Employment case update: "up or out" management, unfair dismissal and calculating compensation

The Employment Appeal Tribunal recently considered the fairness of the notorious “up or out” approach to performance management used by some leading consulting and law firms.  It also looked at how compensation should be calculated in cases where an employer asserts that the employee would have been dismissed in any event.   Although the “up and out” model is largely used in professional services, the case offers some salutary lessons for all employers, particularly in light of changes to unfair dismissal law under the Employment Rights Act 2025. 

What happened?

The claimant was an analyst with Accenture.  Accenture expects employees to show that they are continually developing their abilities for the next promotion.  Employees who do not demonstrate continuous improvement and readiness for promotion within a set timescale are considered to be underperforming, even if they are performing to expectations in their current role.  The claimant was rated “not progressing” but then had a period of absence due to surgery to remove ovarian cysts and further surgery for endometriosis.  6 months after her return to work, she was again rated “not progressing” and was dismissed a month later.  She brought claims for disability discrimination and unfair dismissal. 

The Employment Tribunal (ET) upheld her claim for unfair dismissal on the basis of procedural breaches, but reduced her compensatory award by 100% as it considered that she would have been dismissed in any event (called a Polkey deduction). 

However, the Employment Appeal Tribunal (EAT) allowed the Claimant's appeal and ordered that the case be reconsidered by a new ET.  The ET had assumed that Accenture would have followed a fair process and that its “progression-based model” was itself fair. The EAT cast some doubt on whether either was true.  In particular, it noted that a fair dismissal for capability (i.e. performance) requires the employer to show that the dismissal related to the employee's ability to perform the work they were employed to do.  On the face of it, this is incompatible with an"up or out" policy. 

Alternatively, the potentially fair reason for dismissal could be “some other substantial reason”, but Accenture would still need to show that this justified dismissal - something which the ET should not take as read. 

The ET also failed properly to consider whether the Claimant's endometriosis amounted to a disability under the Equality Act. 

Key takeaways for employers 

Employers that have dismissed an employee using an unfair process might think they can sidestep a substantial compensation award by arguing for a Polkey deduction.  While this is often an effective strategy, this case demonstrates that ETs will not take an employer's assertions at face value and will assess whether the underlying reason for dismissal would have been fair. Employers that opt for a culture of aggressive performance management can expect to be scrutinised carefully when making this argument. It's important, therefore, that even if the process is truncated, the underlying conduct, performance or other issues are given enough ventilation to support favourable findings in the ET as to what the outcome of a fir procedure would have been. 

The importance of establishing a fair reason for dismissal will be magnified further when changes to unfair dismissal law come into force next January:  the shortening of the qualifying period from 2 years to 6 months, and the removal of the cap on compensation.    When dealing with highly paid employees or senior executives, employers which choose not to go through a full process will be taking on a much greater financial risk;  increases to compensation of up to 25% for failure to follow the ACAS Code (where it applies) could end up being eye-watering sums.   We anticipate that Polkey deduction arguments will come to the fore as a means of seeking to reduce compensation or achieve a commercially acceptable settlement.  This case emphasises that employers should be wary of relying too heavily on such arguments if they haven't laid the foundations.  

Senior hires are often judged according to their leadership potential, as well as their current performance.  While this approach may make commercial sense, as a means of creating opportunities for fresh talent and succession planning, this case highlights that, from a legal perspective, this approach has its risks.   Employers should consider setting out in the contract the expectation that the employee will "demonstrate the ability for promotion". 

There are also potentially wider discrimination issues - some employees will be perfectly happy in a more junior role (perhaps because it fits with their family commitments, or is more compatible with health conditions or neurodiversity than a leadership role).   “Up or out” policies risk being indirectly discriminatory on the basis of sex, disability and age, and employers need to consider carefully whether they can objectively justify this approach.