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Cap on Compensatory Award for Unfair Dismissal

A cap on the amount of compensation awarded in unfair dismisal claims has been announced.

Posted on 25 January 2013

The Department for Business, Innovation and Skills announced last week that it is intending to introduce a cap on the unfair dismissal compensatory award of twelve months’ pay.  The current overall cap of £72,300 remains in place if twelve months’ pay is greater than the cap.

By cutting the limit of an employee’s award to twelve months’ pay it is likely that a significant proportion of employees will not be adequately compensated for their loss.

It is common sense that a claimant who wins their unfair dismissal claim should receive compensation, which fairly reflects their financial loss resulting from the dismissal, a large part of their award being compensation for loss of earnings.

This is another clear blow for employee rights and, combined with the recent change to increasing the qualifying period to bring an unfair dismissal claim to 2 years and a number of other changes including plans to introduce employment tribunal fees, this most recent proposal will make it even harder for employees to bring claims against their employers. In our experience it is not uncommon for it to take over 12 months to find an equivalent job, especially given the current economic climate.

In particular, employees who work in highly specialised jobs may take longer than 12 months to find suitable alternative work. Research has also found that older employees experience greater problems finding another job.

Figures from the Office of National Statistics found the re-employment rate for individuals over 50 more than three months after being made redundant is 11% lower than for individuals aged 16-50. Ethnic minorities and women will also be harder hit by the new 12-month cap as they tend to work in lower paid jobs and/or part-time positions.

If their compensation is limited to 12 months’ pay they may find that they are not compensated adequately at all after they have had to pay fees for bringing a claim as well.  Employers may also become less fearful about dismissing them as they may assume that they will be unable to afford to bring a claim against their employer even if they wanted to, or that any compensation payable will be modest.

The government stated that its principal reason for introducing a cap on the compensatory award is so that it would lead to a more realistic perception of the likely level of awards which would, in turn, encourage earlier resolution of employment disputes.

Whilst the employers who were consulted about this change appeared to be generally supportive, there was however still some uncertainty about whether it would in reality make any difference when attempting to settle a claim.

For example, the new cap may lead to more employees seeking to bring spurious claims for discrimination and whistleblowing which do not have a cap on compensation, alongside their unfair dismissal claim.

There were also concerns that introducing the cap may create the perception that employees would in fact be automatically entitled to 12 months’ pay thereby making it more difficult to settle with them rather than less.

It seems apparent that the real solution should be more information and solid advice to employees so they have a realistic expectation of what their compensation is likely to be, rather than imposing an arbitrary cap which will mean that employees with genuinely high compensation claims lose out.

Jasmine Patel is a lawyer in the Leigh Day Employment team