Unfair Dismissal Compensation UK : An ultimate guide

Unfair dismissal is a complex and often emotionally charged issue. In the United Kingdom, 15 000 unfair dismissal applications are lodged with the employment tribunal by employees every year.

As such, understanding the fundamentals of the law on unfair dismissal can help businesses remain compliant, limit exposure to these claims and avoid costly employment tribunal processes. 

The Weight of the Matter

An unfair dismissal compensation claim may be very costly for your business. Have a look at the following statistics from the Ministry of Justice to get a more precise picture of what an unfair dismissal compensation could mean to your business. 

Across the year 2022:

• At least 630 claims received unfair dismissal compensation award
• The average unfair dismissal compensation award was £13,541 (compared to the average award of £12,080 in 2020/2021)
• The highest award for an unfair dismissal compensation case was £165,000
• As at the end of September 2022, there were 493,000 claims outstanding, 448,000 of which were multiple claims and 45,000 of which were single claims

In this article, we have prepared the following comprehensive information on unfair dismissal compensation in the UK to be a practical guide for employers, business owners, and HR managers.

What is Unfair Dismissal

The UK labour laws provide that employees are entitled to fair, just, and reasonable treatment by employers in cases of termination of their employment. In particular,  Employment Act of 1996, a dismissal unreasonable if you dismiss an employee for one of the following:

• Without following a fair dismissal procedure
• An automatically unfair reason

Automatically Unfair Reasons for Dismissal

Some things are considered automatically unfair if they are the main reason you dismissed an employee. Here are the circumstances that the law regards as automatically unfair reasons for dismissal. 

If the employee:

• Requests for flexible working hours
• Is pregnant or seeks maternity leave
• Requests  a family leave such as maternity, paternity, or adoption leave
• Becomes a trade union representative or member 
• Takes part in legal, official industrial action for 12 weeks or less
• Asks for legal right, for instance, to be paid the National Minimum Wage
• Takes action, or proposes to take action concerning a health and safety issue
• Is involved in whistle-blowing 

Constructive Dismissal

Constructive unfair dismissal is the cessation of employment brought about by an employer making the working conditions so intolerable which compels the employee to leave. Although there is no actual dismissal, the employee opts to resign by the virtue of the (mis)conduct of the employer.

Under the UK labour laws, if an employee feels they have no option but to resign due to a hostile working environment caused by the employer, they can file a claim for compensation for constructive unfair dismissal.

Unfair Dismissal Compensation

An unfair dismissal can cause significant financial, emotional, and professional harm to employees. Under UK labour laws, such employees are entitled to redress, otherwise known as unfair dismissal compensation.

Unfair dismissal compensation is a financial award given to employees dismissed from their job in a manner deemed unfair or unjust by law.

Usually, the compensation covers lost income, benefits, and other financial losses resulting from the dismissal as well as non-economic damages, such as the loss of reputation, stress, and inconvenience. 

In some cases, you may also be ordered to reinstate the employee or provide additional remedies like training and counselling.

Employment Tribunals

Employment tribunals are court systems separate from the normal civil court system (i.e., High Court, Court of Appeal, County Court).

These tribunals only deal with employment law cases such as discrimination claims, wrongful dismissal, unfair dismissal, and redundancy matters.

Unfair dismissal cases begin here, but decisions can be appealed in the Employment Appeal Tribunal, and then to the Court of Appeal, and finally the Supreme Court.

The 2-Year's Rule

By law, only employees with more than two year’s continuous service with the same employer are entitled to statutory protection against unfair dismissal.

This is to say, you can dismiss an employee with less than 2 years continuous service without the need to demonstrate a fair reason for the dismissal and with no obligation to pay compensation for the dismissal.

Useful Read: What is Statutory Redundancy Pay? A Guide for UK Employers

However, for the employee who has accrued 2 years’ continuous service, you will need to give one of five reasons for fair dismissal as provided under ERA. Otherwise, you risk exposing your company to an unfair dismissal claim.

Unfair Dismissal Compensation

If the Employment tribunal finds that the manner in which you dismissed an employee was unfair ('harsh, unjust or unreasonable), it may issue the following remedies:

Reinstatement- this requires you to restore the employee to their initial position and compensate them for the financial loss they incurred from the date of dismissal to the date of reinstatement

Re-engagement- this is where you give the employee a role that is similar to their former job and also compensate them for any financial loss they suffered from the date of dismissal to the date of re-engagement

Monetary Compensation- Here, you are obligated to pay for any financial loss that the employee incurs due to unfair dismissal. 

Unfair Dismissal Compensation Award

The Employment Act of 1996 requires all the circumstances surrounding unfair dismissal to be considered when determining the amount an employer should pay as unfair dismissal compensation. Some of the factors that the law requires to be considered include the following:

• The impact of the unfair dismissal compensation on the viability of the business
• The length of service of the dismissed employee
• The employee's remuneration if you had not dismissed them
• The employee's effort to mitigate the financial loss after an unfair dismissal
• Income earned by the employee from alternative employment for the period between the dismissal and the making of the order for compensation 
• The income the employee is reasonably likely to earn from the time when an order of compensation is issued to when the actual compensation is made
• Anything else that the Employment Tribunal will deem relevant 

Calculating Unfair Dismissal Compensation

Although there is a fixed formula for calculating unfair dismissal compensation, the amount payable to an employee varies significantly across different cases. Usually, unfair dismissal compensation award comprises: 

• The basic award
• Compensatory award

Unfair Compensation Basic Award

A basic award reflects an employee's unfair dismissal. It is calculated similarly to a statutory redundancy payment and depends on the employee's age, years of continuous service and gross weekly pay (i.e., before tax, National Insurance, or any other deductions). 

The multiplier for calculating the basic award is derived as follows: 

Half a week's pay for every complete year of employment for employees below 22 years

One week's income for every complete year of service for employees between 22-40 years

One-and-a-half week's pay for every complete year of employment for employees above 41 years

The maximum gross weekly pay is capped at £571 (reviewed at the beginning of April every year to factor in inflation), while the length of service is limited to a maximum of 20 years.

Useful Read: UK Tax Deductions: The Employer's Guide

Deduction of Basic Award Payment

The tribunal may decide to reduce the basic award payment that you should pay to an employee in the following circumstances:

In case the employee contributed to the dismissal, for example, through misconduct 

If the employee unreasonably refuses an offer to be reinstated/reengaged

Where compensation for redundancy has been paid to the employee if the dismissal was due to redundancy

Unfair Compensation Compensatory Award

A compensatory award is intended to compensate the employee for financial loss relating to the dismissal, including additional expenses and loss of benefits. There is no preset compensatory award since the Employment Tribunal has discretion regarding how much should be awarded.

The tribunal considers an amount deemed equitable and fair in all circumstances while having regard for the financial loss suffered by the employee. 

Calculating Compensatory Award

A compensatory award is calculated by multiplying the employee's net salary for the week (including the benefits) by the number of weeks they have been unemployed. The tribunal also takes into account the employee's loss of future income as well as loss of statutory rights. 

In addition, the Employment Tribunal evaluates any other direct losses that the employee incurs due to the unfair dismissal, such as expenses associated with re-training.

Here in the UK, the compensatory award amount is now capped at £93,878 (reviewed annually according to economic inflation) or 52 weeks' gross salary – whichever is lower.

Factors Affecting the Compensation Award

The employee's compensation award is subject to increase or decrease in the following instances:

Failing to mitigate- The employee has an obligation to counter any financial losses by finding other employment opportunities. The Employment Tribunal may lower the compensatory award if it finds that the employee never made any reasonable effort to find alternative employment

Earnings- the tribunal considers any other benefits or increase in salary that the employee would have gained. For instance, if your employee was to receive a bonus if you hadn't dismissed them, the compensatory award may include such a bonus

Polkey- The Employment Tribunal can reduce the compensation award if it finds that; while the dismissal was procedurally unfair, the employee deserved the dismissal. This is also known as a Polkey deduction.

Contribution- If the tribunal determines that the employee contributed in a way to their dismissal, the compensatory award amount can be reduced

Unlimited Compensation for Unfair Dismissal

There are instances where the maximum limit (statutory cap) for unfair dismissal compensation does not apply, such as in the following cases:

• If you dismissed the employee for whistleblowing
• If you discriminated against the employee on the basis of age, sex, race, disability, etc.
• If you dismissed the employee for raising a health and safety concern

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Frequently Asked Questions on Unfair Dismissal Compensation

How is Unfair Dismissal Compensation Calculated?

There is a set formula and guidelines for awarding unfair dismissal compensation in UK. Compensation normally consists of two elements: the basic award and the compensatory award.

However, there is there is no accurate average compensation award amount since each is different and the compensation awarded is based on many factors that vary from company to company.

Who Can Claim Unfair Dismissal?

Under the law, a person has the right to make an unfair dismissal compensation claim against you only if:

• they are your lawful employees i.e., they have ‘employee’ employment status
• they have worked continuously at your company for two years

The following categories of persons cannot file for unfair dismissal compensation:

• Self-employed persons
• Independent contractors
• Agency workers
• Persons working overseas or for a foreign government

What Unfair Dismissal Compensation Cases Don't Require 2 Year's Service?

The Employment Rights Act of 1996 provides that only employees with two years’ continuous employment can file an unfair dismissal claim with the Employment Tribunal. However, if an employee can prove that you dismissed them due to an automatically unfair reason or on the basis of discrimination, the two years qualifying period does not apply.