The Government has now voted to remove the statutory cap on compensatory awards for unfair dismissal claims as part of the Employment Rights Bill. At present, compensation is capped at the lower of 52 weeks’ pay or a fixed financial limit (currently £118,223). Under the proposed reform, successful unfair dismissal claims would no longer be subject to that statutory ceiling and awards would reflect the employee’s actual financial loss, subject to the usual requirement to mitigate.
Alongside this, the Government is committed to ensuring that the qualifying period for ordinary unfair dismissal rights will be reduced from two years to six months’ continuous service from 1 January 2027.
The reforms still need to pass the House of Lords, but it seems that the reforms were part of the deal the Government has negotiated to get its Bill over the line.
Many would argue that the capped regime has never properly reflected the financial realities for senior employees. Currently, the statutory cap is insufficient to deter employers unfairly dismissing high earners, especially if doing so might prevent the employee receiving a large bonus payment or lucrative stock options. Indeed, some employers stifle claims by offering senior executives settlement payments close to the statutory cap which are wholly or largely funded by the bonus they would have to pay if they didn’t dismiss.
Conversely, senior executives who find that the financial cap on unfair dismissal does not cover their losses, often add discrimination or whistleblowing claims (which are not subject to a cap on compensation) to ensure they receive an award that adequately reflects their actual loss. However, such claims are more complex and tend to push up the time and cost of proceedings. Often there will need to be preliminary hearings to determine the issues and, when the substantive hearing finally takes place, additional questions will need to be resolved. The result is longer hearings, extended delays and reserved judgments that may not be handed down until weeks, if not months, later.
So, while a straightforward unfair-dismissal claim might be heard and decided in one or two days, discrimination and whistleblowing claims often need a week or more of hearing time. The current regime therefore contributes to the ever-growing tribunal backlog: claims that could have been resolved quickly are turned into much more complicated litigation because the unfair dismissal cap provides inadequate remedy for higher earners.
So what could happen with the removal of the statutory cap? Employers could be discouraged from dismissing employees (particularly at higher salaries) unless they have a genuine reason for doing so. However, if compensation for unfair dismissal can reflect any employee’s actual financial loss, senior employees will not need to add secondary claims to recover their losses. As such, while there may be more claims brought (due to the decrease in the qualifying period from two years to six months), the complexity of such claims should also be reduced, with more claims focussing purely on whether the employer had a fair reason for the dismissal and whether it followed a fair procedure when dismissing the employee for that reason.
There are downsides. Removing the cap increases financial exposure for employers, potentially affecting hiring decisions and resulting in higher settlement payments. Smaller employers, in particular, may feel they are operating in a less certain environment. However, if the Government want to ensure fair employment rights for working people (wherever they are in their career), this probably has the biggest impact – and potentially comes with the added bonus of alleviating the huge impending additional pressure on a system which is already bursting at the seams.
In summary, if it gets past the Lords, the reform will ensure fairness for senior employees, without necessarily disadvantaging employers, who generally know how to dismiss fairly but will now have to plan a little further ahead to ensure they adopt a fair and well-documented process. Alternatively, they can just add a nought to the end of the cheque.
For advice and further information, please contact B P Collins’ employment team at enquiries@bpcollins.co.uk or call 01753 889995.
