Employer Guide: Preparing Your Business for Uncapped Unfair Dismissal Awards

From 1 January 2027, employment tribunals will no longer be limited by a cap when awarding compensation for unfair dismissal. The current ceiling — £118,223, rising to £123,543 in April 2026, or 52 weeks' pay if lower — is abolished under the Employment Rights Act 2025.

For most employers, most of the time, this will not change outcomes: the median compensatory award was £6,746 in 2023/24. What changes is your tail risk. A single badly handled dismissal of a senior, bonus-earning employee is no longer a capped liability. This guide is a practical readiness plan.

1. Re-model your exposure

Stop pricing dismissal risk against a statutory number. Price it against actual loss.

• Build a simple exposure model per employee band: base salary, bonus, deferred or unvested awards, pension, benefits, and a realistic re-employment period for that role.
• For senior and specialist roles, the re-employment period — not the salary — is usually what drives the number.
• Assume the ACAS Code uplift of up to 25% applies whenever process is weak.

The practical output is a board-level number: what does a lost unfair dismissal claim against our top 20 earners actually cost after 2027?

2. Fix process before you fix policy

Uncapped compensation does not make dismissals riskier in principle — it makes procedural failure more expensive. The controllable variables are all procedural:

• A genuine, documented reason falling within a potentially fair category.
• A fair investigation, with the evidence disclosed to the employee before any decision.
• A proper invitation letter setting out the allegation and the possible outcome.
• The right to be accompanied, honoured in substance not just in form.
• A decision-maker who was not the investigator.
• A real appeal, heard by someone more senior and genuinely open to a different outcome.

Most uncapped exposure will be created by shortcuts at exactly these points.

3. Tighten documentation and record retention

After the cap goes, your defence is evidential. Train managers to create contemporaneous records — meeting notes, performance evidence, warnings, and the reasoning behind selection decisions in redundancy pools. Retain them for the full limitation period plus appeal exposure.

4. Audit the high-risk populations

Prioritise where uncapped exposure is concentrated:

• Employees earning materially above the old cap.
• Employees with deferred bonus or share awards that would vest during a notional loss period.
• Long-service employees in specialist or regulated roles.
• Anyone in an active performance, capability, sickness or grievance process.
• Anyone who has raised a protected disclosure or discrimination concern — those claims were already uncapped and now sit alongside an uncapped unfair dismissal claim.

5. Rethink your settlement strategy

Settlement is now the main tool for converting an unquantifiable risk into a fixed cost.

• Open earlier. The cheapest settlement is the one agreed before a flawed process creates the claim.
• Price against modelled loss, not the old cap, or your first offer will read as unserious.
• Use protected conversations properly. Section 111A protection is fragile and lost through improper behaviour — get the framing right before you open the conversation.
• Get the drafting right: waiver of claims, warranties, repayment provisions, references, confidentiality, and restrictive covenants that are actually enforceable.
• Budget for the employee's legal fee contribution — it is a legal requirement for validity and a rounding error against the risk.

Our HR and employment law service for business covers process audits, manager training, exit strategy and settlement drafting.

6. Prepare for the wider Act at the same time

The cap removal does not arrive alone. The Employment Rights Act 2025 also moves unfair dismissal towards a day-one right, removing the two-year qualifying period for most employees. Together these mean more people can claim, and successful claims are worth more.

Practical implications: probation processes need to be real and documented, recruitment decisions carry more weight, and "we can let them go in the first two years" is no longer a strategy.

A 90-day readiness checklist

1. Model uncapped exposure for your top earners and produce a board summary.
2. Audit your disciplinary, capability and redundancy procedures against the ACAS Code.
3. Train line managers on documentation and on what not to say in exit conversations.
4. Review contracts: notice, PILON, bonus discretion, restrictive covenants.
5. Review probation and onboarding for a day-one-rights world.
6. Set an internal escalation rule: any proposed exit above a defined salary threshold gets legal review before the first conversation.
7. Agree a settlement mandate framework so managers are not negotiating ad hoc.

Frequently asked questions

Should we accelerate dismissals before January 2027?

No. Rushing a process is precisely what creates uncapped liability, and dismissals timed to defeat incoming rights attract their own scrutiny. Fix the process instead.

Does insurance cover this?

Employment practices liability cover may respond, but limits and exclusions were written for a capped world. Review your policy limits with your broker before 2027.

Do small employers need to worry?

Exposure follows pay and loss periods, not headcount. A small business with two highly paid directors can carry more risk than a large one with a low-paid workforce.

Get advice

Deen & Co Solicitors advises employers on dismissal process, exit strategy and settlement agreements. Employees should read the companion guide, the unfair dismissal compensation cap removal explained.

Call 0208 551 0476 or request a callback to arrange a readiness review.