Labour Market

The P&O saga: no way to say goodbye?

The continuing row over P&O’s decision to sack 786 ferry employees without notice, and replace them with low-paid agency workers, raises broader questions about employment protection laws.

We should look beyond the immediate politics, which sees Grant Shapps, the Transport Secretary, adopting the usual ‘something must be done immediately’ response, egged on by the opposition. Mr Shapps has made a number of assertions about the legality or otherwise of P&O’s decisions, has threatened its CEO with disqualification as a company director, has urged ports to block ferries from docking if they do not pay their crew the UK minimum wage (something, incidentally, which could expose them to legal action from ferry companies), and has plans to create new laws. The RMT union doesn’t see why the owners of P&O, Dubai-based DP World, should not continue to subsidise loss-making ferries and allow their members to remain in reasonably well-paid employment. 

Now, nobody wants to lose their job, which can have severe consequences for living standards, mental and physical health and family stability. It is reasonable that we try to cushion people from the worst aspects of sudden job loss. We provide statutory redundancy pay, unemployment-related benefits such as Jobseekers’ Allowance, and assistance in accessing retraining and searching for new employment – although it is possible to query whether existing provision is the best approach and whether more market-based insurance systems might not be better in the long run.  

But the reality of life in the competitive private sector is that job security is always at some risk, whether it be from global financial crises or lockdowns, rising fuel prices, market entrants with new business models, dramatic technical change or shifts in consumer spending patterns. This is something which cosseted public sector workers and academics don’t always grasp.  

Changes are often irreversible and governments trying to prevent job loss at all costs end up subsidising failure and slowing the process of creative destruction which has made modern life so much more prosperous than that of our ancestors. Without the destruction of old industries and old business models, or their migration to other parts of the world, it is difficult for new and more efficient organisation of our resources to emerge. If we are slow to shift employment and capital in response to economic change, we inevitably find productivity and living standards grow only sluggishly. 

Once, not so very long ago, there were few legal restrictions on the ability of firms to fire workers. It was only in 1971 that an Industrial Relations Act introduced the first employment protection legislation to this country, creating the concept of ‘unfair dismissal’. Interestingly, Geoffrey Howe once suggested to me that the reason why Ted Heath’s Conservatives introduced this was not because they regarded it as intrinsically a good thing but because trade unions, very strong at that time, tended to come out on disruptive strikes whenever people were sacked. By providing a legal remedy against over-hasty dismissal, it was hoped strikes would be minimised.   

Unfair dismissal legislation has changed several times over the last fifty years. Nowadays, once you have been employed by a business for two years, you can only lose your job on a limited number of grounds.  

These are: capability (poor performance or prolonged sickness absence); serious misconduct (such as theft or assault); illegality or contravention of a statutory duty (for instance DBS barring); redundancy (a post being no longer needed); and ‘some other substantial reason’. 

In order to dismiss anyone, employers must go through a formal process with the possibility of appeal. Failure to do this can render the dismissal automatically ‘unfair’ and lead to compensation at an employment tribunal. Dismissals for redundancy (relatively few in the UK, currently running at only 2.4 per thousand during a three-month period) can be unfair if proper consultations have not been held, or if the process of choosing people for redundancy disproportionately affects those with ‘protected characteristics’, such as women or people with disabilities. 

The category of ‘some other substantial reason’, incidentally, provides a loophole for the controversial practice of ‘fire and rehire’. If the alternative to sacking employees and rehiring them on less favourable terms – which might not involve a pay cut, but some other contractual change, such as a requirement to work at weekends – is closure of the business, this is a ‘substantial reason’ which enables the practice to be permitted.  

Unions and the Labour Party have long been opposed to fire and rehire, and have used the P&O case to renew pressure for banning it. However this is a different issue: what P&O has done is not to fire and rehire the existing workforce, but to dismiss the existing workforce completely and replace it with cheaper agency employees.  

In this, the P&O case resembles the famous 1981 Air Traffic Controllers dispute when Ronald Reagan sacked more than 11,000 striking Federal employees and forbade their reemployment.   

In the USA the ‘contract at will’ doctrine remains influential. This is the idea that both parties to an employment contract should be able terminate it without notice or penalty. Although this principle is now hedged around with various restrictions, it is still easier to dismiss workers than it is in the UK, and dramatically easier than in parts of continental Europe, where many years of employment protection laws have attempted to make jobs safe from virtually any eventuality so long as a company remains in business. 

Of course, US businesses don’t dismiss people without reason. If there is a downturn in business, employers may ‘hoard’ employees – particularly highly skilled ones – because it would be more costly to sack them and then have to recruit new people when the economy turns up again. Many employers probably also feel responsibility to loyal employees. But it is nevertheless the case that American firms dismiss relatively more workers in recessions than, say, Belgium or France. However, the corollary is that they are quicker to take workers on in a recovery; there is less risk involved in taking people on when you know you can dismiss them if recovery stalls. 

Evidence suggests that tight employment protection laws lead over time to lower employment, higher average levels of unemployment and longer average spells of unemployment. Moreover, businesses try to get round dismissal restrictions by employing people on temporary contracts. In 2020 the tightly-regulated Spanish labour market had 24% of employees on temporary contracts as opposed to 5% in the UK.   

And those who end up on such contracts – usually at lower rates of pay than ‘permanent’ workers and often for years at a time – are those at the bottom of the employment pile. Young workers, women returners, migrants and minorities are disproportionately likely to be temporary workers with little access to training and career development. 

So, in crafting a response to the P&O episode, the government should be careful not to impose strict new employment laws which deter employment across the economy, and lead to the proliferation of temporary contracts, or unnecessarily large numbers of zero-hours contracts. It needs to recognise that there have to be ways for employers and employees to say goodbye if the labour market is to remain flexible and able to accommodate change.  

It may also have to recognise once again that Britain no longer rules the waves. If foreign-owned and registered vessels employ people on different contracts from those used in the UK, there may be relatively little we can do about it. We may be able to impose minimum wages for ferries between, say, Liverpool and the Isle of Man, but P&O’s cross-channel ferries are registered in Cyprus and there are probably limits to what we can do. These ferries carry significant amounts of freight and are thus similar in this respect to the huge container ships which pass my home every day on the way to Tilbury. We can certainly do nothing to affect the pay of those staffing these monsters, however angry this makes Grant Shapps. 

Editorial and Research Fellow

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.