The Employment Rights Act 2025 introduces far-reaching reforms that will affect sponsors and their portfolio companies, further details on which can be found here.
Within that broader package, two changes to the unfair dismissal regime carry particular weight for sponsors and their portfolio companies. From 1 January 2027:
- Uncapped compensation: The cap on compensatory awards for unfair dismissal claims is being removed, meaning there will be no limit on the amount that can be awarded by the Employment Tribunal (currently the lower of 52 weeks' pay and £123,543).
- Qualifying period: All employees will have the right to claim unfair dismissal after six months of employment (currently two years).
These reforms will fundamentally alter the landscape for employee exits. Employers should anticipate:
- A significant increase in claims;
- The potential for substantial awards for senior executives;
- More complex and protracted settlement negotiations; and
- A shift in claim types.
Senior executive departures
The exposure for sponsors and their portfolio companies will be at its sharpest where a departing senior executive holds a meaningful economic interest in the business alongside their salary. Liability for a successful unfair dismissal claim could potentially extend across the full spectrum of remuneration: salary for the duration of the loss period, performance bonuses that would have been earned, pension contributions, and equity or carry positions that were forfeited on exit.
The classic exit scenario revisited
A fair dismissal has two components: a fair reason (capability, conduct, redundancy, statutory restriction or some other substantial reason) and a fair process.
It is not uncommon for an employer to identify a fair reason for termination to establish that the dismissal is not discriminatory or in retaliation for a protected disclosure, (both of which already carry uncapped exposure) and then terminate on notice, knowing that it will negotiate a settlement agreement that effectively buys out some or all of the capped award.
From 1 January 2027, that same exit, handled the same way, will carry uncapped exposure meaning that employers will need to focus on both the fair reason and the fair process when dismissing senior executives.
Four tactical responses
There are several measures sponsors and their portfolio companies can take when implementing senior executive exits to try to reduce their exposure:
1. Focus on procedural fairness
Unfair dismissal claims often succeed at a senior level not because the employer lacked substantive grounds, but because it failed to establish a fair process. Procedural fairness is materially harder to achieve at a senior level for two principal reasons:
- Disciplinary processes attract greater scrutiny and tend to involve more complex subject matter. Where there is a regulatory dimension, procedural failings can have serious implications for a senior executive's future employability and regulatory standing.
- Performance management is often avoided owing to challenges in organisational hierarchy, the perception that measurable objectives are difficult to set, and a reluctance to give regular feedback.
However, a strong, fair process will be an important tool in negotiation going forwards:
- A robust disciplinary process following the ACAS Code of Practice will avoid a compensation uplift of up to 25% being applied to the claimant's compensatory award. Regulated companies will also want to ensure that they have discharged their separate but linked regulatory obligations to assess whether an employee should maintain their status as a fit and proper person.
- A genuine performance improvement plan should be a serious consideration, even at the most senior level. It can:
- strengthen the substantive position on fair reason;
- create a contemporaneous record of performance concerns that did not previously exist; and
- improve the legal tools available to limit any award if the matter reaches the Tribunal.
If initiated by a senior partner or the chair of the board and coupled with an early off-the-record discussion, a performance improvement plan provides both a negotiating lever and a litigation backstop. It allows a settlement proposal to be tabled without arming the senior executive for litigation and sends a clear signal that a formal process will follow if a negotiated exit is not achieved.
2. Deploy the legal tools that limit awards
Even without a cap, established Tribunal principles can substantially reduce the value of awards. The compensatory award is assessed by reference to what is just and equitable in all the circumstances, having regard to the losses sustained by the executive in consequence of the dismissal insofar as those losses are attributable to the employer's actions. In high-value executive claims, identifying and deploying the relevant limiting principles early is essential.
- Causation: The compensatory award is limited to losses directly caused by the dismissal. Where losses would have arisen independently of the dismissal, or where dismissal would have occurred in any event for a legitimate reason, those losses should be challenged robustly. For example, in a dismissal for gross misconduct where the reason is found to be fair but the process is not, bad leaver provisions would likely apply regardless of any procedural failing, meaning the executive is unlikely to recover the value of their equity.
- Mitigation: The executive is obliged to take reasonable steps to mitigate their loss. Employers should actively request evidence that such steps have been taken and pursue this point where the evidence is lacking.
- Polkey reductions: Where a dismissal is found to be procedurally unfair, the Tribunal can apply a percentage reduction to reflect the likelihood that dismissal would have occurred in any event had a fair process been followed. Where the underlying case for removing the executive was sound, reductions of 50–100% are achievable in the right circumstances.
- Contributory fault: Where the executive's own conduct contributed to the dismissal, the Tribunal can reduce both the compensatory award and basic award (an additional award calculated by reference to length of service and age, currently capped at £22,530). Relevant conduct includes poor performance, failure to address known issues, and any breach of internal policies or governance obligations.
3. Manage the timeline strategically
Complex unfair dismissal claims, particularly those involving multi-day hearings and expert evidence on equity valuations, typically take two to three years to reach the Tribunal. That timeline is, counterintuitively, one of the most powerful tools available to employers.
In a portfolio company, a senior executive's most significant heads of loss are likely to be exit-related: equity upside and any transaction bonus. In a sponsor, carried interest is also likely to be tethered to deals. As time passes and no exit event materialises, or materialises on different terms than anticipated, the senior executive's ability to prove those losses on the balance of probabilities becomes progressively weaker. Tribunals are cautious about projecting losses far into the future and are generally reluctant to award losses extending beyond two years from dismissal without compelling justification.
The passage of time also creates sustained commercial pressure on the senior executive. A well-timed, evidence-based settlement approach can resolve matters at a fraction of the theoretical uncapped exposure.
4. Management incentive plans
The same logic that makes tactical planning important in defending the claim applies with equal force to the management incentive plan itself. The structure of the senior executive's economic interest, and the conditions attached to it, can do significant work in limiting exposure before a claim is ever brought.
Two areas warrant particular attention:
- Leaver provisions: Sponsors should review existing MIP leaver definitions to ensure they accurately reflect the full range of exit scenarios and retain discretion within leaver categories so that re-categorisation remains a viable negotiation tool. Conditioning good leaver treatment on the senior executive signing a settlement agreement is also worth considering. With sufficient sums at stake, that can be a powerful incentive for a clean exit.
- Discretionary elements: Where bonus entitlements or equity distributions involve genuine board or remuneration committee discretion, a Tribunal will be slow to award those sums to the senior executive without a clear evidential basis for concluding that discretion would have been exercised in their favour. Rigorous contemporaneous records of how and why discretionary decisions are made make it significantly harder for the senior executive to characterise a favourable outcome as a foregone conclusion.
Our view
Executive exits will become more complex and more costly from 1 January 2027, particularly where compensation is (as it often is) closely tied to exit outcomes and the pressure to move quickly is high. Sponsors and portfolio companies that take advice early, plan carefully, restructure their termination tactics, review their MIP documentation, and manage the litigation timeline strategically will be in a significantly stronger position than those that do not.
White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.
This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
© 2026 White & Case LLP
