The government has signalled a major amendment to the Employment Rights Bill – scrapping the statutory cap on unfair dismissal compensation.
If implemented, employees with six months’ service or more could pursue uncapped financial loss for unfair dismissal. Below, we outline what this means in practice and what employers need to know.
Where are we now?
Currently, the compensatory award for unfair dismissal is capped at the lower of 52 weeks’ pay or £118,223. The government is proposing to remove both of these limits. These limits have played a significant role in shaping litigation risk, settlement strategy and boardroom decision-making for decades.
What’s changing and why does it matter?
If the proposal is introduced, it will mean:
- The compensatory award will become unlimited
- Employees need six months’ service to claim unfair dismissal (the change to the qualifying period is due to come into force 01 Jan 2027)
- The basic award remains capped (currently £21,570)
For employers, the key issue is risk. Not necessarily because awards will routinely skyrocket, but because negotiation dynamics, expectations and claim behaviour are likely to shift.
Who is most likely to be affected?
Martin Cornforth, our Director of Litigation, thinks this change will have the biggest impact in specific, higher value scenarios:
”“Tribunals and compensatory awards aren't there to issue windfalls. This proposal is likely to make the biggest difference in cases for high earners, those with generous pension schemes, or individuals whose career prospects are significantly impacted.”
Examples could include:
- Senior employees in high-value, highly paid roles
- Those with valuable pension arrangements, particularly final-salary schemes
- Individuals experiencing career-long loss, such as employees close to retirement
”“Some high earners have historically avoided unfair dismissal claims because of the cap, opting for breach of contract claims instead. Removing the cap changes that calculation.”
Should we expect a wave of high-value claims?
Jess Kelleher, our Head of Litigation, warns that the bigger challenge may come from how claimants perceive the value of their claim rather than the awards tribunals actually make:
”“We’re already seeing litigants in person using AI tools to draft claim submissions. These systems often pull from headline outcomes rather than the nuanced reality (the average award for these claims currently sits around £14k), so, with no cap we’re likely to see more claimants starting from unrealistic assumptions. Without proper advice on mitigation or how tribunals assess loss, the gap between expectation and reality could widen quickly.”
High-value claims may still occur, but they’ll likely remain rare:
”“Even if exceptional awards crop up, tribunals must act equitably and claimants must still show they've attempted to mitigate their losses. So in most cases, the practical impact is unlikely to be dramatic. But claimant expectations may rise, and claimant lawyers may take on more no-win, no-fee cases where the upside is suddenly far greater.”
What this could mean for HR and business leaders
If this reform becomes law, employers may see:
Increased complexity in senior exits – the risk profile for dismissing high-paid individuals changes significantly. Longer performance processes or more structured risk assessments may become the norm.
Shifts in early negotiation strategy – with no cap anchoring settlement discussions, expectations may become harder to manage, especially when AI-generated submissions inflate perceived value.
More robust probation decisions – employers may take a firmer approach in the first six months, where no unfair dismissal right exists.
Reflecting on recruitment and resourcing – some employers may reconsider headcount growth or increase use of contractors or consultancy arrangements to remove the potential for unfair dismissal claims.
Longer tribunal timelines – higher-value cases often require complex evidence and longer hearings, potentially adding to existing bottlenecks.
How can we help?
We’ll keep you updated as the amendment progresses, but if you’d like support reviewing your dismissal processes, manager training or risk analysis for complex exits, we’re here to help – get in touch.
This update is accurate on the date it was published but may be subject to change which may or may not be notified to you. This update is not to be taken as advice and you should seek advice if anything contained within affects you or your business.
