From 1 January 2027, two significant changes to the unfair dismissal regime will take effect: the qualifying period for bringing an unfair dismissal claim will fall from two years to six months, and the cap on compensatory awards will be removed entirely. The current cap is limited to one year's salary or £123,543, whichever is lower. For high earners, the removal of that ceiling will have serious financial consequences for employers.
Factors to consider
The complexity of remedy calculations is set to increase significantly. Employment tribunals will need to grapple with a range of factors that they have not really had to deal with to date.
Where an individual is dismissed before a share option can be exercised, there is case law indicating that, depending on the circumstances, this may be treated as a benefit the employee was likely to have received had they remained in employment.
Managers in the private equity sector are typically expected to acquire ordinary shares in the corporate entity in which the private equity funds invest, but if dismissed before the private equity investor exits, they may receive less than full market value at termination and will lose the benefit of future gains.
For those working in regulated sectors, dismissal could prove career-ending if they are unable to secure alternative employment within their sector. Compensation could be awarded for a substantial period, potentially up to retirement age.
In the public sector, final salary and defined benefit pensions will come into play, with figures calculated by reference to the claimant's speculated retirement period.
The impact extends beyond high earners. Those who struggle to re-enter the workforce due to ill health or age will be able to argue for extended periods of loss, provided they can evidence their position and demonstrate reasonable steps to mitigate.
Employment tribunal: remedy calculations and capacity
The government's economic analysis concludes that the overall cost of removing the cap "is likely to be limited in the aggregate" on the basis that "in practice few awards reach the cap", whilst acknowledging that "some high-paying sectors may be particularly affected". We consider this analysis to underestimate the real impact.
Employment tribunal statistics already show an increasing caseload. The Government itself acknowledges that the reduction in the qualifying period will have "the largest expected impact on the tribunal system of any of the measures in the ERA 2025", with an estimated 9,000 additional Acas early conciliation referrals per year - around 3,000 of which are expected to progress to a tribunal claim. The prospect of swift resolution is, in this context, remote, which in turn increases the potential award made in a successful claim.
Practical steps to implement
The removal of the cap is a significant measure and one for which you need to be prepared.
- Review your existing contracts and procedures to ensure they are fit for purpose ahead of these changes. Properly managed probationary periods reduce the risk of costly unfair dismissal claims.
- The removal of the cap will elevate expectations in settlement negotiations, especially if AI is involved. Consider placing greater reliance on mediation and without prejudice conversations.
- Revisit good leaver/bad leaver provisions in existing share schemes and funds. Consider whether employee shareholder status could be an option for new recruits - an employee shareholder subscribes to shares in the company up to a value of no less than £2,000 and, in return, waives certain employment rights, including the right to bring an unfair dismissal claim.
- Maintain a robust paper trail and follow a fair process. If faced with an unfair dismissal claim, it will be essential to demonstrate a fair reason for the dismissal and that a proper procedure was followed.
- If you are planning to exit any employees over the coming months, ensure that their effective date of termination is before 1 January 2027 to avoid exposure to uncapped compensation.
