Unfair Dismissal Compensation: How to calculate damages?

Unfair dismissal is a critical issue that affects both employees and employers. Understanding how compensation is calculated in these cases, when the dispute reaches the Employment Tribunal, is essential for both parties. This blog will explore the key aspects of calculating damages for unfair dismissal, providing clear and concise information to help you navigate this.

What is Unfair Dismissal?

Unfair dismissal occurs when an employee is dismissed from their job in a manner that violates the law. This can happen for various reasons, including:

• Lack of a fair reason for dismissal: Employers must have a valid reason for dismissing an employee, such as misconduct or redundancy.
• Improper procedure: Alongside a valid reason, the employer must also follow a fair procedure in dismissing the employee.
• Discrimination: Dismissal based on discrimination related to protected characteristics such as race, gender, disability, is considered unfair (this could also be a contravention of the anti-discrimination laws of the Equality Act 2010 but this is another matter).

Differences between Unfair Dismissal and Wrongful Dismissal:

What Types of Compensation Can You Receive in Unfair Dismissal Cases?

There are several types of compensation that an employee may be entitled to if they are found to have been unfairly dismissed:

Basic Award

• Purpose: Compensates the employee for the loss of job security.
• Calculation: Based on age, length of service, and weekly pay.

Compensatory Award

• Purpose: Compensates for actual financial loss, such as lost earnings.
• Calculation Factors:
  • Loss of earnings (past and future)
  • Loss of benefits (e.g., pension, healthcare)
  • Reasonable expenses incurred due to the dismissal (e.g., job search costs)
  • Accounts for any alternative income received (e.g. new job or Job Seekers’ Allowance)

Additional Awards

• When applicable: If the employer fails to comply with an order for reinstatement or re-engagement.
• Calculation: A percentage of the employee’s weekly pay, subject to limits.

What Factors Influence Compensation Amounts?

The amount of compensation awarded in an unfair dismissal case can vary significantly based on several factors:

• Length of Service: Longer service may result in a higher basic award.
• Employee’s Age: Older employees may receive higher awards due to greater difficulty in finding new employment.
• Current Job Market: A worse job market may result in higher compensation as the compensation amount may take into consideration the extra time it may take an employee to secure a job.
• Gross Weekly Wage: The basic and compensatory awards are calculated based on the employee’s weekly wage.
• Mitigation of Loss: Employees are expected to make reasonable efforts to find new employment, which must be evidenced to the tribunal too.
• Statutory Payments: Any statutory payments received, such as Jobseeker’s Allowance, may be deducted from the compensation.
• Alternative employment: If the employee obtained alternative employment, even if not identical, any income from that may be deducted from the compensation.

By understanding these factors, both employers and employees can better anticipate the potential outcome in an unfair dismissal case.

How is the Basic Award Calculated?

The Basic Award is a statutory payment calculated based on the employee’s age, length of service, and weekly pay. The formula used is similar to that of statutory redundancy:

• 0.5 weeks’ pay for each year of service under age 22
• 1 week’s pay for each year of service between ages 22 and 41
• 1.5 weeks’ pay for each year of service over age 41

Example Calculation:

An employee aged 45, with 10 years of service and a weekly pay of £500:

• 1.5 weeks’ pay for 4 years over age 41: 1.5 x 500 x 4 = £3,000
• 1 week’s pay for 6 years between ages 22 and 41: 1 x 500 x 6 = £3,000

Total Basic Award: £6,000

Note: The Basic Award is subject to a statutory cap, which changes annually. It is essential to check the current limit when calculating.

How is the Compensatory Award Calculated?

The Compensatory Award aims to compensate the employee for financial losses due to unfair dismissal. This award is capped at the lower of either a year’s salary or a statutory cap (which changes annually). The calculations for this award include:

• Loss of Earnings: The most significant component, covering wages lost from the dismissal date until the tribunal hearing and potential future losses.
• Loss of Benefits: Includes pensions, health insurance, and other employment benefits.
• Expenses Incurred: Reasonable costs such as job search expenses, additional travel costs, and training required for new employment.

Mitigation of Loss: Employees are under an obligation to take reasonable steps to mitigate their loss, such as seeking new employment. Failure to do so can reduce the compensatory award.

Special Cases:

• Discrimination-Related Dismissals: If the dismissal involves discrimination, additional compensation may be awarded, with no statutory cap.
• Dismissal During Pregnancy or Maternity Leave: Additional protections and potential compensation apply.

Example Table for Compensatory Award Calculation:

What are Common Challenges and Mistakes?

When calculating damages for unfair dismissal, several challenges and common mistakes can arise:

• Misunderstanding Statutory Caps: Failing to account for the legal limits on awards. This could be an issue for example with the Compensatory award when cases take longer than a year to resolve.
• Overestimating or Underestimating Compensation: Not accurately calculating potential compensation can lead to unrealistic expectations or undervaluing a claim.
• Failure to Mitigate Loss: Employees must actively seek new employment. Failing to do so can reduce the compensatory award.

Avoiding These Mistakes:

• Seek early legal advice to understand potential compensation accurately.
• Document all job search efforts and expenses to support your claim.
• Be aware of statutory caps and exceptions, such as those for discrimination cases.

How Can You Maximise Compensation?

To maximise compensation in an unfair dismissal case, consider the following tips:

• Document the Dismissal Process: Keep detailed records of the dismissal, including correspondence, reasons provided, and any procedural steps taken by the employer.
• Seek Early Legal Advice: Consulting with a solicitor can provide valuable insights and help build a strong case.
• Gather Evidence and Witnesses: Collect any evidence that supports your claim, including witness statements from colleagues or other relevant parties.
• Prepare for the Employment Tribunal Hearing: Understand the tribunal process, including presenting your case and responding to the employer’s arguments.

By following these steps, employees can strengthen their case and increase the likelihood of receiving fair compensation.

Conclusion

Calculating damages for unfair dismissal involves a thorough understanding of the different types of awards and the factors influencing them. By being aware of the compensation structure and potential pitfalls, employees can better navigate their claims.

For tailored advice and assistance, contact our Employment Team.

If you have any questions, call us on 020 7940 4060 or email us at mail@anthonygold.co.uk.