The autumn of capped liability: why your indemnity clauses won’t survive the winter

In our first article of this series, we looked at the new obligations arriving in October 2026: the re-introduction of third-party harassment duties, the doubling of the tribunal limitation period and the contractual updates needed to keep your supply chain compliant.

But a further set of changes follows, and this one extends to the commercial essentials of how risk is allocated in service contracts.

From January 2027, two further changes under the Employment Rights Act 2025 will fundamentally alter the risk landscape for commercial contracts that carry workforce obligations. First, the qualifying period for ordinary unfair dismissal claims drops from two years to six months and, second, the statutory cap on compensatory awards, currently the lower of one year’s gross pay or £123,543, is abolished entirely.

For those of us advising on outsourcing, managed-service, staffing and facilities-management agreements, the consequences reach well beyond the employment relationship and into the heart of the liability framework sitting behind every deal.

The cap that anchored your risk model is gone

From a commercial drafting perspective, parties to service contracts have, for decades, negotiated aggregate liability caps with one eye on the statutory ceiling for unfair dismissal compensation. That ceiling gave both sides a roughly predictable worst-case scenario for any single employment claim, and liability caps were set accordingly.

From January 2027, tribunals will assess compensation based solely on the claimant’s actual financial loss, including future earnings, bonuses, equity and pension, with no upper limit.

To put that in perspective, the average unfair dismissal award is currently around £14,000 and rarely tests the cap. But for higher earners, the picture changes dramatically: a senior manager on £250,000 plus incentives who suffers career-long loss could generate a claim running to multiples of the old statutory maximum. The assumptions underpinning your aggregate cap no longer hold, and we are already seeing this reshape negotiations on deals coming across our desks.

TUPE indemnities are underpriced

TUPE transfers are a standard feature of outsourcing and service-provision changes. When a contract is awarded, renewed or re-tendered, employees may transfer to the incoming provider and bring their continuous service and claims exposure with them.

Most TUPE indemnities have been calibrated against a two-year qualifying period, on the basis that the transferring employer’s practical risk window was limited to longer-serving employees bringing claims subject to a known ceiling.

With the qualifying period shrinking to six months, the pool of transferring employees who can bring unfair dismissal claims expands significantly. Anyone hired from July 2026 onwards will have accrued six months’ service by 1 January 2027 and will immediately have unfair dismissal protection. Crucially, each of those claims is now uncapped, meaning a single re-tendering exercise involving a modest number of transferring staff could generate aggregate exposure well beyond what the existing indemnity contemplates.

Cross-indemnities need repricing

Many service agreements treat employment claims as a single, broadly predictable cost line, balanced through mutual cross-indemnities. That approach worked when the statutory cap provided a natural ceiling. In an uncapped environment, the financial exposure on each side of the indemnity is harder to model and potentially far larger, particularly in sectors with high headcounts and frequent staff turnover.

Facilities management, catering, cleaning and security contracts, where TUPE transfers happen regularly as contracts change hands, are especially exposed. It’s also worth noting that incoming service providers negotiating these contracts will demand stronger indemnity protection. Where the outgoing provider has no commercial incentive to offer it because they are losing the contract, the customer may find itself bearing that exposure directly, whether through an indemnity obligation or higher contract pricing.

What should you do now?

Our commercial team is advising clients entering into or renewing service contracts to review their liability and indemnity frameworks well before January 2027. That means stress-testing aggregate caps against uncapped claim scenarios, revisiting TUPE indemnity wording to reflect both the shorter qualifying period and uncapped compensation and reconsidering whether blanket cross-indemnities for employment liabilities remain commercially appropriate.

Employment practices liability insurance should also be reviewed. Existing policy limits may have been set when the statutory cap provided a natural backstop, and that backstop is about to disappear.

The statutory cap has been part of the furniture for so long that many contracts simply assume it. That assumption is about to expire, and contracts that don’t adapt will be carrying risk they have not priced for.