The costs of getting it wrong and ending up with an unfair dismissal or discrimination claim can be enormous. The Employment Tribunal Service’s report shows that for the year to April 2007 there were 132,577 claims brought against employers. That is an increase of more than 50 per cent on the year to April 2005.

With the compensatory award for unfair dismissal costing up to £60,600 and the highest discrimination claim being over £980,000, the price of dismissing can hit growth businesses where it hurts; their P&L.

To dismiss cheaply you must ensure that you comply with the employee’s contractual entitlements (through both written and oral agreements) and statutory rights. To most employers that translates as a labyrinthine process full of delays, but there is a path through the maze.

An employee is only entitled to unfair dismissal protection after 12 consecutive months’ work, so it is cheapest to dismiss someone who is still on their probationary period, or if the probationary period has been missed, within their first 51 weeks with the company.

After a year or more there are only five “potentially fair” reasons to dismiss in the eyes of the law. These are serious underperformance, bad behaviour (including lateness, drinking or unauthorised use of computers), redundancy, a significant corporate reorganisation, or a statutory reason such as the loss of the employee’s work permit.

There is a basic three-step process which must be followed when dismissing employees. If you don’t jump through these hoops it is automatically considered to be unfair dismissal and the compensation claim can be increased as a result by ten to 50 per cent. You must write to the employee requesting a meeting, meet the employee (with a colleague in tow, if requested) and give the employee the right to appeal the decision.

The process won’t sanitise an otherwise unfair dismissal. If you attempt to dismiss a long-serving employee for poor performance but do not allow a reasonable period for them to improve (which can be any period from three months to two years), it will be unfair – and you may face a dismissal claim.

A final word of advice: use annual performance reviews properly. If you don’t tell employees they’re not up to scratch you’re harming your business because you’re not giving them a chance to raise their game. In addition, a reprimand may spur them on to find another job and become someone else’s problem.