The Government has announced proposals that could significantly reshape UK employment law, including the possible removal of the compensation cap for unfair dismissal claims. While recent headlines have centred on the proposed ‘six-month’ qualifying period for certain employment rights, the potential lifting of the unfair dismissal compensation cap may have even greater long-term consequences for both employers and employees.
At Bhayani Law, our HR and employment law specialists are closely monitoring these developments to ensure our clients are fully prepared.
Current Position: How Unfair Dismissal Compensation Works Today
Under the existing rules, compensation for unfair dismissal is capped at:
One year’s gross pay, or
£118,223 for dismissals on or after 6 April 2024,
whichever is lower.
For dismissals before this date (but within the previous 12 months), the cap was £115,115.
Some claims, such as discrimination, whistleblowing, or health and safety-related dismissals, are already uncapped, meaning compensation can exceed these limits.
What Might Change?
The Government has not yet clarified the exact proposal, but two possibilities are being considered:
Removing all limits on unfair dismissal compensation, or
Removing the one-year maximum pay cap, while possibly retaining a monetary limit.
Either change would represent a major shift in UK employment protection. High-earning and senior employees may be more willing to bring claims if potential compensation becomes substantially higher.
Why the Compensation Cap Matters
The previous Government argued that the current cap may create unrealistic expectations and could deter employers from hiring, given the potential risk of large tribunal awards.
Removing or increasing the cap could:
Increase the financial exposure for businesses, particularly SMEs.
Encourage more claims, especially from higher paid employees.
Change the dynamics of settlement negotiations and early conciliation.
Implications for Employers
Employers should begin reviewing their HR and risk management practices now. Key steps include:
Review dismissal and disciplinary procedures to ensure they are fair, consistent, and compliant with employment law.
Update HR policies and risk assessments, especially around redundancy, restructuring, and performance management.
Plan for the possibility of higher compensation payouts, particularly where senior or long-serving staff may be affected.
Seek early legal advice before progressing with dismissals that may carry increased financial risk.
Our team at Bhayani Law is already advising clients on how to prepare for these potential changes.
Implications for Employees
For employees, the removal of the unfair dismissal cap could mean:
Greater potential compensation where a dismissal is found to be unfair.
Stronger incentives for high-earning employees to bring claims.
A greater need to understand your rights, time limits, and possible outcomes.
The importance of seeking early legal advice, particularly if your employment is at risk or you are considering a claim.
What Happens Next?
The Government is expected to publish further detail in the coming months. Until then, both employers and employees should stay informed and seek advice before making decisions that could be affected by these reforms.
Need Advice on Unfair Dismissal or HR Risk?
At Bhayani Law, our employment law and HR team can help you understand what these proposed changes mean for your business or your employment rights.
Contact our team today for clear, practical advice on 0333 888 1360 or email [email protected]
