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Vince Cable, Business Secretary in the coalition cabinet, recently announced a consultation on reducing the amounts that may be awarded in unfair dismissal compensation .

In 1999, the cap for awards for unfair dismissal compensation was increased from £12,500 to £50,000. This has subsequently been increased in line with inflation over the years and now stands at £72,300.

Loss of earnings

When considering the appropriate amount for the compensatory award, the Employment Tribunal takes the following into consideration:

  • Loss of earnings (past and future);
  • Loss of benefits (commission, company car, pension, healthcare, etc.);
  • Loss of statutory rights.

The Employment Tribunal publishes statistics on compensation that has been awarded. In 2010-2011, the average amount was £8,924. Only two per cent of the 47,900 claims lodged for unfair dismissal were awarded compensation over £50,000.

In 2011-2012, the average amount was £9,133. Again, only two per cent of the 46,300 claims lodged for unfair dismissal were awarded compensation over £50,000.

Basic award for unfair dismissal compensation

The consultation paper Ending the Employment Relationship seeks views on changing the limit of the compensatory award in unfair dismissal cases to provide employers with more certainty about their potential liability and to give employees more understanding of the value of unfair dismissal claims. There is no proposal to change the basic award, which is calculated in the same way as a redundancy payment.

The options being considered by the government are:

  • Do nothing;
  • Introduce a cap on individual awards of 12 months’ pay (where this is less than the overall cap); or
  • Reduce the cap on the compensatory award to a lower flat rate.

The Employment Tribunal will still have the power to award unlimited compensation if it finds that the dismissal was also an act of discrimination.

It is unclear exactly what effect the proposed changes would actually have on employers and employees. Looking at last year’s statistics, it could be said that there is  no need to implement any changes.

While the proposed changes would no doubt be welcomed by employers, mid- to high-earning employees who have a genuine unfair dismissal claim may be disadvantaged, as they might not be fully compensated for their loss of earnings and benefits. This could lead to those employees pursuing claims in the High Court or County Court, potentially at considerably greater expense to the employer.  It may also lead to more employees seeking to argue that they have been subjected to discrimination, in an attempt to avoid the cap on compensation. One view is that it should be left for the Tribunal Judge to decide what level of compensation to award based upon the individual circumstances of the case.

The consultation closes on 23 November 2012.

For more information on the issues raised in this article or on employment law matters in general, please contact us on 0117 904 6000.