Oral statement to Parliament

Reforming employment relations

Good morning. My thanks to Terry Scuoler and the EEF for organising this event today. I think it is fair to say we have an extremely good and…

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
The Rt Hon Dr Vince Cable

Good morning. My thanks to Terry Scuoler and the EEF for organising this event today. I think it is fair to say we have an extremely good and fruitful relationship with this organisation. It is not empty flattery for me to say you have worked with us extensively on a series of tasks in government - particularly on the review of manufacturing, which is absolutely central to our economic strategy.

But I’m not here to talk about that today. The EEF has contributed to another review - our comprehensive review of employment legislation - with the same degree of frankness and insight. Emphasising the critical importance of flexibility and spelling out the impact of the laws governing unfair dismissal; employment tribunals; and regulations emanating from Brussels such as the Pregnant Workers Directive.

The willingness to speak truth to power is more important than it has ever been, because we are meeting against a backdrop of immense uncertainty in the global economy. The Eurozone sovereign debt crisis is reverberating through financial markets and it is affecting the real economy, here and elsewhere, depressing demand. How it plays out is going to have far-reaching consequences for the country.

But that is no reason for us to give into pessimism and resign ourselves to anaemic growth in the years ahead. That’s why in government we have embarked on a comprehensive review of growth and how we can clear away the structural barriers to economic recovery.

So today I want to set out our plans to radically reform employment relations - we want to safeguard workers’ rights, while deregulating to reduce the onerous and unnecessary demands on businesses.

We start with the proposition that flexible labour markets are an essential component of a successful economy. It’s essential they function in a way that employers have the confidence to take on new workers, create new jobs, so people out of work can get that first foot in the labour market.

Our starting point is that Britain’s employment practices stand up very well to international comparison. According to the OECD, the UK has one of the most effective and lightly regulated labour markets among developed economies: it describes us as a ‘successful employment performer’.

That is one of the reasons the unemployment rate remained lower than many forecasters had suggested during the recent crisis and recession. Many private sector managers and trades unions - including many in the manufacturing sector - showed remarkable wisdom and flexibility when they were really up against it. They agreed flexibility, pay cuts and part-time working in order to save jobs.

And I think businesses increasingly recognise this government’s determination to address the flaws that are present within a system that in general works very well. A recent survey of SMEs, commissioned by BIS, revealed that the proportion regarding regulation, including employment regulation, as the main obstacle to business success was only 6% - and it has halved over the last two years. We still have a way to go, clearly, but we are moving in the right direction and we are committed to addressing the remaining concerns.

In particular, we want to remove the perverse incentives in current employment framework that can dissuade responsible employers from hiring new staff for fear of the costs and the time incurred if it doesn’t work out.

Perhaps the most important step a growing or new business ever takes is to recruit its first employee. So the need to ensure flexibility for the employer and security for the staff member has to be very carefully balanced, otherwise it damages the incentive to make the relationship work.

That is the underlying reason why we launched a comprehensive review of employment laws, which my colleague Ed Davey has been leading in the department. And why today we are outlining a package of measures to improve the way businesses hire, manage and end relationships with employees, when this proves to be necessary.

But I want to stress that our proposals are not - quite emphatically not - an attempt to give businesses an easy ride at the expense of their staff. This is not about introducing a ‘hire and fire’ culture. We are not making a cynical choice to favour flexibility over fairness.

Instead, what we are doing here is hacking through the excessive red tape and regulation that prevents too many businesses from creating new jobs in the first place.

Reducing Workplace Disputes measures

Nowhere is this more apparent than in the employment tribunal system, which employers have told me time and again is far too costly, and time-consuming, and complex.

If you are a very big company you can afford the dedicated and expensive HR personnel to deal with cases that arise. But for small business owners, it means days dealing with it themselves personally - valuable time lost from running and growing their company.

And workplace disputes are increasingly being settled through tribunals - over 200,000 claims last year. We are in danger of getting away from the principle that they should be the last resort, not the first option. But there is a widespread feeling it is too easy to make unmerited claims - and that the whole system militates against early resolution of disputes through dialogue rather than confrontation.

To tackle these problems, and to remove the incentives that exist for employers not to hire, we intend to radically reform the tribunals system. Our plans are set out in the government’s formal response to the Reducing Workplace Disputes consultation which we conducted earlier this year, and we estimate they will deliver £40m in direct savings to employers each year.

First and foremost we want to reduce the number of tribunals happening in any one year - because we believe the only winners from that are the lawyers. So in future, all claimants will be obliged to submit their complaint to ACAS, in order that parties are given an opportunity to resolve their dispute through conciliation before it can be taken to a tribunal.

In addition, we are introducing a system of ‘protected conversations’. These will allow employers to raise issues such as poor performance or retirement plans in an open way, free from the worry it will be used as evidence in a subsequent tribunal claim. We will be consulting on the detail of this proposal in the New Year.

Where relations have broken down, we want it to be as easy as possible for both parties to reach a settlement without a tribunal. Therefore we will consult on simplifying compromise arrangements, to enable the two sides to reach a no-fault settlement in exchange for an agreement not to bring future claims.

However, there will always be those cases that cannot be settled through negotiation. But for more straightforward matters such as a dispute over holiday pay, a tribunal with all its costs is an unnecessarily burdensome way of finding a resolution. So I am today announcing our intention to look at ways of providing a quicker and cheaper alternative to a tribunal hearing - a ‘Rapid Resolution’ scheme.

And we are looking at a variety of options - but it could involve an independent legal expert reaching decisions based on written evidence. We will be working on the detail in the months ahead and the scheme will be subject to a full public consultation before being implemented.

Even in those instances where an employment tribunal is the only way a claim can be resolved, we believe there is substantial scope for improving the current very unwieldy, expensive and delay-ridden system.

The average claim costs £4,000 and takes 24 weeks, which may not be an issue for a major employer but it is for an SME. And what often happens is that some employers decide to settle rather than face the time and expense required to defend themselves.

For this reason, I have asked Mr Justice Underhill to undertake a root-and-branch review of the rules governing employment tribunals, in order to modernise them and ensure we have a system that meets the needs of an economy which is striving to recover and grow.

And we believe it is reasonable there should be a cost to starting a tribunal case - especially if it encourages an individual to think long and hard about the validity of the claim. Too many people have unrealistic expectations about the scale of award they may receive, and perhaps don’t think carefully about the type of claim they should bring.

Introducing different fees for different kinds of claim will encourage potential claimants to fully consider their cases - leading to more realistic expectations for individuals and greater certainties for employers.

But I want to make it very clear that for those with a genuine claim, fees will not be a barrier to justice. We will ensure that there is a remissions system for those who need help.

I can confirm therefore that the Ministry of Justice will shortly publish a consultation on introducing fees for anyone wishing to take a claim to an employment tribunal. We will be seeking views on two options. The first proposes a system that involves payment of a fee to lodge a claim, and a second fee to take that claim to a hearing. The second option proposes introducing a £30,000 threshold, so those seeking an award of more than £30,000 will pay more.

Finally, we want to close a loophole in the Public Interest Disclosure Act relating to whistle-blowing. It has become apparent through case law that employees are able to blow the whistle about breaches to their own personal work contract. This is not what the legislation is designed to achieve and we are going to stop this in future.

Taken together, these measures will address the unnecessary bureaucracy associated with employment tribunals; the excessive costs, and the time wasted on lengthy hearings. A coherent and far-reaching programme of reform in this area is essential and that is what we are pursuing.

What we need to do is balance our support for job creators to grow their businesses with the need to provide job security in these uncertain times. And that’s why we are doubling the qualifying period for the right to claim unfair dismissal from one year to two years.

The aim of increasing the qualifying period is to give greater confidence to employers in recruiting new employees, without undermining workers’ sense of job security at a time when consumer confidence is low.

However, there have been some suggestions over recent weeks that our dismissal procedures are too onerous, particularly for small businesses, and questions over whether they lead to fair outcomes for employees and employers.

What is required is a cool analysis of the evidence, the views of employees and employers, and the implications for job creation and productivity. And that is why, alongside the measures I have set out, we will begin a call for evidence on two proposals for reform of our employment laws. I want to hear the different views of employees, business organisations and other interested parties.

First, we are seeking views on a proposal to introduce compensated no-fault dismissal for micro firms - that is those with 10 or fewer employees. Now I stress that we are seeking evidence on both sides. We don’t want to dent job security and consumer confidence and we have to seek a balance here.

Second, we will look at radically slimming down our existing dismissal processes. These can be, and are often perceived to be, lengthy and unfair to both employers and employees. So we will also be seeking views on how we might move to a simpler, quicker and clearer dismissal process - including, potentially, by working with ACAS to make changes to their Code, or by introducing supplementary guidance for small businesses.

Our objective is to strike a sensible balance between the need to give poorly performing workers reasonable warning that they should improve their performance; and the need to ensure that employers, especially SMEs, have the flexibility to manage their staff if they are not performing adequately in spite of warnings. And to do so without getting tangled up in red tape and bureaucracy.

So we will consider all the evidence and representations we receive over the coming weeks, and then decide how best to take forward the government’s twin objectives of supporting private sector job creation while ensuring employment security.

In this context, I am struck as I travel the world promoting British businesses and exports how far behind Germany we are, particularly in many emerging markets. Yet the Germans have a model of employee relations where they treat their employees as a resource, an asset - they don’t think of them as a cost, a liability. Their employees help to run companies, and indeed set executive pay. I think we could do with a bit more ‘Vorsprung durch Technik’ in British businesses.

Of course, the vast majority of UK businesses do treat their staff with respect - it is in their commercial interests to do so, to have motivated staff and a culture of mutual trust in the workplace. Our reforms to employment tribunals, and commitment to reviewing dismissal procedures, will mean that businesses can once again have the confidence to hire the staff they need to grow and thrive.

Red tape challenge on employment law

Unfortunately, that doesn’t mean that all the issues associated with being an employer have been solved at a stroke.

The Red Tape Challenge on employment law, which saw all the rules and regulations published online so businesses could tell us what was causing them problems, has identified a number of other areas ripe for reform. As a result, of the 159 regulations looked at, over 40% are to be merged, simplified or scrapped.

For example, the bureaucracy associated with a Criminal Records Bureau check has been a long-standing complaint for employers and staff alike. The length of time it can take has meant some people are not able to start the job they have been offered. And the need to get fresh clearance every time a person changes jobs just adds to the frustration and expense, actually £44 a time.

So the Home Office has pledged that, from 2013, once a CRB check has been conducted the results will be available and instantly accessible online, for employers to confirm no new information has been added since the check was conducted. For a small annual fee, the individual’s record will be kept up to date - putting an end to agonising delays and repeated expensive applications.

This long overdue reform will be a particular relief to employers and self-employed people who have to obtain a new check for each new contract. It is a simple change that will bring real benefits and make the search for a job that little bit easier.

Similarly, we have plans to simplify and streamline the UK’s recruitment sector to help smooth the path into work. It is an absolutely key part of our flexible labour market, enabling companies to respond to fluctuating demand and giving individuals an important entry point into the jobs market.

Around two million people find work through the recruitment sector - but the rules that hiring businesses must comply with are hugely complex. We are going to consult next year with a view to scrapping unnecessary rules and making the remaining ones more comprehensible to business, so they can use agency workers as flexibly as possible.

Alongside this, we are committed to reviewing the paperwork around implementation of the Agency Workers Directive, in 18 months’ time, with a focus on looking for opportunities to simplify it.

And we will also simplify the National Minimum Wage regulations, merging the current body of 17 different regulations into a single consolidated set, and complementing the work the Low Pay Commission is already doing to streamline the regime.

I want to be absolutely clear this is not an attempt to reopen discussion on the principle of a National Minimum Wage - our commitment to that is absolute. We merely want to ensure that its administration is as light touch as possible.

This suite of measures will help to make the process of employing a new staff member less daunting, with less time wasted on form-filling and box-ticking merely to please the bureaucracy.

But just as importantly, we need to ensure businesses have the flexibility to manage their workforce in a way that enables them to respond to changing demand and market patterns.

So today we are launching two further calls for evidence. The first is on the rules governing statutory consultations on Collective Redundancies. We often hear that the 90-day period is too long and consequently it holds up the implementation of agreements that have already been struck.

This inability to get on with the necessary restructuring can make the process even more painful than inevitably it will be. We want to explore the consequences of reducing the current 90-day limit to 60, 45, or possibly even 30 days. But we are looking for evidence and we have an open mind.

However, we understand that there are real benefits to having effective consultation periods. So we want to explore how employees’ representatives use consultation to limit the impact of the redundancies on employees. And how Government can use the minimum periods to work with affected employees to help them find new employment or training opportunities. When we have all the information - both sides of the argument - we will make a decision based on the facts.

Our second call for evidence is on the current TUPE rules. Businesses have expressed concerns that the arrangements are overly bureaucratic and may, in some areas such as service provision, unnecessarily gold-plate European rules.

We are therefore seeking views on how the rules might be simplified to enable necessary business restructuring, while continuing to provide appropriate levels of protection to employees.

The plans we are setting out today will give businesses the confidence to take on new staff - and create new opportunities for people looking for work. It is important to remember that fact, because the guiding principle is to ensure that everyone who wants to work, and is able to so, can do so.

So we specifically asked Dame Carol Black and David Frost to undertake their review into sickness absence. They published their report on Monday, setting out recommendations to ensure people are not shut out of the labour market purely because of ill-health. We will look at them in detail and respond to the report next year.

That same principle - helping people to find work and keep it - also underpins our commitment to extend the right to request flexible working, and to modernise maternity leave so it becomes shared and flexible parental leave. These reforms will help millions of people juggle their commitments at work with their responsibilities at home.

Family life has been transformed in recent decades. Most women now go out to work and men shoulder more of the duties at home - at least we hope they do. As roles and responsibilities have changed, our lives have become increasingly complex. And that’s not just true of parents with young children. Many have to combine working with looking after an elderly parent, a sick partner, or a grandchild. Extending the right to request flexible working to everybody will make that difficult job easier.

But we are committed to extending flexibility at work in a way that avoids imposing any unnecessary burdens or costs on companies. We want to deliver the real economic and business benefits that flexible working brings. Research by the CBI, for example, has found that 63% of firms offering flexible working report lower staff turnover - producing savings on recruitment and training costs. It is in their interests, too.

Greater flexibility is also required in relation to parental leave, to keep up with the profound shifts in society we have witnessed in recent decades. Nearly all fathers, 94%, take time off when their child is born, but around 30% are supplementing their paternity leave with their holiday entitlement. There is a demand here that is not being met.

Indeed research by the Fatherhood Institute has found that a quarter of fathers change jobs, often in the first two years after a child is born, so they can spend more time with their families. This inevitably generates costs for employers, so the answer lies in a system of leave that reflects modern patterns of parenting, but in a way that does not mean extra costs or regulation for business.

Our plans empower individuals to balance work and home life, helping to keep them in the labour market, and they give businesses a larger pool of potential recruits. They will also enable companies to hold onto skilled and experienced staff and keep down costs. So everyone should benefit.


So, let me just say in conclusion, I am conscious that the plans I have outlined today focus on legislative changes to the employment law framework. But changing the legislation is only a beginning. We want to see a wider change in the employment relations culture.

A culture that establishes dialogue rather than confrontation as the norm between employers and employees. That trusts people to do the right thing rather than relying on regulation to deal with every single issue that arises. And that ensures businesses have the confidence to hire the talented and committed workforce they need in order to thrive.

The package of measures I have announced today carefully balances the needs of employers with the rights of individuals. But we still have to work through the fine detail in the months ahead to make sure we get it absolutely right.

So that is why, as we focus on implementation, we are asking for your input - to ensure our ambitious plans to deregulate and modernise employment relations genuinely help fuel the economic recovery we are striving to achieve.

Published 23 November 2011