At present, the cap gives employers, employees and advisers a known framework. It limits financial exposure and shapes settlement behaviour. That framework is about to disappear. The current upper statutory cap of £123,543 will go, along with the secondary cap of 52 weeks’ gross pay where that is lower. That changes the economics of dismissal.
For years, employers have been able to price unfair dismissal risk with some confidence. In many cases, that has encouraged settlement. In others, it has made litigation unattractive for claimants once cost, stress and uncertainty are taken into account. Remove the ceiling and both sides behave differently.
Take an employee in their early sixties earning £60,000. Under the current regime, the statutory cap often anchors settlement discussions. From January 2027, that same employee may argue that their loss of earnings could extend well beyond 12 months, particularly if finding equivalent work is difficult.
In some cases, the argument may move towards long-term or even career-long loss.
For senior executives, the shift is sharper. A chief executive earning £250,000 plus bonuses may currently be deterred from tribunal litigation because the compensatory award is capped.
Once the cap is removed, that deterrent weakens. Claims involving bonuses, incentives, pensions and long-term remuneration will become more attractive, more complex and more expensive to resolve.
This matters because many employers still rely too heavily on commercial settlement as a substitute for good process.
Increased risk
That approach is about to become riskier. The organisations most exposed will be those that tolerate informal decision-making, weak performance management, inconsistent probation reviews or undocumented concerns about senior staff. These issues may look manageable while compensation is capped. They become much harder to defend when potential loss is open-ended.
HR leaders should resist treating this as a legal compliance update: it is very much a governance issue.
Boards will need to understand that “fire now and settle later” may become a far more expensive strategy. Managers will need to understand that poor documentation is no longer just an administrative weakness. It may become the difference between a contained dispute and a significant financial exposure.
Fixed-term contracts also need closer attention. Their expiry is a dismissal in law. In a capped regime, some employers have treated that risk as manageable. In an uncapped regime, the same approach could carry much greater consequences.
There is also a tribunal capacity issue. Remedy hearings are likely to become more contested. Employers should expect sharper arguments over mitigation of loss, contributory fault and the value of bonuses, pension loss and other benefits. AI-assisted pleadings may add further complexity, particularly where claims are inflated or poorly focused.
Preparation is key
The practical antidote to all of this lies in preparation. Employers should start with reviewing the robustness of their recruitment to seek to avoid the need to deal with early exits.
The next focus is then probation. A six-month qualifying period means early performance concerns need to be identified, recorded and acted on quickly. Probation processes that exist only on paper will not be enough.
They should then review performance management, questioning whether managers use it consistently, whether decisions are evidenced and whether the process works for senior roles as well as junior ones.
Contracts and reward structures should also be checked. Bonus schemes, incentive plans and pension arrangements may all become relevant when compensation is assessed. Employers need to know where the financial exposure sits before a dispute arises.
Insurance should not be overlooked. Existing employment practices cover may not reflect the new risk environment. Waiting until claims values rise is poor risk management.
Some employers will look at difficult exits before January 2027. That may be sensible in specific cases, but it is a short-lived strategy and does little for the long-term outlook.
A more considered approach would be to use the next few months to improve the quality of employment decision-making. That means enhanced recruitment models, better probation reviews, stronger manager training, robust performance processes and more disciplined paper trails.
The reform also creates an opportunity for HR. For too long, fair process has sometimes been treated as a brake on commercial decision-making. In the new landscape, it becomes a source of commercial protection.
That is the point employers need to grasp. Uncapped awards will not make every dismissal claim high value. Tribunals will still assess actual loss, mitigation and fairness. But the removal of the cap changes the bargaining position. It gives claimants more room to argue. It gives employers less room to rely on predictable limits.
The old rules of engagement are ending. People teams that act now will help their organisations manage the transition calmly and commercially. Those that wait until the first uncapped claim lands may find that the real cost of weak process has been hidden for years.
This article was originally published in People Management.
