Uncapped unfair dismissal | Increased significance of incentive awards

From 1 January 2027, the qualifying period for unfair dismissal is being reduced from two years to six months and the compensatory cap is being removed. Together these changes create the potential for much higher payouts, which may include losses in respect of equity awards, bonuses and other benefits. 

Removal of compensatory cap

At present, compensation for ordinary unfair dismissal is the lower of 52 weeks' gross pay or a statutory cap (currently £123,543). The Employment Rights Act removes both of these caps, meaning that compensation for ordinary unfair dismissal will be unlimited.

Claimants will be able to seek to recover their full financial loss, with settlement negotiations set to become more complex and challenging. 

With little case law and guidance yet on how losses will be quantified, claims are likely to extend to bonuses, equity awards (including share options, restricted stock units, growth shares, management incentive plans and carried interest), pension contributions and other benefits. Such awards previously may not have been challenged in employment tribunals due to the compensation cap. 

This change is likely to have a material impact on claims and increase costs for employers, particularly where the claimant is a senior executive who is out of work for a prolonged period. 

The removal of the cap will be a particular issue for sectors where remuneration is heavily weighted towards variable and equity-based pay; in particular, the private equity industry. In some cases, the value of unvested equity alone can far outweigh annual salary, particularly where companies are approaching a liquidity event or milestone. Complex valuation issues are likely to come into play. 

Osborne Clarke comment

To prepare for these changes, employers may wish to review their vesting and leaver provisions across their incentive plans.

Leaver provisions vary considerably, from a "leave and lose" approach to defined categories of good and bad leaver, which are typically drafted to dovetail with the provisions in the company's articles of association. There may also be discretion as to the treatment of an individual or award on termination of employment, particularly in relation to vesting or performance conditions. Such discretions are typically exercised by the board or remuneration committee.

Employers should ensure that proper processes are followed when dismissing an employee, and that the relevant provisions in any incentives documentation are properly considered and applied on termination. HMRC's guidance should be taken into account on any exercises of discretion relating to tax-advantaged options. 

Care should also be taken to ensure consistency in how discretion is applied and that decisions are properly documented. 

Osborne Clarke microsite and webinar series

Osborne Clarke's microsite Employment law reforms on the horizon | Preparing for change outlines these changes and wider reforms. 

Details of our upcoming ERA webinar series are here, starting with "You’re (not so easily) fired: The new era of unfair dismissal" at 10am on 22 September.