There has long been talk of amending the upper limit on the compensatory award for unfair dismissals, and we now have confirmation and details of this new statutory cap. 

Current law

In an unfair dismissal case, a successful Claimant will be entitled to a basic award, and may also be awarded a compensatory award. 

The basic award is calculated in the same way as a statutory redundancy payment, taking into account the Claimant’s length of service and weekly earnings (subject to a statutory limit).

The compensatory award will be an amount which the judge considers to be just and equitable in all the circumstances, taking into account the actual loss suffered by the Claimant (including, most significantly, his loss of earnings). In practice, therefore, the compensatory award will be based on the Claimant’s pay pre-dismissal, and will correspond to the length of time he should reasonably take to find a new job of equivalent status and pay. In the recession, this period has typically lengthened and now it is not unheard of for Claimants to be awarded more than 12 months’ salary by way of compensation, provided this remains below the upper statutory limit for the compensatory award, currently set at £74,200.

New law

The draft Unfair Dismissal (Variation of the Limit of Compensatory Award) Order 2013 (the “Order”) has just been published by Parliament, and sets a new cap on the compensatory award of £74,200 or 52 weeks’ pay (whichever is the lower).

The Order is expected to come into force sometime in July. The new limit will apply to all dismissals which are made after that date and which are found to be unfair. 

Cheaper for employers?

Average wages in the UK are well below the current cap of £74,200, which means that many Claimants are (in theory at least) currently able to claim much more than one year’s salary by way of compensation. In relation to those employees, losing an unfair dismissal claim will potentially be much cheaper for the employer if the dismissal is made after the Order comes into force this summer.

For example, a Tribunal might find that it would reasonably take a particular employee (earning £35,000 a year) two years to find another job. If that employee was to be unfairly dismissed before the Order comes into force, their likely compensatory award would be around £70,000. If their dismissal took place after the Order came into force, the judge would not be able to award more than 12 months’ pay, ie £35,000. Certainly a point for employers to consider.

A word of warning

Bear in mind though that, in most sectors, it is not too onerous for a Claimant to find a new job within a year, even during the recession, and so their compensation will rarely approach or exceed 12 months’ pay. The average unfair dismissal award in 2001/12 was £9,133 and only 2% of awards exceeded £50,000, so it seems unlikely that the extra cap will have much effect to most unfair dismissal claims.

Bear in mind also that some unfair dismissals (including ‘whistleblowing’ dismissals) will not be subject to a cap, nor will there be a cap in discrimination cases. In those cases, the actual compensation received by a Claimant may still exceed one year’s salary.

And finally, bear in mind that the cheapest way to dismiss your employee may well be to do so fairly, rather than await a lower cap on compensation…