Unfair Dismissal Reform in Great Britain: What Private Equity Firms Need to Know

With effect from 1 January 2027, the Employment Rights Act 2025 will, amongst other things, introduce two changes that materially alter the employment law landscape. Firstly, the qualifying period for employees in Great Britain to bring unfair dismissal claims will be reduced from two years’ to six months’ continuous service, and secondly, the cap on compensatory awards (currently the lower of 52 weeks’ gross pay or £123,543) will be removed. Together, these reforms significantly shift the risk profile for PE firms and their portfolio companies.

Key Considerations

A full formal performance management process (involving written warnings, improvement plans, and review periods) is rarely realistic for a member of the C-suite. In most cases, the relationship has simply broken down, the board has lost confidence, or strategic direction has shifted. The result is that senior exits are often negotiated departures rather than procedurally compliant dismissals. Historically, this created limited practical risk given the statutory compensation cap and the ability to “buy out” the unfair dismissal risk under the terms of a settlement agreement. With the removal of the cap, the position will materially shift, and departing executives who consider themselves unfairly or constructively dismissed could seek much greater compensation awards (or settlement sums), which could include losses under management incentive plans, carried interest schemes, or discretionary bonus arrangements. In starker terms: a claimant’s schedule of loss that was once capped at just under £125,000, could now run into the millions of pounds, on the same facts surrounding their termination of employment. In that light, we expect that firms will want to review the performance of existing portfolio company management teams now, and consider expediting any personnel changes in good time before the reforms take effect in January 2027. 

The Scale of the Change

It is worth placing the reforms in context. Discrimination and whistleblowing claims have always been uncapped and carry no minimum qualifying period, so many contentious senior departures in a PE context already attract significant financial exposure. The cap removal alone may therefore be less significant in practice than initially expected. That said, the reforms do fundamentally change the position for shorter-service employees who previously fell outside unfair dismissal protection, and whose awards would in any event have been subject to the statutory cap. For that cohort, both constraints are now removed, creating a materially broader base of claims risk across the workforce in Great Britain.

International Comparisons

Great Britain’s direction of travel is best understood in the context of other countries. In France, the 2017 “Macron caps” introduced a statutory scale for unfair dismissal damages (ranging from one to 20 months’ salary depending on length of service) to create predictability. However, well-advised executives often pursue uncapped parallel claims for harassment, discrimination, or loss of MIP rights (as is currently the case in Great Britain). Conversely, in Germany, where there is no statutory cap, reinstatement is the primary remedy, and senior executive dismissals typically settle for negotiated sums reflecting uncapped exposure, with MIP and equity losses factored into the quantum. In Spain, statutory severance is capped at two years’ total remuneration, and recent Supreme Court authority definitively closed the door on awards beyond the statutory formula. European jurisdictions, which continue to be “employee friendly”, contrast sharply with the US where employment is predominantly “at-will” with no statutory severance entitlement, but with contractual severance entitlements typically agreed under the employment contract or offer letter for senior executives.

We do not expect that employers in Great Britain will move towards the US position — with severance packages agreed at the outset of the employment relationship — as the parties cannot contract out of the statutory unfair dismissal regime. Instead, our expectation is that settlement will become much more expensive for employers who want to avoid the threat of an uncapped claim.

Why the Reforms Matter for Private Equity Firms

• Unfair dismissal compensation could now encompass MIP losses. When a senior executive in Great Britain holds MIP allocations that would have vested but for dismissal, there may be a basis to argue that the value forms part of compensable loss. With the cap removed, those losses are no longer limited by statute. An executive dismissed unfairly after only a very brief period of employment could, in theory, seek compensation for the full value of lost participation.
• Management changes and restructuring post-acquisition. The two-year qualifying period and the cap on compensation has generally given PE-backed businesses flexibility to make leadership changes post-acquisition with reasonable legal certainty and limited cost. Removing the compensation cap significantly increases the financial risk of dismissing management, making it more expensive to replace incumbent leadership. Equally, new management hires post-acquisition will acquire unfair dismissal rights after just six months rather than two years. In a sector where investors frequently reassess and change portfolio company management if performance targets are not met or cultural differences arise, new hires who do not work out will be considerably more costly to remove once they pass the six-month threshold. Beyond management, these reforms will affect broader workforce restructuring. PE-backed acquisitions frequently involve post-completion headcount reductions and cost synergies. Previously, employees with less than two years' service could be dismissed without ordinary unfair dismissal risk, reducing the exposure associated with large-scale reorganisations. Under the new rules, the vast majority of a target's workforce in Great Britain will hold unfair dismissal rights at the point any restructuring is implemented, materially increasing the pool of potential claimants and the aggregate cost of claims.
• Settlement dynamics. Historically, PE-backed businesses used settlement agreements to avoid performance management processes that are impractical at executive level. As noted above, with uncapped exposure, departing executives may expect much larger exit packages in exchange for compromising their claims.

How Private Equity Firms Can Prepare for the Reforms

• Pre-acquisition management assessment. Greater emphasis should be placed on whether the target has the right management team in place pre-acquisition, with an expectation of higher costs if executives are replaced on or shortly after completion. When new management is being brought in, a compressed window for assessment and removal before unfair dismissal exposure arises will need to be factored into asset management plans.
• Settlement and exit planning. Settlement discussions require more rigorous planning. Firms should ensure there are well-documented reasons and a clear audit trail for any exit decision, and adjust budgets for larger negotiated exit payments.
• Employment and MIP documentation. Firms and employers will want to review and tighten contractual documentation in anticipation of an increased number of claims from departing executives and MIP participants. In particular, this should include reviewing loss of share rights provisions in employment documentation to reduce the prospect of successful claims for losses that can be attributed to an unfair dismissal.
• Constructive dismissal exposure on post-acquisition restructuring. The removal of the cap equally affects constructive dismissal claims, where an executive resigns in response to a repudiatory breach of contract. In the PE context, post-acquisition changes to management structures, reporting lines, or incentive arrangements create a real risk that a senior executive treats those changes as fundamental breaches and resigns and is then able to bring an uncapped claim. Firms should ensure that any post-completion restructuring is supported by a clear business rationale, genuine consultation, and a realistic assessment of litigation risk before changes are proposed or imposed.