Two reforms under the Employment Rights Act 2025 will substantially change the risk profile for PE firms and their portfolio companies.
With effect from 1 January 2027, the Employment Rights Act 2025 will, amongst other things, introduce two changes that materially alter the employment law landscape. Firstly, the qualifying period for employees in Great Britain to bring unfair dismissal claims will be reduced from two years’ to six months’ continuous service, and secondly, the cap on compensatory awards (currently the lower of 52 weeks’ gross pay or 123,543) will be removed. Together, these reforms significantly shift the risk profile for PE firms and their portfolio companies.
A full formal performance management process (involving written warnings, improvement plans, and review periods) is rarely realistic for a member of the C-suite. In most cases, the relationship has simply broken down, the board has lost confidence, or strategic direction has shifted. The result is that senior exits are often negotiated departures rather than procedurally compliant dismissals. Historically, this created limited practical risk given the statutory compensation cap and the ability to “buy out” the unfair dismissal risk under the terms of a settlement agreement. With the removal of the cap, the position will materially shift, and departing executives who consider themselves unfairly or constructively dismissed could seek much greater compensation awards (or settlement...
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