Welcome to the latest edition of Employment Law Matters, our regular update on key issues in employment law. In each edition, we share a selection of important developments in employment law and workplace regulation, together with practical insights and considerations for employers.
CM Murray LLP are leading specialist employment law advisers to multi-national employers, senior executives and partnerships. If you have any topics you would like us to cover in our regular updates, please do get in touch.
Lifting the Cap on Unfair Dismissal: What Employers Need to Prepare For
The removal of the compensation cap for ordinary unfair dismissal, one of the biggest and most surprising changes brought by the Employment Rights Act 2025, comes into effect from 1 January 2027. The qualifying period for unfair dismissal rights also shortens from two years to six months from the same date. The lifting of the cap (which is currently the lower of 12 months’ salary and £123,543) will have a significant impact on high earners, particularly in industries such as finance, private equity and professional services.
For businesses, the removal of the cap will fundamentally change the risk profile for exiting high earners. Historically, businesses could relatively quickly exit senior executives with considerable equity and bonus compensation whose value far exceeded the cap (subject always to any risks in relation to whistleblowing, discrimination or any other uncapped liability).
Employers may need to be prepared to pay considerably more to exit an executive where they lack one of the five potentially fair statutory reasons for doing so (redundancy, conduct, capability/capacity, legality or some other substantial reason), and/or where they have not or are unable or unwilling to follow a fair and robust processes.
To reduce the occurrence of such circumstances, employers should consider taking early action in relation to potential conduct or performance issues, ensuring that they keep robust documentation of informal performance or conduct discussions, for example.
An employer will still need to follow a formal process to terminate fairly for misconduct or performance. It will be much better placed to do so where an employee’s conduct escalates to the point where the employer wishes to terminate, where previous issues have been documented and dealt with promptly.
This does not mean employers should create an environment of hyper scrutiny as they will want to be mindful of the culture they want to foster (and conscious that undermining the mutual duty of trust and confidence could itself lead to an uncapped unfair dismissal claim). Rather, managers should not ignore or avoid addressing troublesome behaviour until it escalates to a point that the behaviour is unworkable.
A major impact on businesses will be on the cost of restructuring or changing leadership quickly and nimbly, particularly if those processes are related to a highly confidential transaction where leaks of sensitive information could be hugely damaging to the organisations involved. The cost of taking a commercial approach to dismissals related to a transaction is likely to increase dramatically.
In order to minimise risk, employers should ensure they follow a robust, fair (and early) consultation process in respect of any restructuring. Importantly, employers should always bear in mind that to be genuinely fair, a consultation should give employees a real opportunity to influence the outcome. Employers will need to be even more cautious about documenting any final decisions before consultation has taken place.
Employers may not always have the time and opportunity to follow a robust process and may need to pivot in a different direction for strategic or commercial reasons. We expect to see an increase in terminations relying on ‘some other substantial reason’.
As the lifting of the cap brings high earner’s valuable deferred compensation squarely into the scope of settlement negotiations, we anticipate that equity plans and deferred bonus schemes will become more of a battle ground, both the rights and entitlements under such plans as well as the potential value of awards lost.
In practice compensation will still be limited by the actual loss suffered by a dismissed employee and the employee’s duty to mitigate their losses by actively seeking alternative employment. Accordingly, another practical point of consideration for employers when exiting employees, particularly senior executives and other employees with niche specialisms, will be how such exits might be handled in a way that preserves and protects the employee’s reputation and employability in the market.
If you are interested in a more in-depth discussion of this topic and the potential impact, please join us for a panel discussion hosted by the International Forum of Senior Executive Advisors on 29 September in London: The Uncapped Era: Senior Executive Dismissals After the Cap- The key battlegrounds ahead – and how to prepare for them.
The Unfair Dismissal Cap Is Going. Polkey Is Not.
In Polkey v AE Dayton Services Ltd, a van driver, Mr Polkey, was dismissed for redundancy without prior warning or consultation, and without consideration of alternative employment. The employer argued that a fair procedure would not have made a difference as he would have been dismissed in any event. It was held that this did not prevent the dismissal itself from being unfair, however, it could be relevant to the compensation awarded. This decision resulted in what has become known as the Polkey deduction; a reduction in compensation dependant on the likelihood that a dismissal was to occur in any event.
This is one aspect of the Polkey doctrine but there is a crucial point to note, namely that cases where Polkey could apply are not confined to procedural unfairness. The principle requires a broader assessment of what would have happened but for the unfair dismissal, and may therefore apply where the unfairness is substantive, as well as procedural. An example could be where an individual is dismissed for alleged conduct with no investigation (which is substantively unfair,) but the workplace is closed two weeks later, with no employees remaining, so that the individual’s loss arising from a substantively unfair dismissal is limited to that short period.
With the removal of the statutory cap on unfair dismissal compensation from January 2027, claims brought by senior executives may increase significantly in value where a dismissal results in substantial losses, including salary, bonus and long-term incentive arrangements. However, the removal of the cap does not necessarily mean compensation will be unlimited in every case.
One of the most important limitations on compensation will remain the principle established in Polkey. Where a dismissal is found to be unfair because of procedural failings, a tribunal may still reduce compensation if it concludes that the employee would have been dismissed in any event had a fair process been followed. The dismissal remains unfair, but compensation is adjusted to reflect the loss actually caused by the unfairness. With the unfair dismissal cap lifting, employers are likely to rely more heavily on Polkey arguments, alongside contributory fault and mitigation, to limit exposure.
For senior executives, the key issue may therefore be, not just whether the dismissal was unfair, but whether the employer can demonstrate that the same outcome would have been reached through a fair process. Tribunals must assess that question by considering what the actual employer would likely have done and whether there is evidence to support that conclusion.
As a result, evidence is likely to become increasingly important. Performance records, succession plans, restructuring proposals, disciplinary concerns and internal decision-making may all be relevant when assessing whether dismissal was genuinely inevitable.
January 2027 may attract increases in the potential value of unfair dismissal claims, particularly for highly remunerated employees. However, Polkey is likely to become an even more significant feature of unfair dismissal litigation, making the question of what would have happened after a fair process just as important as whether the process itself was fair.
From Reasonable Steps to All Reasonable Steps: Are Employers Ready?
Since the Worker Protection Act 2023 came into force in October 2024, employers have been under a proactive obligation to take reasonable steps to prevent sexual harassment of workers in the course of employment, with Employment Tribunals able to apply an uplift of up to 25% to compensation where an employer has failed to comply with that duty.
The Employment Rights Act 2025 raises the bar on this preventative duty as, from 30 October 2026, employers will instead be required to take all reasonable steps to prevent sexual harassment.
Whilst on paper this change is only one word; it is likely to increase scrutiny of the steps employers have taken to identify and minimise the risk of sexual harassment to employees. The focus will no longer be on whether an employer implemented reasonable measures, but whether there were any further reasonable steps that could and should have been taken.
What constitutes a reasonable step will continue to depend on the circumstances, including the employer’s size, sector, working environment and resources and government guidance indicates that further regulations are expected to provide additional clarity.
In preparation for the 30 October 2026 implementation date, employers should consider reviewing their existing arrangements to ensure that they can demonstrate a proactive approach to the prevention of sexual harassment. This may include:
- Reviewing and updating anti-harassment policies;
- Delivering training;
- Reviewing any previous complaints and the response to those complaints; and
- Considering whether there are any additional controls which have previously been discussed but not implemented and reassess whether those measures may now be required.
Employment Tribunal Limitation Periods
A further significant change takes effect on 1 October 2026, when the time limit for bringing most Employment Tribunal claims doubles from three months to six months. It is important to note that the extension will apply only where the relevant act, omission, detriment or dismissal occurs on or after 1 October 2026. Claims arising before that date will remain subject to the existing three-month limitation period.
Employers should be mindful that incidents occurring after 1 October 2026 may not give rise to Tribunal proceedings until many months later, creating a longer period of uncertainty. As a result, preserving evidence at an early stage of a potential claim will become increasingly important.
If you would like to discuss any of the topics covered in this update in more detail, please contact Partners Merrill April or David Fisher, both of whom specialise in employment and partnership law issues for multinational employers, senior executives, partnerships, LLPs, partners and LLP members.
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