Employers are preparing for a major wave of reforms being introduced through the Employment Rights Act (ERA). From 1 January 2027, two fundamental changes take effect: the qualifying period for ordinary unfair dismissal claims will reduce from two years to six months, and the compensatory award cap will be abolished. Combined, these reforms significantly increase potential financial exposure for employers, particularly where claims involve losses linked to equity awards, bonuses or other contractual benefits.
Removal of the compensatory cap
Currently, compensation for ordinary unfair dismissal is limited to the lower of 52 weeks’ gross pay or the statutory ceiling (now £123,543). Under the ERA, both limits disappear. As a result, compensation for ordinary unfair dismissal becomes uncapped, allowing claimants to pursue recovery of their full financial losses.
This shift is expected to make settlement discussions more complex. With no established case law yet on how tribunals will assess and quantify losses, claimants are likely to include a much broader range of financial elements in their claims. These may encompass bonuses, equity‑based incentives (such as share options, RSUs, growth shares, management incentive plans and carried interest), pension contributions and other benefits that previously may have been excluded due to the statutory cap.
The impact is likely to be particularly significant for employers dealing with senior executives who remain out of work for extended periods. It will also be especially challenging for sectors where remuneration is heavily weighted towards variable or equity‑linked pay—most notably private equity. In some organisations, the value of unvested equity can far exceed annual salary, especially where the business is nearing a liquidity event or key milestone. This will inevitably give rise to complex valuation disputes.
What employers should do now?
In anticipation of these changes, employers may find it helpful to review vesting rules and leaver provisions across their incentive arrangements.
Leaver provisions differ widely. Some operate on a strict “leave and lose” basis, while others define good and bad leaver categories aligned with the company’s articles of association. Many plans also give boards or remuneration committees discretion over how awards are treated on termination—particularly in relation to vesting outcomes or performance conditions.
Employers should ensure that dismissal processes are robust and that incentive plan rules are properly applied when employment ends. Where discretion is exercised—especially in relation to tax‑advantaged options—HMRC guidance should be taken into account.
Consistency is critical. Decisions should be documented carefully, and employers should ensure that discretionary judgments are applied fairly and in line with established practice.
1 October 2026