New UK Dismissal Rules: What Raised Protections Mean for Global Employers

Transcript

John Sander
Principal, New York City

Welcome to the latest episode of We Get Work. I'm John Sander, co-leader of the International Law group at Jackson Lewis. And I'm joined today by my friend Rob Hill, Head of the Employment Law practice at Clyde & Co London. 

We wanted to talk today about something that is a bit of a storm cloud on the horizon for those of you who manage global employment law issues, particularly in the UK. A lot of clients outside the UK, including many of my clients in the U.S., are not really up to speed on this. It has not hit their radar, and yet it is an important development that will take effect at the end of the year. I would go so far as to say this takes the UK from being "Europe-lite," which is the way I've usually described it to clients in terms of the level of complexity and protections for employees, to maybe a bit more of a "Europe classic.” The UK is now a little more like countries such as France, Italy, and Spain in terms of unfair dismissal protections.

Rob, let's try to unravel this. Before we get into the specifics, tell us a little bit about the legal and political context in the UK. Why is the law being changed now, and do you think this is something that will be durable as we see different UK governments in the future?

Rob Hill
Partner and Head of the Employment team, Clyde & Co LLP

Thanks, John, and hello everyone. The laws and the changes that are coming up are definitely politically driven. We have a relatively new Labour government; they've been with us for coming up to two years, and it was a key plank of their election manifesto that they would look to increase protection for employees. At one point, they were going to go further than they actually have, and I'll explain that in a bit of detail. But it's very much politically driven. It's also driven by our trade unions, who are the biggest contributors and supporters of the Labour government, so no surprises with these changes coming in.

The interesting question is how long they'll last and whether they will outlast this Labour government. It isn't a popular Labour government, so we might well see a change at the next election in two to three years’ time. If Reform or the Conservative Party gets in, I can see these rules being repealed or rolled back. This may be shortish-term pain, but it's going to be at least pain for two or three years.

Sander

Let's see if we can distill it down to two, three, or four main changes from the current legal context in the UK. Maybe you can take us through what the current rules are and how the major changes will be starting again at the end of 2026.

Hill

Happy to. Let's start with the current position, which is that employees in the UK who have two years' service with the same employer have the right not to be unfairly dismissed. It's a statutory right. What that means in practice is that if an employer wants to dismiss an employee with the qualifying service fairly, then they need both a substantive fair reason and to follow a procedurally fair approach.

The substantive reasons are set out in statute and are limited. They are conduct, capability, redundancy, and illegality, effectively. The key usually is the fairness of the approach, and that's what slows employers down. That's where employers get tripped up, because there are codes of practice that need to be followed. They take time, and it can be easy to get it wrong if you're not really clued up. At the moment, you've got a gap of two years in which you can effectively dismiss without worrying about falling foul of the legislation.

The other big difference is the compensation position. At the moment, there is a cap on compensatory awards for unfair dismissal, and they're currently capped at one year's gross pay or a maximum of about 123,000 pounds, whichever is the lower figure. At least currently, employers have a maximum worst-case position that they can factor into their decision.

As to what's changing, the two principal changes are these: from January 1st, that two-year qualifying period is going to be reduced to just six months. Anybody who hits six months of qualifying service period is going to have that unfair dismissal right. That is going to bring in a significantly greater number of employees into the protection regime. Secondly, the statutory cap I've just referred to is going to be removed. There will be no cap on compensation at all. That is very different from the U.S., where you have punitive-style issues. Here, the regime is compensatory, so it is still a question of loss. But potentially employees can recover the totality of their loss. Big changes, John.

Sander

The damages point is something that, particularly for people who are managing these issues from afar, is really what we look at and what our clients need to relay to their management. Up to now, we were able to say, well, worst case it would be essentially one year's compensation or less. That was a maximum. Not that people wanted to pay that, but it was at least something that was fairly easy to manage.

Now, with the uncapped damages, and I take what you say about the regimes being different from the U.S., where we have basically an uncapped punitive damages possibility, what would the damages look like? Can you lay that out and maybe tell us, based on what you've seen perhaps in discrimination cases, which have always been uncapped, the kind of damages you would expect to see?

Hill

We are clearly going to see claims for longer periods of loss. I'm expecting that, particularly as we're in choppy economic waters, employees may take longer to get a new job, or may have to accept a lower salary. I'm expecting to see schedules of loss and claims for certainly multiple years, not limited to one year. That's what we see often in discrimination claims. The approach to the assessment of loss by the tribunals is not going to change, so you've still got to try and persuade a tribunal that you would not be able to get new employment within the period you're claiming. But you can certainly see people trying for longer periods, and I've seen recently schedules of loss covering three or four years of earnings, particularly for people in their fifties who are saying, 'I'm going to struggle to get a job in this market, so my losses should run through to when I was going to retire.’ We're going to see bigger claims for damages.

What flows from that, John, is that we're also going to see it being harder to settle at more sensible levels early on. It was always easy to negotiate against a cap of one year, knowing that the economics of fighting it for an employee become less attractive the closer you get to that one-year mark. That dynamic is going to change, so negotiating is going to be a harder game as well, and employers will probably have to take a longer-term approach to trying to get rid of claims.

Sander

In a labor tribunal case, I'm sure this varies throughout the country, but let's say in the London area, how long would it normally take to get a case before the tribunal?

Hill

Well, it's been very slow probably ever since COVID, and we've had an increase in claims and a lack of resources in terms of judges. Currently, it's not unusual in London to wait two years, or two and a half years, from the date of issuing your claim to get to a full trial.

Now, obviously, we're going to see more claims given the reduction in the qualifying period. Unless the government throws resources at the number of judges and the tribunal administration, it certainly is not going to come down in terms of delay. If anything, it might go up. There is obviously a lot of pressure on the government as well, because of the justice denied claims and criticism, so we'll have to see. But it's not going to speed up.

Sander

What is the background of the labor tribunals? Are they professional judges, or do they come from the labor side or from the employer side, or some of both? How does it work?

Hill

It's a panel, usually for most claims, of three individuals: one who will be a trained employment judge, so a member of the judiciary, and then usually two panel members. One will come from an employer's background, so might have been an HR manager, and the third member will usually come from the employee side, often having been a trade union representative.

Increasingly, over the years, it's been harder to work out who's who. Most of them, notwithstanding the difference, are, in my experience, pretty balanced. What we are noticing, however, is that because we've had a large number of new employment judges over the last year or so trying to catch up, there are quite a lot of inexperienced judges at the moment, and a lot of the more experienced ones have retired. That could be a bit more problematic when we come to assessing losses and those kinds of issues, because you'll have judges who just don't have that level of experience. We'll have to see.

Sander

We can be thinking about claims coming to the tribunal. If it does take two years, people are going to have a pretty good claim, at least for a couple of years of back pay, if they have not been able to find another position. It seems like our baseline is going to be going up for sure in terms of damages, even if they're not quite as unregulated as they would be in the U.S.

Hill

That’s right. We'll see different categories of claims. There'll be those where the employee is utterly unrealistic and won't settle, because they'll see a big payday, so they'll take it all the way to the tribunal even if they've got to wait a couple of years. Obviously, if they haven't got a job at that point, that sets the base minimum for what a tribunal is probably going to award. If it takes two years and they haven't got a job, you'll be looking at two, two and a half, or three years potentially, subject to the evidence on attempts to get a job and what the job market is. You'll still get that category of employee who wants to get a windfall and move on to another job quickly. It's not going to be impossible to negotiate settlements, but I suspect demands will be higher.

Sander

Let's go back to claims prevention and claims avoidance. Obviously, the big issues now are going to be really compressed into that first six months. Before, we had two years of something like employment at will, as we have it in the U.S., or something like it. Now that window is going to be pushed back to six months.

After we have an employee for six months, we're going to be in the unfair dismissal regime. I assume that leads to a lot of recommendations for how we now recruit and manage employees. Looking at recruiting and onboarding first, what kind of measures are you recommending that employers take?

Hill

It's common sense, really. The importance of getting your recruitment right is that much more acute because you've got less time to check whether you've made the right decision, post them starting.

It is really about looking at your recruitment processes and making sure your recruitment managers are properly trained and really understand the kind of person you're looking for.

I'm also saying to clients that if you've had problems with employees who've come in, have a look to see whether there's a pattern of particular managers who have been poor judges and have not approached recruitment in that rigorous fashion. In which case, they either need training or should be removed from the recruitment process. There is very much a focus on sharpening up the approach to recruitment more generally.

We all know recruitment mistakes happen, irrespective of how rigorous and good the process is. The key change is really moving from what I used to call a two-year probationary period, in truth, to a six-month one. You really need to manage performance much more rigorously, much more systematically, and you have to get managers to own the capability and performance process. They need to be trained to give proper feedback in the moment, transparently.

You are not going to have the luxury of time to suddenly, at four or five months, think, 'we're going to start a process.' Because if you want to go through a process, you're not going to have time to do so. It's really about starting that process and being rigorous as you go through.

We see it all the time: clients come to us to say this person's not performing, they haven't performed for forever, and yet the manager's just not picked it up until right at the last minute, and they want to move very quickly. That's going to be difficult because you're going to run out of time.

Sander

Yeah, because let's fold in the observation that I always get from our side, which is, and I'm not saying this is fair, but this is of course what they say: the UK has to have meetings to arrange for more meetings, to arrange for more meetings, and then finally we have a meeting where we can now begin the performance improvement program. Then, there are more meetings after that.

What does it look like now that we're in this six-month regime? I have an employee who, within the first two or three months, is clearly not performing. They don't have the right qualifications for the job, et cetera. What is a process that you think is going to be defensible and is still going to comply with what the UK terms a fair process?

Hill

During the six months, remember, even with the changes, employees are not going to have unfair dismissal rights. Your main concern during that period is to avoid claims of discrimination or whistleblowing because of disparate treatment. You do not have to follow the processes in full because you're not worried about fairness in the sense of the unfair dismissal regime. Your real concern is consistency of treatment with people who might have different protected characteristics.

Employers can still take fairly vigorous decisions. If someone after three months is genuinely not performing, you do not have to go through a long process; you can terminate. That is what the probationary period is there for, effectively as a period to assess fit: is this person going to be the right person for the role?

The key for me, John, is making sure those decisions are taken during that six-month period and that we do not get into a position where, five months down the line, the employee gets wind of a problem, goes off sick, and we cannot get hold of them. Then, they trip over into six months, and you've got a problem.

Sander

When we get past the six-month period, so now we're into the unfair dismissal regime, will things be pretty much the same as they were before in the post-two-year period that we work under now? In other words, is the process going to be the same: consultation with the employee, giving them a chance to respond, and everything else? Do you see that remaining the same?

Hill

Yes. There is no suggestion of any changes to the procedural side of unfair dismissal, or that the ACAS code of practice, which governs the fairness of dismissals for performance and conduct, is being changed. I see that as remaining the same.

Clients who are used to dealing with performance and capability issues with employees in the UK who have two years plus will see no change in terms of doing what they did before. What has changed is that, if they do not do it properly, the potential downside in terms of compensation has potentially gone up significantly.

Sander

How do you support your clients now? I assume it is probably more important than ever to get training not only in what the new law provides, but because the stakes are much higher in terms of potential unfair dismissal claims. Are you recommending new or additional training or resources for HR and line managers?

Hill

What we are suggesting to clients is that they try, to the extent they can, to set up centers of excellence in the sense of: let's get a group of managers who will be handling performance, disciplinary, and capability processes, and let's get them trained properly on how to do those in a compliant way.

Otherwise, if a manager is doing it for the first time, there is just a greater risk. HR obviously plays a massive part in keeping those managers on the right track. We've been doing a lot more training for both HR teams and those managers who are running those processes on how to stay on the right side of the legal challenge that could follow. That's the key to me, which is, you cannot ignore the fact that the risk of getting it wrong is now higher. Pick your best people to run those processes and make sure that they are trained.

Sander

One of the things that you always worry about as an in-house counsel or a senior HR manager is whether this is a process that can be run in-house. Is this an investigation I can do in-house, or is this something I need outside resources for? Now that the stakes have changed in these cases with the potentially uncapped damages, do you see a change in that?

Do you think clients are going to rely more on outside investigators, or do you think that, with proper training, this can pretty much still be done in-house for the most part?

Hill

It depends what the issue is. If we're talking about performance, then it has to remain in-house because it is really the managers working with the individuals who can properly input on the areas of performance that are not working.

For conduct or disciplinary type issues, I see no reason why they cannot continue to be done in-house where appropriate, and in most cases it will be appropriate unless you really need a degree of independence. We see that more around allegations of sexual harassment, where it is often helpful to get someone who is completely independent and third-party to come in and do the investigation. The employer still has to take the decision based on the investigation outcome. I do not see that changing significantly.

Sander

To wrap this up, how do you see this changing in terms of how these cases are litigated? Is this now going to become, like we see in the U.S., a magnet for employee-side lawyers because now we have not only a lot more eligible claimants, but potentially more money at the end of the day? Do you see this as a big growth area immediately as these rules change?

Hill

I can see the usual suspects in terms of claimant lawyers licking their lips a bit, thinking there's going to be a lot more work and that they're going to be able to ask for a lot more money by way of compensation. It will change.

It will not be quite as drastic as all that, remembering that we've had uncapped claims for discrimination and whistleblowing forever. Employees and employers have been engineering those kinds of claims to try and get rid of the cap, so all it will mean is we'll be seeing more of that kind of behavior.

It is bound to lead to increased demands and increased volume, and more importantly, it's just going to be harder to settle for lower sums. It will be a change.

Sander

Thanks, Rob. I know you and your team have put together some very specific ideas for focus, particularly in the next five or six months, since we should all keep in mind that claims which might be below the threshold right now are going to be within the coverage of the law if the employee is still present after December 31st.

There certainly are some immediate measures people should take with difficult situations they have right now. Your team has done a great job laying that out. We will include in our notice of this podcast the link to some materials that you've prepared. 

Please, all of you listening in, click on that link to take a look at things that you want to be doing.

Thanks, everybody, for listening to this Jackson Lewis podcast, and keep tuned to our channel. We'll have a lot more for you and a lot of international matters involving different countries.