In brief
- The statutory cap on unfair dismissal claims is scheduled to be abolished from 1 January 2027.
- Anyone continuously employed for six months or more from that date has protection from unfair dismissal.
- Compensation for unfair dismissal is primarily based on financial loss.
- Dismissing employees in regulated sectors is going to become much higher risk as their financial losses are more likely to be significant and will no longer be capped.
- Exposure may be particularly acute in sectors with high value benefits, such as deferred variable compensation or equity or defined benefit pension schemes.
Background
Regulated sectors tend to have mechanisms that limit the employability of individuals who are dismissed for regulatory reasons. Dismissals in certain contexts can therefore cause significant, or even career-impacting, losses to the employee, because they may prevent the employee from obtaining employment in the same sector either until the matter has been determined by a relevant regulator or at all.
Until now, unfair dismissal claims have been a weapon of limited benefit in these circumstances due to the cap on compensation, which is currently the lesser of a year's pay or £123,543. Financial services employees who are subject to the FCA's (or PRA's) certification regime have found themselves in a particularly invidious position because they do not have direct recourse to the regulator. Obtaining an unfair dismissal finding can potentially recover a career and claimants have made good use of reinstatement orders in recent years to get around the compensation cap.
This article looks at the likely consequences of removing the unfair dismissal cap in regulated sectors, with a specific focus on financial services firms and on schools, but it will equally apply to other regulated sectors.
What is changing and when?
From 1 January 2027 there will no longer be a cap on compensation for unfair dismissal claims. Therefore, employees will be able to get compensation for their actual losses; if an employee who earns £100,000 per annum is dismissed and is out of work for three years, they could in theory be awarded £300,000 in compensation. The existing rules on mitigating losses (requiring claimants to take reasonable steps to find alternative work) and Polkey reductions (where an employer demonstrates there was a chance the employee would have been fairly dismissed in any event) will still apply.
The unfair dismissal qualifying service requirement is also changing. Instead of requiring two years' qualifying service, anyone continuously employed for six months or more from 1 January 2027 will have unfair dismissal protection. You can read about the implications of this change for employers here.
Financial services
Employees who are subject to the certification regime require a "regulatory reference" from their former employer to obtain a role at another regulated firm. The regulatory reference form requires former employers to disclose whether they have concluded that the individual was not "fit and proper" to perform a regulated function, whether they have taken disciplinary action related to whether the individual was fit and proper, and any other information that may be relevant to such an assessment. They are also required to notify the regulator if they have reason to believe that the individual has committed a Conduct Rules breach.
The consequence of this regime is that it can be extremely difficult for an employee who is dismissed in certain circumstances to obtain alternative employment with another FCA- (or PRA-) regulated employer. Most regulated firms are unlikely to take a risk on an individual who has already been determined as not fit and proper by another firm. It can also prevent promotion to a senior management function, which requires approval from the regulator, who will take the former employer's fit and proper determination into account when making its assessment.
Until now, certified employees in the financial services sector have been in a particularly invidious position because, ultimately, the regulator will not determine whether the dismissal was valid, and yet if their former employer considers that they have engaged in conduct which calls into question their fitness and propriety or which might amount to a Conduct Rule breach, it can be extremely difficult to find alternative employment. There has been a recent trend for affected claimants successfully to use applications for reinstatement orders (for example Weir v Citigroup Global Markets Limited and Jones v J P Morgan Securities plc).
Teachers in schools
There are three related, but interconnected, routes where a dismissal of a teacher in a school can result in it being very difficult to obtain alternative employment in the same sector.
First, teachers are subject to regulatory approval by the Teaching Regulation Agency (TRA). If a teacher is dismissed for "serious misconduct", or would have been dismissed had they not resigned beforehand, the school must make a referral to the TRA, which can determine if a prohibition order should be issued. A full TRA hearing typically takes over a year and sometimes much longer. In the meantime, the teacher is likely unable to work in their chosen profession.
Second, when asked to provide references for a teacher, schools must ensure the information confirms whether a teacher applicant is suitable to work with children and provide facts of any substantiated safeguarding concerns or allegations that meet the harm threshold. This renders it practically impossible for a teacher dismissed in such circumstances to obtain any role working with children (and for very good reasons).
Third, schools must make referrals to the Disclosure and Barring Service if they have decided to dismiss a teacher and they consider that one of the triggers for inclusion on the barred list applies.
Liability for losses
The implication of removing the unfair dismissal cap for regulated employers like financial services firms and schools is that employers can be on the hook for very high compensation claims if a dismissal in these circumstances is defective. If a financial services firm wrongly determines that a certified employee committed misconduct that renders them not fit and proper, or a school determines that a teacher was dismissed in circumstances that questions their suitability to work with children, the employee may be unlikely to be able to mitigate their losses at all before an unfair dismissal hearing.
The benefits associated with employment in these two sectors can also increase financial exposure. Financial services employees are typically partly paid, often to a significant proportion, in some form of deferred remuneration (for example long-term incentive awards) that can be lost on termination of employment. While such deferred remuneration arrangements are rare for teachers in school, most teachers have a valuable benefit in the form of a defined benefit pension in the Teachers' Pension Scheme. Potential losses from losing access to such a scheme can be extremely high.
What to do?
The simple fact is that the stakes around holding a fair disciplinary process are about to get much higher. There are steps employers can take to protect their position:
- It is invaluable to ensure that managers, and those who are advising them, are appropriately trained on conducting fair disciplinary processes. The above referenced reinstatement judgments highlight that even highly resourced global investment banks can get regulatory-related dismissals wrong.
- The possibility of significant pension losses forming part of unfair dismissal claims is another reason why those schools who are able to and have not yet done so may wish to consider withdrawing from the TPS.
- Employers should ensure their relevant policies and procedures are regularly reviewed and up-to-date and take into account the regulatory environment in which the employer operates, rather than using generic off-the-shelf precedents.
- Some employers who are able to do so are considering using the previously forgotten "employee shareholder" status, which removes employees from the ordinary unfair dismissal, regime in exchange for the employee receiving fully paid-up shares worth at least £2,000.
How Mishcon de Reya can help
Our Employment team advises financial services firms, schools and other regulated employers on all aspects of disciplinary and dismissal processes, including regulatory obligations and the management of unfair dismissal risk. As the removal of the compensation cap approaches, we can help you review and strengthen your disciplinary procedures, advise on fit and proper assessments and regulatory reference obligations, and represent you in Employment Tribunal proceedings. Please contact us if you would like to discuss how these changes may affect your organisation.