Unfair dismissal settlements and compensation

This is a practical guide to unfair dismissal and negotiating a settlement agreement with compensation for unfair dismissal. 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 who has been dismissed by your employer and are no longer in their employment. 

Unfair dismissal and constructive dismissal

Unfair dismissal is sometimes confused with constructive dismissal. Constructive dismissal is essentially where you feel forced to leave your employment because you can no longer stand your employer’s (or possibly your colleagues’) behaviour towards you.  As a result, you resign and leave, rather than get dismissed. You can read more about this in our related guide here.

What are unfair dismissal settlement agreements?

Employers often offer settlement agreements to settle a potentially unfair dismissal 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.

Was your dismissal fair or unfair?

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.  There are some exceptions to this basic rule which are discussed further 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. 

Reason 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.

Procedure for dismissing you

If you have been given a potentially fair reason, the next thing to look at is the procedure. If a fair procedure was not followed, then you can still claim for unfair dismissal, although any compensation could be reduced to reflect the chances 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. You should have a fair hearing, with the chance to bring a colleague. And you should have a right of appeal to a higher level of management (or a different manager if it is a small employer). 

The ACAS code of practice is  used by the employment tribunals to measure whether a procedure was fair or not

Do you usually 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.

If you are dismissed after 1 week before the 24-month mark, without notice, in circumstances other than for gross misconduct, the employment tribunal can add the one-week statutory notice, giving the minimum two years’ service needed for an unfair dismissal claim. 

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

Although two years’ continuous employment is generally needed to be able to bring an unfair dismissal claim, if the dismissal is for one of what are called  “automatically unfair” reasons below, there is no qualifying period:

• Dismissal due to discrimination 

• Health and Safety dismissal

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.

• Pregnancy-related dismissal
  
  But only if the employer was aware the employee was pregnant.

• 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

• Dismissal for whistleblowing

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

In the above 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.

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 be able to claim for unfair dismissal if you know that there was an underlying reason and that this was 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 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 fair 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 £88,519, whichever is lower (as from April 2020).

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 £538  (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 £16,140. (All figures  from April 2020.)

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

What’s the average 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 experience at Monaco 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 which don’t have a direct monetary value such 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 unfair dismissal, the median employment tribunal award is £6,646, and the average award is £10,812.

Comment on average payouts for unfair dismissal

Remember that awards made by an employment tribunal are subject to income tax, whereas ex gratia payments of up to £30,000 in a settlement agreement are tax-free.

It does not take a great mathematician to work out that anyone earning more than about £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

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.

Based on your answers to a few questions, the letter builders create a letter designed to be sent to your employer, and set out your legal case for compensation for unfair treatment. You download the letter, complete a few final details and send it off.

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 compensation and settlement agreement that you want, then Monaco Solicitors may be able to help.

Every one of our legal team comprises senior unfair dismissal solicitors with years of experience representing employees like you (not employers).  So please do get in touch – it costs nothing to ask.

We would always recommend seeking a fair financial settlement and not 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 a settlement agreement with you.

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