Mr Rob Marris (Wolverhampton South West, Labour)

I beg to move amendment No. 78, in page 38, line 1, leave out from '(1),' to 'shows' in line 4 and insert

'failure by an employer to follow a procedure in relation to the dismissal of an employee shall not be regarded for the purposes of section 98(4)(a) as by itself making the employer's action unreasonable if he'.

Mr Joe Benton (Bootle, Labour)

With this it will be convenient to take amendment No. 27, in page 38, line 5, after 'procedure', insert

'and the dismissal would have been fair apart from this section.'.

Mr Rob Marris (Wolverhampton South West, Labour)

The amendment seeks to clarify section 98A of the Employment Rights Act 1996. The meaning of new section 98A(2) and the context in which it sits have been the subject of much debate on Second Reading. Several individuals and organisations have expressed concern about the way in which the new regime would operate, particularly in relation to the overturning of Polkey. The amendment would clarify and probe those issues.

Under new section 98A(1), unfair dismissal will take place if there is a breach of the basic procedure of schedule 2. That will lead to four weeks of compensation as set out in new section 112(5). The right to be accompanied under the schedule 2 basic procedure was clarified by the Minister when we debated it; he kindly confirmed that. The right to a fair hearing is implicit in schedule 2, and I hope that he will be able to make that explicit now. If there were no proper investigation under the basic schedule 2 procedure, I hope that he will also confirm that the employer who failed to carry one out would be caught by new section 98A(1)-a breach of the procedure-which would lead to an automatic finding of unfair dismissal.

I understand the Government's desire to encourage employers to adopt at least the basic procedure by introducing it statutorily, but we also need to encourage enhanced procedures-better than those in schedule 2-in the interest of better industrial relations and of having fewer cases come before employment tribunals because differences have already been resolved in the workplace. New section 98A(2) overturns the long-standing case of Polkey in 1998, which was raised on Second Reading. I am anxious that overturning Polkey will lead to employers not using the enhanced procedures and hiding behind the no-difference test. They might say that they would have got rid of the employee anyway and the fact that they did not follow the procedure does not matter because of what is stated in the legislation. I appreciate the Government's desire, encompassed in the Bill, to encourage enhanced procedures and the fact that, if we did not have the new subsection, an employer might be hoist by the petard of a minor breach of an enhanced procedure. If an employer were so hoist, he would be less likely to have an enhanced procedure for fear of going wrong, and would be more likely to fall back on the basic procedure under schedule 2. Nevertheless, proposed new subsection (2) raises questions, some of which I have tried to elucidate today. The Minister mentioned a forthcoming review of such issues. I seek his assurance that, in overturning Polkey, the review will establish whether proposed new subsection (2)-as drafted, or in the light of my amendment-dilutes enhanced procedures that improve on the basic schedule 2 procedure, thereby enabling employers to hide behind the wording, or whether the subsection results in employers moving away from enhanced procedures that operated before the Bill's enactment.

Mr Brian Cotter (Weston-Super-Mare, Liberal Democrat)

I wish to speak to amendment No. 27. As we know, under current law a tribunal can rule that an employee has been unfairly dismissed on either procedural or substantive grounds. Clause 34(1) changes the conditions relating to procedural fairness. If an employer fails to comply with the minimum statutory procedures, the tribunal will automatically find that the employee has been unfairly dismissed. However, clause 34 seems to go far beyond achieving that aim by excluding the possibility that a dismissal could be substantively unfair even where it is not procedurally unfair. For example, a person could be dismissed on a very minor ground such as turning up for work a minute late.

Amendment No. 27 is designed to tighten up the clause by limiting its impact to the circumstances in which it appears it was intended to apply. Under the amendment, dismissals could be deemed unfair for other reasons, even if they were found to be procedurally fair. I should be interested to hear the Minister's response to that key point.

Mr Mark Prisk (Hertford & Stortford, Conservative)

In principle, I welcome the attempt to minimise the impact of minor procedural changes. In that regard, the Government's effort to reverse the Polkey principle is acceptable, but the clause gives rise to problems, with which the amendments attempt to deal, and to an inconsistency that is at the heart of the clause's relationship with the rest of the Bill.

On the one hand, the Government are using the Bill to promote the idea that businesses and all forms of employers should seek to follow a regular and accepted procedure, whether in general, disciplinary or dismissal situations. On the other hand, in many senses clause 34 reduces the importance of that same procedure. Perhaps the Minister would like to comment on that inconsistency and the message that it sends to employers and employees. I am also concerned that the absolute nature of proposals in relation to awards against a failure to follow minimum statutory procedures is potentially unfair to the smallest of firms. Neither the scope nor the character of the procedures is crystal clear, so the danger of an employer unintentionally falling foul of minor procedural mistakes is all the greater.

The Law Society's much-quoted briefing highlights the point that the hon. Member for Wolverhampton, South-West (Rob Marris) raised earlier, namely that although clause 34 may be intended to be narrow and focused,

''its wording excludes the possibility that even where a dismissal is not procedurally unfair, it could still be substantively unfair. It does this by making the provision applicable . . . to the whole 'Part' of the Employment Rights Act 1996, in which it will be added.''

There is a danger that the clause may have a wider effect than the Minister intends. Will he comment on that?

Mr Tony Lloyd (Manchester Central, Labour)

The concentration on subsection (2) is important. The hon. Member for Hertford and Stortford mentioned the Polkey principle, so he should have no objection to its reversal. This could become an incredibly arcane debate in which only those of us who wear employment law anoraks are entitled to take part, but we risk unsettling some fundamental issues if the Bill stays in its current form.

My hon. Friend the Member for Wolverhampton, South-West said that there are two primary concerns-first, that where an employer fails to meet the basic criterion of a fair hearing, natural justice is put at risk and, secondly, that an employer who fails to pursue a proper and fair investigation can use the current wording of the Bill to avoid the charge that their procedure was inadequate.

At first, I wondered whether common sense says that an employer who makes a tiny procedural slip up should not be charged with that error to the exclusion of everything else. An employer who has made a manifestly fair dismissal in the sense that the charge is of enormous gravity and under any logical terms would warrant dismissal may find that because he failed to put the right postscript on the letter it is deemed to be unfair. Naturally, we do not want that to happen.

Several kinds of cases that tribunals have in the past judged to be unfair dismissal would almost certainly not be so judged in future, because the reversal of the Polkey principle means that they are unable to make judgments on the same basis.

Mr Mark Simmonds (Boston & Skegness, Conservative)

Does the hon. Gentleman think that the reason why not many cases have fallen into this category is because small businesses are exempt, and that that is where problems will arise?

Mr Tony Lloyd (Manchester Central, Labour)

We must look at several issues in the round. One problem is that we know only what tribunals have resolved. Because tribunals sit in geographically dispersed parts of the country there is no central collation of their proceedings. Examples are folklore unless they can be illustrated by real cases. To help the Committee, the TUC has tried to find practical examples where this change in the wording of the law will make a material difference.

British Home Stores v. Burchell is an old case from 1978 in which the tribunal decided that an employer is under an obligation to carry out a reasonable investigation before initiating disciplinary action. Common sense would suggest that reasonable investigation is central to natural justice, a judgment which was confirmed by that tribunal, but that must be placed in context. Although an employer is under that duty, they do not have a duty to have got the case right. All they must demonstrate is that they believed that they were acting in the right way. They could have got it wrong, but only on the basis of proper investigation.

The problem with the schedule 2 minimal grievance and disciplinary structure is that it does not call on the employer to institute a proper investigation. Not only will the employer not have to get it right-it will be a reasonable defence to say that they thought that they got it right-it will not be necessary for them to say, ''I took proper steps to ensure that I got it right''. They can say, ''I believed that to be the case and I acted on it''. Under subsection (2), they will have to show that they would have decided to dismiss the employee if they had followed the procedure.

That is not a tough test; it is an extremely subjective test. How does the employer show that they would have acted that way had they followed the procedure and investigated? They could argue, ''I still would have dismissed the employee because he is a pain in the neck. We have wanted to get rid of him for years.'' The question of investigation is significant.

Last year's case of Midland Bank v. Madden provides another relevant example. Mr. Madden joined the bank as a school leaver and over a period of 11 years had risen through the ranks. He went from being a trainee bank clerk to chief cashier foreign clerk and eventually reached the position of leading clerk. He was a man of some probity within that organisation and up to that point he had an unblemished employment record. In July 1997, three debit cards were stolen from the bank almost certainly by a bank employee. Following a tip off from the bank's police liaison officer, the police raided Mr. Madden's home and he was arrested, but because of a lack of evidence he was released without charge.

Under our criminal justice system that is the end of the story. However, an internal workplace investigation took place, and although Mr. Madden denied any knowledge of the allegations the decision was made to sack him following an investigation of other employees. He exercised his right to appeal, but to no avail. The tribunal found that the tenor of the internal investigation pointed to Mr. Madden as the likely culprit. It also found that the investigation of other employees was not as thorough as the police investigation of Mr. Madden. It decided that the relevant managers had accepted the investigators' conclusions too readily and uncritically, and on that basis it decided that the investigation was inadequate and therefore found in his favour.

If that case were subject to this legislation, the employer would have argued that they would still have decided to dismiss the employee had they done anything differently because they had already drawn their conclusions. They would simply have asserted that they were right, and the tribunal would not have been in a position to decide that that dismissal was unfair. I ask my hon. Friend the Minister to consider that case carefully.

Bentley Engineering Co. Ltd. v. Mr. Mistry in 1978 is the final case that I should like to bring to the Committee's attention, and it concerns the question of how a meeting is conducted. Mr. Mistry was employed as an office clerk and became involved in a fight with another employee. Both men alleged that the other had started the fight, thus placing the blame on the other individual. Statements were taken from other employees who had witnessed the fight, and the assistant personnel officer, who interviewed both men the following day, decided to dismiss Mr. Mistry. He appealed, but neither the other combatant nor any witnesses were at the appeal hearing, so Mr. Mistry did not have the opportunity to cross-examine them. Both the employment tribunal and the appeals tribunal found that the dismissal was unfair because Mr. Mistry had not been given written statements by the witnesses and the other employee involved in the fight. The appeals tribunal ruled that the employer had failed to satisfy the requirements of natural justice, which entails:

''not merely that a man shall have a chance to state his own case in detail; he must know sufficiently what is being said against him so that he can properly put forward his own case.''

That was a fundamental tribunal decision.

Most people would agree with the tribunal that if Mr. Mistry did not have the opportunity to know the basis of the evidence against him or to cross-examine those who brought the case, his right properly to defend himself was abrogated. I contend that under this legislation a tribunal would be unable to consider that case in the same way. Schedule 2 does not contain an employee's right to know the case against them. More narrowly, it states:

''Meetings must be conducted in a manner that enables both employer and employee to explain their cases.''

Explanation of a case is not the same as an opportunity for Mr. Mistry to be confronted by the witnesses who put the case against him and to challenge their testimony. Once subsection (2) becomes law, a tribunal would find it difficult to reach the same judgment as the 1978 tribunal that Mr. Mistry had been unfairly dismissed.

I appeal to my hon. Friend to recognise that those are real cases. My argument is not hypothetical. It is not a knee-jerk, Luddite reaction, or an attempt to use minor slip ups by an employer as a way of conceding cases in which common sense suggests that an employee deserves dismissal. Sometimes there is a narrow gap between procedure and substantive cases, and they can almost amount to the same thing. In the cases that I have described, discovery of the substantive case depended on the procedure being proper and full.

Mr Mark Prisk (Hertford & Stortford, Conservative)

I share the hon. Gentleman's concern that there are cases, some of which he has cited, where the line between what is substantive and what is procedural is unclear. However, would his criticisms not be better directed towards the weakness in the drafting of schedule 2 rather than being expressed through the amendment?

Mr Tony Lloyd (Manchester Central, Labour)

Alas, Mr. Benton, we have passed that point in the Bill. I asked my hon. Friend the Minister whether we could strengthen schedule 2 by adopting, for example, the ACAS code, which would have raised the minimal level. That would have been one way of approaching the problem. My hon. Friend the Minister made it clear that although the Government support the ACAS code, he is trying to establish a minimum and simple threshold that all employers will take on board. Although I still urge my hon. Friend the Minister to look again at raising that threshold, I can understand his intention. With a simple code, as the schedule outlines, no one can really use the defence that it was too complicated and a terrible burden.

Whether the Committee likes it or not, subject to Report and amendments in another place, schedule 2 is what we have. We must try to look at how to preserve the position for those who, at least notionally, are covered by something better than schedule 2 but will find that eroded by the impact of the Bill.

The hon. Gentleman raised an important point. I put another concern before the Committee. Because of custom and practice before tribunals, a range of tests applies to different types of disciplinary action. For example, on dismissals related to incapacity or sickness, an employer is required to give the employee fair warning and an opportunity to mend his or her ways and show that he or she is fit to do the job. On the other hand, in misconduct cases, the employer should investigate the complaints of misconduct fully and fairly and hear what the employee wishes to say in defence, explanation or mitigation. In redundancy cases, the employer should warn or consult any employees affected or their representatives, adopt a fair basis on which to let the redundancy occur and take such steps as may be fair or reasonable to avoid or minimise redundancy by redeployment in the organisation.

The important point is that different tests have arisen, because of different circumstances, by custom and practice over time. That is not unreasonable. Misconduct is clearly very different from redundancy. The test of reasonableness in redundancy is normally about ensuring that there is no arbitrary discrimination. Obviously, the test is different in a case of misconduct because misconduct is specific to an individual or group of individuals.

If we reverse the Polkey decision, the real concern is that those developed tests defined by the case law approach will be thrown out of the window and that, rather than having a refined system that offers fairness to all parties, we will have a much more arbitrary system. In the end, that could lead to injustice and unfairness because tribunals will no longer be able to make decisions in the way in which they have in the past.

I have a high regard for my hon. Friend the Member for Wolverhampton, South-West, but I am yet to be convinced that the amendment is the right way for us to move forward. I appeal to the Minister to reflect on the spirit of the concerns that have been raised and to recognise that there is substance in the remarks made by hon. Members on both sides. He should address those in a way that guarantees not a simple reversion to tribalism and the Luddite approach but that ensures that we will continue to get the benefit of the custom and practice that tribunals have shown, in such cases, in the interests of fairness in the workplace.

Mr Alan Johnson (Minister of State (Employment and the Regions), Department of Trade and Industry; Kingston upon Hull West & Hessle, Labour)

This is one of the most important debates on this part of the Bill. I will address the specific points that hon. Members have raised after I have placed on record the Government's thinking.

Clause 34 has two main effects. First, it will reinforce the new minimum procedural standards by making it automatically unfair to dismiss employees unless those procedures have been followed, while providing for the first time that in such circumstances there will generally be some compensation for the employee. It will also ensure that when an employer fails to follow a procedure that goes beyond the new minimum procedures, or makes an error in following it, that in itself will no longer render the dismissal unfair, provided that he or she can show that following it would have made no difference to the decision to dismiss the employee and that the dismissal is otherwise fair.

Mr Tony Lloyd (Manchester Central, Labour)

Those comments are interesting and helpful. My hon. Friend said that if the employer shows that he would have otherwise have followed the procedure, dismissal would be fair. The Bill as drafted does not have that test.

Mr Alan Johnson (Minister of State (Employment and the Regions), Department of Trade and Industry; Kingston upon Hull West & Hessle, Labour)

That is the nub of the issue. We are drafting new section 98A into subsection (2), and we believe that that makes the right connection in that it remains the employer's responsibility to prove that dismissal was fair. We have spoken about minimum standards, but the minimum will not be sufficient in all cases. The amendment tabled by my hon. Friend the Member for Wolverhampton South-West makes precisely that point about the linkage with the need for the dismissal to be fair in all other respects. I will come to that in a second.

Mr Mark Prisk (Hertford & Stortford, Conservative)

Must an employer ensure that he does what is necessary, or should he do what is felt to be correct under the wider definition? How can employers ensure that they are doing what they should when such uncertainty exists?

Mr Alan Johnson (Minister of State (Employment and the Regions), Department of Trade and Industry; Kingston upon Hull West & Hessle, Labour)

We have spoken about that in our debates on schedule 2. Employers must not think that they need only go through the basic three-step procedure or go through the motions. For instance, if they dismiss someone for alleged theft, they have to go to the trouble of investigating whether there was theft. That is an important example, because it is not in the minimum standards, although it may be in the more elaborate and sophisticated procedure. If they tried to do that, they could not argue that the lack of an investigation made no difference to the decision to dismiss. Of course it would make a difference if there were no examination or investigation into the reasons for that dismissal.

There is some debate about whether ''in writing'' should appear in the procedures, but employers must ensure that they understand-and they must understand it perfectly well-that that is the basic minimum procedure. They should not think that because the investigative part is not in the Bill-and is in the ACAS code-that there is therefore no need to investigate before dismissal. Employment tribunals are not that easy. Both my hon. Friends said that an employer could stand up and say, ''It made no difference to my decision, I would have dismissed that person anyway.'' Employers cannot get away with that in front of an employment tribunal.

That is the test in the Polkey case, where it was decided in 1998 to reverse the decision made in 1979 that there would be no difference, provided that there was no difference to the employer's decision to dismiss. The point rests on the employer's decision to dismiss. That is one problem that the employer has to get over, but the employer has to be fair in all other respects too.

It has been suggested that we have restored wholesale the no-difference test, which was overturned by Polkey, which is the leading case in this area. In fact, where the statutory minimum procedures are concerned, we are strengthening the principle in Polkey. I will give examples in a minute. We looked at cases that were lost by the employer and won by the applicant on the basis of the Polkey test. In the vast majority, the breach in procedure was a fundamental breach that is now covered by the basic three-step procedure. For example, there was no hearing, or employers did not tell the employee the case against them, or they did not have an appeal hearing.

The Bill should not been seen as reversing Polkey. It strengthens Polkey in respect of the basic minimum standards, and if those minimum standards are not kept, dismissal will automatically be unfair. The Polkey judgement made it likely that an employer who did not follow procedures would lose an unfair dismissal case. Our proposal makes it so important to follow minimum procedures that it will automatically be unfair to dismiss employees without doing so. That automatic unfairness will mean an automatic penalty of at least four weeks pay, unless the tribunal considers that that would result in injustice to the employer. It has some discretion.

At the moment, it is not uncommon for a dismissal to be found to be unfair solely on procedural grounds as a result of the Polkey judgment, but for the tribunal to award no compensation because the procedural failure caused no real injustice to the employee. In the great majority of such cases that we have looked at, the failure was in procedures that would have fallen within the new minimum standards and clause 34 will be in line with the Polkey judgment. Less frequently, the procedural breach relates to a procedure that would have gone beyond the new minimum procedures. It is only in such cases that we propose to allow employers to argue that following the procedure would have made no difference to the decision to dismiss.

The hon. Member for Hertford and Stortford (Mr. Prisk) said that that is inconsistent. We do not believe that. We are setting out the minimum procedures and making it automatically unfair to dismiss if the procedures have not been followed. We are encouraging people to look to the ACAS code, which still holds the field, and it would be perverse and a disincentive if we said to employers, ''This is the basic minimum. We want you to move to something more elaborate and sophisticated, but if you do, be careful because the slightest breach of those procedures will make it likely that you will always be found against at an employment tribunal.''

There is consistency and logic in the provision. To have left Polkey in the new situation with basic minimum standards would have discouraged employers from having more elaborate procedures. As the hon. Gentleman said, it was our firm view that to introduce such a brave new world for every workplace, no matter how small, necessitated our introducing a minimum basic three-step procedure.

Only in cases in which employers have procedures over and above the minimum will restoration of the no-difference test apply. It is a partial and strictly defined restoration of the test. I emphasise that even when an employer is able to show that following a procedure beyond the statutory minimum would have made no difference to his decision to dismiss, the dismissal must otherwise be fair. It is not the case, as amendment No. 27 implies, that the employer is excused from acting fairly in other respects. On the contrary, he must have dismissed the employee for one of the potentially fair reasons set out in the Employment Rights Act 1996. We are not changing that clause. In all other respects, the employer must act reasonably when dismissing an employee, as section 98(4) of the 1996 Act requires. We are not changing that either. Clause 34 is not intended to make any changes to the basic principles of fairness and reasonableness. We believe that the current drafting protects that position.

Mr Tony Lloyd (Manchester Central, Labour)

Will my hon. Friend concentrate on the case that I referred to him earlier-Bentley Engineering Co. Ltd. v. Mistry. The matter was investigated and statements were taken from witnesses, but the tribunal held that the dismissal was unfair because Mr. Mistry was not given adequate opportunity to know the witnesses' case against him or to cross-examine the witnesses. That is important. I accept what my hon. Friend said about the provision being not intended to catch such cases, but that may be its consequence. The employer would have the defence of saying that, having investigated the matter and carried out the procedures adequately, it drew the conclusion that Mr. Mistry had instigated the fight, so it would still have dismissed him even if Mr. Mistry had cross-examined the witnesses. The employer would be entitled to insist that that was the case and, under case law, would not have to prove that he was right in that, merely that he believed that to be the case. The employer believed that Mr. Mistry was the instigator of the fight and, having investigated the matter, dismissed him. However, the tribunal found that because Mr. Mistry did not have the opportunity properly to cross-examine, his rights under natural justice had been violated. The important point is that, although both parties have the right to put their case, nothing in schedule 2 procedures provides the right to cross-examine. That might seem like a narrow technical point, but it is fundamental to obtaining truth and, ultimately, justice. Perhaps Mr. Mistry would have been dismissed had proper cross-examination taken place, but because it did not, we will never know whether the case against him was well founded.

Mr Alan Johnson (Minister of State (Employment and the Regions), Department of Trade and Industry; Kingston upon Hull West & Hessle, Labour)

This is a crucial point. None of us can be absolutely sure how the examples to which my hon. Friend referred would have concluded in the new scenario, but the Government believe that dismissal would probably still have proven unfair. My hon. Friend mentioned the link with fairness, and gave examples of an investigation not being carried out and a meeting being conducted improperly. In keeping with the Polkey principle, an employer might say that such factors made no difference to his decision, but he would still have to prove that the decision was fair and reasonable in the light of the remaining protections for applicants.

These points are of fundamental importance. If concerns remain that the clause is unclear, we are happy to consider spelling it out that partial restoration of the no-difference test will not excuse employers from acting reasonably in other respects. We are prepared to accept amendment No. 78, which similarly points out that, where a procedure has not been followed, a no-difference line of defence does not of itself guarantee that an employer acted reasonably. In other words, an employer must have acted reasonably in all other respects, and if he did not, a dismissal will still be unfair. According to parliamentary counsel, the amendment achieves the desired effect, and on that basis, we will accept it.

Amendment No. 27 would not have the required effect, although I understand the underlying concerns. It would introduce the concept that

''the dismissal would have been fair apart from this section'',

but the concept remains undefined. That would create uncertainty for tribunals, and risk their developing a test of fairness for proposed new section 98A that would be different from that otherwise applied in unfair dismissal cases. That is undesirable.

My hon. Friend the Member for Wolverhampton, South-West asked about the right to a fair hearing. Schedule 2 grants the right to a meeting-in other words, a hearing-but no more than that. However, unless dismissal without a fair hearing made no difference, it would be likely to be found unfair. My hon. Friend also asked about reviewing the clause to establish whether it had the desired effect. I can assure hon. Members that, over time, we will look closely at the practical effects of the change. During consultation, many employer groups told us that current law is a disincentive to putting in place more detailed procedures, and we shall want to establish whether the change has altered their practices.

My hon. Friend the Member for Manchester, Central rightly referred to employment law anoraks-indeed, some of us are well on the way to becoming cagoules. In any event, it is likely that all his examples would have constituted unfair dismissals, but I shall give the further example of the employer who dismisses a number of employees for racially harassing their colleagues. He loses the case solely because of a procedural error, even though the tribunal acknowledges that it made no difference to the outcome and awarded no compensation to the employees-

It being One o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four o'clock.