Unfair dismissal damages do not include injury to feelings

The concept of unfair dismissal became part of UK law in 1971 and shortly afterwards the courts decided that compensation payable for unfair dismissal should be limited to financial losses only.

This was followed in 1996 by the Employment Rights Act, which states that compensation for unfair dismissal should be:

"such amount as the tribunal considers just and equitable in all the circumstances having regard to the loss sustained by the complainant in consequence of the dismissal in so far as that loss is attributable to action taken by the employer".

But in a 2001 case before the House of Lords, Lord Hoffman issued an opinion suggesting that compensation should be extended to cover the non-economic losses – such as distress caused by bullying – suffered by the dismissed employee.

The question of whether compensation is limited to financial losses alone was then considered later in 2001, when a Mr Dunnachie took Hull City Council to an employment tribunal for unfair dismissal.

Dunnachie had worked for the Council for 15 years, working his way up through the environmental health department until, when acting principal environmental health officer, he was forced to resign. The tribunal found that the resignation was the result of harassment and undermining by Dunnachie's former line manager, and that this was a clear case of workplace bullying. It followed that Mr Dunnachie had been constructively and unfairly dismissed.

The tribunal then awarded damages, which included £10,000 for the emotional distress suffered by Dunnachie.

The Council appealed to the Employment Appeals Tribunal (EAT), arguing that the remarks in the House of Lords case were not part of the main reasoning of that case and should therefore be disregarded. The law, said the Council, was that compensation in unfair dismissal cases should cover only financial loss and the sum of £10,000 should not be awarded. The EAT agreed, but gave permission to appeal.

In March, the Court of Appeal approved the award. In a majority decision it ruled that, while Lord Hoffman's comments were not binding on any other court, the restriction of compensation to financial loss only was "not good law".

But the ruling looked set to create uncertainty for employers, as they tried to work out how to quantify damages for injury to feelings or, as the Court of Appeal put it, "self-respect".

Hull City Council appealed and, in a decision that will leave employers heaving a huge sigh of relief, the House of Lords ruled that compensation for unfair dismissal should cover only financial loss.

Giving the opinion of the five-judge panel, Lord Steyn dismissed Lord Hoffman's controversial comments in the earlier 2001 case as being extra remarks that had not been pertinent to that decision. As a result, they were irrelevant to the Dunnachie case.

In Lord Steyn's opinion the legislation did not allow for compensation to be paid for non-economic loss.

Robyn McIlroy, an employment law specialist with Masons, the law firm behind OUT-LAW.COM, said:

"This decision is to be welcomed as it restores some certainty to the issue of qualification of losses in unfair dismissal cases. In essence, parties to an employment dispute are more likely to take a realistic view as to the prospect of settlement of the claim where the maximum amount of compensation that the Tribunal can award to an Applicant with reference to economic loss is quantifiable."

McIlroy warned, however, that the decision only relates to the qualification of losses in unfair dismissal cases. "Employees will still be entitled to compensation for injury to feelings in discrimination cases," she explained.