3 Essential Employment Law Changes that Small Businesses Need to Know About

Over the last 18 months there have been some significant changes in employment law as a result of the Coalition government's 'Red Tape' scheme to enliven the economy by encouraging businesses to grow and employ new staff.  Three of these measures will serve to help protect businesses, especially small businesses, against claims of unfair dismissal.

Firstly, on 6 April 2012, the Unfair Dismissal and Statement of Reasonsfor Dismissal (Variation of Qualifying Period) Order 2012 (SI 2012/989) came into force and increased the qualifying period for bringing an unfair dismissal claim from one year to two years’ service. Thus, all staff that commenced their employment after 6 April 2012 will have to wait two years as opposed to one year in order to qualify to bring an unfair dismissal claim. This means that businesses are now free to terminate employees’ contracts within two years of them starting work without the worry of the said employee bringing an unfair dismissal claim against them.

Secondly, on 29 July 2013, section 14 of the Enterprise and Regulatory Reform Act 2013 came into force. This prevents pre-termination negotiations between employers and employees from being disclosed in Employment Tribunal proceedings for ordinary unfair dismissal claims, which was not the case previously. This enables employers to attempt to terminate a staff member’s employment through confidential negotiations rather than commence a disciplinary or redundancy process, which can often take a considerable amount of time to complete. This allows businesses to confidentially terminate employment without the risk of this evidence being used against them during Tribunal proceedings. This is especially useful for small businesses who may have limited funds and need to get rid of staff quickly in order to survive or flourish.

Thirdly, in July 2013, The Unfair Dismissal (Variation of theLimit of Compensatory Award) Order 2013 (SI2013/1949) was published. This Order came into force on 29 July 2013 and changes the upper ‘compensatory award’ limit for unfair dismissal to either 52 week's pay or £74,200, whichever is lower.

Ironically, this change has come into force at the same time as the EU officially emerges from the post-credit crunch recession, with industry sectors on the continent, especially in France and Germany, and the housing market in the UK, showing green shoots of recovery to mirror our long-awaited balmy English summer.

So what is the significance of this change? The main area of change relates to the option of 52 week's pay as the upper compensatory award limit, that is unless 52 week's pay is more than £74,200. Thus, for an employee on a yearly salary of less than £74,200, this yearly salary amount will be the maximum that they can be awarded at an Employment Tribunal for unfair dismissal (along with a possible ‘basic award’ of up to £13,500). Considering that the average 52 week salary in the UK is £26,000, this greatly limits what an employee can be awarded. This is significant for small businesses as most of their staff will be on salaries of less than £74,200 per annum. Thus, if they have to pay an award to an employee as a result of Tribunal proceedings, it is likely to be closer to the employee’s annual salary which would be easier to absorb than a much higher award of £70,000 or more.

Interestingly, from 29 July 2013, Employment Tribunals will now charge fees for each claimant. The combination of Tribunal fees and lower awards means that prospective claimants for unfair dismissal may be priced out of using lawyers to represent them at Tribunals. This is exacerbated by the fact that, traditionally, legal costs cannot be recovered in an Employment Tribunal. Such prospective claimants may be forced to act as litigants-in-person which may in turn affect their chances of success. This serves as another tactical advantage for businesses.

As businesses will now be aware of the maximum compensatory award an employee could be awarded, this could prompt employers to make lower offers in settlement negotiations. This in turn will help businesses reduce litigation costs and exposure.

These changes will also make claims harder for employees as they may need to find grounds for discrimination to add to their unfair dismissal claims in order to secure higher awards, or alternatively claim only for discrimination against their employers. Either way, this narrows their options for a solution through litigation, sometimes the only option available.

There is no doubt that these new changes should promote the growth of businesses by aiding the termination of employee’s contracts via confidential negotiations and controlling litigation risk and costs regarding unfair dismissal. This should certainly be a much needed shot in the arm for small businesses, many of which have struggled since the downturn to keep afloat in stormy seas.

Mediate or Meet the Cost?? Failing to Consider Mediation Could be a Costly Strategy

The dispute resolution landscape post the Jackson Reforms earlier this year has taken on a slightly more rugged if not treacherous appearance, and this is certainly the case concerning the widespread changes to the costs regime. Lord Woolf began the crafting of a more undulating and challenging dispute resolution landscape back in 1996 and now Lord Justice Jackson has added some lofty peaks for litigants and litigators alike to be aware of, or ignore at their peril. These measures have been taken to minimise abuses and streamline the court process by introducing sanctions with a touch more bite. Certainly some sturdy trekking gear and thorough map reading will be required to navigate these new ranges.

Case law is now filtering in which is providing a picture of how the courts intend to interpret some of the new costs measures that were introduced back in April 2013. One such key measure is that the costs of a case must be 'proportionate' to the amount in dispute. No longer will excessive legal costs be justifiable because they were merely 'necessary'. Thus, if the amount in dispute is £200,000, then legal costs to trial of £150,000 would most likely be disproportionate, regardless of how much work was involved.

A judge may even agree that the costs were necessary but be forced to reduce them under the new proportionality criteria. As such, prospective litigants and litigators must carefully budget before and during the litigation process and this will be closely monitored by the court, with deviation from budgets being punished. One solution to increasing and sometimes hard-to-predict litigation costs is early mediation.

Interestingly, Lord Justice Jackson published the ADR (Alternative Dispute Resolution) Handbook as part of his wide-ranging reforms to civil litigation in 2013. This report, among other matters, stipulated that if your opponent offers mediation then this must be considered with constructive engagement. To merely ignore such an offer would attract a costs sanction.

This advice regarding mediation has now been confirmed by the Court of Appeal in the recent case of PGF II SA v OMFS Company 1 Limited [2013] EWCA Civ 1288. In this case the defendant ignored an invitation by the claimant to consider mediation. Ordinarily, a party can justify refusing an offer for mediation by citing various factors that were laid out in Halsey v Milton Keynes General NHS Trust [2004] 1 WLR 3002. Such factors include the merits of the case and whether such mediation would have a reasonable prospect of success. If a party could justify to the court a refusal to mediate according to these 'Halsey Principles' then no costs sanction would generally follow.

However, in line with Jackson's ADR Handbook advice, the Court of Appeal held that to simply ignore an offer to mediate would attract a costs sanction automatically, regardless of whether it was justifiable under the Halsey Principles or not. As such it was held that the defendant would be liable for more of the claimant's costs than if they had simply engaged with the other side in relation to their mediation request. This is in line with the new 'proportionality' requirement as a successful mediation can, in principle at least, greatly reduce subsequent litigation costs and thus is an avenue which must be at least considered properly if suggested.

Some prospective litigants may view considering or undertaking mediation, especially at the outset, as a sign of weakness. However, with possible costs recovery implications now in place around the refusal to consider mediation, litigants should ask their legal advisers to lay out the mechanics, timings and costs of a possible mediation as this may prove more cost effective than litigation, from a commercial perspective.

The key point to take away for litigants and litigators is that consideration must be given to the possibility of mediation if the other side suggest mediation, whether suggested in conversation or in writing. A response must be given to a request and if mediation is not appropriate then you must carefully apply the Halsey principles to the facts to justify your refusal. It may be that the court will issue more 'Ungley orders' - these are orders of the court which require parties to consider ADR before trial and file reasons for any refusal. These objections can then be used by the court when considering costs, which could prove costly if ADR would have proven significantly cheaper than any subsequent yet forced litigation.

No doubt more case law will emerge in the coming months to further augment the new costs regime implemented by the Jackson Reforms. It is doubly important that one now steps the path towards contested litigation with a firm and carefully placed footing, so as to avoid any unpleasant pitfalls.