterprise and job creation. In fact, the most sustainably efficient and productive economies of the last 40 years have deep social democratic investments in employee rights and security. How much of a mess need unregulated markets make before rational reflection on these issues begins?

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