Loss of Equity Value: A New Front in Unfair Dismissal Claims

As a result of the changes being implemented from 1 January 2027 arising from the Employment Rights Act, we expect a rise in employees including “loss of equity value” as a head of loss when bringing claims against their employers. This article sets out why, what it means in practice, and some of the responses we are already seeing employers consider.

What Changes From 1 January 2027

The Employment Rights Act introduces two changes to the unfair dismissal regime that will make loss of equity value relevant to a much larger pool of claimants:

1. A shorter qualifying period. The two-year service requirement before an employee acquires unfair dismissal rights will be reduced to six months, substantially increasing the number of employees who can bring a claim at all.
2. Removal of the compensation cap. Without a cap limiting the overall award, claimants will have both the room and the incentive to include loss of equity value alongside their other claims.

Together, these changes mean a meaningfully larger number of unfair dismissal claims are likely to include a claim for lost equity value.

Not a New Legal Concept

The ability for employees to claim for their losses, including in some cases the loss of equity value, is not new law. What has kept it rare, historically, is twofold:

• In breach of contract claims (such as wrongful dismissal), loss of equity value is usually excluded by the employment terms and the related equity documentation.
• In unfair dismissal, in which such a contractual exclusion would not be effective, claims have been subject to a statutory cap on compensation. That cap is typically reached through other, more straightforward heads of loss, so there has been little need, or incentive, to pursue a loss of equity value claim as well.

Why This Creates Uncertainty

Because claims of this kind have historically been rare, there is insufficient case law or tribunal guidance to create a standard approach. For example, it is unclear how unvested equity should be treated or how the value of the loss should be quantified. Employers, advisers, and tribunals alike will be working through these questions with limited precedent to draw on, at least initially.

How We Expect the Market to Respond

We anticipate this uncertainty will drive several changes in practice:

• Increased claimants. With a wider pool of potential claimants and no compensation cap to limit the upside, claimants are more likely to argue they have been unfairly dismissed and include loss of equity value as part of that claim.
• Greater focus on process. Employers will place more emphasis on following a fair and well-documented dismissal process to reduce the risk of a successful claim arising in the first place.
• A shift toward consultancy arrangements. Some employers may look to avoid the employment relationship altogether when possible, engaging individuals on a consultancy basis instead.
• Higher settlement values. As the potential scope of claims widens, we expect settlement discussions to reflect that.
• Detriment to exits and fundraising. Investors and acquirers are likely to pay closer attention to any existing or threatened employee claims as part of their due diligence processes, and the resulting uncertainty is likely to be detrimental to companies looking to exit or raise money, as unresolved or threatened claims become a harder risk to price and manage.
• A fresh look at equity structuring, including the use of ESS. Under the employee shareholder status (ESS) regime, which was introduced in 2013 but rarely used since the regime’s tax benefits were removed in 2016, a company can issue employees shares worth a minimum of £2,000, for example, in connection with a funding round or as part of a wider equity incentive arrangement, in exchange for the employee waiving their right not to be unfairly dismissed. This is still an early-stage concept, and one that we are actively exploring.

In Summary

The underlying legal principle is not new, but the practical landscape is changing quickly. We encourage clients to start thinking now about how their dismissal processes, equity documentation, and (when relevant) diligence practices may need to adapt ahead of 1 January 2027. 

We are happy to discuss how these changes might affect your specific arrangements.