At present unfair dismissal awards are made up of a statutory basic award and a compensatory award. The basic award is based on the employee’s age and length of service and is worked out on the same basis as a redundancy payment.
The compensatory award is mainly based on the Claimant’s loss of earnings up to the date of the tribunal and a set amount for future loss if they have not found another job. In most cases the award will not exceed one year’s pay, but in certain circumstances (e.g. if the claimant is unlikely to find work for some time given the job market for their skills) the award can be higher and in some cases could cover losses up to anticipated retirement age.
The compensatory award has already been subject to a statutory cap for a number of years, starting at £12,000. It was increased to £50,000 in 1999, and has since been linked to a formula that increases it annually in line with the RPI, with the current cap being £74,200. Such increases have historically taken effect on 1 February each year but will in future take place on 6 April.
As with many other areas of employment law, the Coalition Govt will be introducing new rules on the level of compensatory awards for unfair dismissal. The cap of £74,200 will remain, but in addition to this cap, a further cap of one year’s salary will also be applied. In other words the cap on compensation will become the lower of these two amounts. The calculation of a year’s pay for these purposes will be based on the statutory definition of "a week's pay". This means broadly that the upper limit will be based on a year's gross salary (i.e. before tax and NICs) but that pension contributions, benefits-in-kind and discretionary bonuses will be excluded.
The new cap will apply where the effective date of termination is after the 29th July. Bear in mind that this cap only affects unfair dismissal complaints and does not apply to uncapped claims such as whistleblowing or HR.