If we want to see more jobs and money, it’s important to get employment law right. Businesses – particularly smaller businesses with less than 250 employees – feel strangled by the weight of employment law. Many are discouraged from expanding until absolutely necessary for fear of the costs that may fall on them if a hire goes wrong.
Flexible labour markets are key to increasing jobs and money according to the OECD’s growth project. The UK’s current employment laws reduce job market flexibility and are a major cost to business. Smaller businesses account for 6 out of 10 UK private sector jobs. All this means that so called employment protection is having the perverse effect of holding back new jobs that could be created in the UK economy.
The latest industrial tribunal statistics show that there were 236,000 claims made to Employment Tribunals in 2009/10. That’s a massive jump from 151,000 in the previous year. The CBI calculated the cumulative cost of employment law between 1998 and 2009 at £70Bn – which it says is equivalent to the employment costs for more than 215,000 people in full-time jobs paid at average earnings throughout the period.
What is to be done? There has been much discussion about increasing the period of employment protection from the current 1 year to 2. That would particularly encourage smaller businesses to grow and provide relief from much of the burden of labour law. Yet there are some other reforms, less discussed, that are also worth considering.
First, the maximum award an industrial tribunal can make is £63,500, rising to £68,400 from February. This is because the Labour Government increased the maximum level from £12,000 (at a time when average earnings were £14,888) to £50,000 in 1999. The amount has been uprated by inflation ever since. Surely it would be more appropriate for the maximum compensation level to be equal to average earnings?
Annual average earnings for employees stood at £25,900 as at April 2010. At that level, the fear factor for employers that a huge award could be made against them would be reduced. It would give more confidence to job creators. The number of tribunal awards greater than average annual earnings is just over 5%. So few would lose out in practice, while the confidence bounce to employers would be substantial.
A second reform that might be considered is more effectively to tackle discrimination in the workplace. The current regime of having no cap and no minimum length of service for such claims stirs fear on the part of all employers. The CBI rates this as a serious concern and has called for an end to uncapped claims. Yet the current system enables guilty employers quietly to settle such claims and hush them up. Could a more effective system be enforcement by public fines? This would ensure more effective targeting of poor employment practices, rather than the current system where all employers are subjected to the nagging concern they might be subject to spurious uncapped claims.
Finally, nearly half of employers have reported a rise in weak and vexatious claims. In almost a third of claims employers now settle even though they are advised they will win. There are ways the Industrial Tribunal system could dispose of such claims more quickly. Pre trial reviews and more effective case management are possible under current law, yet rarely used. Changing this and making it is bit more expensive to make a tribunal claim or require a deposit where a pre trial review deems a claim is weak would help reduce the number of such claims. So too would greater use of costs orders where a claim is clearly lacking in merit. These things may seem dry and dull, yet they matter because such claims cost business money and management time that would be more fruitfully used to create new jobs and economic growth.
Regulation falls hardest on smaller business. Small businesses can’t afford big HR departments nor employ people who are expert in the minutiae of regulations that affect their business sector. Making employment law lighter touch will not only help create more jobs across the board. It will particularly encourage more smaller businesses to take the plunge, create new jobs and help power us out of Labour’s downturn.