HR teams are likely already getting to grips with the sweeping changes brought about by the Employment Rights Act, but one change towers above the rest.
The cap on unfair dismissal compensation is coming to an end, meaning a tribunal can set the bill as they see fit.
It has never been more important to stay out of a tribunal case, so HR teams need to be ready.
Why is the unfair dismissal compensation cap ending?
From 1 January 2027, the cap on unfair dismissal compensation will be removed.
It may not be lost on you that this is also when unfair dismissal protection kicks in after six months of employment, rather than the current two years.
The logic behind the change is to better reflect the actual financial loss that a person may experience when they are subject to an unfair dismissal.
There were also concerns that employers were factoring in the cost of the compensation when unfairly dismissing an employee, indicating that the current system was not acting as a deterrent.
The current system, which will remain in place for 2026, sees employees receive the lower of one year’s gross salary or £188,223.
Larger employers could comfortably absorb the cost of a lower-paid worker’s annual salary, so the new measures will aim to protect these workers more.
How will HR teams be affected by the change?
Hopefully, your business will not be facing an employment tribunal and the direct impact of the change will not be felt.
What is more impactful for HR teams is the need to manage employee dismissal fairly and effectively.
Probation periods need to be completely reconfigured in line with the new requirements.
Ideally, a probation period will now be around three months long, with a final decision on employment coming after five months.
This does not give the same length of time for an employee to embed in the business, so the protections may see more cutthroat probation periods.
It will be necessary to either commit to the training needed to get a new employee up to speed or move them along within that shorter time frame.
HR teams will likely carry the main responsibility in ensuring that employers and employees understand their position when handling probation periods.
The risk of getting things wrong can now be immense, so having a clear strategy in place is vital for avoiding an unfair dismissal case.
Where an employee has to be dismissed after six months of work, clear evidence that the correct procedures were followed will be essential.
It is worth noting as well that other forms of compensation, like discrimination or whistleblowing, were already uncapped, so the change brings unfair dismissal into the same level of legal standing.
Just as HR teams avoid issues with discrimination and whistleblowing, now they must also prevent unfair dismissals from taking place by educating employers and employees alike.
