The removal of the unfair dismissal cap means that incentive arrangements are likely to be examined more closely in executive exit disputes.

Published: 16 September 2026
Authors: Dan Sharman

From 1 January 2027, the qualifying period for ordinary unfair dismissal protection will reduce to six months and the statutory cap on compensatory awards will be removed. The impact of these changes to executive share plans should not be underestimated.

Where the employee being dismissed is a senior executive with valuable share options, growth shares, interest in a management incentive plan or other long-term incentive arrangements, the removal of the cap changes the value of any potential unfair dismissal claim they might have. Losses that previously have been theoretical because they exceeded the cap, will become central to settlement discussions and tribunal proceedings.

Why equity incentives may become part of the compensation analysis

The compensatory award for an unfair dismissal is based on what the tribunal considers just and equitable, having regard to the loss sustained by the employee because of the unfair dismissal. That can include loss of benefits the employee might reasonably have expected to receive but for the unfair dismissal.

Once the cap is removed, senior executives are more likely to argue that they would have remained employed until a vesting date, liquidity event or exit, and would have received value under the relevant plan. They may then seek to include that alleged lost value in any compensatory award.

Contractual provisions limiting loss on termination may help in wrongful dismissal claims, but they are unlikely to effectively waive statutory unfair dismissal rights. Those rights can only be surrendered through a valid settlement agreement or COT3.

What steps can employers take to protect their position?

Employers operating executive incentive plans should consider reviewing their documentation and processes before the 2027 changes take effect. Any review should focus on:

(1)        Settlement agreements and good leaver status

Amending leaver provisions in plan documentation so that they work sensibly alongside settlement agreements.

For example, the definition of a good leaver (and the vesting of an award) could be expanded to include an individual who enters into a company approved settlement agreement on termination, waiving claims against the employer.

In high-value executive departures, this may help achieve a negotiated settlement rather than having to engage in protracted and costly legal disputes.

(2)      Valuation provisions

Carefully drafted valuation language can help evidence the nature of the right and the degree of contingency attached to it. For example, plan documentation could make clear that any valuation must take account of investor preference rights, debt, transaction costs, dilution, restrictions and other relevant plan terms; and hypothetical transactions or possible future exits should not be assumed unless they have actually occurred or are sufficiently certain.

This will not prevent an employee from advancing a claim for the hope value of the equity incentives. It may, however, help the employer argue that the alleged value is too contingent or speculative to justify a substantial award.

(3)      Tighten discretion wording

Reviewing discretion wording in plan documents. Broad discretions over leaver status, vesting, performance conditions, valuation and exercise can be useful, but may invite challenge if exercised inconsistently or without evidence.

(4)      Communication

Ensuring grant letters, plan summaries, investor communications and exit discussions are aligned with the plan rules and expectations. Avoiding language suggesting guaranteed value, inevitable vesting or assured participation in an exit is helpful unless that is genuinely intended.

(5)      Follow a fair process

Reviewing existing practices to ensure that a fair process is followed prior to any decision to dismiss being made. Although senior employee exits often necessitate speed over procedural fairness, the scales may tip once the cap is removed. As a result, the importance of following internal processes will increase. If the dismissal is found to be fair, the issue of compensation does not arise.

However, often with senior executives, it is not always practical to undertake lengthy performance improvement processes. Often there may be a potentially fair reason for dismissal, but no time for procedure. In those cases, the employer’s best defence is that the compensation should be limited to just the short period it would have taken to have carried out a fair dismissal. Employers should not assume that seniority removes the need for procedural fairness. Recent authority confirms that even at CEO level tribunals will generally expect meaningful warnings, consultation and an opportunity to respond before dismissal. However, where a tribunal concludes that a fair procedure would nevertheless have resulted in dismissal, compensation may be reduced to reflect the period that a fair process would have taken. In some cases, that may substantially limit claims based on future salary, bonus or incentive awards.

Employers should also revisit probationary periods and early-stage performance management in light of the shorter six-month qualifying period. Clear objectives, regular reviews, feedback and appropriate support will help identify issues before unfair dismissal protection applies. It will no longer be acceptable to allow probation periods to drift on.

Could any other potential solutions help?

• Employee shareholder status

Employee shareholder status may look attractive because an employee shareholder gives up certain statutory rights, including ordinary unfair dismissal rights, in return for fully paid-up shares worth at least £2,000.

However, it has significant limitations. Employee shareholders retain important rights, including protection against discrimination and certain automatically unfair dismissals. The historic tax advantages are no longer available to new entrants, and existing employees cannot be forced to accept the status.

Although employee shareholder status is rare nowadays, it may have a narrow role for a sophisticated senior hire who accepts the rights trade-off knowingly, but it should not be treated as a simple workaround for uncapped unfair dismissal compensation.

• LLP membership

LLP structures may also appear attractive. In principle, a genuine LLP member is not an employee and would not ordinarily benefit from protection against unfair dismissal.

However, recent case law and HMRC guidance demonstrate that simply describing an individual as an LLP member is not enough and the requisite substance to the arrangements must exist, such as legally enforceable governance rights, genuine participation in the affairs of the LLP and meaningful economic risk. Equally, from an employment rights perspective, LLP members are not entirely outside the protection of employment legislation. They still qualify as “workers” and retain important statutory protections, including whistleblowing and discrimination rights.

Conclusion

The removal of the unfair dismissal cap means that incentive arrangements are likely to be examined more closely in executive exit disputes. For employers, the best protection will be a combination of careful drafting of plan rules/agreements, realistic valuation expectations, properly governed discretion, and fair dismissal processes.

If you would like to discuss this further, please speak to Dan Sharman dan.sharman@shoosmiths.com or Adam Lambert adam.lambert@shoosmiths.com.