Labour party’s proposals to reform workplace rights - spotlight on unfair dismissal
18 May 2023
The outcome of recent local elections indicates a Labour party victory at the next general election. In a series of articles, we'll explore what the employment law landscape might look like under a Keir Starmer-led Labour government by examining their wide-ranging proposals for reform. This first article spotlights Labour’s proposals to reform unfair dismissal laws. These changes, if implemented, will require many employers to change their approach to recruitment, performance management and dismissal.
The next UK general election is forecast to take place in Autumn 2024. While, according to Harold Wilson’s famous saying “a week is a long time in politics”, 18 months is an eternity. Nonetheless, with the Labour party far ahead according to both pollsters and bookmakers, and promising reforms to the employment landscape of a greater magnitude than, arguably, any time in the last 40 years, employers need to start considering the potential implications for their organisations.
When launching their Employment Rights Green Paper A new deal for working people in 2021, the Labour party committed to introduce new employment laws within the first 100 days of government. Many of the Green Paper’s reform proposals were reflected more recently in a wide-ranging programme of provisional policies obtained last week by Labourlist. Although the policies will need to be signed off by the party’s national policy forum over the summer, they are likely to form the blueprint shaping the party’s manifesto for the general election.
Of these proposed reforms, perhaps the most significant for many employers will be proposed changes to unfair dismissal laws.
What are Labour’s proposals to reform unfair dismissal law?
The proposed reforms set out in the Green Paper include major changes to unfair dismissal protection in Great Britain.
- Introducing a day one right to unfair dismissal protection
- Removing limits on unfair dismissal compensation
- Extending the right not to be unfairly dismissed to all workers, not just employees
- Extending time limits to bring claims in the employment tribunal
The party's proposals also commit to outlawing “fire and re-hire” (a shorthand reference to the practice of dismissing and re-engaging employees on less favourable terms and conditions). Among Labour’s proposed steps is “adapting unfair dismissal and redundancy legislation to prevent workers from being dismissed for failing to agree to a worse contract.”
Day one right to unfair dismissal protection
Employees working in Great Britain are entitled to protection from unfair dismissal after a qualifying period of employment (currently two years for most dismissals). The Green Paper states that this protection will become a day one right (Labour describes these “day one rights” as “basic rights”).
Unfair dismissal protection was originally introduced under Edward Heath’s Conservative government in 1971 with a two-year qualifying period. The qualifying period has changed several times since then and, over the intervening half century, Labour governments have reduced qualifying periods and Conservative governments have increased them. Nonetheless, a Labour government under Keir Starmer’s leadership would be the first to remove the qualifying period altogether. Unfair dismissal law is a matter which is devolved for the Northern Ireland Assembly to legislate on. The current lack of a functioning Assembly and Government makes it impossible to predict with confidence what may happen in Northern Ireland, but previous experience suggests that the status quo will likely remain. The minimum service requirement for bringing a claim in Northern Ireland remains at one year, not the two years currently in Great Britain.
Changes to the qualifying period for unfair dismissal protection in Great Britain since 1971
One year for employers with more than 20 employees
Removing a qualifying period for unfair dismissal would not be unique across the G7 and other comparable countries, but it would place the UK among a small number of jurisdictions with day one rights for these purposes.
Qualifying period for unfair dismissal protection among G7 nations
Qualifying period for unfair dismissal protection across other comparable countries
The OECD annually scores countries for the extent of their employment protection rights. Internationally, this change to the qualifying period for unfair dismissal protection would mean the UK would move from a jurisdiction of relatively weak individual employment rights to one with comparatively strong rights overnight.
Employment protection rights among G7 nations (latest data from 2019):
Looking beyond the G7 countries, a general pattern emerges of weak employment protection rights in North America; strong general protection in Western Europe; and APAC countries such as Australia, New Zealand and Japan somewhere in-between . The UK currently sits with those APAC nations but is not alone as Denmark and Ireland also fall into this group. If Labour’s reforms are introduced, the UK is likely to figure among other Western European countries for strength of employment protection rights.
Removal of cap on compensation
Currently, an award of compensation for a successful claim of unfair dismissal in Great Britain comprises two elements:
- A basic award calculated in the same way as a statutory redundancy payment depending on age, weekly pay, and length of employment (currently capped at £19,290).
- A compensatory award calculated to reflect the individual’s loss (currently capped at the lower of a year’s pay or £105,707 ).
The Green Paper states: “Caps which limit the amount of compensation that workers can receive are unfair and discourage companies from following the law. Labour will ensure that workers will receive full compensation, without statutory limits, if they suffer loss because of employers’ breaches of the law”.
From this it seems likely that the statutory cap on unfair dismissal compensatory awards would be removed altogether, meaning that compensatory awards for unfair dismissal would be uncapped and aligned with claims of unfair dismissal involving whistleblowing or unlawful discrimination claims.
Extension of unfair dismissal protection to workers
Unfair dismissal protection is currently only available to employees. Since 1996, the employment status of those in work has been divided into the self-employed, workers and employees, generating a significant body of litigation analysing the correct categorisation for a given individual.
Over the years, different inquiries and reviews have considered whether the current legal framework can keep pace with the evolving labour market, and whether worker status should be removed, leaving a binary distinction between the self-employed and employees. The government most recently consulted on this in 2018 and set out its proposals to reform employment law in its Good Work Plan. The Green Paper proposes to create a single status of worker, for all but the self-employed. The impact of this proposal will be the focus of a future article in the series.
The Green Paper states that everyone within this new status of worker will have protection from unfair dismissal, capturing many who have not historically benefitted from such protection.
Extension of time limits
The Green Paper proposes “to extend the time period for bringing claims to Employment Tribunals”. No more detail is provided, but it can be expected that the three month limit would be extended to six months.
Outlawing fire and re-hire
Labour proposes to outlaw the practice of firing and re-hiring. This term describes a practice of changing employment terms by way of dismissal and re-engagement, typically in situations where it is impossible to obtain employee or trade union consent to the changes.
The Green Paper proposes three changes to give effect to this ambition: improving information and consultation procedures; reviewing notice and ballot requirements on trade union activity; and adapting unfair dismissal and redundancy procedures.
At the moment, an employer faced with employees who will not agree to less generous employment terms cannot lawfully change the contract unilaterally. However, employers can lawfully give notice to terminate the employment of the relevant employees and offer new terms in the hope that the employees will accept them. For employees with over two years’ service, employers will need to demonstrate a fair reason for the dismissal and that the dismissal was reasonable in all the circumstances.
A dismissal with a view to rehiring on new terms triggers a duty to inform and consult collectively if more than 20 employees are affected . However, an employer cannot rely on redundancy as a potentially fair reason for the dismissal in these circumstances.
Nonetheless, over the years, case law has decided that a dismissal for refusing to accept changes to employment terms comes within the potentially fair reason for dismissal of “some other substantial reason”. However, to be a fair dismissal, the employer must go further and show that it acted reasonably. This will generally mean that the employer must be able to show sound business reasons for the change and that it has consulted adequately. An employment tribunal will also take into account whether or not a majority of the employees accepted the change voluntarily.
The Green Paper proposes to amend unfair dismissal law to “prevent workers from being dismissed for failing to agree a worse contract” and not merely make this more difficult. Presumably, this would be achieved by legislating that a dismissal for refusing to accept worse conditions would not constitute “some other substantial reason” and would, therefore, be unfair. The implication of this reform may be limited in practice if employees enter into a settlement agreement by which they waive any unfair dismissal claims. However, the other proposed changes to unfair dismissal laws in the Green Paper (removing the qualifying period and cap on compensation) would increase the risks to employers (and the potential costs in negotiated settlement agreements) of forcing changes in this way.
The practice of firing and re-hiring has attracted heightened controversy in recent years, leading the current government to announce plans to introduce a new statutory Code of Practice to encourage employers to act fairly and reasonably in negotiations over changes to terms and conditions. If this practice is outlawed, it could have significant repercussions for employers facing financial difficulties that want to offer reduced terms as an alternative to job losses. Under Labour’s proposals, even if the vast majority of staff agree, the employer would not be able to proceed if a handful of employees resisted the change.
What do Labour’s proposed reforms to unfair dismissal laws mean for employers?
The combined impact of removing the qualifying period and the cap on compensation will likely result in dismissals becoming more expensive and lead to an increase in claims being made in employment tribunals. Many employers will need to change their approach to recruitment, performance management and dismissal by:
- Taking greater care in making recruitment decisions, including greater due diligence into prospective hires.
- Making greater use of probationary periods for new recruits. If Labour adopts a similar approach to some other jurisdictions, terminating employment at the end of a probation period will be safer, despite day one protection. In the Netherlands, for example, the right to protection from unfair dismissal is available only after the probation period has been passed. In any event, justifying terminating for failing to pass a probationary period is likely to be easier than after its expiry.
- Introducing more rigorous performance management to support capability dismissals from day one of employment.
- Working harder to combat bullying and other poor behaviour at work (where the costs from a successful constructive unfair dismissal claim would be higher).
- Considering alternatives to dismissal, including providing more training and support to overcome perceived shortcomings.
- Adhering more closely to fair procedures and going through formal processes before dismissal to be in a stronger position in negotiations (or to defend any claim if settlement negotiations fail). Currently, in circumstances where employers have not followed a formal process before dismissal, even employees with over two years’ service often have little alternative in practice than to accept an employer’s offer of settlement in light of capped unfair dismissal compensation, the unrecoverable costs of bringing a claim, the delays before claims reach a hearing and the unpredictability of the hearing outcome.
- Reducing the length of notice periods given by the employer to the employee (these notice periods may become shorter than the notice period given by the employee – there is no legal reason why they need to be the same, this is merely convention).
- Making larger settlement offers to reflect the larger possible pay outs at tribunal.
What are other likely consequences from Labour’s proposed reforms?
The number of manifestly ill-founded discrimination or whistleblower allegations is likely to fall
The qualifying period and the limits on compensation for unfair dismissal claims currently result in some individuals who feel unfairly treated seeking redress by claiming unlawful discrimination or unfair dismissal on grounds of whistleblowing where, in both cases, there is no qualifying period and no limit on compensation.
These unmeritorious claims do not help the significant numbers of people genuinely discriminated against and it is unhelpful that employers should face unmeritorious discrimination claims when the wrong complained of is really one of unfair treatment.
Employers may hesitate more before hiring
Employers who find themselves facing increased costs where a new recruit does not work out or where staff numbers need to be cut for economic reasons could easily respond by recruiting more cautiously. Further, as advances in automation and AI increase the scope for technology to take on a wide variety of job tasks, or in some cases replace human jobs completely, increased employment costs can only shift the balance further in favour of machines. We explore the impact of technology on the future of work and jobs in our publication for the Future of Work Hub Eight Drivers of Change – 2022 and beyond.
An increasing burden on the employment tribunal system
A rise in unfair dismissal claims will inevitably increase the burden on a creaking employment tribunal system. If Labour’s policies also increase the number of claims filed there will need to be a significant increase in resourcing and funding to ensure that employees’ rights can be enforced in a quick and effective way.
What steps should employers take to prepare?
Employers should consider the following eight actions now to prepare for Labour’s proposed reforms to unfair dismissal laws:
- Review performance management, appraisal, misconduct, grievance and redundancy procedures
- Consider further training for those involved in employment decisions
- Review recruitment processes and due diligence
- Review approach to probationary periods
- Review notice periods for new hires
- Review how employment tribunal claims are handled
- Identify which workers may become covered by unfair dismissal protection
- Tackle any serious performance issues before any new laws come into force