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High earners who win claims for ordinary unfair dismissal could in future receive unlimited amounts in compensation under plans the UK government is drawing up to lift the current £118,000 limit.
A commitment to lift the cap on compensation was part of a compromise deal with business and unions, under which Labour abandoned a manifesto promise to give workers dismissal protections from the first day in a job.
At the moment, workers can only get the lower of their annual salary or £118,223 if they win a claim for ordinary unfair dismissal. Such claims can usually only be brought after workers have held a job for two years.
The government now intends to remove both caps on compensation for all cases, along with reducing the time period to six months, according to business and union representatives involved in the negotiations.
This would be a “seismic” change, according to Colin Leckey, a partner at the law firm Lewis Silkin.
He said it would “significantly increase the cost and complexity” for employers of agreeing severance packages for high earners because they would have greater leverage to push for big payouts.
In practice, compensation for unfair dismissal awarded by tribunals is usually well below the existing caps, with an average award less than £7,000, according to the latest employment tribunal statistics.
One government figure added that even in particular types of cases where compensation is already uncapped — such as discrimination, whistleblowing, health and safety and trade union representative claims — awards rarely reached anywhere near six figures. Tribunals decide the level of award depending on proven losses.
Darren Newman, a consultant on employment law, said people on average earnings would benefit if the government removed the cap on compensation above a year’s earnings, which was put in place by the Conservative-led coalition in 2013.
But Newman argued that lifting the overall cap could be “disastrous” for the already overloaded employment tribunal system, as it would encourage high earners in the City to pursue claims that could run into millions, leading to lengthy, hard-fought litigation and “crowding out claims from those who might be in much more need of the compensation”.
Labour MPs have long argued that workers should be fully compensated for losses resulting from unfair dismissal, regardless of their previous level of earnings. Unions argue that the £118,000 cap does not only affect high earners, but also leaves older workers at risk of long-term loss of earnings if they struggle to find a new role after unfair dismissal.
The Department for Business and Trade did not immediately respond to a request for comment.
However, the government is expected to set out its intended approach shortly in amendments to its Employment Rights Bill, which is due to return to the House of Commons next week.
The legislation — a set of sweeping changes to union and workers’ rights — has been delayed by a stand-off between the Lords and the Commons over its most contentious provisions. There is broad agreement over the six-month qualifying period, which could allow the bill to pass by the end of the year, although many provisions will be implemented only after further consultation.
