Senior exits: a new risk landscape on the horizon

As we sing Auld Lang Syne in the early hours of 1 January 2027, a radical change in employment law will have occurred. We are speaking, of course, of the changes to unfair dismissal law, which are likely to cause a seismic shift to the costs and strategy associated with senior exits. With approximately four months to go, there is still time to prepare. In this article we summarise the steps you may want to take now, followed by the longer-term considerations.
 

The changes

From 1 January 2027:

• Employees will only need six months’ continuous service to be eligible to bring an “ordinary” unfair dismissal claim; down from the current two years.

• The statutory cap on compensation for ordinary unfair dismissal will be entirely removed. The current cap is the lower of 52 weeks' gross pay or £123,543.

The removal of the cap does not mean that all unfairly dismissed employees will automatically receive hundreds of thousands of pounds in compensation. Compensation will still be assessed by reference to the financial losses that flow from the unfair dismissal and claimants will still be expected to make reasonable attempts to find a new job, to mitigate their losses. In addition, compensation can be further reduced for reasons we explain later in this article, such as where the claimant was in some ways to blame for their dismissal, even though it’s been found to be unfair. However, there will be no “backstop” cap to fall back on.
 

Why is this significant for senior exits?

It is easy to see how someone on a six-figure salary could quickly hit the compensation cap under the current system. This reality has long shaped the landscape for senior exits, both in terms of economics and strategy. For example, it can mean that the departing employee’s notice pay entitlement alone could use up all or most of the capped amount, with the consequence that there might be little to no penalty for not following a full, standard dismissal process. It can also mean that there is little point analysing other potential sources of loss, which are often much more complicated, such as the loss of future bonuses, benefits, pension and equity. (Although the employee might, in some circumstances, have separate claims that could cover such losses.)

The new, uncapped compensation landscape means the cost of a senior exit could quickly become more expensive. This is heightened by the fact that employers will only have six months before the employee gains these protections.

The good news for employers is that there are steps they can take to mitigate these changes.
 

What to do between now and January?

Anyone who joined your organisation in the period 2 January 2025 to as recently as 1 July 2026 will gain protection from unfair dismissal come New Year’s Day 2027. Accordingly, if you have concerns about the performance of someone within this cohort, you should address them now (even if they have passed their probation period). If, ultimately, you consider that dismissal is necessary, you should deal with this before Christmas, for the reasons explained in our previous article: Getting your timings right for expanded unfair dismissal protections – time to plan ahead.
  

Longer-term considerations

When a senior hire is not working out, it is likely that both the employer and senior executive will continue to prefer a swift, negotiated exit in most cases. While the landscape for such exits will undoubtedly change, there are a range of measures that employers can adopt to help soften the impact. They include:

1. Make effective use of probation periods. This applies to all levels of employee. It is of course already good practice to utilise probation periods, actively reviewing performance and integration into the business. Put simply, this will become more important from January 2027.

2. Review the length of your probation period. Probation periods of six months are common; however, you should not wait until the very end to make a decision, as this will risk the employee hitting their six-month anniversary and accruing unfair dismissal rights, or being deemed to have done so when you factor in statutory minimum notice entitlements. We discuss this in more detail in Getting your timings right for expanded unfair dismissal protections – time to plan ahead. We would suggest considering probation periods of four to five months, in order to leave a margin of error.

3. Document concerns. When it comes to senior exits, there isn’t always a focus on documenting concerns in a clear and structured way, as opposed to getting straight into exit negotiations. However, doing so will assist in showing genuine grounds for a fair dismissal, which in turn supports a robust stance on the level of any settlement payment (e.g. is a shorter notice period for the first 12 months appropriate?).

4. Follow a process. Following a process of sorts can greatly assist arguments that the executive’s period of loss, and so settlement amount, should be limited. Some organisations may wish to consider having bespoke processes specifically for senior roles that comply with minimum standards of fairness but are also geared towards speed.

5. Review contracts of employment. For example, payment in lieu of notice provisions can be drafted to provide for payment in instalments with a concomitant obligation on the executive to seek new employment in that time.

6. Review bonus schemes. For example, does the scheme have tight eligibility criteria for cases where performance concerns have been raised, including express wording on no prorated bonus? This ties in with points 3 and 4 above about documenting concerns and following some form of process.

7. Establish an approach to alleged share scheme related losses. Share plans and contracts of employment will usually have provisions that exclude or limit loss of share scheme related benefits because of termination of employment. Such provisions are effective in principle in a claim for breach of contract but might not be effective for the purposes of unfair dismissal compensation. Calculating the potential value of a future grant or vesting of shares is inherently a difficult exercise due to the number of variables. However, having a strong understanding of the scheme and how it works can assist in dealing with arguments on this issue. In addition, alleged losses can potentially be reduced or even eliminated from the calculations where you have cogent arguments that you could fairly dismiss before the relevant share scheme event.
    

How can we help?

We would be delighted to advise you on all the above issues, whether in relation to a particular case or more general advice on policies and processes, as well as our incentives colleagues. Please do not hesitate to contact us (see below) if you have any queries, and please keep an eye for our invitation to our autumn seminar on 3 November 2026, where we will be discussing the issues mentioned in this article.