The Employment Rights Act 2025 introduces one of the most consequential changes to the law of unfair dismissal since the right was first created. Whilst much attention has focused on the reduction of the qualifying period for bringing a claim, employers should be equally alert to another reform that could prove far more expensive: the removal of the statutory cap on unfair dismissal compensation.
For many employers, unfair dismissal claims have historically represented a relatively predictable risk.
That predictability is about to disappear. From 1 January 2027, not only will employees obtain unfair dismissal protection after six months’ service, but the statutory cap on compensatory awards is expected to be removed entirely.
For businesses employing senior executives, directors and other highly remunerated individuals, the financial consequences could be substantial.
Under the existing regime, an employee generally requires two years’ continuous service to bring a claim for ordinary unfair dismissal. If successful, compensation comprises:
- A basic award; and
- A compensatory award designed to reflect the employee’s financial losses arising from the dismissal.
The compensatory award is currently capped at the lower of a statutory maximum or 52 weeks’ gross pay. This cap has traditionally provided employers with a relatively clear upper limit when assessing litigation and settlement risk.
In practice, many senior employees have often pursued alternative claims instead, such as discrimination, whistleblowing or contractual claims, because the unfair dismissal cap significantly restricted the value of any award available through an ordinary unfair dismissal claim.
What Is Changing?
The Employment Rights Act 2025 removes both:
- The financial statutory cap; and
- The alternative cap of 52 weeks’ pay
The Government has also confirmed that the qualifying period for bringing an ordinary unfair dismissal claim will reduce from two years to six months. Both changes are expected to take effect from 1 January 2027.
The significance of these reforms should not be underestimated. Employers will no longer be able to assess unfair dismissal risk by reference to a statutory maximum. Instead, compensation will be based upon the employee’s actual losses, subject to the usual principles of mitigation.
Why High Earners and Directors Matter
The removal of the compensation cap will affect all employers, but it is likely to have the most significant impact on businesses employing:
- Directors
- Senior executives
- Professional services partners and consultants
- Individuals receiving substantial bonus payments
- Employees with long-term incentive arrangements
- Employees approaching retirement
For these individuals, annual remuneration often extends well beyond basic salary. Total earnings packages may include:
- Annual bonuses
- Deferred remuneration
- Share awards
- Long-term incentive plans (LTIPs)
- Pension contributions
- Other executive benefits
Legal commentators have noted that tribunals may now be required to consider wider categories of financial loss when assessing compensation, potentially including bonuses and incentive arrangements where appropriate.
For employers accustomed to viewing unfair dismissal as a relatively contained financial risk, this represents a fundamental shift.
Director Exits Require a Different Strategy
Many organisations currently focus heavily on contractual notice periods, post-termination restrictions and settlement negotiations when managing executive departures.
From 2027 onwards, ordinary unfair dismissal claims may become an increasingly attractive claim in their own right.
Employers may need to consider potential claims for career-long losses, discretionary bonuses, pension losses and stock awards when assessing termination risk
This means that a poorly handled executive exit could create exposure that substantially exceeds the sums traditionally associated with unfair dismissal claims.
Process Will Matter More Than Ever
One of the biggest misconceptions in employment law is that having a fair reason for dismissal is enough.
It is not.
Employers must establish both:
- A potentially fair reason for dismissal
- A fair procedure
Tribunals have always scrutinised procedural fairness, but the stakes are likely to become much higher once compensation becomes uncapped. Even where dismissal appears inevitable, procedural failures can still render a dismissal unfair.
Employers should therefore expect increased scrutiny of:
- Investigations
- Disciplinary procedures
- Consultation processes
- Performance management documentation
- Appeal processes
Where the potential value of claims increases, employees and their advisers are likely to devote greater resources to challenging procedural shortcomings.
The Expansion of the Claimant Pool
The reduction in the qualifying period from two years to six months creates a second challenge for employers.
Historically, many newly recruited executives left employment before obtaining unfair dismissal protection. Under the new regime, that position changes dramatically.
Senior hires who prove unsuccessful after six or seven months will often have unfair dismissal protection. Consequently, employers will no longer be able to rely on short service as a defence in many cases.
This is particularly relevant for businesses operating in sectors where senior appointments frequently fail during their first year.
Will We See More Tribunal Claims?
The answer is likely to be yes.
While most unfair dismissal awards have historically fallen well below the existing cap, commentators have observed that senior executives have often had little incentive to pursue ordinary unfair dismissal claims because the available compensation was relatively limited. Once the cap disappears, unfair dismissal may become a far more attractive cause of action.
Employers may therefore face:
- More tribunal claims
- Higher settlement demands
- Longer remedy hearings
- Increased legal costs
- Greater pressure to reach early settlements
What Should Employers Be Doing Now?
- Review Executive Exit Processes
Businesses should ensure that senior departures are managed through robust and documented procedures.
- Strengthen Performance Management
Issues concerning performance, conduct and capability should be identified and addressed at an early stage.
- Audit Senior Remuneration Structures
Organisations should understand precisely what elements make up executive remuneration packages and how these could influence litigation exposure in the event of dismissal.
- Train Managers
Line managers and HR teams should understand that dismissals which may previously have appeared low risk could now create substantial financial exposure
Conclusion
The combination of a reduced qualifying period and the removal of the unfair dismissal compensation cap fundamentally alters the dismissal landscape for UK employers.
For many years, ordinary unfair dismissal claims were viewed as a manageable risk, particularly where senior executives were concerned. From January 2027, that assumption is likely to change. Directors, executives and high earners may be able to pursue significantly larger claims than ever before, transforming the financial and strategic considerations surrounding senior exits.
Employers that invest now in robust procedures, effective performance management and carefully planned termination processes will be best placed to navigate the new era of unfair dismissal litigation. The cost of getting dismissals wrong is about to become much higher.
