Employment law changes could mean huge payouts for under-performing private equity execs
Private equity often hires on a “perform, or else” basis, with senior executives are left exposed to deliver positive results (and fast). But changes to employment will make it harder – and more expensive – to sack anyone with more than six months’ service, writes Jade Gooding
The challenges facing the UK economy continue to have wide-ranging ramifications for the private equity sector. This is demonstrated by slower returns on investment and fewer lucrative deals than times gone by. Private equity backed businesses are under increased pressure to make disciplined business decisions, focus on immediate value creation and to prioritise business performance. The effects of these trends have ricochetted into the employment landscape.
To achieve these business goals, it is more important than ever to attract, engage and retain the best talent into senior executive positions. This is often secured through highly competitive remuneration and benefit offerings, and the glimmering hope of a dazzling equity package should an exit event be forthcoming. However, there should be no illusion that this goes hand-in-hand with a backdrop of heightened expectations – senior executives are left exposed to deliver positive results (and fast) or risk having their neck on the proverbial “chopping block”.
Generally speaking, this model of “perform or else”, has operated with relatively low risk under existing UK employment law for employees with less than two years’ service. This is because this group of employees are not currently protected from ordinary unfair dismissal. While there are exceptions, particularly in instances of potential discrimination and whistleblowing claims, the process for dismissing an underperforming senior executive with less than two years’ service is relatively straightforward and low cost. Even for those with more than two years’ service, the maximum financial exposure for an employer faced with an ordinary unfair dismissal claim is currently capped at the lower of 52-weeks’ gross pay or £118,223. As such, it is often significantly cheaper to settle senior executives out of a business than the “would-be” payouts they may otherwise be entitled to.
Employers beware
However, employers beware: UK employment law is experiencing a tectonic shift to the unfair dismissal regime. The Employment Rights Act 2025 implements two key changes that questions the continued viability of this exit model and paves the way for considerably higher costs for terminating underperforming senior executives.
The first significant change implemented by the Act, coming into effect next year, is the six-month eligibility for unfair dismissal rights. In reality, this change will immediately benefit any senior executive who commences employment from 1 July 2026 and has six months service as of 1 January 2027. It is yet to be seen how this will play out in practice and the government will likely publish guidance for employers in due course on navigating this change. However, it is anticipated that there will be a greater onus on employers to closely monitor performance of senior executives during probationary periods. There may also be a shift towards alternative engagement models, including initial fixed-term contracts of less than six months, that acts as a trial period before fully committing to permanent employment.
In a bid to enhance employee protection, the second and unexpected last-minute change implemented by the Act is the removal of the statutory claim cap for ordinary unfair dismissal. There are a number of employee groups who are likely to materially benefit from this change, most notably senior executives. It is anticipated that senior executives – who may have previously been disuaded from bringing legal action – will be more inclined to litigate in the event of termination. This could potentially open the floodgates to high value and uncapped claims for losses which may include equity, bonus, salary, pension and company benefits. Combined with hefty legal costs, and the time and resources required to defend legal claims this is risky business. To mitigate impact on profitability bottom line, businesses are encouraged to proactively review their engagement models, recruitment and capability processes, employment contracts and remuneration policies.
If there is one thing for certain moving into 2026 and beyond, the private equity sector may wish to take heed of a more cautious and considered approach before pulling the lever on executive exits.
Jade Gooding is an employment associate at law firm JMW in London