From 1 January 2027, UK employees can bring an unfair dismissal claim after only six months’ service, as opposed to the current requirement of two years. For senior appointments with high remuneration and equity incentives, the more significant change is the removal of the cap on the compensation that can be awarded in an unfair dismissal claim.

In this article, we explore what the change means when appointing senior executives and what steps employers must take now to mitigate risk.

How do the unfair dismissal changes impact senior appointments?

Currently, the maximum compensation an employment tribunal can award for an ordinary unfair dismissal claim is the lower of £123,543 or 52 weeks’ gross pay. This cap usually provides a company with certainty regarding its financial exposure when a senior executive is dismissed and therefore drives any exit negotiations. For example, if a senior executive were offered £100,000 as a termination payment, they would have little incentive to refuse or try to negotiate as, because of the cap, they couldn’t do much better even if they brought and won a tribunal claim.

However, that will change for employment that terminates on or after 1 January 2027 because the cap will no longer apply. Instead, the senior executive in the above scenario would be able to argue that they were entitled to be compensated for more.

What does this mean for employers if there is a claim?

The change raises uncertainty and risk around the exit of a senior employee with high remuneration and generous incentives. This is because the law permits the tribunal to include the loss of incentives which the employee might reasonably have expected to receive but for the dismissal. Pension losses, shares and long-term incentives will all be relevant when assessing compensation.

However, there will still be limitations to what can be awarded by the tribunal, which must still apply the test of what is just and equitable compensation. The tribunal may reduce an award by taking into account conduct that contributed to the dismissal, and the likelihood that the employment would have ended had a reasonable process been carried out. The tribunal must also consider the employee’s need to mitigate their loss by looking for new employment. Executives working in regulated roles may argue that obtaining comparable employment will take longer, particularly where the dismissal affects their reputation or ability to work within a particular industry. As a result, the removal of the cap means the loss claimed could cover a longer period than employers have historically taken into account.

How will this impact the dismissal of senior executives?

The current statutory cap has provided employers with a reference point when assessing litigation risk and negotiating settlement terms with senior employees. Once that cap is removed, both parties will need to consider a larger quantum of possible losses. Negotiated exits are likely to be harder to achieve for well-remunerated executives with the benefit of legal advice.

Employers must therefore make sure that their processes and reasons for the proposed departure of an employee follow best practice to place them in a stronger negotiating position. Well-documented audit trails, comprehensive reviews of the contractual terms, and compliance with policies will be required to place the employer in a strong position to manage the employee’s departure at limited financial cost and avoid the risk of an unfair dismissal claim.

In addition, any equity and long-term incentive arrangements must be reviewed at an early stage to establish how the termination affects vesting, good-leaver status and outstanding awards, all of which will form part of the negotiations.

How can employers mitigate the financial exposure on appointment?

Recruitment and vetting processes must be reviewed to ensure they remain fit for purpose after 1 January 2027. Employers must place greater emphasis on probationary periods, given the shorter window in which unfair dismissal protection will now apply. For senior appointments, this can enable significant cost savings if shorter notice periods are applied under the employment contract during the probationary period.

There are also other options which could provide greater certainty for businesses and mitigate their financial exposure before appointment. For example:

• Could the employee be appointed as a partner of an LLP rather than a limited company, or is there genuinely a case for self-employment, which would give the individual no employment rights?
• Is employee shareholder status viable, where the employee waives their right to unfair dismissal rights in exchange for a gift of at least £2,000 shares subject to certain conditions being met?
• Could a ‘pre-nuptial’ agreement be signed, where the employee waives their right to bring an unfair dismissal claim on appointment in return for an agreed termination payment? The termination payment would need to be commercially attractive, and the necessary legal safeguards would need to be applied, such as it being conditional on entering into a valid settlement agreement on termination. There is no guarantee yet that such an approach will be enforceable, and so should only be considered having taken legal advice.

Five actions employers should take before the unfair dismissal changes on 1 Jan 2027

1. Check whether any employee in a senior role is currently serving their notice or on garden leave – subject to the contractual entitlement to do so, it would be wise to terminate the employment and pay in lieu of notice to avoid the termination of employment taking effect on or after 1 January 2027. Employees serving notice or on garden leave can still bring unfair dismissal claims.
2. Consider alternative engagement structures to mitigate the risk of an unfair dismissal claim, and whether they are feasible.
3. Consider making the appointment conditional on a ‘pre-nup’ under which the employee waives the right to bring an unfair dismissal claim in exchange for a pre-agreed termination payment.
4. Review good and bad leaver and vesting provisions in employee share plans to ensure that they remain fit for purpose, given the increased risk of losses connected to the dismissal.
5. Review dismissal procedures and ensure that they are fit for purpose and apply best practice, including necessary authority from senior stakeholders.

If you would like to speak to a member of the team regarding the new rules on unfair dismissal, please contact Charlie Barnes.

Latest related insights