Uncapped unfair dismissal: why executive reward is the next battleground

Since we last wrote about uncapped unfair dismissal and reward risk at the start of the year (which you can read here), the direction of travel has become clearer. Senior exits are being analysed less through salary and notice and more through lost bonus, lost vesting and lost equity value.

The Employment Rights Act 2025 changes the economics of the dispute. The qualifying period for ordinary unfair dismissal is being reduced from two years to six months. Tribunal time limits are expected to move from three months to six months this October 2026 and, from 1 January 2027, the unfair dismissal compensatory cap is due to disappear.

Not every claim will succeed. Not every dismissed executive will recover every loss. But claimants will have more time, greater incentive and stronger financial reasons to scrutinise reward outcomes following termination.

The reforms explain why these claims may become more valuable. They do not fully explain why they are likely to become more common. For that, it is necessary to look at how modern executive reward is designed and communicated.

The behavioural reality

As always, the interesting point for me is behavioural. And I have written before about my interest in this area (which you can read here).

Imagine the executive sitting at home after dismissal with the termination letter, settlement agreement, bonus letter and LTIP certificate in front of them. They may also have a share plan portal showing unvested awards, deferred shares from earlier bonus years and, in a private company, options or growth shares presented during employment as part of the value creation story.

The employer's position may appear straightforward. Employment has ended. The bonus was discretionary. Unvested awards have lapsed. The executive is not a good leaver. The plan rules say no compensation is payable for loss of awards on termination.

All of that may be right.

But the executive is not thinking like a share plan or employment lawyer. They are thinking like someone who has just watched a significant part of their expected wealth disappear. Human nature does the rest.

The conversation quickly shifts from "what do the plan rules say?" to "what would probably have happened if I had stayed?". That is both a natural reaction and, increasingly, the question that will drive the dispute.

The claim does not need to be perfect on day one

A senior executive does not need to prove at the outset that every pound of bonus and every share award would definitely have paid out. The immediate task is more modest, but still powerful: make the counterfactual credible enough that the employer must answer it.

Would the bonus probably have been paid? Were objectives set clearly and assessed properly? Was discretion genuinely exercised? Would the LTIP have vested, at least in part? Was the dismissal close to a vesting date, sale event, refinancing or bonus payment? Was the leaver classification defensible? Were others treated more favourably? In a private company, was the equity valuation consistent with the company's own messaging about future value?

These are not just legal questions. They quickly become evidential ones.

The claim is no longer only about whether the dismissal process was fair. It is also about the value of the economic opportunity the executive says they have lost.

That may require the company to explain the documentary record: committee papers, valuation materials, board minutes, management presentations, internal communications and contemporaneous decision-making. For organisations that have spent years promoting equity as a key component of reward, that record may become uncomfortable territory.

Why equity is worth fighting over

Equity is increasingly contested because it has become economically significant.

For many senior executives, salary pays the mortgage. Bonus funds lifestyle. Equity is the wealth creation story.

That is true in listed companies, where LTIPs and deferred bonus arrangements form a substantial part of remuneration. It is equally true in private companies, where options, growth shares and management incentive arrangements may be the primary reason an executive joined the business.

There is a predictable consequence to years of ownership messaging. If a company has spent years describing an executive as an owner, aligned with shareholders and rewarded through long-term value creation, it should not be surprised if that executive later scrutinises the loss of that opportunity.

Investors examine executive equity because it is valuable. Departing executives do the same.

Their question is not whether the award was justified when granted. It is whether they have been deprived of something that, absent the dismissal, would probably have produced real value.

Valuing the lost opportunity

A sophisticated claim is rarely framed as "I was entitled to the full award".

The stronger argument is usually that the executive lost a real and substantial opportunity to receive value, rather than that payment was automatic.

The focus is therefore on what would probably have happened had the employment relationship continued. Would the executive have remained employed? What level of vesting was realistic? Would performance conditions have been met? Was a transaction, refinancing or exit genuinely in prospect? What would the shares have been worth?

Each of those questions carries its own discount for uncertainty, performance risk, timing, tax and the possibility that the executive might have left or been fairly dismissed, in any event.

Take an executive on a £275,000 salary with a 125% target bonus, half deferred into shares. Assume they also hold an LTIP granted at 200% of salary, two-thirds through its performance period, with the share price materially higher than at grant. Add a retention award due to vest shortly after termination. In a private company, add growth shares supported by investor materials showing a credible exit pathway.

The executive may recover all, some or none of that value. But if the combined package is capable of producing £1.5 million to £2 million of gross value, even a heavily discounted claim may still be worth several hundred thousand pounds.

Before salary and notice are considered, that is enough to alter the settlement dynamics materially.

Listed and private company plans create different disputes

In listed companies, disputes are often about timing, performance and discretion. Was the executive dismissed shortly before vesting? Would performance conditions have been satisfied? Was discretion exercised consistently? Were plan provisions applied in line with policy, precedent and the underlying facts?

Because share prices are public and plan structures are formalised, the dispute is frequently less about valuation and more about probability, process and consistency.

Private companies create a different set of arguments.

The executive may seek to understand valuation assumptions, hurdle structures, preference rights, debt levels, exit expectations, leaver mechanics and distribution waterfalls. The company may argue that the equity had limited value, while the executive points to management presentations, investor decks or board materials suggesting a different picture.

Neither position is necessarily wrong. The difficulty arises when the documentary record does not support the explanation being advanced.

Plan wording matters, but it is not a forcefield

Good incentive plan drafting remains important. Leaver provisions matter. Discretion matters. Exclusion wording matters.

A well-drafted plan may provide that awards lapse on cessation, participation creates no entitlement to continued employment and no compensation is payable for loss of awards on termination.

That can be highly protective.

What it does not do, however, is eliminate the need for evidence. If communications have oversimplified the position, discretion appears inconsistent or the timing of the dismissal raises questions, plan documentation becomes only one part of the analysis.

The employer may ultimately succeed. But success may depend on a coherent evidential record showing that the reward outcome followed both the plan and the facts.

Some disputes may ultimately extend beyond unfair dismissal into contract, estoppel or shareholder-related claims. However, the unfair dismissal claim will almost certainly be where the commercial leverage begins.

Where employers should focus now

A senior executive's advisers will typically examine four things: timing, comparators, process and communications.

In practice, those issues are closely connected. A dismissal shortly before vesting raises questions about how others were treated. That leads to scrutiny of decision-making, supporting evidence and the consistency between what the company said during employment and what it says after termination.

This is often where settlement value emerges.

Not because the plan rules are defective, but because the documents do not align.

The contract says one thing. The plan rules say another. Reward communications are more expansive. Investor materials are more optimistic. The exit correspondence is more restrictive. The paper trail struggles to reconcile them.

The answer is not greater generosity. It is greater preparation.

Reward outcomes should be capable of withstanding scrutiny before a dispute arises. Committees should minute decisions properly. Leaver classifications should be applied consistently and documented contemporaneously. Valuations should be capable of reconciliation with underlying business materials. Discretion should be exercised through a clear process rather than justified retrospectively. Communication programmes should explain participation accurately without overstating likely outcomes.

And if you want to hear more about high-risk dismissal and settlement strategies, please tune into our recently published podcast.

The next phase of dismissal risk

Uncapped unfair dismissal does not transform every lost bonus or lapsed equity award into compensation. Claimants will still face questions of causation, mitigation, contributory conduct, discretionary plan terms, performance risk and probability discounts.

But removing the compensatory cap changes the economics of making the argument.

It gives executives greater reason to pursue reward-related losses, employers greater reason to evidence their decisions and both sides greater incentive to resolve disputes before the counterfactual is tested.

The next phase of senior dismissal risk will not focus solely on whether the dismissal was fair. Increasingly, it will focus on the value that the dismissal is said to have destroyed.

With the removal of the unfair dismissal compensatory cap due to take effect on 1 January 2027, employers still have time to prepare. But that preparation should not begin with the settlement agreement. It should begin with the reward framework itself.

For employers that have not closed the gap between their legal documentation and the expectations created during employment, that is where the real cost is likely to sit.

At Burges Salmon, we advise companies, Remuneration Committees, founders, private equity-backed businesses and senior executives on the design, operation and dispute risk of bonus and equity arrangements, including LTIPs, deferred bonus plans, growth shares, options, MIPs, leaver provisions, valuation processes and award treatment on termination or exit.