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Unfair dismissal settlements and compensation

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This is a practical guide to unfair dismissal and negotiating an unfair dismissal settlement agreement with compensation in the UK. It is written by our specialist unfair dismissal solicitors who are experts at winning claims for employees. 

It’s aimed at you if you’re an employee, have been dismissed by your employer, are no longer in their employment and if you think you have grounds for unfair dismissal. 

This guide covers:

What is unfair dismissal?

Unfair dismissal is a term used in employment law when you get dismissed (in other words, sacked)  from your employment without good reason. It can also refer to instances where you get dismissed and your employer has failed to follow their own formal disciplinary and/or dismissal processes.

It is your right as an employee not to be unfairly dismissed and there are laws to protect you against unfair dismissal. There are also ways in which people who are unfairly dismissed can seek compensation from their employer for their unfair treatment.

You usually need to have worked continuously for your employer for at least two years before you can make a compensation claim for unfair dismissal, although there are some exceptions which are outlined below.

Unfair dismissal and constructive dismissal

Unfair dismissal is sometimes confused with constructive dismissal, which is where you feel forced to leave your employment because you can’t any longer cope with your employer’s (or your colleagues’) behaviour towards you. 

As a result, you resign and leave, rather than get dismissed. See our guide on constructive dismissal and constructive dismissal payouts here.

Who can claim unfair dismissal?

You have to be an employee who has been dismissed before you can make a claim for unfair dismissal. An employee is an individual carrying out work under a contract of employment.  

You don’t count as an employee and therefore can’t make a claim of unfair dismissal, if you are: 

  • self-employed 
  • an agency worker or classed as a ‘worker’ 
  • a police officer or in the armed forces 
  • a registered dock worker
  • working overseas or for a foreign government 

You can also check your employment status on the gov.uk website. 

If you are an employee who has resigned because your employer has ill-treated you, then that’s not unfair dismissal, it’s ‘constructive dismissal’ – as mentioned above.

Want help with your unfair dismissal case?

 

What are unfair dismissal settlement agreements?

Employers often offer settlement agreements to settle a potentially unfair dismissal compensation claim: in the agreement, they offer you a sum of money so that they do not have to follow a dismissal procedure. 

Try to resist the temptation simply to take the first offer, and instead tell your employer that you’ll get back to them after a week or so. This gives you time to find out more about unfair dismissal in your particular circumstances and – if you need it – to get some proper expert advice.

How do you know if your dismissal was fair or unfair?

There are several ways of ascertaining whether your dismissal was fair or not and therefore if you have grounds for an unfair dismissal claim against your employer.

For starters, you usually need to be employed continuously for at least two years with your employer in order to bring a claim for unfair dismissal compensation.  See more on this below.

For the moment, let’s assume that you have your two years’ service and you would like to know if your dismissal was fair. 

What was the reason given for dismissing you?

Firstly, you need to look at the reason given for your dismissal. There are five potentially fair reasons for dismissal:

1. Capability 

For instance,  where you are found to be not capable of doing your job – sometimes also referred to as ‘Performance’.  (See our guide on Performance improvement procedures and plans.)

2. Conduct

For example, where your conduct is found to be unacceptable for reasons such as poor attendance, ignoring important instructions, deception, dishonesty.

3. Redundancy  

Where the redundancy is for genuine business reasons. (See our Redundancy guide.)

4. Illegality 

An example would be where you need specific skills and/or qualifications to do your job legally, but it turns out you don’t actually have them.

5. Some other substantial reason 

This is basically a ‘catch-all’ reason where none of the above applies, such as:

  • dismissing and then re-employing you to try to get you to accept a new contract/terms and conditions; 
  • dismissing you because of a personality clash which means you can’t work with a colleague; 
  • safeguarding issues concerning children or other vulnerable people but where your employer doesn’t have grounds for dismissing you for misconduct.

 

If the reason given to you was not one of the above, the chances are that you were unfairly dismissed. For example, if you were dismissed because you are friends with the old CEO who has been fired, this is not a fair reason.

What was the procedure used for dismissing you?

If you have been given a potentially fair reason for your dismissal, the next thing to look at is the procedure.

If a fair procedure was not followed, then you still have grounds for an unfair dismissal claim, although any compensation could be reduced to reflect the possibility that you would have been dismissed if the correct procedure had been followed.

Exactly what is a fair procedure varies depending on the size and administrative resources of your employer. The bigger the company, the more hoops they usually have to jump through.

As a guideline: in a capability/performance dismissal, you should be given: 

  • warnings and chances to improve
  • a fair hearing, with the opportunity to bring a colleague
  • a right of appeal to a higher level of management (or a different manager if it is a small employer). See our appeals guide for how to appeal a decision.

See our guide on performance improvement for more information about performance/capability dismissals.

Also the Acas code of practice that is used by the employment tribunals to measure whether a procedure was fair or not

Do you need 2 years’ service for unfair dismissal? 

 Before you have the two years’ continuous service mentioned earlier, there is usually no requirement for your employer to follow an official dismissal procedure.

 Put simply, providing they give appropriate notice, an employer can dismiss you without giving a reason. They don’t have to mention your performance, a company restructure or any reason at all, although often they do give a reason anyway.

What if you get fired just before 2 years are up? 

If you get fired after, say, 23 months, and your employer does not give you your one month’s notice, unfortunately, all you can do is bring a claim for your one month’s notice. 

It is however often possible to obtain some kind of compensation in these situations with some negotiating, regardless of the legalities of the situation. The closer the termination date is to the two years’ service, the stronger your argument would be.

Let’s assume you are dismissed after 1 week before the 24-month mark, without notice, in circumstances other than for gross misconduct. 

In those circumstances, the employment tribunal can add the one-week statutory notice, giving the minimum two years’ service needed for an unfair dismissal claim. (See also our guide on notice periods.

 

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What unfair dismissal claims don’t need 2 years’ service? 

Two years’ continuous employment is generally needed to be able to bring an unfair dismissal claim. However, if the dismissal is for reasons of discrimination or one of what are called  “automatically unfair” reasons, there is no qualifying period. There are over 60 automatically unfair reasons which include the following:

For example, if you get dismissed because you are afraid of contracting a disease such as coronavirus in the workplace and so refuse to attend; you object to unsafe machinery handling practices and other such hazards.

 

 

  • Dismissal related to asserting a statutory right 

For example, if you complain to your employer about any of your statutory rights, such as unpaid wages, withheld holiday entitlement

 

  • Dismissal relating to Trade union membership or non-membership

 

  • Dismissal in connection with the national minimum wage

 

  • Dismissal connected with refusing to exceed the 48-hour working week

 

For example, if you get dismissed because you have complained to higher management or to external authorities about illegal work practices. (See our whistleblowing guide.)

 

In automatically unfair dismissal cases, not only is there no minimum employment requirement, but there is also no upper limit on the amount of damages the employment tribunal can award.

Discover your rights, get advice and build the perfect legal letter with Virtual Lawyer.

Top Tips

Alex Monaco
  • 1
    You normally need to be employed for at least two years in order to bring a claim for unfair dismissal.
  • 2
    When you are unfairly dismissed the time limits are very strict – you only have 3 months less one day to bring a claim in the employment tribunal. This does not get extended by any grievance process.
  • 3
    If you win a claim then your unfair dismissal compensation payout will reflect how much money you lost by being out of a job. For example, if you were only out of a job for 2 weeks, you will get very little compensation.

How to prove that the dismissal reason was not the real reason?

This is always tricky: you may have been given a fair reason, and the procedure was fair, but you may still have grounds for an unfair dismissal claim if you know that there was an underlying reason and that you have been put through a ‘sham’ exercise.

This argument should be used with some caution: employment tribunals are part of the establishment and are not readily persuaded by conspiracy theorists.

But still, if you can prove that there was a different reason for your dismissal than the one given to you, then you may be successful in your claim, even though on the face of it the process seemed fair.

What unfair dismissal compensation could I get?

In order to assess what unfair dismissal compensation you could get in your settlement, it is worth looking at what an employment tribunal would award in a case of unfair dismissal.  Doing this can help you to work out what a reasonable unfair dismissal settlement agreement value would be in your circumstances.

There are two elements to such an award: a compensatory award and a basic award:

The compensatory award

This payout is usually the larger of the two elements and is awarded by a tribunal to compensate you for losses you have sustained as a result of your employer’s unfair actions.

The maximum ‘compensatory’ award in the tribunal for unfair dismissal is one year’s salary, or £89,493, whichever is lower (as from 6 April 2021).

However, you have a duty to mitigate your loss, which means that if you get a new job straight away on the same or more money, you won’t be entitled to any compensatory award at all.

The basic award

The other element of unfair dismissal compensation is a ‘basic award’. This is similar to statutory redundancy pay – and is:

  • 1.5 weeks’ pay per year of service from age 41
  • 1 week’s pay for each year of service if you are aged 22 – 40
  • 0.5 week’s pay for each year served if you are under 22 years

The award is based on your gross weekly pay when you were dismissed up to a maximum of £544  (whichever is lower) per year of service.

This is unlikely to amount to much unless you’ve been with your employer for a long time and the payout is capped at a maximum of £16,320. (All figures  from 6 April 2021.)

Often it’s better to try to remain employed rather than quit or be fired, that way you can leverage a higher unfair dismissal settlement from your employer because they will effectively pay you to leave.

 

What unfair dismissal compensation could you get?

What’s the average UK payout for unfair dismissal claims?

There are two ways of thinking about average payouts for unfair dismissal claims:

  1.  Claims settled directly with your employer;
  2.  Claims settled by an employment tribunal,

as outlined below.

Average payout for claims settled directly with your employer

Our extensive experience as unfair dismissal solicitors indicates that employers usually end up better off (both mentally and financially) if they can negotiate a settlement agreement and associated compensation directly with their employer.

An approximate average payout at Monaco Solicitors for unfair dismissal settlement agreement cases is upwards of three months’ pay in the form of an ex gratia payment (tax-free), plus notice pay (taxed).

You may also be able to negotiate over such payments as holiday pay, bonuses and commission and share options. There are also extras that don’t have a direct monetary value such as an employment reference in the form you want.

You cannot negotiate over the award made to you by an employment tribunal.

Average compensation for claims settled by an employment tribunal

The Ministry of Justice publishes annual statistics for awards made by employment tribunals for a wide range of claims, including unfair dismissal.

The latest published figures are for 2019 – 2020.  They are set out in the  Employment Tribunal and Employment Appeals Tribunal Annual Tables 2019 – 2020 in a wider report here).

For an unfair dismissal compensation awarded by a tribunal, the median award was £6,646, and the average award was £10,812.

Comment on average payouts for unfair dismissal

It does not take a great mathematician to work out that anyone earning more than £24,000 per annum would be likely to end up better off by negotiating an unfair dismissal settlement agreement payout, rather than having to accept an employment tribunal award.

 

 

Next steps

We would always recommend seeking a fair financial settlement in preference to an employment tribunal case unless there is no other option.

However, while there is still time to make a tribunal claim, your employer would be more likely to reach an unfair dismissal settlement with you.

If you decide to take action, then do take it promptly, as there are strict time limits for making employment tribunal unfair dismissal claims – as explained in our guide on the subject here.

Try our unfair dismissal letter builders

If your unfair dismissal relates to a performance/capability issue, ill health, or unfair redundancy, then you might like to try one of our free letter builders to kick start negotiations with your employer.

To try one of the letter builders – entirely free of charge – just click below on the one that relates to your case:

Ill health unfair dismissal letter builder

Performance unfair dismissal letter builder

Redundancy letter builder

Get in touch with Monaco Solicitors

If the letter builders and your own negotiations don’t result in the unfair dismissal compensation and settlement agreement that you want, then Monaco Solicitors may be able to help.

Our legal team comprises qualified unfair dismissal solicitors who have years of experience representing employees like you (not employers).  So please do get in touch:

 

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