It's the economy stupid!

I have looked with surprise at the debate around changing the unfair dismissal qualification period from one year to two.  Is the unfair dismissal qualifying period really what drives small businesses away from employing people?

Fear of employment law (which is used by many to sell employment law insurance) does not seem to tie in with what employment law actually says.  And, as for the change to a 2 year qualifying period, it seems that only about 1% of existing claims would have been affected by this change – not a big difference to employers.  

But employees who have struggled into new or first time employment would have a two year wait for a full set of employment rights – a very big difference for them.

So, is the “employment law problem” really driving unemployment?  I had a look through our current and recent files.

• Under one year’s service: only a small number of issues – and these are mostly related to discrimination claims (which are not affected by the changes)
• Individuals with more than two years’ service - 95% of our case load!

So, what is holding small businesses back from recruitment?  Could it be the real issue is ... money?  Let’s have a look at how employment affects cashflow.

Our example client gets some new business worth £120,000 per year revenue – result – champagne all round.  But our client is selling at narrow margins in order to compete in the recession, so their gross profit is just 20% - or £24,000 for the year.

In order to ensure continuity of supply, our client has to pay their own suppliers on time.  And in order to support the new account, they need to take on a part-time worker as there is no slack in the existing workforce.   Brilliant – a person off the dole queue.  Let’s say that costs them £6,000 per year (including NI, to keep the example simple), and that they are not going to have other costs supporting this business – they can use their existing premises and overhead.   So they should make £18,000 trading profit on their extra turnover of £120,000 – a 15% return before fixed overheads which is not great but not bad, except ...

Let’s assume their orders from the new client are evenly spaced across the year.  Let’s also assume that the big customer does not pay for 90 days (ask any small business about doing business with a big one!).   Because our client has to pay their supplier on delivery and their worker at the month end,  by the time they get paid their £10k for the month 1 shipment (in month 4), they’ve paid their supplier for four month’s shipments (4 x £8k = £32k) and the costs of 4 months of the new employee (£2k).

So, although their accountant tells them that in the 4 months they’ve made a profit of £6k on this account, in cash terms they are £24k worse off (£34k total paid out to supplier and part-timer, £10k in from customer).
Now, we all know the banks aren’t lending, so how do you handle it?  They can’t not pay their supplier, or they have nothing to sell to their customer.   So, at the very least, you can’t take on more staff since you have no way of paying them.

Of course, if the wonderful new customer would pay on time – in the same month that the goods were sold –  the whole situation is transformed.   Now our small business can pay their supplier, pay their staff and have money in the bank at the end of the month.

Fear of employment law is real, but what is far more real is fear of not being able to pay the staff you take on; fear of not being able to get finance or credit.   Of course, my example is a very simple model, and our imaginary client is not trying to pay rent, rates, utilities and other staff, nor does it have a bad debt problem from other clients.  But the example supports a clear and simple point.

It’s not employment law that is the barrier to businesses taking on staff.  We need to find a way to ensure businesses can finance their trade swiftly and effectively and have enough confidence to take on staff believing they can pay them.

Annabel Kaye is Managing Director of Irenicon Ltd, a specialist employment law consultancy.
Tel: 08452 303050 Fax: 08452 303060 Website:  www.irenicon.co.uk
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