New cap on compensatory award for unfair dismissal in force

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Since the introduction of unfair dismissal rights in 1971, all governments have agreed that the compensation paid to employees who make a successful Employment Tribunal claim should be subject to a statutory limit.

When an Employment Tribunal makes an award of compensation for unfair dismissal, the award must consist of a basic award and a compensatory award.  The amount of the basic award will, in most cases, be the same as that of a statutory redundancy payment calculated on the basis of age, length of service and salary, capped currently at £450 a week. The compensatory award is considerably higher and is presently capped at £74,200.
The limit on the compensatory award was increased from £12,000 to £50,000 from 25 October 1999 and since 1999, this figure has increased annually above the rate of inflation.  It currently bears no relation to the average compensatory awards actually made by the Employment Tribunals which have been between £4,000 and £5,000 for the past five years.
The government is of the view that introducing a pay-based cap on the compensatory award will help align employees' expectations with reality and reduce expensive and time consuming litigation. With effect from Monday 29 July 2013 the compensatory award for unfair dismissal is capped at one year's gross pay or £74,200, whichever is the lower.  Therefore, an employee earning £25,000 gross per annum will have his or her compensatory award capped at £25,000 if they are successful in proving their case in the Employment Tribunal.  The new cap will apply where the effective date of termination is on or after 29 July 2013.
The other significant change also introduced with effect from 29 July 2013 is the introduction of fees in the Employment Tribunal (see e bulletin no 60 ) with potential claimants having to pay an issue fee of  between £160 and £250 to issue a new claim in the Employment Tribunal and between £230 and £950 if they require a hearing before an Employment judge to determine the claim. 

It is expected that these fees will be increased over the next three to five years to assist in covering the administrative costs of Employment Tribunals in England and Wales.  There are remission arrangements for claimants who lack the means to pay these fees. As mentioned in e bulletin no 60, UNISON are challenging the introduction of Employment Tribunal fees by way of a judicial review application. It has just been reported that the High Court hearing will take place in October. 
It is likely that the introduction of the cap, coupled with the requirement to pay issue and hearing fees, will have a significant impact on the number of unfair dismissal claims presented on or after 29 July 2013. Research by the London School of Economics suggests that (together with the increase in the qualifying period to claim unfair dismissal to two years in April 2012) there will be a 20% reduction in the number of Employment Tribunal claims.