Key Takeaways
| Point | What it means for you |
|---|---|
| The statutory cap on unfair dismissal compensation may be removed | Employees could claim far higher sums if dismissed unfairly |
| The change is part of the Employment Rights Bill currently before Parliament | Employers must review dismissal procedures now, before the law changes |
| The cap currently stands at £115,115 or 52 weeks’ pay, whichever is lower | Removing it could expose employers to unlimited compensatory awards |
| Private equity and fund managers face particular exposure | Portfolio company HR practices may need urgent review |
| Employees with two or more years’ service are protected against unfair dismissal | This qualifying period may also be reduced under the Bill |
The Employment Rights Bill, currently progressing through Parliament, contains provisions that could remove the statutory cap on compensation for unfair dismissal. If enacted, this change would have significant consequences for employers across all sectors, giving employment tribunals the power to award sums well beyond the current ceiling. For workers and their advisers, understanding the current rules and what may change is essential.
Wolf Law has extensive experience advising employees on unfair dismissal claims. If you believe you have been dismissed unfairly, speak to our employment law team today.
What is the current statutory cap?
Under the current rules, the compensatory award in an unfair dismissal claim is capped at the lower of £115,115 or 52 weeks’ gross pay. This limit applies to the compensatory element of any award made by an employment tribunal. It does not apply to the basic award, which is calculated separately using a formula based on age, length of service and weekly pay.
The cap has been criticised for limiting the remedy available to higher earners and long-serving employees whose actual financial losses far exceed the maximum award. A senior professional dismissed without justification may suffer losses running into several years’ salary, yet receive compensation that covers only a fraction of that figure.
Why the cap exists
The statutory cap was introduced to provide employers with certainty about their maximum financial exposure in unfair dismissal proceedings. It has also been used to justify the relatively low qualifying period for unfair dismissal protection, on the basis that the risk to employers from employees with short service was limited. Removing the cap would alter that balance significantly.
What the Employment Rights Bill proposes
The Employment Rights Bill proposes removing the cap on compensatory awards entirely, allowing tribunals to award compensation that reflects an employee’s actual financial loss with no upper limit. This mirrors the position that already applies in discrimination claims, where no cap exists and awards can reflect career-long losses.
The Bill also proposes reducing the qualifying period for unfair dismissal from two years to a much shorter period, potentially from day one of employment in some circumstances. Together, these changes would substantially increase both the number of potential claimants and the value of successful claims.
Implications for private capital and fund managers
Legal analysis from a number of firms has highlighted the particular exposure facing private equity managers and investors. Portfolio companies with high-earning workforces, significant redundancy programmes or aggressive restructuring plans face the greatest risk. A single successful claim by a senior employee could result in an award running into hundreds of thousands of pounds if the cap is removed.
Fund managers are also subject to management fee clawback provisions and carried interest arrangements that could be affected if key individuals bring successful employment claims. Our employment law specialists at Wolf Law can advise on how to structure employment arrangements to reduce this risk.
What employers should do now
Employers should not wait for the Bill to become law before reviewing their practices. Employment tribunals already scrutinise dismissal procedures closely, and any procedural failing can result in an uplift to any award made. With the prospect of uncapped compensation on the horizon, the cost of a poorly handled dismissal is likely to increase substantially.
Key steps employers should take now include reviewing and updating disciplinary and grievance procedures, ensuring managers receive proper training in conducting fair dismissal processes, documenting performance management and capability procedures carefully, and taking legal advice before dismissing any employee with two or more years’ service.
The importance of following a fair procedure
An employer can have a genuinely fair reason for dismissal and still lose a tribunal claim if the procedure followed was inadequate. Tribunals apply the band of reasonable responses test: they ask whether the decision to dismiss fell within the range of responses open to a reasonable employer, and whether a fair procedure was followed. Failing on the procedural element alone can result in a finding of unfair dismissal, even where the underlying reason was sound.
How Wolf Law can help
Whether you are an employee who believes you have been unfairly dismissed or an employer seeking to manage risk before the law changes, Wolf Law is here to help. Our employment law team advises on all aspects of dismissal, from the initial process through to tribunal representation.
We act for employees across England and Wales in claims involving unfair dismissal, constructive dismissal, discrimination and whistleblowing. If you have been dismissed in circumstances that did not seem right, we offer a free initial consultation to assess your position.
For further information on the current law, the GOV.UK guidance on dismissals provides a useful overview. The ACAS Code of Practice on Disciplinary and Grievance Procedures sets out the procedural standards that employers are expected to follow. The Employment Rights Act 1996 remains the primary legislation governing unfair dismissal in Great Britain. Updates on the progress of the Employment Rights Bill can be found on the Parliament Bills website.
Frequently Asked Questions
What is the current compensation cap for unfair dismissal?
The current cap on the compensatory award for unfair dismissal is £115,115 or 52 weeks’ gross pay, whichever is lower. The basic award is not capped in the same way and is calculated separately.
Could the cap really be removed entirely?
The Employment Rights Bill as currently drafted includes provisions to remove the statutory cap. The Bill is still progressing through Parliament, so the final form of the legislation may differ. However, employers should plan on the basis that removal is a realistic prospect.
Do I need two years’ service to claim unfair dismissal?
Under the current rules, most employees need at least two years of continuous employment to bring an unfair dismissal claim. Some dismissals, such as those relating to whistleblowing or protected characteristics, do not require any qualifying period. The Employment Rights Bill proposes reducing or removing the two-year threshold.
What is the difference between unfair dismissal and wrongful dismissal?
Unfair dismissal is a statutory right under the Employment Rights Act 1996 and relates to whether the employer had a fair reason and followed a fair procedure. Wrongful dismissal is a common law claim based on a breach of the employment contract, typically involving dismissal without proper notice.
Can I claim unfair dismissal if I resigned?
You may be able to bring a constructive dismissal claim if your employer’s conduct made your position untenable and you felt you had no choice but to resign. Constructive dismissal is treated as unfair dismissal provided the employer’s conduct amounted to a fundamental breach of contract.
How long do I have to bring an unfair dismissal claim?
You must present your claim to an employment tribunal within three months less one day of your effective date of termination. Missing this deadline will usually prevent you from bringing a claim. Contact Wolf Law as soon as possible if you think you have a claim.
What compensation could I receive if I win an unfair dismissal claim?
If your claim succeeds, you may receive a basic award and a compensatory award. The basic award is calculated by formula. The compensatory award reflects your actual financial loss, subject to the current statutory cap. If the cap is removed, the compensatory award would reflect your full loss with no ceiling.
This article provides general information about employment law in England and Wales. It does not constitute legal advice. For advice about your specific situation, please contact Wolf Law for a free initial consultation.
