Last week Margaret Hodges’ Public Accounts Committee, increasingly resembling some sort of neo-Jacobin Committee of Public Humiliation, gave BBC managers a torrid time over their role in apparently paying over the odds to get rid of unwanted executives. Never one to be outdone, Harriet Harman added to the fray by condemning the Beeb’s ‘rewards for failure’.
While I hold no brief at all for the BBC, I can’t help feeling that their critics are rather missing the point. A good part of the reason why the corporation’s Human Resources Department and other managers will have sanctioned these seemingly excessive payments is that they are hemmed in by legal restrictions and a defensive mindset which politicians have imposed on employers over decades.
Once somebody is employed for two years, he or she has a very significant degree of employment protection in the UK (albeit less than some of our European neighbours). Employees can only be dismissed ‘fairly’ for a limited range of reasons. They include dishonesty, gross misconduct such as working under the influence of drugs and drink or assaulting fellow employees, inability to perform the job, long-term absence through illness, imprisonment, breaching statutory employment restrictions, or redundancy. As to the latter, this has to be demonstrated convincingly, and employment tribunals expect employers to consult and to make attempts to redeploy staff.
Even when there is a legitimate reason for dismissing someone, employers have to follow correct procedures. In the case of inability to perform the job competently, for example, employers must issue warnings and give people training and support to improve their performance. If correct procedures are not followed, dismissal will be ‘unfair’ irrespective of the substantive cause for sacking someone.
You might argue that contracts like those possessed by BBC executives would involve waiving such considerations in return for generous pay and other benefits. Not so: tribunal and higher court judgments have ruled that employers cannot buy people out of their statutory rights.
So this is the legal background. Now consider that the executives facing dismissal were probably not personally incompetent in any objectively verifiable sense, or drunk, or had their hands in the till. Nor were they really redundant in the legal sense. What was happening was that the BBC wanted to save money and reorganise its operations. It chose to do this by removing a range of posts, even though, presumably, the functions served by the executives were still part of the BBC’s remit. The executives could in principle be redeployed, but this would defeat the object of saving money.
No doubt, like most other individuals in this position (and I’ve been there myself), the supernumerary executives were shocked, upset and angry that their career hopes had been damaged, in some cases perhaps irretrievably. Their legal representatives would advise them that they might have a case to claim unfair dismissal. This in itself can only bring limited compensation to the individual (as payment is capped) but it has the potential to delay matters, tie employers up in often lengthy tribunal proceedings (which can cost them a lot of money in defending themselves whatever the outcome), and possibly damage the reputation of the organisation. Moreover if the individual is female, or not in the first flush of youth, or gay or transgender, or has a disability, or a strong religious belief or is a member of some other ‘protected group’ (in the terminology of the 2010 Equality Act) then it may be possible to make a case that the dismissal is discriminatory. In such circumstances the sky’s the limit. There are no restrictions on the compensation paid to those unlawfully discriminated against.
So a dismissed person can sometimes, paradoxically, have quite a strong bargaining position. The BBC may have been particularly lily-livered, and perhaps its HR department was just too risk-averse. But very many employers in this position, whether in the public sector or the private sector, will end up offering a deal which is considerably better than that to which the individual has a strict legal entitlement.
Employment protection legislation thus substantially raises the costs of dismissing people when organisations are restructuring themselves or downsizing. The case of the BBC’s payoffs is already last week’s news, just part of our overwrought and hysterical political culture, no doubt to be forgotten as another of the endless procession of ‘scandals’ hits the headlines. But the wider ramifications of employment protection should not be forgotten.
Econometric evidence suggests that it delays hiring in economic upturns, penalises ‘outsiders’ such as young labour market entrants, and slows economic adjustment - thus reducing the rate of productivity growth. It may indirectly increase public expenditure on benefits. It also leads (as the example of Spain illustrates) to the unnecessary proliferation of temporary contracts and outsourcing. It lengthens spells of unemployment, with adverse consequences for morale and future career prospects.
If politicians want to draw a lesson from the BBC business, it may be that they need to think more carefully about the law on unfair dismissal (originally introduced in 1971, Lord Howe once told us at the IEA, to reduce unofficial strikes over dismissals at a time when trade unions were much more powerful), and move rather more in the direction of the US ‘contract at will’. Under this dispensation employees can in principle be dismissed for any reason or none. You can build severance payments and procedures into a particular contractual arrangement, but there is no back-up legal protection other than that afforded generally against breaches of contract. Although at-will employment has been subject to some modifications in recent years, American firms still fire much more readily than in Europe - but they also hire much more rapidly in economic upturns.
I doubt any of our politicians can stomach the strong meat of scrapping employment protection laws. But if not, then perhaps they ought to stop posturing and stop bleating about the predictable consequences of the policies they support.