The UK government’s decision to go ahead with completely lifting the cap on unfair dismissal compensation from the start of next year will require companies to rethink their dismissal strategies, an expert has warned.
The government confirmed that it would be removing the current cap on unfair dismissal awards as part of the changes being brought in by the 2025 Employment Rights Act.
It has also confirmed that the minimum service requirement for unfair dismissal will be lowered from two years to six months, as part of a tranche of changes coming into force on 1 January 2027.
Anne Sammon, an employment law expert with Pinsent Masons, said confirmation of the removal of the compensation cap would give employers a greater degree of certainty for planning how to handle potential awards. But she also warned: "Employers will need to think holistically about their remuneration structures and the consequences of these for unfair dismissal awards, and advice may be needed for mitigation strategies”.
“In terms of wider strategies, these might include making enhanced redundancy payments - or other payments that are dependent on redundancy status - contingent on the employee entering into a settlement agreement to avoid employees being able to receive such an enhanced payment and still bring an unfair dismissal claim."
Under the change, the existing cap on compensatory awards for unfair dismissal – which currently stands at the lower of either 118,223- or 52 weeks’ gross pay – will...
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