Happy Birthday: Unfair Dismissal at 50 – by Hugh Collins

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1. Introduction

Half a century ago, on the 28^th of February 1972, the provisions of the Industrial Relations Act 1971 that established an employee’s statutory right not to be unfairly dismissed came into force.  To mark this anniversary, I offer some reflections on the significance and impact of this major legal innovation.

2. The Birth of Employment Law

Given the significance of employers’ disciplinary powers to back up their control over the workforce to further the purposes of the business, this legislative fettering of managerial power was undoubtedly a major qualitative leap in the regulation of employment relations.  Indeed, it is arguable that no previous legislation in the U.K. had so directly tackled the dangers of oppression in the relation of subordination that lies at the heart of contracts of employment. 

Previously, the law had promoted and structured a system of industrial pluralism through which employers and trade unions would negotiate collective agreements that settled terms of employment and often addressed other potential sources of conflict in the workplace.  Managerial power was controlled by collective agreements, but the legitimacy of this system of control was that any constraints had to be agreed to by the employers, albeit under the threat of industrial action from trade unions, and not imposed by the law.  Furthermore, the collective agreement could provide dispute resolution procedures through which employers and trade unions could resolve issues autonomously, without legal intervention.   Although the law controlled the use of collective power by trade unions, for the most part it abstained from direct regulation of terms and conditions and the exercise of managerial powers. 

 In contrast, the statutory right to claim unfair dismissal both placed a mandatory control over disciplinary powers and placed dispute settlement under the control of the legal system.   Apart from the Victorian Truck Acts that restricted the employer’s power to impose arbitrary deductions of pay, no legislation after the industrial revolution had previously imposed controls over any of the core managerial disciplinary powers, of which dismissal (and the threat of it) is arguably the key ingredient.  One might even say that the legislation appeared to introduce the Rule of Law into a field that was previously regarded as a matter of private prerogative power.   

With the benefit of hindsight, that cold February in 1972 – when we suffered power cuts and brushed our teeth in the dark to save electricity while Prime Minister Edward Heath and the miners struggled over who was running Britain (on that occasion – the miners) – turned out to be a watershed moment in the history of labour law.  Indeed, we might say that the legislation planted the seeds of a change in name for the subject from labour law (or the law of labour-management relations) to employment law.  Instead of legislation pursuing the policy of promoting and channelling voluntary collective bargaining in accordance with the philosophy of industrial pluralism, which was the main purpose of the Industrial Relations Act 1971 as a whole, the provisions on unfair dismissal introduced a new agenda of regulating employment with mandatory, individual statutory rights against an employer. 

This switch in legislative strategy involved three vital transformations: it rejected collectivist solutions in favour of individual dispute resolution; it removed the law’s reluctance to intervene in private contractual relations and treated the legal rights of employees as within the scope of mandatory public standards; and the legal system and lawyers were given the power to resolve disputes between employees and employers on an increasing range of matters, from dismissal, to discrimination, to the minimum wage and working hours.  The protection of workers’ rights has recently culminated in the law of unfair dismissal providing a main vehicle through which the rights guaranteed by the European Convention on Human Rights can be protected against interference by employers.   

3. The Origins of the Legislation

Oddly, Professor Sir Otto Kahn-Freund, the legal scholar who is frequently credited with the creation of the subject known as labour law in the U.K. and who had extolled the virtues of the British industrial pluralist system of ‘collective laissez-faire’, was the person who had masterminded this transformation in the orientation of the law.   He had reluctantly realised that in many respects the British system was not working properly in accordance with the ideas of industrial pluralism.  Perhaps its worst feature was that, unlike most developed countries in Europe and North America, collective bargaining in the U.K. had not developed effective grievance procedures for the vast majority of workers covered by collective agreements.  The result was that if a managerial decision to dismiss or discipline a worker had to be contested, the only way to do so was through industrial action.  Strikes over dismissals in the 1960s constituted about a third of the total number of strikes (of which, unlike today, there was a very large number).  There were no options available for workers apart from uncomplaining submission to unfair managerial discipline or all-out struggle. 

A new statutory right to bring a legal claim for unfair dismissal was recommended in a chapter in the Donovan Commission Report (Royal Commission on Trade Unions and Employers’ Associations, Cmnd. 3623 (1965-8) [525]-[545]), reportedly penned by Otto Kahn-Freund, which preceded and provided the basis for the subsequent Industrial Relations Act 1971.  The new right was recommended in part to reduce the number of strikes over dismissal, a task in which it was almost completely successful, and in part to provide protection against unfair dismissal for those who were unlikely ever to benefit from effective collective bargaining over grievance and disciplinary procedures.    The law was also required to protect workers on strike against selective dismissals in return for their trade unions agreeing to participate in the new statutory scheme that regulated collective bargaining and industrial action – an invitation that trade unions effectively declined. 

The legislation that came into effect in February 1972 was remarkably similar to the current law in 2022.  There have been clarifications and additions, such as the amendment of the definition of dismissal to include constructive dismissal and the introduction of the basic award, but the essential principles of the statutory right to claim unfair dismissal are much the same. The current qualifying period of two years was there at the start.  The upper limit on the ‘just and equitable’ compensation of a year’s wages or £4000, whichever was the lesser sum, was there too.  The core question about fairness, then as now, was whether it was reasonable or unreasonable for the employer to have dismissed an employee for the substantial reason given as the principal reason for the dismissal.  Although the details of the legislation such as the length of the qualifying period are politically contested, the general principles and structure of the legislation therefore seem to be supported by a cross-party consensus. 

4. The Flaw in the Industrial Tribunal system

Unfortunately, that consensus has not extended to the judiciary.  Kahn-Freund may have foreseen the potential problem that the High Court might be reluctant to interpret the legislation in ways that interfered with managerial prerogatives.  He had witnessed a similar problem with the federal courts in Germany in the Weimar Republic.  The proposed solution of the Donovan Commission, as in other countries, was to create a specialist court to interpret and apply the new law of unfair dismissal.  The tripartite industrial tribunals, consisting of a legally trained chair and two wing-persons (one drawn from employers’ organisations and the other from trade unions) would bring both expertise and sympathy for the goals of the legislation to the hearing of claims brought by employees.  In the early days, the tribunals often held their hearings inside the factory and dispensed justice informally and expeditiously.  But that sensible practice soon ended.

There was a fatal flaw in this industrial tribunal solution to the risk of an unsympathetic judiciary.  The legislation provided that there could be appeals on points of law to higher courts, in 1972 to the National Industrial Relations Court (NIRC) (now the Employment Appeal Tribunal (EAT)), and thence to the Court of Appeal and the Judicial Committee of the House of Lords (now the Supreme Court).  Since these rights of appeal were not full appeals on the merits, but merely judicial review of the legality of tribunal decisions, it might have been expected that the courts would be excluded from all but the rare case when a tribunal had acted irrationally or plainly contrary to the law. 

But the courts used the power of review to interpret the legislation in particular ways and find an error of law if a tribunal had the temerity to ignore the judicial pronouncements on the correct meaning of the legislation. In practice there was no decision of an industrial tribunal that could avoid a pedantic challenge that a tribunal had drunk only from the pure water of the statute and had not mixed it with the toxins of judicial precedents.  Ultimately, therefore, all the crucial questions of interpretation of the meaning and scope of the legislation were decided by High Court judges. 

5. The Judicial Legacy

Let us briefly recall some of that judicial legacy. The first president of the NIRC, Sir John Donaldson, was quick off the mark.  In Norton Tool Co Ltd. v Tewson [1972] ICR 501, the court insisted that the just and equitable compensatory award should be confined to identifiable items of economic loss, such as loss of income during a period of unemployment following dismissal.  This ruling excluded aggravated damages for psychological suffering caused by the manner of the dismissal including the failure by the employer to follow a fair procedure. Judges have always been anxious to minimise levels of compensation in order to remove much of the deterrence against unfair dismissals. 

Lord Denning MR made his own unique contribution.  He put a stop to ‘whimsical’ tribunal decisions on constructive dismissal in Western Excavating (ECC) Ltd v Sharp [1978] ICR 221 (CA) by insisting that only a repudiatory breach of contract could satisfy the statutory definition now contained in Employment Rights Act 1996, s. 95(1)(c).  Shortly afterwards, in Hollister v National Farmers’ Union [1979] ICR 542 (CA), Lord Denning explained, however, that if the repudiatory breach of contract by the employer was for a sound business reason, then an employee’s refusal to accept new terms of employment would give the employer a substantial and probably fair reason for dismissal. 

Perhaps the most significant contribution from the House of Lords was in Polkey v A.E. Dayton Services [1988] ICR 142 (HL).  Although the judicial committee firmly endorsed the decisions of tribunals to hold that a dismissal would normally be unfair if the employer followed an unfair procedure (or simply dismissed summarily), it also endorsed two damaging limitations on the protection of fair procedures.  The first, originally devised by the NIRC in Earl v. Slater & Wheeler (Airlyne) Ltd [1972] ICR 508, was an acceptance that, if the dismissal had been for a good substantial reason such as misconduct, the failure to follow a fair procedure would probably result in a finding of unfair dismissal, but then a tribunal would be expected to reduce the compensation to nil or thereabouts. 

The second limitation, known as the ‘Polkey deduction’, holds that compensation should be reduced to reflect the likelihood that a (fair) dismissal would have occurred in a short period of time in any event, so that the employee has not suffered any loss from the unfair dismissal.  This decision was extended from redundancies to disciplinary dismissals in cases such as Thornett v. Scope [2006] EWCA Civ 1600, [2007] ICR 236 to require tribunals to speculate on whether the employer, though having just dismissed an employee unfairly, would have decided to dismiss the employee fairly in the near future, in which case, the employee has lost nothing by the unfair dismissal.  The consequence of these decisions is to provide an escape route for most employers from having to pay compensation for failure to follow a fair procedure.

6. The Range of Reasonable Responses test of fairness

The most notorious and damaging judicial interpretation of the legislation was their replacement of the statutory test of fairness.  Despite minor amendments, the statute has always stated the core question to be that the tribunal must decide whether the employer acted reasonably or unreasonably in the circumstances in treating the reason for the dismissal as a sufficient reason for dismissal.  Some decisions of the EAT seemed to indicate that this test of fairness was the same as the test of reasonableness for judicial review in public law laid down in Associated Provincial Picture Houses Ltd v Wednesbury Corp [1948] 1 KB 223 (CA): the tribunal should defer to the management’s decision unless no reasonable employer would have dismissed the employee in the circumstances.  Browne-Wilkinson J in Iceland Frozen Foods Ltd v Jones [1983] ICR 17 (EAT) said that interpretation of reasonableness was wrong, but then he proceeded to apply the same test dressed up in different language.  The crucial point was that the tribunal should not impose its own judgment about whether the dismissal was reasonable or unreasonable – despite that being exactly what the statute says the tribunal should do.  Instead, the tribunal needs to ask itself whether the employer’s decision was so unreasonable that it fell outside the range of reasonable responses of employers. 

No-one has ever been able to explain to my satisfaction why this ‘range of reasonable responses’ (RORR) test is any different from the Wednesbury formula.  It defers to all but the completely indefensible substantive reasons for dismissal.  Moreover, the RORR test is incoherent.  How can a tribunal know what reasonable employers might do without forming their own opinion about reasonableness?

In practice, the allegation that the employment tribunal has substituted its own view of reasonableness for that of the hypothetical range of reasonable employers is always available to the courts in order to reverse decisions of the tribunals that they do not like on the merits.  When the Court of Appeal in Post Office v Foley and HSBC v Madden [2000] ICR 1283 (CA) castigated the lower tribunals for departing from the RORR test by substituting their own opinion about the reasonableness of the investigation prior to the dismissal, the Court of Appeal promptly did the same act of substitution by saying that the procedure followed by the employer had been reasonable.  In short, it is not possible to make a decision about whether conduct was reasonable without making a judgment about what conduct should be regarded as reasonable.   

7. Extracting the teeth from the legislation

Why were the judges so unsympathetic to the apparent purpose of the legislation to subject an employer’s decision to dismiss an employee to an assessment of its reasonableness?  After all, who could object to a requirement that employers should only dismiss employees when it was fair to do so?  No employer would ever admit to doing otherwise than acting fairly. 

A sociological explanation suggests that most judges are out of touch with the world of employment.  Since they have mostly been self-employed barristers, with no personal experience of being an employee and working under the threat of dismissal, and certainly no knowledge of managing a business, they have no sense of what most people would regard as reasonable or unreasonable disciplinary action.  Unsure what is reasonable, judges normally defer to managerial decisions. 

An alternative ideological explanation emphasises how much the judges remain faithful to the common law principles of master and servant under which unquestioning obedience to an unfettered discretionary power was sustained by the law of contract.   In the common law, the workplace was a private space, not a realm where public policy sought to regulate behaviour.   The premise of the common law was that disciplinary action was simply outside the law, a matter of private prerogative power, so that an employer could dismiss an employee for bad reasons or no reasons at all. 

The combination of the judicial lack of expertise and the premise that dismissal was none of the law’s business combined to direct the High Court judges to extract the teeth from the legislation.  The rule of law was introduced into the governance of the workplace, but the judges ensured that for the most part it only sanctioned arbitrary and irrational dismissals.  The judges want to ensure that dismissals can be harsh but fair. 

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(Suggested citation: H Collins, ‘Happy Birthday: Unfair Dismissal at 50,’ UK Labour Law Blog, 3 March 2022, available at https://uklabourlawblog.com/)