I remember the days when the compensation limits for unfair dismissal were nice round numbers. The compensatory award was set by Government as £8,000 (a while ago), £10,000 or £12,000. Then New Labour increased the limit to £50,000 and provided that from then on it should rise in line with inflation. Since then I’ve never been able to remember the limit off the top of my head. In fact I have just had to check that the current limit is £76,574. Back in 2013 a new complication was added with the result that the compensatory award was capped at the level of one year’s gross pay if that was lower than the specified maximum figure.

It’s now that time of year again and the Government has announced that the new maximum from 6 April will be £78, 335 (or one year’s pay if that is lower). The limit on a week’s pay – used in calculating statutory redundancy payments and the unfair dismissal ‘basic award’ – is also increasing from £464 to a princely £475.

Do we care? Those of us who advise employers sometimes succumb to the temptation to talk about the maximum figure as if it represents a typical or likely outcome. That may be good for business but the fact is that for the majority of unfair dismissal claimants the maximum award available is irrelevant. Overall we should pay less attention to the maximum amount that can be awarded for unfair dismissal and pay more attention to how much someone is actually likely to get. That is harder to judge, however, because there are just so many variables in play – only one of which is how much the claimant has lost.

The alternative reality of a Polkey deduction

There are several grounds on which the amount payable can be reduced. If the employee is guilty of misconduct then the Tribunal can make a deduction of up to 100% to reflect his or her contributory fault. Even if the claimant is blameless however, there is still the ‘Polkey deduction’ to consider. This is based on the seminal case of Polkey v AE Dayton Services Ltd which emphasised that unfair dismissal was not an ‘all or nothing’ claim. The compensatory award is based on the amount that is ‘just and equitable’ and the courts have taken the firm view that it is not just and equitable to compensate an employee for an unfair dismissal if the employee would still have been dismissed even if the employer had behaved reasonably. As a result Tribunals must assess the chances that an employee would have been dismissed in any event and apply that figure as a a reduction to the compensatory award.

Polkey deductions can be anything up to the whole value of an award and they make compensation for unfair dismissal very difficult to predict. The Tribunal essentially has to peer into an alternative universe where the employer has behaved reasonably and decide how much longer the employee would have remained employed. The Tribunal might decide that dismissal was inevitable and reduce compensation by 100%, or it might decide that there was a 25% chance of the employee being dismissed anyway and make that deduction. How the Tribunal arrives at the right figure is an art rather than a science – and the Tribunal is only expected to take a broad brush approach. On the same facts a Tribunal might make a Polkey deduction of 25%, 50% or 75% based on what it ‘feels’ would be a likely outcome. As long as it comes up with a plausible sounding explanation for its conclusion, there is really very little way to challenge the figure ultimately arrived at.

The modest reality of unfair dismissal claims

There are no statistics kept of the Polkey deductions made by Tribunals but there is little doubt that they are a major factor in keeping the level of awards in check. The latest figures for 2013-14 show a median unfair dismissal award of just £5,065 – but about a quarter of the awards (447 of them) were actually for less than £2,000. These are claims where the claimant won on the merits, but I’m sure that many would not have bothered to bring the claim at all if they had known how little they would be awarded in compensation. I know everyone says ‘its not about the money’ – but I rather think it should be.

We have to be careful not to place too much reliance on the official statistics. The awards that are recorded are atypical because most cases settle before they get to that stage. So it was very interesting to see some recent research that shed some light on the level of Acas conciliated settlements. The research was actually about whether employers pay up when a case has been settled (it seems that they do – which is nice) but as part of that the researchers recorded the level of settlements they were looking at. The median settlement for unfair dismissal cases (on an admittedly small sample) was just £4,360. We don’t know how those settlements were arrived at. Many will certainly be ‘nuisance’ settlements where the employer would probably have won the case anyway. Nevertheless the modest level of settlements recorded does show that concentrating on the maximum award gives a false impression of how the law of unfair dismissal works in practice.

Anyone who tells their clients about the increase in the maximum award without putting that news in the clear context of what awards are made in practice (you know who you are) is just misleading them. Unless the claimant in question was highly paid, in which case the maximum award may represent just a few months’  worth of loss, the cases in which the statutory maximum actually comes into play are likely to be few and far between.