Welcome to our new bi-monthly series, where we compare employment law and practice from an international perspective, drawing on the experience of local and international employment lawyers who deal with these issues every day.
The first article in our series compares the new UK Government's proposed changes to unfair dismissal protection with the law in Germany to see if there are any lessons that can be learned for UK employers from Continental Europe.
What's to come in the UK?
On July 5, 2024, the results of the UK General Election confirmed what the polls had long been projecting – a new Labour Government. Labour's landslide victory is expected to bring far-reaching changes to employment law in Great Britain. The proposals (to the extent they become law) will herald the biggest changes to employment law in decades and are expected to focus on strengthening workers' rights. See here for our most recent article on the topic (published July 30, 2024).
Note: As employment law is devolved to the Northern Irish legislature, the UK Government's employment law reforms will apply only to England, Scotland, and Wales. Separate legislation will be needed in Northern Ireland if there is a political desire to align Northern Irish law with the UK Government's approach.
Overview of proposed changes in the UK
One key aspect of the new Government's proposed changes to employment law is the extension of unfair dismissal protection to all employees from day one of employment, effectively removing the current two-year qualification requirement.
Under current UK employment law, once an employee has accrued the required two years' service to qualify for unfair dismissal protection, an employer must both identify a fair reason and follow a fair process, prior to making any decision to dismiss. Crucially, however, employees with less than two years' service with an employer do not qualify to be able to claim unfair dismissal, effectively giving employers much more flexibility to dismiss within the first two years of employment.
It is important to remember that even if an employee does not qualify for unfair dismissal protection, employers do still need to ensure that any dismissal is not discriminatory or a result of whistleblowing. Employees benefit from protection against discrimination and from being dismissed as a result of whistleblowing from day one of employment. (The position is similar in Germany – see below).
In addition, the new Government has said that it wants to strengthen protections for new mothers by "making it unlawful to dismiss a woman who has had a baby for six months after her return to work, except in specific circumstances" (what those are is not yet clear). This goes significantly further than the current legal position, which does not grant any special protection against dismissal to pregnant women or those returning from maternity leave, provided that the dismissal is not discriminatory and (in a redundancy situation) the employee has been offered a suitable alternative vacancy (where one is available).
If the new Government is true to their word and implements these changes, it will mark the biggest shift to dismissal protections in the UK since unfair dismissal law was first introduced in the 1970s. UK employers will need to overhaul their processes for monitoring the suitability and performance of new joiners accordingly. Multinational employers with a presence in Continental Europe may be able to learn from their European colleagues, who may already be familiar with strict dismissal laws applying from day one of employment.
Similarities to German law
In Germany, protection against dismissal derives both from statute and corresponding case law established by the courts – so it is necessary for employment lawyers to consider the principles set out in both.
To start with, employees in Germany are protected against any termination of employment that is discriminatory or retaliatory from day one of employment (as is the case in the UK). Enhanced dismissal protections are also available to pregnant employees, those who have just given birth and employees who are taking leave to care for close relatives. These are specific situations in which German employees have some protection against dismissal from day one of employment but is not the general rule.
Aside from that, the German equivalent to UK unfair dismissal rights – i.e., the general dismissal protection – applies after an employee has been in employment with a specific employer for six months. Legally speaking, this six-month period is known as the "waiting period" (even though most employers refer to this as a probationary period, which is technically incorrect!). Where the employee has completed the waiting period and therefore has qualifying service, the employer is required to demonstrate that any such dismissal is "socially justified" (and the burden of proof is on the employer in that regard). If an employee has less than six months' service with their employer, then there is no requirement for the dismissal to be socially justified. Taking this into account, German employers must be mindful of making good use of the first six months of employment to ensure any new hire turns out to be a success (and to avoid problems further down the line).
Recommended practice examples in Germany: dismissal protection
So, can UK employers take any practical learnings from German employers on how to manage dismissals if the Government's proposals become law?
- Hit the ground running: performance assessment right from the start
In Germany, managers need to be tasked with evaluating any new hire's performance closely, right from the get-go. A detailed and supportive onboarding process is essential to this. It is easy to forget that a new hire is likely to be unfamiliar with the new employer's practices and ways of working, which (if not caught and corrected) could negatively (and unnecessarily) impact performance.Where this is done properly, the onboarding process helps the new hire to get settled into their new working environment quickly and perform to the best of their ability.
At the same time, following a thorough performance management process from day one can highlight any early gaps or issues, which the new hire can then promptly work to address. In addition to giving the new hire an early opportunity to improve, this approach gives the employer a concrete decision to make prior to the end of the probationary period, about whether the new hire is a sufficiently good performer to be retained going forward. Typically, probationary periods in Germany are six months – effectively mirroring the date on which the employee gains general dismissal protection. Regular check-ins, in biweekly or monthly intervals, as well as a comprehensive "first 100 days" review, have proven to be helpful for the majority of employers in Germany.
HR has a very important role to play here. HR should ensure they are following up with managers of new joiners regularly to make sure they are aware of the timing of any decision point (i.e., the six-month mark), so employees do not accidentally slip past that point, which would then require the employer to socially justify any later dismissal.
- No hasty decisions: using legal tools to give employees opportunity to prove themselves
If there are concerns about a new hire's performance or overall suitability for the position, this does not necessarily mean that employers need to (nor should) terminate the employee's employment right away. Where there is a possibility that the employee can turn their situation around for the better, one creative option the employer has is to offer a termination agreement to the employee; this agreement would typically specify a termination date beyond the end of the probationary period, and the employer would thereby promise to rehire the employee if they prove themselves to a sufficient standard. These agreements need to be worded carefully. If badly drafted, there is a risk that they could be interpreted as binding, fixed-term contracts, with an unenforceable termination date due to the prior employment.
An alternative approach would be for employers to issue a unilateral notice of termination and extend the notice period to allow for further probation. In the same document, they can promise to rehire the employee if they pass the extended probation. Again, this needs to be worded carefully.
- Being mindful about benefits
Given that decisions need to be made early on about an employee's performance and suitability for the role, employers should pay special attention to benefits that are available in the first few months of employment.
If an employer typically offers sign-on bonuses, then the employment contract should include a mechanism for (partial) repayment in situations where the employee leaves the company shortly after joining (but only if the employee resigns or causes the employer's termination by breach of contract). Alternatively, employers might consider switching from sign-on bonuses to bonuses that are awarded specifically when the probationary period is passed, to avoid this difficulty. Some employers also promise a salary increase after the probationary period has passed. This can be a good motivating tool.
- Promotions on probation
Once an employee has established six months' continuous employment with their employer, the employee benefits from comprehensive dismissal protection. Often, employers face a dilemma if they would like to promote an employee but are uncertain about whether they are suitable for the more senior role. If they turn out to not be suitable, the employer's options are restricted – usually they would only be able to transfer them to a different role on the same hierarchy level. Demotions are not possible without there being a reason that could also justify a termination, were there not to be an alternative vacancy in the company.
For such cases, probationary periods related to individual working conditions (e.g., a raise, a title change, etc.) can be a helpful tool. This is done by drafting a fixed-term agreement that states that a specific condition changes until a set date, and after that the contract goes back to how it was. If both parties like the change, they can then agree to either extend the term or agree to make the change permanent.
- No strings attached: fixed-term employment contracts
A well-liked alternative to the probationary period is the fixed-term contract. Entering into a fixed-term contract gives the business the ability to not commit to a permanent hire but rather to get to know the candidate for a shorter period, lasting no longer than two years (longer fixed-terms are only possible if statutory exceptions apply).
However, it is important to be aware that terminations prior to the end of the fixed-term face the same obstacles as contracts for an indefinite term. So, even when an employer does enter into a fixed-term contract with an employee, they are advised to follow the same performance management measures outlined above.
Additionally, employers need to navigate the formal pitfalls of fixed-term contracts. They must have been signed in wet-ink and provided to the employee prior to their starting work. Further, there must have been no prior employment with the company and the maximum number of extensions must not be exceeded (three times – again, statutory exceptions may provide for more generous exceptions).
If managed diligently concerning the formal pitfalls, fixed-term contracts are a viable option to preserve employer flexibility in view of challenging dismissal protection laws.
Which practices can be transferred to the UK?
When looking at these recommended practice examples from Germany, the first thing that stands out is that the requirement for an employer to prove that a dismissal was "socially justified" only kicks in after six months. This principle is comparable to ordinary unfair dismissal protection in the UK. If everything changes as expected, then in the UK we will not just have a reduction to the qualifying period for unfair dismissal protection (i.e., closer to Germany's six-month period), but unfair dismissal protection will apply from day one of employment. This is a material difference.
That said, notwithstanding the expected introduction of a day one legal right to protection against unfair dismissal, the new Government has expressly stated that "We will continue to ensure employers can operate probationary periods to assess new hires." Clearly, then, we can expect that any changes to unfair dismissal laws will include some carve outs or exceptions which give employers a little more flexibility if it turns out that an employee is not working out shortly after hiring. In the UK, probationary periods are not legally regulated and in practice are little more than a contractual mechanism enabling the employer to dismiss with shorter notice during the first few months of employment. However, if this changes as expected, then we expect UK employers to rely much more heavily on probationary periods (as is the case in Germany).
It will be interesting to see how the expected changes to UK unfair dismissal law interact with fixed-term contracts. Currently, UK law classes the termination of a fixed-term employment contract as a "dismissal"; for that reason, UK employers tend to ensure that any fixed-term lasts no longer than two years, to avoid having to navigate unfair dismissal protection. However, if unfair dismissal protection were to apply from day one of employment, and the expiry of a fixed-term continues to be classed as a dismissal, then this might impact the attractiveness of fixed-term employment contracts to UK employers. It may well be that the new Employment Rights Bill contains carve outs or exceptions for fixed-term employment contracts, as well as probationary periods.
Without doubt, one thing that is almost certain is that it is going to be critical for employers (and their HR teams) to be switched on to potential performance and/or conduct issues and to have robust performance/disciplinary procedures in place from the very beginning of employment (which we know from experience is not always the case). UK employers who routinely monitor, assess and correct performance or conduct issues for new joiners in the same way as long-servers (who have unfair dismissal rights) will find the extension of unfair dismissal protection less of a shock to the system. It seems there is a lot that UK employers can learn from Germany, in that respect.
Until then, we will have to wait to see what the promised Employment Rights Bill says...
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.