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17th September 2012

Proposal to reduce cap on unfair dismissal compensation

On 14 September 2012 the Business Secretary, Vince Cable, announced that the Government is proposing to reduce the cap on compensation for unfair dismissal claims from the current cap of £72,300 to a maximum of 12 months salary.

On 14 September 2012 the Business Secretary, Vince Cable, announced that the Government is proposing to reduce the cap on compensation for unfair dismissal claims from the current cap of £72,300 to a maximum of 12 months salary. This came as part of an announcement on a wider range of employment law reforms as the Government attempts to reduce the burden of employment law on employers. Mr Cable stated that he felt the current maximum compensation award of £72,300 discourages employers from taking on staff due to the fear of being hit with a large award if taken to an Employment Tribunal. It is felt that the reduction in the potential compensation will give business more confidence when hiring people. The amount of the new reduced cap is currently subject to consultation, but the Government’s proposals are to either to reduce the cap to 12 months salary or to the average yearly salary of £26,000. The Business Secretary stated, however, that the Government’s proposals for "non-fault-dismissals" for micro-businesses shall be scrapped and instead the focus will be upon reforming the law to enable employers and employees to come to an agreement to part company more easily. The Government is proposing to introduce new laws regarding settlement agreements, which it is hoped will remove the complexity and formality of Compromise Agreements (the agreements currently used to settle disputes with employees). It is hoped that this will make it easier for employers to come to an agreement with employees to part company, especially in cases where employees are under performing. The Government has prepared a draft model letter and settlement agreement which it suggests could be used by employers and these documents will be subject to consultation over the next few months. The proposals have been heavily criticised by Unions as being a further example of the Government watering down employees’ rights, following the recent changes to the qualifying period required for unfair dismissal protection and the confirmation of the introduction of fees to bring an employment tribunal claim. Businesses are, however, likely to welcome the changes as a further step toward balancing the rights of employees and the needs for businesses to be able to manage their workforce without fear of tribunal claims. The consultation in relation to settlement agreements and the reduction to the cap on unfair dismissal claims closes on 23 November 2012. It shall, therefore, be a matter of "watching this space" to see how these proposals shall be put in place in practice. For further information, please contact Gemma Burnham on 01604 463309 or at gemmaburnham@hewitsons.com

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