Employment Compensation Cap: Progression or Regression?


The Employment (Industrial) Tribunals were originally designed to be informal forums (i.e. you didn’t need lawyers) for resolving disputes. However, with increasingly complex legal principles in the employment arena, many of them emanating from Brussels, it has over the years become more and more difficult to navigate through Tribunals. In October 1999, the maximum award that Employment Tribunals could make for loss of earnings and other losses in respect of unfair dismissal claims rose from £12,000 to £50,000. This made unfair dismissal claims much more serious and indeed numerous. With the cap currently set at £72,300, the Government (which sees such a high figure as a barrier to growth and the creation of new jobs) is now consulting on proposed legislation to reduce this cap.

The Government has already increased the length of service required to bring an unfair dismissal claim from twelve months to twenty four months from April 2012. The impact of this change has yet to be seen but they now seek to:

  • significantly reduce the overall cap on compensation from £72,300 to a yet to be decided;
  • impose a secondary limit of twelve months actual pay on a case by case basis;
  • permit the use of without prejudice without the risk of those being put to the Tribunal; and
  • allow greater intervention by employment judges in weak claims.

To quote the Department for Business Innovation and Skills (BIS) the consultation aims:

“… to give firms more flexibility and confidence in managing their workforce and to reduce employment law red tape …”

The effect of the reduction in the cap would seem drastic but, in reality, it may have a much lesser impact. The average compensation award for unfair dismissal claims for the period 1 April 2011 to 31 March 2012 was £9,133 (Ministry of Justice statistics September 2102). Only two per cent of cases led to compensation in excess of £50,000. At the same time, the amount of unfair dismissal claims has reduced from 57,400 in 2009-10 to 46,300 in 2011-12.

It is therefore arguable that unfair dismissal claims will be unaffected by any reduction in the compensation cap. However, it is also arguable that a lower expectation of compensatory awards should assist the employer in reaching a settlement and may weed out the speculative claims. Add to this the proposals that there should be an ACAS guide on how to settle claims with pre-dismissal without prejudice discussions, then we could see an even greater reduction in claims. Although it is anticipated that there would be, to start with at least, satellite litigation to establish how the guide should be applied.

When the Government increased the unfair dismissal qualifying period from twelve months to twenty four months’ service in April this year, it expected that this would reduce claims by 3,000 per annum. However, when the qualifying period was last set at this level in pre June 1999, numerous claims were brought under the various discrimination jurisdictions to circumvent it.

Discrimination claims do not require any qualifying length of service. Of particular note was the argument that, as more women tended to have a shorter length of service, the twenty four month qualifying period was “indirect sex discrimination”. This argument was left largely unresolved when service was reduced to twelve months and the claims fell way. Of course, discrimination claims have no cap on compensation so we can expect an increase in these types of claims to circumvent qualifying service and remove the cap at the same time.

Discrimination law has moved on considerably since the 1990s: at that time, the primary protected characteristics were sex, race and disability. Now under the Equality Act 2010, discrimination is unlawful on the grounds of age, disability, gender re-assignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex, or sexual orientation. Protection is also given to part time workers, fixed term contractors and whistle blowers: all with no qualifying service requirement or cap on damages. So expect the cunning claimant (or representative) to construct cases that fall under these jurisdictions, all of which are more complex, time-consuming and costly to defend.

We wait and see what the Government decides and how this will actually affect the real world.

Gordon Dadds