What’s the difference between unfair and wrongful dismissal?

Although these terms are often used interchangeably, there are clear distinctions that HR needs to know about

Dismissing an employee is never an easy task, but unfortunately it is sometimes a necessary one. The dismissal process can be complex and fraught with difficulty; if not handled with care and diligence, employers could leave themselves open to potential claims for unfair or wrongful dismissal.

These terms are often used interchangeably, but there are key differences between them; the main one being that unfair dismissal is a statutory right under the Employment Rights Act 1996, while wrongful dismissal is a contractual right.

Unfair dismissal

For an employee to prove they have been unfairly dismissed, they need to have two years’ continuous service with the employer to bring a claim and must establish that a ‘two limb’ test has not been satisfied.

The first limb relates to the five fair reasons for dismissal listed under the Employment Rights Act, which are: capability, conduct, redundancy, statutory illegality and ‘some other substantial reason’ – a catch-all criterion. If an employee has not been dismissed for one of these reasons, their dismissal will be deemed unfair on the grounds of reasoning.  

The second limb relates to the employer’s conduct and whether the employee’s dismissal was fair and reasonable in the circumstances, taking into consideration the size and resources of the employer. Was a fair procedure followed in respect of the employee’s dismissal (the Acas Code of Practice for dismissals on the grounds of conduct and capability), and did the decision to dismiss fall within a band of reasonable responses available to the employer?

If either of these limbs is failed, the dismissal is deemed unfair. Even if a potentially fair reason is established (first limb), a dismissal will still be unfair if it fails the second limb. However, if the dismissal would have happened anyway – because there was fair reason – the amount of compensation may be reduced accordingly.

The financial remedy for unfair dismissal is made up of a basic award, calculated by reference to age, length of service and salary (subject to a cap), and a compensatory award, which is subject to a maximum of one year of an employee's gross pay or £80,541 (whichever is lowest). This includes compensation for the loss of statutory rights, which is a set sum of around £300 to acknowledge the fact that the employee will have to start accruing length-of-service-related benefits again. Other potential remedies include reinstatement or re-engagement.

Wrongful dismissal

Wrongful dismissal is different to unfair dismissal in that it focuses on a contractual breach. There is no specific legislation; rather it is a branch of contract law, which comes from common law.

The most common example of a wrongful dismissal is failure to give an employee the correct length of contractual or statutory notice.

Unlike unfair dismissal, there is no requirement for an employee to have a set period of continuous service to pursue a claim; it is effectively a ‘day one right’.

Wrongful dismissal claims must be brought at employment tribunal within three months less a day from the date of the employee’s termination.

However, the employee will also have the option of pursuing their claim in the civil court, in which an extended six-year limitation period applies. An employee who is out of time to pursue a claim in the employment tribunal could still pursue a civil action.

In recent years, it may have been cheaper for the employee to pursue civil action. However, with the recent announcement that employment tribunal fees will be scrapped, the tribunal might again become the preferred forum.

The employment tribunal is only able to award up to £25,000 for a wrongful dismissal claim. Therefore, if the value of the employee’s claim is worth more, they would need to pursue their claim in the civil courts.

On the whole, any damages award is unlikely to be a substantive sum unless the employee is a high earner with a long notice period.

Tandem claims

From a practical perspective, an employee is likely to pursue an unfair dismissal and wrongful dismissal claim in tandem. However, this will have implications on the value of any awards as an employee wouldn’t be entitled to double recovery for the same loss.

Claire Knowles is a partner at Acuity Legal and an employment law expert