Senior exits in a post-cap world

You might have today (2 July 2026) marked in your diary. It is the last day on which a new employee can start work and still have enough service to bring an unfair dismissal claim (with uncapped compensation) on 1 January 2027.

And you probably already know why: by virtue of the Employment Rights Act 2025, two key reforms to the law on unfair dismissal take effect on 1 January 2027. First, the qualifying period will reduce from two years to six months and, second, the compensatory award cap (currently the lower of £123,543 or one year's pay) will be removed entirely.

But what might be less immediately obvious is the specific impact these reforms will have on the exit of your most senior and highly paid executives, or how you might reduce your exposure to potentially uncapped compensation.

This briefing looks at these points and sets out what you should be thinking about now.

Why does this matter for senior executive exits?

Senior executive exits are rarely straightforward. Most happen because the business has decided the individual is no longer the right person to take things forward, which is a question of fit or direction rather than a clear performance failure. That makes it difficult to show a "fair" reason for dismissal, even where "some other substantial reason" is relied on.

Even where performance is the issue, a “fair” process is rarely followed. Capability dismissals require you to give the individual time to improve, with targets, support and training in place. That can take months. For commercial reasons businesses often need to move quickly and confidentially with senior exits, so a negotiated settlement is usually the preferred route.

But, from 1 January 2027, settlement negotiations may become trickier. The current statutory cap acts as a natural ceiling on negotiations. Without it, employers lose a powerful anchor for keeping demands in check. The 25% uplift for failure to follow the ACAS Code of Practice could also become a much more significant figure when applied to an uncapped award.

Where settlement negotiations break down, litigation will become more attractive. Currently, most senior executives do not pursue unfair dismissal claims because the maximum award falls well short of their actual financial loss, and civil court litigation is unattractive due to costs risk and a £25,000 limit on breach of contract claims. From 1 January 2027, qualifying executives will be able to recover their full losses in the employment tribunal, making litigation a far more realistic prospect.

And more executives will qualify for the right to bring an unfair dismissal claim given the reduced 6-month qualifying period. Most senior exits involve employees with more than 6 months’ service given that businesses are rarely able to dismiss a senior hire before six months (it’s too early to properly assess performance or fit), and the time and cost involved in senior recruitment makes it commercially unattractive to take early action.

How might compensation be calculated?

There's no case law yet on how tribunals will approach uncapped unfair dismissal awards. The closest guide we have is discrimination case law, where compensation is already uncapped.

Those cases suggest tribunals may award losses for long periods, and sometimes career-long losses. Compensation may also be subject to interest, which may be particularly high where any litigation is delayed (and we are increasingly seeing cases take two years or more to get to tribunal). In determining the period for which losses are awarded, tribunals consider how long an employee might typically remain in a role and how frequently the individual has changed roles in the past. They will also consider whether the employee took reasonable steps to find alternative employment (i.e. did they mitigate their losses). For these purposes they will consider how wide (geographically and by sector) a person in their position would reasonably be expected to search for comparable employment.

The cases also suggest that, on top of lost salary, claims may include lost pension contributions, bonuses, incentive arrangements (including share options and awards), and benefits (such as company cars/car allowances). For senior executives, these are likely to be substantial in value.

However, the discrimination cases suggest there may be some exercise of discretion in the employer’s favour. Tribunals have taken the total value of compensation into account when considering whether to make an uplift for failure to comply with the ACAS Code of Practice. Where a claim is high-value, tribunals have generally awarded a lower percentage uplift (albeit that this lower percentage can still amount to a significant payment). The same reasoning and approach may be followed in unfair dismissal cases.

Ultimately however, tribunals may develop a different approach for senior individuals claiming unfair dismissal, than for those claiming discrimination. Potentially tribunals might take account of the sophistication of the individual and the commercial reality that senior exits rarely follow formal process. They might therefore reduce compensation where a successful unfair dismissal claim by a senior executive hinges on procedural fairness alone. Of course, case law will develop over time, but if you face these risks from January 2027, you should be aware of these potential arguments.

What should employers think about now?

Considering these changes and heightened risk, clearly there is a case for performance managing executives and following a fair process for dismissal going forward. But in most cases, this just won’t be a realistic option given commercial realities (as set out above).

So how could you reduce the potential compensation that might be claimed in tribunal or requested during settlement negotiations? Can contracts, benefits, and discretionary pay schemes (including share options and awards) for your most highly paid employees be structured to reduce potential compensation values? Here are some key areas to focus on.

How we can help

Our employment, incentives and benefits teams work closely together to help you prepare for these changes. We can help you with:

• Reviewing and aligning contracts, bonus scheme and share/option plan documentation and executive communications
• Drafting performance conditions and vesting contingencies
• Tightening governance around discretionary awards
• Contract structuring: including notice provisions, liquidated damages clauses, garden leave arrangements, and restrictive covenants

Additionally, if you are a financial services employer, our financial services regulatory, incentives and employment teams work together on senior exits and can advise on the full picture, including how to limit employment tribunal exposure whilst complying with the SMCR and remuneration code.

Get in touch to talk through what these changes mean for your organisation. We'd be delighted to help.