If an employee is dismissed, the normal remedy for them awarded by an Employment Tribunal is compensation. Tribunals do have the power to order the employer to take the employee back on, but in practice this very rarely happens. We look at the factors taken into account in assessing compensation, and in particular a very recent case on the Polkey principle.
The compensation for unfair dismissal is made up of two parts. The first is a basic award, which is calculated like statutory redundancy pay and is based on the employee’s length of service, age and earnings. The second element is the compensatory award. This is designed to compensate the claimant for the losses they suffer as a result of the unfair dismissal and in the vast majority of cases is capped at the lower of one year’s gross basic pay or £76,574. However, the Claimant cannot just sit back and do nothing for a year and expect their former employer to pay them what they would have earned. The Tribunal will expect them to seek to mitigate their loss and try to find alternative employment. If at the date of the hearing the Claimant has not found another job, the Tribunal will assess whether it feels it reasonable for the employee to still be out of work, or whether they should have already found new work. The Tribunal will also assess how far in the future to award losses – and this will depend on all sorts of factors such as the Claimant’s age, their skills, the job market in the area, and generally how employable they are. It will then make an award, but that assessment of loss is in many cases just the starting point.
Employers can seek to persuade the Tribunal to reduce the compensation in a number of ways. These include reducing the compensation to account for any payments already made to the Claimant, or in some cases showing that the Claimant had failed to follow the ACAS Code. In appropriate cases, employers can also argue that the employee contributed to their own dismissal by their behaviour. For example, if the employee was caught with his hand in the till and the employer simply dismissed without following a fair procedure, the dismissal is likely to be unfair, but the compensation (including the basic award) may well be reduced by up to 100%.
The other common way to reduce the potential compensation is the so called Polkey reduction. This is named after the case of Polkey v AE Dayton Services Ltd . In this very important decision, the House of Lords held that the compensatory award may be reduced or limited to reflect the chance that the claimant would have been dismissed in any event and that the employer’s procedural errors accordingly made no difference to the outcome. Polkey itself was an unfair dismissal claim following on from a flawed redundancy procedure, and the House of Lords held that the Tribunal should assess what the chances were that the employee would have been dismissed in any event. For example, if there is an entire closure of a business and no alternative roles, there is certainty that the employee would have lost their job in any event, and the fact that the employer failed to follow a fair procedure is likely to have made no difference to that. In an example like this, the Tribunal is likely to limit the compensation to the period it would have taken for the employer to have followed a fair procedure.
In the very recent case of Contract Bottling Limited v Cave and MacNaughton  the Employment Tribunal found that a redundancy process had been conducted unfairly and applied a 20% reduction to the compensatory award as it felt that was the percentage chance that the employees would have been dismissed in any event. However, this reduction was not based on any evidence and or reasoning, and appeared to be plucked from the air. On appeal, the Employment Appeal Tribunal (EAT) held that Tribunals must assess the evidence as to whether the employee would have been dismissed in any event, and look at the evidence which suggests that the dismissal would have been likely had a fair process been followed, as well as the evidence which suggests that the employee would not have been dismissed. It is only after this process that the Tribunal should apply a percentage reduction if it feels it appropriate.
It is worth noting that the Polkey principle is not limited to redundancy situations. For example, if there is a dismissal for misconduct with flawed disciplinary process, the Tribunal may look at whether the flawed process made any difference, and go on to assess what the chances were that the employee might be dismissed in any event. Employers can argue for a Polkey reduction as well as contributory fault, and Tribunal can apply both. In that event they will first apply Polkey, and then the contributory fault reduction.
This article only deals with some of the ways in which the compensation for unfair dismissal is assessed. As always, it is sensible to take specialist advice on specific situations.
If you would like to talk through a situation you are dealing with, or if you need advice on any aspect of employment law, please contact any member of the Pure Employment Law team (01243 836840 or [email protected]).