The Employment Rights Act 2025 represents one of the most significant overhauls of UK employment law in a generation. It covers a wide range of issues, from trade union rights to zero-hours contracts and collective redundancy consultation, but two changes to the unfair dismissal regime stand out as particularly consequential for private capital managers and their senior executives.
This article examines the practical implications of two landmark changes: the removal of the statutory cap on compensatory awards for unfair dismissal, and the reduction of the qualifying service period from two years to six months, both of which take effect on 1 January 2027.
The current position and what is changing
Since the unfair dismissal regime was first introduced in 1971, compensatory awards have been subject to a statutory cap – currently the lower of one year’s pay and approximately £120,000. That cap will be abolished entirely on 1 January 2027. At the same time, the qualifying period of continuous employment required before an employee can bring an unfair dismissal claim will fall from two years to six months. The practical effect is clear: far more people will be able to bring claims, and for senior, highly paid individuals, the potential value of those claims will be dramatically higher.
Valuation of awards: a new landscape for higher earners
Compensation is designed to put the claimant in the position they would have been in had the dismissal not occurred. Employment tribunals have very wide discretion in assessing such losses. The most obvious head of loss is earnings, but tribunals have historically permitted claims for a broad range of financial consequences flowing from the dismissal, including lost bonuses, and forfeited benefits.
For private capital executives, this breadth of recovery takes on particular significance. Discretionary bonuses, unvested equity awards and carried interest are all common features of senior remuneration in the sector, and are all in principle recoverable as heads of compensatory loss. For example, an executive dismissed before a bonus payment date could point to awards made to comparable colleagues, or to their own historic bonus record, to support a claim for the bonus they would have received had they not been dismissed. Similarly, forfeited carry positions could form a substantial element of any award.
The valuation of carry is a well-understood process and carry awarded at the outset of a fund is often accepted by HMRC to have very little value. Valuations of later awards may also come in relatively low where there is uncertainty over the carry paying out. However, an individual who has forfeited carry on termination may well seek to challenge any valuations as part of their unfair dismissal compensation. Tribunals are accustomed to dealing with expert valuation evidence as it is already a feature of equal pay cases and other complex claims. Therefore, in principle, there is no reason why specialist valuation evidence could not be adduced in the context of carry and equity disputes.
Where liability and remedy are considered at separate hearings, there may be greater scope for the parties to reach agreement on quantum. A firm that has lost on liability at a preliminary hearing may well be motivated to negotiate rather than face a further contested hearing on the value of complex remuneration elements.
Procedural fairness under greater scrutiny
A fair dismissal requires both a fair reason – misconduct, redundancy, incapacity or some other substantial reason – and a fair process. When assessing compensation, a tribunal constructs a hypothetical scenario in which the unfairness did not occur and then estimates the period over which the employee would have remained in employment. In a clear redundancy scenario with only a minor procedural defect, the tribunal may conclude that the employee would have been made redundant in any event and limit the loss period to the additional time a fair process would have taken. By contrast, in the context of a performance dismissal with no process at all, tribunals are less likely to be persuaded of inevitability of the departure. These sorts of exits could result in a much longer period of recovery, reflecting the likelihood that the individual would not otherwise have left for several years.
Procedural errors in misconduct dismissals can also result in uplifts of up to 25% to any award. At present, the statutory cap limits the practical impact of such uplifts, but once the cap is removed the financial consequences of procedural failings will become significantly more acute.
All this places real importance on investing time in robust and well-documented decision-making, particularly around good leaver and bad leaver classification. Remuneration committee or board minutes evidencing the rationale behind discretionary decisions may well need to be disclosed, and they need to stand up to scrutiny.
Litigation risk: disclosure and witness sensitivities
Managers should also be alive to the practical realities of tribunal litigation. Although disclosure in the Employment Tribunal is not governed by the Civil Procedure Rules, it follows a substantially similar trajectory, and all relevant material will need to be disclosed. Where a claim includes elements such as a missed bonus, disclosure is likely to extend to the bonus payments made to comparable colleagues, historic award data, and minutes of remuneration committees or boards. Much of this information will be highly confidential – and documents used in hearings are publicly available, creating real risks of press attention and broader reputational exposure.
There is also an opportunity cost in diverting senior management witnesses away from their day-to-day responsibilities alongside the litigation risk of putting them on the stand.
LLP members: a distinct but connected issue
Unfair dismissal protection is available only to employees, so in principle LLP members fall outside the scope of the regime, however there is a nuance to be aware of. Some LLP members will be classified as “salaried members” for tax purposes under ITTOIA (Income Tax (Trading and Other Income) Act 2005), meaning they are taxed as if they were employees. There is a risk that members (whether salaried members for tax purposes or not) may seek to reclassify themselves and assert employee status in order to bring themselves within the unfair dismissal regime – an approach that has parallels with cases involving individuals engaged as self-employed consultants who have subsequently sought to claim a different status to bring employment claims.
Some firms might consider structuring their arrangements so that key individuals are LLP members rather than employees, provided of course that such arrangements are genuine and the individuals do not remain employees in substance.
Practical steps for private capital managers
There are several practical measures that managers should be thinking about now, ahead of the changes taking effect.
- Recruitment and probationary assessments – the reduction in the qualifying period makes it critical to recruit the right people and to assess their capabilities quickly. If an individual is not performing, firms will want to make decisions before the six-month qualifying period has been accrued. Formal contractual probationary periods remain relatively uncommon at senior levels and may attract pushback, though they are worth considering as part of a broader approach to early assessment.
- Contractual protections for incoming executives – executives with significant bargaining power may increasingly seek to negotiate initial fixed-term arrangements or liquidated damages provisions to insulate themselves against the risk of early termination shortly after joining.
- Robust procedural frameworks – there is always a tension between commercial speed and procedural fairness. The removal of the cap alters the risk calculus in that balancing exercise, and firms should expect to invest more time in documenting how and why individuals are being treated in particular ways – especially in considering the interaction between the reasons for dismissal and good leaver and bad leaver classification.
- Document consistency – firms should review their suite of employment and incentive documentation including employment contracts, carry documents, equity plans, LLP agreements, deeds of adherence and bonus side letters to ensure consistency, particularly where documents may have been drafted at different times, by different advisers and in different jurisdictions.
- Pre-agreed settlement structures – while a pure advance waiver of unfair dismissal claims is not possible, given the regulatory requirements for independent legal advice on any settlement, firms can pre-agree that an executive will receive good leaver treatment or a specified sum on termination, conditional on signing a settlement agreement at the relevant time. This structure is already common in the market, and clients have become adept at pitching the pre-agreed amount at a level designed to maximise compliance – reflecting the principle that certainty now is often more attractive than a potentially larger but uncertain outcome later.
Looking ahead
There is an expectation that the removal of the cap will lead to both an increase in the volume of unfair dismissal claims brought by senior executives and a rise in settlement values. However, this must be set against a possible countervailing effect: the current legislative framework has long incentivised claimants, particularly well-remunerated ones, to frame their allegations as discrimination or whistleblowing claims, since recovery in both those areas is already uncapped. Experience from other European jurisdictions, where compensation for “ordinary” unfair dismissal is more generous, suggests that a reduction in discrimination and whistleblowing claims may follow, which could partially offset the anticipated increase in unfair dismissal litigation.
We are aware that UK Private Capital has asked the Government to reconsider the approach and its impact on the private capital sector, and the outcome of that engagement may yet shape the final legislative position. In the meantime, private capital managers would be well advised to review their existing arrangements, strengthen their procedural frameworks, and ensure their documentation is fit for purpose before the new regime comes into force on 1 January 2027.