The Employment Rights Act 2025 was passed late last year, and you will be forgiven for trying to catch up with all the proposed developments — there are so many! One of the most significant is the removal of the statutory cap for the compensatory award in successful unfair dismissal claims (the cap is currently the lower of 52 weeks’ gross pay or £118,223).
The statutory cap will be removed at some point in January 2027
From the information currently available to us, it is likely to be 1 January 2027 on the same date that the qualifying period for unfair dismissal is reduced from 2 years to 6 months.
Once removed, how will the UK fare when compared to a very employee friendly Europe?
In most European counties, unfair dismissal compensation is capped. The aim is simple: balance fairness for employees with predictability for employers.
Let’s look at the different regimes:
- France link compensation to length of service. Awards start at around three and a half months’ salary (for two years’ service) and cap at 20 months’ salary, even for long-serving employees.
- Switzerland limits compensation to six months’ salary.
- Sweden caps awards at 32 months’ salary, depending on service.
- Spain applies a formula of 33 days’ pay per year of service (for post-2012 hires) but again capped at 24 months’ salary.
- Italy operates a dual system. Employees hired after March 2015 face capped awards of:
| 6 to 36 months’ salary for large employers. |
| 3 to 18 months’ salary for small employers. |
| Following a Constitutional Court ruling, judges now have discretion within those ranges — but the cap remains firmly in place. |
- Ireland caps unfair dismissal compensation at 104 weeks’ total remuneration.
- Denmark applies caps under collective agreements (up to 52 weeks’ pay) or six months’ salary for salaried employees, depending on service.
The common thread for most European countries — compensation is capped, and employers are able to plan negotiations accordingly. Beyond Europe, caps are still the norm. In Australia for example, the Fair Work Commission can award compensation for unfair dismissal but only up to six months’ salary.
The UK will be joining a handful of countries which have uncapped awards. In Luxembourg, judges are given a wide discretion with no fixed statutory cap. Canada has no formal statutory cap, but compensation is typically limited to damages reflecting the employee’s reasonable notice period, rather than open-ended loss. Lastly, in Brazil, employers are required to deposit 8% of the employee’s monthly salary into an account which is managed by the Federal Savings Bank on behalf of the employee. If an employee is dismissed without cause the employer must pay to the employee, (in addition to the payment of accrued rights and as a penalty for unfair dismissal) an amount equal to 40% of that which the employer has deposited into the employee’s severance compensation fund during their employment. The amount of the penalty will therefore depend on the length of employment and on the amount of the employee’s monthly salary.
It is clear that the UK will be joining the minority rather than the majority of countries who have uncapped unfair dismissal awards.
What are the repercussions of an uncapped compensation regime?
The statutory cap currently guides settlement negotiations with parties often negotiating around three to six months’ pay to avoid the time and costs attached to tribunal hearings.
Without the statutory cap:
- Claimants may be more willing to take cases to a final hearing, adding to an overburdened tribunal system.
- It is more difficult for employers to quantify the financial risk of a dismissal, which will inevitably impact settlement negotiations.
- High earners are no longer deterred from lodging Tribunal claims meaning an increase in litigation for this group.
- There is likely to be more complex remedies hearings that need to consider quantifying bonuses, deferred incentives and unvested equity.
- Where the Acas Code applies, a potential 25% uplift suddenly bites harder when the underlying award is not capped.
- On a positive note, it is likely to result in a reduction in more complex discrimination claims and whistleblowing claims as there will no longer be a need to bring these claims to avoid capped compensation.
How should you prepare?
Employers would be wise to start taking preparatory steps to tighten up procedures and ensure a clear document trail is in place. With an extended early conciliation period, plans to increase tribunal time limits for lodging claims and existing tribunal delays, tribunal witnesses will be placed under significant pressure to recall events which took place possibly two to three years ago. HR teams can make both their and witnesses’ lives a lot easier with clear processes and consistent decision making.
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Kate Walsh
Refreshing Law
