Removal of Unfair Dismissal Cap will elevate claims into the Boardroom: What employers need to know

Earlier this week, the Employment Rights Bill cleared the House of Lords and has now received Royal Assent to become law as the Employment Rights Act 2025 (18 December). But a late stage amendment could have profound implications for senior leadership teams and boards across the UK, according to our employment law team.

The removal of the statutory cap on unfair dismissal compensation risks transforming unfair dismissal from a manageable HR issue into a more significant concern for employers.

Adrian Hoggarth, Head of Employment Law, Jurit LLP, explains what the cap previously meant in practice, what will change, and critically, how employers should respond.

What is the unfair dismissal cap?

When an employee brings a claim for unfair dismissal, compensation awarded by an Employment Tribunal normally comprises two parts:

1. Basic Award – calculated using a statutory formula based on age, length of service and weekly pay (subject to a weekly limit).
2. Compensatory Award – designed to reflect the employee’s actual financial losses, such as loss of salary, pension, benefits, and the time it reasonably takes to secure alternative work.

Historically, the compensatory award was subject to an upper limit. This was set at the lower of:

• 12 months’ gross pay; or
• a statutory maximum (currently £118,223).

While some claims, such as whistleblowing, health and safety, or trade union-related dismissals, were already exempt from this cap, the majority of unfair dismissal cases fell within it, providing employers with a degree of certainty over potential exposure.

What will change?

Currently, compensatory awards for unfair dismissal are capped at the lower of 12 months’ gross pay or £118,223, allowing employers to quantify and manage their exposure with a reasonable degree of certainty. The Act will remove that cap entirely.

This means Employment Tribunals will no longer be restricted by an upper threshold and may award compensation that reflects the entirety of the employee’s actual losses.

The basic award remains unchanged, as does the general requirement for employees to have at least two years’ qualifying service unless claiming automatic unfair dismissal, although this will be reduced to six months as part of another change to unfair dismissal law.

However, the key difference is that all unfair dismissal claims will, once the change to the law takes effect, carry the possibility of significantly higher awards, potentially mirroring the magnitude of damages previously seen only in whistleblowing or discrimination cases.

“Much of the early commentary has focused on headline-grabbing examples such as professional footballers,” says Adrian.

“But the more consequential impact is likely to be felt in the boardroom. Senior executives and C-suite leaders, whose remuneration packages often include complex incentives and long-term awards, could pursue substantially higher claims.”

What this means for employers

The removal of the cap will undermine the predictability employers rely on when managing exits, even where employment contracts include carefully drafted limitations on loss relating to share options and incentive arrangements.

Adrian explains: “By eliminating the cap, the legislation erodes employers’ ability to assess risk with confidence,” Hoggarth adds. “As the boundaries of uncapped compensation are tested, unfair dismissal claims are likely to be elevated into the boardroom, becoming a material governance and financial risk for organisations.”

1. Greater financial exposure

Employers will face potentially higher compensatory claims, particularly where:

• The employee held a senior or specialist role with high earnings
• The dismissal impacts long-term career prospects
• The job market makes securing alternative employment difficult.

2. Increased litigation risk and settlement values

The uncapped compensation regime makes unfair dismissal litigation more attractive to potential claimants. As a result:

• Employers may see a rise in claim volumes
• Settlement expectations are likely to increase
• Employers will need to reassess their risk appetite in relation to contentious exits.

3. Need for rigorous processes and documentation

With higher potential liabilities, tribunals will scrutinise the fairness of the dismissal process even more closely. Employers should ensure:

• Thorough investigations and clear rationales underpin decisions
• Procedural fairness is consistently applied
• Documentary evidence is maintained throughout
• Managers are properly trained to manage performance, conduct, and restructuring processes.

4. Renewed focus on early resolution

Employers may find greater value in:

• Early legal risk assessments
• Mediation and alternative dispute resolution
• Protected conversations
• Settlement agreements.

These mechanisms can offer certainty and cost control, avoiding protracted and expensive tribunal proceedings.

The removal of the unfair dismissal cap marks a fundamental shift in employment law, increasing both the risks and the responsibilities for employers.

While the change does not alter the core test of fairness in a dismissal, it significantly raises the stakes when processes are not followed correctly or where the rationale for dismissal is weak.

Employers should take proactive steps now to review their procedures, strengthen governance, and ensure decision-makers are properly equipped to mitigate the heightened risks. Doing so will not only reduce exposure to claims but also support better employment relations and organisational resilience.

Top tips for Employers

1. Review disciplinary, capability, redundancy, and grievance processes, ensuring they align with Acas Code expectations.
2. Enhance training for line managers on procedure, documentation, and decision-making.
3. Implement stronger HR oversight for high-risk dismissals, particularly involving senior roles.
4. Reassess settlement strategies and internal authority levels for approving packages.
5. Conduct a review of ongoing or anticipated dismissals to identify cases where the increased exposure may be relevant.

If you are worried about how the removal of the unfair dismissal cap could affect your business, Jurit’s employment lawyers can advise you on next steps to ensure organisational resilience.