Compensatory award is the name given to the award which an employment tribunal must make to a successful claimant in an unfair dismissal case to compensate him for financial loss suffered as a result of his dismissal "in so far as that loss is attributable to action taken by the employer" (ERA 1996 s.123 and see notes on act or action). The tribunal will also make a basic award but this is calculated according to a fixed statutory formula according to age and length of service of the claimant and does not vary in relation to loss actually suffered.

Compensatory award is made only in cases in which tribunals decide (as they often do) that reinstatement and reengagement orders would be inappropriate (see ERA 1996 s.112(4) and (ERA 1996 s.118(1)).

Compensatory award is compensation for financial loss only. This had always been thought to mean financial loss (see Norton Tool Co Ltd v Tewson NIRC 1972 ICR 501 and [1973] ICR 45) but there was much debate in 2003 and 2004 over whether compensation could also be awarded in unfair dismissal cases for non-economic loss such as injury to feelings. The question was finally resolved in July 2004 when the House of Lords conclusively ruled that when assessing compensatory award the loss suffered by an employee for which compensation can be awarded by an employment tribunal is indeed financial loss only. In particular the House of Lords confirmed that there is no power in unfair dismissal cases for a tribunal to award compensation for non-economic "loss" such as injury to feelings, just as there is no power for a tribunal to award aggravated or exemplary compensation by way of penalisation of the conduct of the employer (see Dunnachie v Kingston upon Hull City Council HL 2004 UKHL 36, House of Lords on 15th July 2004).).

Tribunals have wide discretion over the amount of compensatory award, subject to a maximum limit or cap set under ERA 1996 s.124(1). Subject to that limit, it must be such amount as the Tribunal considers to be just and equitable compensation for loss sustained by the complainant in consequence of his unfair dismissal "in so far as that loss is attributable to action taken by the employer" (ERA 1996 s.123(1)).

An employer's failure to follow proper disciplinary and dismissal procedures as set out in the ACAS Code of Practice on dismissing an employee can lead to an increase of up to 25% in the amount of compensatory award which would otherwise be payable (see notes at Disciplinary and Grievance Procedures - 2009 changes/ACAS Code of Practice ).

Compensatory award maximum limit or "cap" can be changed by order (ERA 1996 s.124(2)). The cap was massively increased in October 1999 from £12,000 to £50,000 (Employment Relations Act 1999 s.34(4)). Since then the maximum limit on compensatory award has been increased, or reduced, annually in line with inflation (see Indexation of awards ). The cap is increased to £68,400 (previously £65,300) where the appropriate date is on or after 1st February 2011 (see the Employment Rights (Increase of Limits) Order 2010, SI 2010/2926 and notes at Maximum and minimum tribunal awards/statutory limits ).

The compensatory award limit applies, of course, only to awards in unfair dismissal cases - there is no statutory limit to damages which can be awarded in wrongful dismissal cases by a court (but see Employment tribunals/jurisdiction of/extension to breach of contract cases for notes on the limited powers of employment tribunals in wrongful dismissal cases). Also, statutory limits on maximum compensatory award have been removed altogether in certain unfair dismissal cases (eg Whistleblowing cases). Given the statutory cap noted above, it can sometimes be advantageous for an employee deliberately to refrain from claiming compensatory award on unfair dismissal so that he can instead make a wrongful dismissal claim for loss of earnings in the Courts where there is no statutory limit on the amount which can be awarded - although this can be risky and should only be considered after taking expert legal advice (see notes at Wrongful dismissal/overlap with unfair dismissal awards ).

In practice, assessment of compensatory award on unfair dismissal will generally follow the same common law principles used in assessing damages in wrongful dismissal cases, subject of course to the statutory cap (see notes at Wrongful dismissal/damages for and/or at Wrongful dismissal/unfair dismissal and wrongful dismissal compared ). Factors which are likely to lead to a reduction in compensatory award include any contributory conduct by the employee, any likelihood that the employee would have been dismissed anyway, whether immediately or in the near future, and any failure by the employee to mitigate his loss by looking for other work.

For notes on set-off of amounts already paid to the employee see Unfair dismissal/compensation calculation/set off of payments made by employer and see also notes at Unfair dismissal/compensation calculation/set offs where statutory maximum exceeded ).