The Government has recently issued a new “Call for Evidence”, Dealing with dismissal and “Compensated no fault dismissal” for micro businesses.  The main aim of the paper is to gather evidence from businesses to establish what can be done to encourage small employers to recruit more employees, whilst at the same time ensuring some protection for employee rights. The paper also aims to gather evidence regarding the dismissal process, and in particular how well the 2009 Acas Code works in the case of dismissals for underperformance. 

Small businesses

The Government’s paper looks at the Australian Small Business Fair Dismissal Code – a one page document which provides a very basic set of guidelines to follow when a business with fewer than 15 employees dismisses an employee for conduct or capability. Views are sought as to whether, as regards small businesses, a code such as this could replace the Acas Code which currently applies to all employers, irrespective of size, in relation to discipline and performance matters. The paper also seeks evidence on whether small businesses should be able to dismiss employees on a “no fault” basis, and instead that employees receive an automatic “compensation” payment, whatever the reason for dismissal. The Government is examining how other countries deal with dismissals in the case of small businesses. In Germany, for example, businesses employing 10 or fewer employees are exempted from unfair dismissal laws. 

Whilst the immediate reaction of small employers will likely be to welcome such a change, the wider implications of no-fault dismissals must also be considered. It would appear that the proposal would effectively amount to giving such employers an exemption from unfair dismissal laws except if the dismissal is for a discriminatory reason, or in connection with whistleblowing or assertion of a statutory right. Could this inhibit small employers from taking on more staff if that means exceeding the maximum number of employees for “small businesses”? Since job security will be diminished, it may be harder for small employers to compete for the best talent. Further, without recourse to an unfair dismissal claim, there is a risk that an aggrieved employee will bring a discrimination claim or allege that the real reason for dismissal related to whistleblowing (whether or not this would have any substance at all). However, this risk could be addressed by strengthening the ability of the Employment Tribunal system to weed out unmeritorious claims. 

Having acted for a number of small businesses and charities, our view is that a less complex code would be desirable, particularly for businesses with fewer than 10 employees. However, whether or not they should effectively be exempted from unfair dismissal laws is a more contentious issue. An area of controversy which is inherent in the Government’s proposals is the suggestion to compensate employees for no-fault dismissals. If the compensation is set too high, employers will remain discouraged from taking on staff. If too low, the employees will have virtually no dismissal rights. The Government asks for views on the appropriate compensation. Perhaps a compromise would be to increase the statutory minimum notice period by 2-4 weeks after the employee has 2 years’ continuous employment (ie the new minimum period of employment for unfair dismissal clauses for employees taken on after 5 April 2012), making sure that the legislation provides for employers to be free to pay in lieu of notice so that they not burdened with an employee they do not want.

A point which is unclear from the Government’s paper is whether small employers will be able to opt not to make a no-fault dismissal compensation payment on termination of employment in circumstances such as gross misconduct. It is unclear as yet, whether, if no compensation payment is made, the employee would be entitled to make an unfair dismissal claim, or would their remedy simply be for payment of the statutory no-fault dismissal compensation amount? It would seem sensible that small employers should not have to pay an employee compensation where it has followed a fair dismissal route in such circumstances but if this option is chosen, it also seems fair that the employee should have full recourse to usual unfair dismissal rights. It will be necessary for any legislation to define the concepts clearly and provide for this type of situation to be addressed. 

Acas Code

The Government is also seeking views on the Acas Code, which was already substantially revised and reduced in length in 2009. As well as having a concern that it is not suitable for small businesses, the Government also considers that it may not deal adequately with cases of poor performance. The criticism is that the Code concentrates more on backward-looking actions (such as conducting investigations) which are more relevant to disciplinary issues, than what is to be done for the future.

Whilst there is no doubt that the abolition of the former statutory disciplinary and dismissal procedures was a beneficial step for employers and has simplified Employment Tribunal claims, we do not believe that the revision of the Acas Code has made much difference in the actual dismissal process. It would have been useful if it had been made absolutely clear that ill health dismissals were not covered by the Code. However, it is our experience that the Code does not hinder the performance management process and it would certainly not be helpful to make the Code any more complex or prescriptive.

Reed Smith will be responding to the Government Call for Evidence paper and for that purpose, we would be interested in hearing your views on the paper or, indeed, on any of the comments we have made above. Please feel free to send in your comments via our blog or to email direct by contacting Ruth Bonino ( Alternatively, you may wish to respond in person. The consultation closes on 8 June 2012.