Unfair dismissal cap at 12 months' pay - What's the impact?

Posted by Max Craft on
BIS has today released the Government Response to the consultation on changing the cap on the compensatory award for unfair dismissal and details of the new "settlement agreements" regime (compromise agreements with a difference).

The Government had put forward two proposals to change the statutory cap, and has opted for introducing a new individual cap of 12 months' pay, although the existing overall cap of £72,300 (soon to rise to £74,200) would still apply. It decided not to introduce the other proposal of reducing the cap to between one and three times full-time annual median earnings.

Anthony Cooper, partner at our firm comments, "This cap could have a much greater impact on older workers near to retirement age than other workers. Despite the law on age discrimination, it is generally accepted that such workers will find it harder to get another job and therefore compensation for their loss of earnings could well be more than 1 year's salary. Introducing an individual cap of 12 months' pay could dramatically reduce the loss of earnings payable to older workers if they are unlikely to work again. However, it should not affect compensation for future pension loss, which will only be subject to the overall cap.

"The cap of a year's pay will, by the Government's own admission, only result in a change for a limited number of high Employment Tribunal awards. Some statistics suggest it would affect only 0.3% of claimants. It is largely a psychological change, intended to strike at unrealistic perceptions of what compensation an employee might receive. The average (median) unfair dismissal award is less than £5,000. In fact, the change may affect more than the statistics reveal: higher earners who might get close to the current cap are more likely to leave with a compromise agreement and not be included in such statistics.

The potential disproportionate impact on older workers has been largely sidestepped by the Government. It accepts that the oldest workers, youngest workers and disabled workers are all groups likely to find it harder to get another job; but simply reverts to saying that most awards do not reach a year's earnings, and also cites the lack of information based on a group of only 0.3% of claimants. It is possible that an older worker could have a claim for age discrimination where there is no cap, but it is also entirely possible that there was no age discrimination involved. In such cases the older worker would find their compensation severely reduced." The option of a straight lowering of the compensatory award, which the Government chose not to pursue, would have impacted greatly on cases where the future losses are high due to the employee's pension, because the compensatory award currently includes pension loss.

The changes are expected to come into force in Summer 2013.

About the Author

Max is a Consultant in our employment team.

Max Craft
Email Max
023 8085 7451

View Profile