Key facts
- The UK's Employment Rights Act removes the cap on unfair dismissal compensation.
- The removal of the cap means compensation for ordinary unfair dismissal will be unlimited.
- The qualifying period for unfair dismissal is being reduced from two years to six months.
- New regulations come into effect on January 1, 2027.
- The changes could lead to higher payouts for executives, including bonuses, equity awards, and benefits.
New employment legislation in the UK, set to take effect on January 1, 2027, is poised to significantly alter the cost of dismissing senior executives. The Employment Rights Act will remove the existing cap on unfair dismissal compensation, which currently stands at £123,543 or 52 weeks' gross pay. This change, coupled with a reduction in the qualifying period for unfair dismissal claims from two years to six months, means employers could face unlimited payouts.
Caspar Glyn KC, a senior employment barrister at Cloisters, expressed confusion over the government's decision to simply remove the cap rather than adjust it to a higher, more eye-catching figure. He noted that this move could make dismissing an executive in the UK more expensive than in countries like Spain, France, and Germany, potentially influencing decisions about where businesses choose to employ senior talent.
The reforms also encompass contractual bonuses, benefits, pensions, equity, and carried interest, which will now be included in redundancy packages. Law firms have reported a substantial increase in inquiries from senior employees exploring their legal options following notice of termination. Merrill April, a partner at CM Murray, observed a widespread trend of senior staff being asked to leave across various sectors, often with a notable lack of ceremony.