The Daily Telegraph, which obtained access to the report regarding a new "employees' charter", commissioned by prime minister David Cameron, reported this would mean more capable people would replace those sacked, boosting economic growth.
It quoted the report saying under current rules workers are allowed to "coast along" with some proving impossible to sack.
The report - which has not been made public - was written by Adrian Beecroft, a venture capitalist.
It follows chancellor George Osborne's recent announcement about new measures aimed at restricting the number of unfair dismissal claims. From April 2011, an applicant must have been in their job for at least two years before being able to make an unfair dismissal claim.
Adrian Hoggarth, head of employment at law firm Prolegal, said: "The Government has already announced a future increase in the qualifying period for unfair dismissal which will reduce the number of Employment Tribunal claims faced by businesses and encourage hiring in the short term. This is significant in itself.
"The abolition of unfair dismissal laws would be a huge policy shift and it is hard to see this as anything other than a call for employers to be allowed to mismanage staff and escape the consequences.
"It is plainly wrong to say that some employees are impossible to sack. If employees are failing to perform they should be trained to work to the standards required or managed through capability procedures.
"There should not be wholesale changes to the law to address failures to comply with procedures that have long been recognised as fair in the workplace"
Jonathan Exten-Wright, a partner in DLA Piper's employment team, added: " There is already the one year in which to make an assessment, and the leaked report's suggestion of simply paying something akin to a redundancy payment is potentially a licence to the bad employer. It is questionable how this is linked to creating growth. The report says this is counter intuitive - it could be counterproductive, inviting more discrimination and whistleblowing claims where there is no qualifying period of service and unlimited awards."
But Chris Ball, chief executive of The Age and Employment Network (TAEN) has worries about the employment security of older workers following the news. He said: "The introduction of a proposed Compensated No Fault Dismissal rule could well be a way of getting rid of older workers through the back door.
"How odd that so soon after the end of the default retirement age, Beecroft's proposals could once again leave older workers exposed.
"There are already mechanisms in place for dealing with poor performance. As matters stand, capability and performance are among the fair reasons for dismissal. An employer wishing to dismiss an employee for incompetence may do so. The only restraint is that they have to follow a fair procedure.
"If this is a quick fix measure by Government to increase productivity, I would suggest the Government considers the knock on consequences.
And Denise Keating , CEO the Employers Network for Equality and Inclusion, agreed. She added: "I am very concerned about the proposals contained in the leaked Beecroft report. Whilst it has some valid points - clearly businesses should not have to tolerate constantly under-performing employees - this certainly must not be seen as a way to dismiss older workers now that the default retirement age (DRA) has been abolished.
"The current Government seems to make a habit of giving with one hand and taking with the other. To recommend now that employers should be given new powers to urge older workers to consider retirement without the risk of being sued for ageism, makes a mockery of last summer's announcement of the end of forced retirement.
"We campaigned long and hard for the end of the DRA - it was an archaic practice that assumed an individual's age was an indicator of the contribution they can make to the workplace. Age is simply not a proxy for ability."
But while Amy Paxton, senior employment consultant at Croner, said the reports had caused "intense debate in the employment field, she added: "What we would remind employers is that it is only a draft report and until anything is finalised, there are no indications that they should not be duly concerned with the proposals.
"In our experience we would be very surprised if these proposals are implemented as they would not be beneficial to either employers or employees.
"We should also not forget the bigger picture here, there are other costs associated with firing and hiring such as recruitment and training costs and therefore the suggestions contained within the leaked report may make little financial difference to the employer.
"Employers with poor performing staff should look at their performance management policies and procedures. Often training and development can solve issues in a low cost and effective way, thereby forgoing the need to dismiss."
