Cutting the cost of dismissal

As a means to simplify Australia’s unfair dismissal laws, the Rudd Government is considering the possibility of introducing new procedures that would provide formal warnings to employees before they could be dismissed. Currently there are no formal guidelines for warnings in dismissing a worker, and many business use the “three strikes and you’re out” rule.

However, under the proposals – currently being put to industry by Small Business Minister Craig Emerson – if employers and businesses followed the new procedures, these reforms could provide employers some protection from future legal action.

The real question is, will it work? Many businesses seem concerned given their experience under the Keating legislation in the early 1990s which required a number of written warnings before an employee could be sacked. Many business leaders at the time suggested that the Keating unfair dismissal laws were skewed too much in favour of workers and was costly to administer and provided little protection from future legal action.

However, Emerson has suggested that this proposed legislation would be different in providing benefits by simplifying procedures and through the “fair dismissal code”. While potentially providing a level of protection, it will remain to be seen how the courts and the newly created Fair Work Australia will interpret the code and the level of protection given to business.

Perhaps a key to understanding the proposals is to look at similar systems internationally.

The most noteworthy mediation model is Britain’s informal conciliation framework for conflict resolution including unfair dismissals.

Principally this is provided by Britain’s Advisory, Conciliation and Arbitration Service (ACAS), which is publicly funded and aims to provide up-to-date information, conciliation, independent advice and high-quality training, and works with employers and employees to solve problems and improve performance in an independent, impartial and confidential manner.

A recent report reviewing ACAS activities concluded substantial net economic benefits worth nearly £800 million a year across British businesses, employees and the economy. According to the report, the net economic benefit of ACAS individual conciliation activities principally through unfair dismissal conciliation and resolution was £154 million, providing a cost benefit ratio of 6:4.

The intervention of ACAS in individual disputes reduces employers’ potential costs collectively by £223 million. This was made up largely of lower legal fees and recruitment costs in cases that are settled, compared with those that proceed to a legal hearing. This also included businesses’ own costs in terms of management time spent on cases proceeding to a hearing compared with those which are settled.

Employees also save from more in earnings and less in legal fees. According to the report, British taxpayers are also winners, saving the £71.5 million annually in the cost of hearing days as a result of fewer cases proceeding to a hearing. However, third parties – lawyers, organisations involved in recruitment services, services supporting claimants and other individuals – lose substantially.

Given that the average Australian Industrial Relations Commission payout from employers is only a few thousand dollars, with many claims settled simply on the basis of a good referee report, the ACAS experience shows that a code of conduct, as proposed by the Rudd Government and based around informal Fair Work Australia procedures, may have the potential to address the real hidden cost in unfair dismissal claims that have not be acknowledge in the past.

Dr Paul Gollan is an associate professor in the department of business, Macquarie University, and an associate fellow in the Employment Relations and Organisational Behaviour Group at the London School of Economics.

This story first appeared in www.BusinessSpectator.com.au