By Maximilian Clarke

Smaller businesses- the backbone of the UK economy- are eager to expand but are being prevented from doing so by overcomplicated employment regulation, the British Chambers of Commerce has found.

In a survey of over 2,000 small businesses, almost two thirds reportedly want to take on more employees. However, their ambitions to grow are often severely frustrated by the difficulties of complying with employment regulation. A staggering one in five businesses has been threatened with an employment tribunal, and 54% of firms find rules around dismissal burdensome. One in two businesses find rules around health and safety a barrier to growth, with rules around sickness absence identified as burdensome by over a third of firms.

“The majority of the UK’s small businesses want to grow,” commented John Longworth, the British Chambers of Commerce’s Director General. “They want to invest and take on more employees, but they are also pessimistic about the UK labour market’s skill level and flexibility. Businesses tell us that their ambition to grow is severely frustrated by the difficulties they face in doing so.”

Small businesses are crucial to the UK economy. They employ more than three million people in the UK, and generate 15% of private sector turnover. More than this, they are the civic-minded firms on our streets up and down the country, at the heart of our communities.

Dismissal rules are too complex, tribunal cases are endemic, and the vast majority of small firms are buying in extra external resource to ensure they are compliant with employment regulation,” continued Longworth. “The more staff they take on, the more likely they are to face claims. The risk is that one bad recruitment decision could wipe out a whole year’s profit, or worse.

“We recognise the government has taken some steps towards improving the tribunal system, but with new agency rules, parental rights and pensions changes all coming down the track before 2015, the net result for our small firms will be negative. The more flexible the employment market is, the more jobs will be created. Business owners want to recruit, so the government must provide a simplified and stable regulatory environment to encourage them to do so.”

Small businesses held to ransom by employment tribunal system:
• A staggering one in five small firms has been threatened with a tribunal claim in the last three years.
• When faced with a tribunal, a large proportion of small businesses opt for settlement (37%). For many firms the cost of settlement is lower than defending a claim. This drives a culture of settlement, encouraging spurious claims and undermining the cases of those employees who have a fair claim to compensation.
• The majority of small firms (61%) believe that employment tribunals are weighted unfairly against the employer.
• These results suggest that the employment tribunal system is a barrier to job creation.
• While the government’s proposed package of reforms is welcome, it does not go far enough. The suggestion of introducing financial penalties for employers must be scrapped and the plans to increase the amount that can be awarded to employers in costs extended.

Red tape a major concern for small businesses:
• Small businesses identified dismissal rules, health and safety and sickness absence as the top three burdensome areas of employment regulation.
• Over 80% of small firms use external expertise to help them comply with employment regulation, illustrating the complexity faced by small businesses.
• Over one in two small firms see dismissal rules as extremely or fairly burdensome. While the government has announced an extension to the qualifying period from one to two years, it must do more to reform dismissal rules to give confidence to those employers taking on a new staff member.

The report also found:
• More than one in two small firms find it difficult to recruit the right staff to fill a vacancy.
• Over half (56%) of small firms perceive the UK’s labour market as less flexible than the rest of the EU. The figure grows to 62% in comparison to the US.
• In fact, the UK’s labour market flexibility has been seen as one of our major competitive advantages, and is considered greater than the rest of the EU. However if the UK’s small firms perceive that our competitive advantage in labour flexibility has been damaged, then this could impact on the wider views of the business community when making investment decisions.

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