The removal of the unfair dismissal cap What employers need to know

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.