Compensatory cap’s removal tilts risk scales in claimants' favour
Kerry Norval warns a change to the law could have unintended consequences
A major change introduced by the Employments Rights Act is the removal of the compensatory cap – a reform which was largely snuck in at the last minute as a parliamentary concession, and which will not be the subject of consultation.
The objectives are admirable. However, as is often the case, such a radical change is likely to bring unintended consequences.
The government argues that lifting the cap will deter employers from treating the cost of dismissing employees unfairly as part of business as usual.
However, the reality is that most claims do not come close to the cap (the lower of £123,543 or 52 weeks’ gross pay), meaning the impact will only really be felt in the cases of senior executives with sizeable pension or stock option entitlements.
As the law stands currently, unfair dismissal is a blunt tool for employees whose remuneration exceeds the cap. It is not uncommon for employers to take a commercial approach and expedite such individuals’ exits on the basis that they can easily quantify (and pay out) the value of any potential unfair dismissal claim, provided there are no credible whistleblowing or discrimination complaints at play.
Uncapped compensation means this approach will no longer be possible. This, in turn, strengthens higher earners’ position both in terms of tribunal strategy and settlement negotiations.
Against this backdrop, it’s possible we will see a cull of executives in the run-up to the change taking effect on 1 January 2027, given the considerable change to the risk profile thereafter.
The government’s other argument in making the change is that it will remove the incentive for claimants to find a whistleblowing or discrimination angle to access uncapped compensation. These types of claims are complex and take longer. Therefore, the argument goes, the burden on the system will be reduced.
However, our experience is that there is a trend at employment tribunals for claimants to take a “kitchen sink” approach to see what sticks and place greater pressure on respondent employers. Unfortunately, there is little to disincentivise claimants from doing so. Moreover, the compensatory award is only limited to financial losses, meaning there will still be an incentive on claimants to raise other types of claims where they are seeking to recover something by way of injury to feelings.
There are also questions around the impact on the UK jobs market more generally. It is possible that many employers will seek to appoint higher paid positions on a consultancy basis in order to give themselves greater protection.
Meanwhile, global companies who have a choice as to where they appoint their senior management may be put off hiring at a senior level in the UK altogether. The removal of the cap places the UK as an outlier amongst many peer economies, as most countries have a cap of some description.
The removal of the compensatory cap represents one of the most consequential changes to UK unfair dismissal law in decades. While the full impact will only become clear over time, the immediate effect will be to shift the balance of financial risk firmly towards employers.
For HR leaders, it’s not simply a case of increased liability, but of increased responsibility: decisions around hiring, performance management and dismissal will need to be more carefully structured, documented and justified than ever before.
Kerry Norval is a director, Burness Paull LLP