Sack the lot of them

There has been much chuntering recently on the right about "freeing up" the labour market in order to promote growth. The ultras case is outlined in the report prepared for government by the venture capitalist Adrian Beecroft, which has been leaked today. This is purely advisory, but it is a fair indication of the bias of the government's thinking (they commissioned it from a man with known views), or at least the thinking when Steve Hilton was warming his socks on the Downing Street radiators.

The headline proposal is no-fault dismissal, which Vince Cable has promptly set his face against, leading to the suspicion that it is already doomed. Looking at the detail, this is actually termed "compensated no fault dismissal", the idea being that so long as the notice period and termination payments are the same as would be the case for a redundancy, then there should be no grounds for a claim of unfair dismissal. In other words, a formalised pay-off that would be cheaper than a compromise agreement. But is it even needed?

Since April this year, a new employee can only claim unfair dismissal if they have worked for 2 years. In effect, an employer can dismiss an underperformer with a minimum of effort, as you’d expect at least a couple of written performance reviews in that time. If the employer cannot spot a wrong ‘un within 2 years, then they are incompetent. Sacking longer-established workers who "go bad" is also straightforward if you've done proper performance reviews over prior years. The drop in performance can be clearly delineated and, assuming no improvement in response to warnings, termination will follow.

The real problem is that the regulations assume that all businesses have competent HR functions and that best practice is followed, such as contracts that define job performance criteria and appraisals that are regular and substantive. In reality, many businesses pay lip service to this. Even when top management mandate it, line management often skimps in practice. The onerous burden they are really complaining about is the need to properly performance manage staff.

The rest of the report covers a variety of current regulations that are considered a burden to business including flexible working, parental leave, gangmaster licensing, equal pay audits, and checking new employees' eligibility to work in the UK.

The last of these is a good example of the flavour of Beecroft. The current regulation amounts to asking an employee to provide a copy of their passport or work permit when they sign their contract. It really isn't much of a burden, assuming your business issues employment contracts and has some basic clerical competence. The report suggests the eligibility check should become the responsibility of the UK Border Agency. In other words, remove the burden for business by increasing the role of the state.

Most of the report is noise, intended no doubt to give the impression that business is enmeshed in red tape. For example, the "right to request flexible working" extends only as far as the name suggests. The employer is under no obligation to accede to the request, they just have to consider it before they pop it in the bin. This isn't made clear in the report, which is generally a pretty poor piece of work, with no empirical evidence and a surfeit of assertions and suppositions. It's hard to believe a venture capitalist would accept a business plan of such poor quality in his day job (unless he specialises in new technology).

There is also a general proposal for micro-businesses (less than 10 employees) to be exempt from the above regulations regardless. In other words, if the government is reluctant to abolish them for medium and large businesses, they can at least curry the small business vote by making them an exception.

While it is possible to believe that a large corporation, with a bureaucratic HR department, might struggle to get its shit together in terms of performance reviews and actively managing underperformers, it is not credible to believe that this in the case with small businesses. An underperformer in a 10-person company will be spotted pretty quickly. If 10% of the workforce are failing to earn their corn, that’s a big hit on the bottom line. And while the HR processes may be rudimentary, you can bet they will be effective.

It's also worth remembering that most employees in micro-businesses are recruited from the pool of family and friends, or friends of friends. Not only does this mean that hiring a wrong 'un is much less likely, but that performance management actually benefits from a wider support structure than you'd get in a big business. Conversely, when conflicts arise they are quite possibly going to relate to matters outside of work as much as in. A right to arbitrarily sack someone may appear to solve a problem, but it may well produce other, unintended consequences in a kinship group (I haven't used that term since O-level Sociology, but it sounds just right).

Given that people are a business's number one asset (supposedly), the need for employer's to have the right to arbitrarily sack staff indicates a massive failure of management. In fact, it now sounds like business groups are less excited by these proposals than Tory MPs, with more interest being shown in the possibility that the employment tribunal system may be streamlined (i.e. made quicker and less costly).

The real significance of this report is that it was built up beyond its merits as an example of the radical supply-side reforms that Tories advocated to kick-start the economy. The OBR have now admitted that they do not expect the cut in the top rate of tax to make any difference to growth, which has put paid to the other classic supply-side manoeuvre (and calls for a flat-tax are unlikely to gain support at present). If labour market reforms are a damp squib as well, what exactly is left? Probably more cuts, inflation and stagnant wages. And you thought Chelsea winning the Champions' League was depressing.