The end of the cap: are senior executives ready for the changes to unfair dismissal claims?

The Employment Rights Act has long offered employees recourse against unfair dismissal with a clear statutory cap on potential compensation. From 1 January 2027, one of its most significant constraints disappears: the statutory cap on compensatory awards for ordinary unfair dismissal will be removed.

The current cap is the lower of 52 weeks’ gross pay or £123,543 (from 6 April 2026). This ceiling applies regardless of an employee’s actual financial loss and has long been a disincentive for senior executives pursuing unfair dismissal claims unless those claims could also be framed as discrimination, whistleblowing, or another uncapped cause of action.

Caroline Doran Millett, Employment Partner at RWK Goodman, who is known for her expertise in advising senior executives in complex and high value exit negotiations says “The abolition of the unfair dismissal cap is arguably the best thing the Labour Government has done for directors, professionals and higher rate tax payers.”

January 2027 is also expected to bring a reduction in the qualifying period for unfair dismissal from two years to only six months, meaning a significantly larger pool of employees will be able to bring claims after a modest period of employment.

For years, the statutory cap has acted as a clearly demarked ceiling in exit negotiations.  The maximum payment was known and understood by all involved even where a senior executive’s real financial loss ran into several hundred thousand pounds, an ordinary unfair dismissal claim had limited financial or strategic value. A CEO or bank professional understood that they may have been dismissed in an unfair manner but there was a limit compensation so negotiations were within those boundaries, and it discouraged litigation. That is about to change, and the scale of the shift becomes clear when you look at how unfair dismissal awards have compared with uncapped discrimination claims.

• In the 2023/24 reporting period, the highest unfair dismissal award was £179,124 (in a case involving an existing exception to the cap), and the median award was just £6,746. By contrast, the highest discrimination awards that year were £995,128 for sex discrimination, £964,465 for disability discrimination and £431,768 for race discrimination, (with median awards of £16,161, £17,218 and £10,253 respectively).

As of 1 January 2027 a C-Suite executive, professional or higher rate tax payer could receive these levels of awards, typically only seen with discrimination, because the process or rationale for the dismissal was not “fair”.

During the House of Lords debate, Lord Pannick KC argued that concerns about uncapped compensation were “exaggerated”, noting that discrimination claims have long been uncapped without producing excessive awards. The Government’s January 2026 Economic Analysis similarly suggested the overall cost would be limited, given that few unfair dismissal awards currently reach the cap. In aggregate, those observations may be correct but they do not fully reflect the senior executive or City market, where even a relatively short period of unemployment can produce losses far above the current ceiling and where the removal of the cap changes the economics of dismissal fundamentally.

“In our experience, Senior Executives were pragmatic, and while they did not like the arbitrary cap, it was understood.

The statutory cap, limited the compensation in vanilla unfair dismissal situations but also limited the time and legal fees spent in exit negotiations. This benefitted both the employer and the employee. The cap also made cost vs benefit of pursuing an unfair dismissal claim uncommercial for many senior employees. The reputational and legal costs of pursing an unfair dismissal claim for £123,543 for a Senior Executive was unattractive.

Now there is an extraordinary opportunity of recouping all uncapped financial losses, perhaps over several years, for ordinary unfair dismissal meaning that such claims will become significantly more attractive to many professionals, directors and Senior Executives.”

– Caroline Doran Millett, Employment Partner at RWK Goodman.

The removal of the cap will not transform every unfair dismissal claim into a high-value one but for a senior executive earning £150,000 or more in salary, bonus, pension, and long-term incentives, one year’s loss can already exceed the current cap. Two or three years’ loss could amount to a claim worth well over half a million pounds putting it in the same territory as the largest discrimination awards. This is particularly significant in sectors where remuneration is heavily weighted towards bonus, deferred awards, share plans, carried interest, or other incentives that may be forfeited on termination.

The ERA cannot escape the grasp of the law of unintended consequences.

“An employer who dismisses a senior employee without due process or rationale will have to pay for the known and ugly biases which unfortunately are still baked into much of the UK recruitment market, whether conscious or not. A person with a protected characteristic may well find it takes significantly longer to find a new comparable role. There are also fewer roles available as an employee becomes more specialised, senior and/or expensive so it is logical – under this new uncapped regime –  that such senior employees should be compensated for longer periods of unemployment at their usual remuneration levels.  Dismissing expensive senior executives will become more problematic, contentious and expensive without the framework of a maximum cap.”

– Caroline Doran Millett, Employment Partner at RWK Goodman.

For example, research has shown that those in their fifties can take up to 2 years to find other roles. Senior Executives who are women, minorities and those facing double discrimination may face even greater hurdles and longer periods of unemployment.  To be clear – this is not the dismissing employer’s discrimination but that employer who has dismissed unfairly (but not discriminated) will have to compensate for hurdles, bias and discrimination in the market place.  In practical terms, under the new uncapped regime, if it takes longer for a historically high-earning older, female, ethnic minority and/or disabled applicant to find a new suitable role as a banker, professional or C-suite director etc then the employer who dismissed them unfairly is on the hook for those uncapped future losses.

The removal of the cap changes maximum exposure but it does not change the legal framework for assessing compensation. The core principles remain, but they now carry far greater commercial weight.

Mitigation. Claimants must still take reasonable steps to find alternative work. In practice, the central question — how long it would realistically take the executive to find a comparable role — will often be the most important battleground in any claim or negotiation. Consider two scenarios where this bites hardest:

• A senior executive who works part-time for childcare or carer reasons may face a small pool of equivalent flexible roles being advertised at the same seniority and pay. If a tribunal accepts that finding a comparable position could take longer periods of time the loss-of-earnings calculation could be significant.
• Similarly, a professional, director, banker or other Senior Executive dismissed in their mid-to-late 50s in a highly specialised role may be able to argue there is no realistic route back to an equivalent position or salary. In that scenario, the difference between a capped and uncapped claim is not merely technical but could be the difference between a contained settlement and a claim for many years’ future loss if they did not plan to return until their 60s or 70s.

Polkey deductions and contributory fault. Awards remain subject to the usual adjustments, such as the Polkey deduction which allows a tribunal to reduce compensation where it concludes the employee would likely have been dismissed in any event, even if a fair process had been followed. Contributory fault can also reduce an award where the employee’s own conduct played a part in the dismissal.

Without a statutory ceiling to anchor negotiations, employers will need to lean more heavily on these defensive arguments precisely because they are now the primary levers for limiting a blank cheque exposure. The size of the prize has grown but so has the importance of the arguments used to cut it down.

Executives should approach any negotiation with a realistic, evidence-based view of how long it would genuinely take to find an equivalent role and should be alert to aspects of their conduct or performance that an employer might use to argue for a reduction. However, it is expected that many negotiations on a Protected Conversation or Without Prejudice basis will see a Senior Executive’s starting point not merely being  for £123,543 as compensation for loss of office/ex-gratia but multiples of their overall annual remuneration package.

The removal of the cap is likely to reshape settlement conversations in two ways.

• First, employers will need to assess potential exposure by reference to actual losses such as salary, bonus, benefits, and where appropriate future earnings rather than a statutory maximum. In higher-value disputes, that is likely to increase pressure to resolve claims at an earlier stage, before the parties become entrenched.

• Second, claimant expectations will rise significantly. Some executives may seek multi-year compensation for future loss, and in exceptional cases may argue they will never realistically recover their previous earnings trajectory. Without a cap, those arguments may translate into much higher opening positions and, in some cases, less willingness to compromise. Negotiations will become protracted, more difficult and expensive without a financial framework. More senior executives will be inclined to litigate.

The argument justifying this last-minute decision to remove the cap was Claimants will increasingly rely on ordinary unfair dismissal only – rather than bolting on weaker or spurious discrimination or whistleblowing allegations purely to try to access uncapped compensation or larger ex-gratia payments in exit negotiations. Ordinary unfair dismissal claims are generally simpler and more compelling to explain and from January 2027, they will become significantly more valuable. However, there is nothing to stop an aggressive or poorly advised employee from continuing to taking a scattergun approach to their allegations.  If they were inclined to throw the kitchen sink at their claims in 2026 they are likely to take the same approach in 2027 and will still argue additional, albeit flimsy, discrimination or whistleblowing claims, particularly where injury to feelings, aggravated damages, personal liability, or reputational issues are in play.

The value of getting early legal advice has increased significantly. The best outcomes are achieved when the legal, commercial, and evidential case is built before an exit is finalised: preserving documents, understanding the full remuneration structure, assessing mitigation realistically, and framing negotiations around the employer’s true exposure rather than the historic cap.

If you are a senior executive facing a possible exit or negotiating a settlement against the backdrop of the 1 January 2027 changes, we would be happy to talk through what the removal of the cap may mean for your position.