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Government proposes 12-month pay cap on compensatory award for unfair dismissal

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A package of measures aimed at reducing the number of workplace disputes that end up at employment tribunal were set out yesterday by employment relations minister Jo Swinson (pictured).

The Government has confirmed that, subject to parliamentary approval, it plans a cap of 12 months' pay of any employee payout for unfair dismissal. This will apply where this amount is less than the overall cap, which is currently £72,300.

The introduction and implementation of a new statutory code and guidance to encourage greater use of settlement agreements, along with setting a limit on unfair dismissal payments, are the next steps in the Government's response to the 'Ending the Employment Relationship' consultation.

In September 2012, secretary of state for business, innovation and skills, Vince Cable, announced that the Government was to introduce a package of new employment law proposals designed to simplify and speed up the process of ending the relationship between employers and employees when it breaks down. It hoped this would give employers the confidence to hire new staff and aid economic recovery.

The cap was the most significant proposal announced yesterday. Other proposals included in the plans are: making template letters available to encourage the use of the new settlement agreements, alongside a statutory code of practice, which will include an explanation of improper behaviour and not to set a guideline tariff for settlement agreements. Government will instead develop guidance outlining the issues that should be considered when deciding and negotiating the level of financial settlement.

Employment relations minister Jo Swinson said: "We are committed to finding ways to support both businesses and employees when a working relationship breaks down. The measures I have announced today will do just that.

"Central to this is promoting the benefits of good communication, better management, and early dispute resolution, as this can lead to the best outcomes for everyone.

"We are working closely with ACAS to get the rules and procedures for Early Conciliation right, and welcome the views of interested parties in our consultation."

Swinson added: "Settlement agreements can be a helpful tool and work in the interest of both employer and employee. Creating a code and simple guidance will mean that these arrangements are more readily available to those in small businesses, not just large corporations.

"Employment tribunals are costly for everyone, in terms of money but also time and stress. We need to tackle unrealistic expectations about the levels of compensation awards, especially when only one in 350 people who make a claim for unfair dismissal receive an award of more than their own salary, and the average award is less than £5,000. Tribunals should be the last resort not the first port of call."

The TUC has responded by saying that limiting the amount of compensation employees can receive for unfair dismissal and reducing the protection for public sector workers transferred to the private sector will "punish the victims" of ill-treatment at work and let bad employers "off the hook".

TUC general secretary Frances O'Grady said: "Limiting the amount of compensation victims can get for unfair dismissal to one year's salary will let bad employers off lightly and deter victims from pursuing genuine claims.

"People who have been unfairly dismissed have had their rights breached and deserve compensation that reflects their loss of earnings and length of service.

"This arbitrary 12-month cap fails to do that and ignores the fact that losing a job, particularly in today's harsh economic climate, is a major blow.

"The Government has already made it harder for people to pursue unfair dismissal claims - by increasing the qualifying period from to two years and introducing fees for employment tribunals - now it wants to prevent people who've been wronged from getting fair compensation."

Richard Fox, head of employment law at solicitors Kingsley Napley, said: "Employers may welcome much of what is proposed. For example, the cap on unfair dismissal awards of 12 months or the statutory cap, whichever is the lower, and the new settlement agreements procedure.

"However, we do now really need to see the proposed new ACAS statutory code and guidance. This is an important piece of the jigsaw for the new environment, which the Government is hoping to introduce in the summer, and employers will need to prepare.

"As an example, employers will want to understand the extent to which any discussions they have with their employees will be inadmissible on any subsequent tribunal proceedings. They will also want to understand and how they may be found to have stepped over the line and be said to have engaged in 'improper behaviour', which will mean their discussions will then be admissible before the Court. They will appreciate seeing the guidance on what exactly is meant by this phrase.

Fox added: "Fortunately employers will not be asked to wrestle with the phrase 'unambiguous impropriety' in that context."