Key Takeaways
- • Macfarlanes advises that the UK cap on unfair dismissal compensation, currently about £120,000, will be abolished entirely on 1 January 2027, materially raising exposure for senior exits in private credit portfolio companies.
- • The qualifying period for unfair dismissal claims falls from two years of continuous employment to six months from the same date, widening the pool of eligible claimants.
- • Capability-based dismissals of C-suite executives can take 4-6 months under the current process, and the firm says no strict legal requirement mandates a full series of warnings for senior staff.
- • Employers are advised to act before 2027 by documenting performance feedback, revising disciplinary policies, and linking good-leaver treatment to signed settlement agreements.
- • Statutory uplift for procedural errors can increase compensation by up to 25%, a factor the firm expects senior executives to use in negotiations.
Summary
According to Macfarlanes, private credit lenders that take control of a troubled borrower from a sponsor often find that the existing management team is not suited to lead the required changes, making senior exits a common consideration. The firm notes that significant changes to UK employment law are scheduled for 2027, making the next six months a practical window for planning.
Under current rules, employees with two or more years of continuous service can bring unfair dismissal claims, and compensation is capped at approximately £120,000. The cap allows employers to make a commercial decision to settle on a relatively low-value basis, often shortening or avoiding a full fair process. From 1 January 2027, the cap will be abolished and the qualifying period will fall to six months. Macfarlanes expects that for senior, highly paid individuals, the value of claims will rise sharply and agreed exits will become considerably more expensive.
On performance management, the firm states that case law has not set a firm standard for how much process is fair for senior staff. While there is no strict requirement for a full sequence of warnings, senior employees must understand how their performance falls short, be aware their role is at risk, and have an opportunity to respond. Macfarlanes stresses that cogent evidence through appraisals and documented feedback will be crucial.
The firm warns that compensation is designed to cover losses over the period a tribunal estimates the employee would have stayed, which can include discretionary bonuses, unvested equity, salary and pension contributions. Without the cap, Macfarlanes expects senior executives to argue they would be out of work for a long period, to include cash and equity granted after the change of control, and to exploit the up-to-25% uplift for procedural errors. Employers' defences will likely rest on showing the business was not tracking projections underpinning incentive arrangements and that departure was inevitable.
Macfarlanes recommends reviewing staffing changes before 2027 while managing whistleblowing and discrimination risk, maintaining a paper trail, conducting detailed appraisals, revising policies to permit shorter processes, and tying leaver treatment to settlement agreements. The firm also notes that changes to large-scale redundancy rules, fire-and-rehire practices and trade union processes are coming in 2027.
Under current rules, employees with two or more years of continuous service can bring unfair dismissal claims, and compensation is capped at approximately £120,000. The cap allows employers to make a commercial decision to settle on a relatively low-value basis, often shortening or avoiding a full fair process. From 1 January 2027, the cap will be abolished and the qualifying period will fall to six months. Macfarlanes expects that for senior, highly paid individuals, the value of claims will rise sharply and agreed exits will become considerably more expensive.
On performance management, the firm states that case law has not set a firm standard for how much process is fair for senior staff. While there is no strict requirement for a full sequence of warnings, senior employees must understand how their performance falls short, be aware their role is at risk, and have an opportunity to respond. Macfarlanes stresses that cogent evidence through appraisals and documented feedback will be crucial.
The firm warns that compensation is designed to cover losses over the period a tribunal estimates the employee would have stayed, which can include discretionary bonuses, unvested equity, salary and pension contributions. Without the cap, Macfarlanes expects senior executives to argue they would be out of work for a long period, to include cash and equity granted after the change of control, and to exploit the up-to-25% uplift for procedural errors. Employers' defences will likely rest on showing the business was not tracking projections underpinning incentive arrangements and that departure was inevitable.
Macfarlanes recommends reviewing staffing changes before 2027 while managing whistleblowing and discrimination risk, maintaining a paper trail, conducting detailed appraisals, revising policies to permit shorter processes, and tying leaver treatment to settlement agreements. The firm also notes that changes to large-scale redundancy rules, fire-and-rehire practices and trade union processes are coming in 2027.
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