Dismissed for Capability: When Is It Unfair?

Capability dismissal is one of the most misunderstood areas of unfair dismissal law. Many employees assume that if their employer has evidence of poor performance or repeated absences, the dismissal must be fair. That is not how employment law works.

Having a legitimate capability concern gives your employer a potentially fair reason to dismiss you. But potential fairness is only the first hurdle. Tribunals then look at whether your employer acted reasonably, followed the right procedure, and gave you a genuine opportunity to improve or recover. Many capability dismissals fail that second test entirely.

This guide sets out exactly what capability dismissal means, what your employer must do to make it fair, and what your options are if they got it wrong.

What Is Capability Dismissal?

Under section 98(2)(a) of the Employment Rights Act 1996 (ERA 1996), a dismissal is potentially fair if the reason relates to the capability or qualifications of the employee for performing work of the kind they were employed to do.

Section 98(3)(a) defines capability broadly: it means the employee’s capability “assessed by reference to skill, aptitude, health or any other physical or mental quality.” In practice, capability dismissals fall into two main categories, each with its own procedural requirements.

Performance and incompetence

This is where your employer says you are not performing your job to the required standard. Examples include: repeatedly missing targets or deadlines, an inability to adapt to new systems or technology, persistent errors, or an inability to work effectively with colleagues or clients.

The critical distinction here is between capability and conduct. If you cannot do the job, it is a capability issue. If you will not do the job, it is misconduct. The Court of Appeal drew this line clearly in Abernethy v Mott Hay & Anderson [1974] ICR 323. Getting this distinction wrong, and disciplining someone for capability issues under a conduct procedure, is itself a procedural error that can undermine the fairness of a dismissal.

Ill health and sickness absence

This applies where illness or injury prevents you from doing your job. It covers two distinct situations:

Long-term absence: A single extended period of sickness. Your employer must obtain proper medical evidence, consult with you, and consider whether adjustments would allow you to return, before reaching any decision to dismiss.

Intermittent or recurring absence: A pattern of short but frequent sickness absences. In International Sports Co Ltd v Thomson [1980] IRLR 340, the EAT confirmed that an employer does not need to show that an employee will never recover where the cumulative effect of absences makes it unreasonable to continue the employment. However, the employer still needs to consult with the employee and consider the position properly.

Qualifications

A dismissal can also fall under capability where an employee loses or fails to obtain a professional qualification that is essential to their role. This is relatively rare and often overlaps with the statutory illegality ground under section 98(2)(d) ERA 1996 (where continuing to employ the person would breach a legal requirement). An example would be a driver losing their licence or a solicitor losing their practising certificate.

The Legal Test: What Must Your Employer Show?

Section 98 ERA 1996 sets out a structured two-stage test that every tribunal applies when a dismissal is challenged.

Stage one: establishing a potentially fair reason. The employer must show that the real reason for dismissal was capability. If the employer cannot demonstrate this, or if the tribunal concludes the stated reason was a pretext for something else (such as discrimination or a desire to remove a troublesome employee), the dismissal will be unfair at this first stage.

Stage two: the reasonableness test. Even where the employer establishes a genuine capability reason, section 98(4) requires the tribunal to consider whether the employer acted reasonably in treating it as sufficient reason to dismiss, having regard to all the circumstances, including the size and administrative resources of the employer.

This is assessed by reference to the “band of reasonable responses” established in British Leyland (UK) Ltd v Swift [1981] IRLR 91. The question is not whether the tribunal would have dismissed in the same circumstances, but whether the dismissal fell within the range of reasonable responses open to a reasonable employer. That said, this test has limits: a dismissal that bypasses all procedural safeguards will fall outside any reasonable band.

Tribunals must also take into account the Acas Code of Practice on Disciplinary and Grievance Procedures when deciding whether an employer acted reasonably. Unreasonable failure by the employer to follow the Code can result in a compensation uplift of up to 25%.

The Procedure Your Employer Must Follow

Capability and conduct share the same Acas Code framework, but capability cases require different practical steps depending on whether the issue is performance or ill health.

For performance capability

Dismissal for poor performance must be a last resort. Your employer is expected to follow these steps before reaching a decision to dismiss:

Identify the shortfall clearly. Your employer must set out, in writing, what the required standard is and how your performance falls short. Vague or shifting goalposts will undermine any subsequent dismissal.

Provide adequate support. The Acas guidance is explicit: an employer must provide “adequate resources” for you to do your job. That means appropriate training, mentoring, coaching, or adjustment to your workload or tools. A failure to offer any support is a significant procedural gap.

Set a Performance Improvement Plan (PIP). Targets must be specific, measurable, and achievable within a reasonable timeframe. The improvement period must be genuinely reasonable given the nature of the role and the shortfall involved. A three-week improvement plan for a complex senior role is unlikely to withstand scrutiny.

Hold formal capability meetings. If performance does not improve, a formal meeting should be held. You have the right to be accompanied by a trade union representative or fellow worker at any formal capability meeting under section 10 of the Employment Relations Act 1999.

Issue written warnings. A written warning, then a final written warning if performance does not improve. Each warning must set out what improvement is required, in what timeframe, and the potential consequences of continued underperformance.

Consider alternatives before dismissing. Before proceeding to dismissal, your employer must genuinely consider whether there is a suitable alternative role, a demotion, or some other arrangement that would address the problem without ending your employment.

Offer a right of appeal. After any dismissal, you must be given the right to appeal the decision. Failing to do so is a breach of the Acas Code and can result in a compensation uplift.

For ill health capability

Ill health cases require a different approach, and tribunals scrutinise them closely. The key principles established in East Lindsey DC v Daubney [1977] ICR 566 remain good law today: before dismissing for ill health, an employer must consult properly with the employee and obtain medical evidence.

Keep in regular contact. An employer who simply waits out a long-term absence and then dismisses without any contact is unlikely to survive scrutiny. Regular, sensitive communication during absence is expected.

Obtain medical evidence. This usually means an occupational health referral or, with your consent, a report from your GP or treating specialist. In Post Office v Mughal [1977] ICR 763, the EAT held that dismissing for ill health without obtaining a medical opinion is likely to make the dismissal unfair. Your employer cannot simply rely on their own assessment of your condition.

Consult the employee. You must be given the medical evidence and the opportunity to respond. The consultation must be genuine, not a formality. If you disagree with the medical assessment, you should be given the opportunity to obtain a second opinion.

Consider the prognosis. The key questions, drawn from Spencer v Paragon Wallpapers Ltd [1977] ICR 301, are: how long has the absence lasted; how long is it likely to continue; can the employer reasonably be expected to wait longer; is the position capable of being kept open; and is there a suitable alternative role?

Allow a reasonable period. There is no fixed rule on how long an employer must wait. It depends on the nature of the role, the size of the employer, and the prognosis. A small employer with a critical role to fill is in a different position from a large employer with a temporary replacement in place.

Consider reasonable adjustments. If the illness may amount to a disability under the Equality Act 2010, the obligation to make reasonable adjustments applies. See below for more on this.

“Capability cases fail more often than people expect, and usually it comes down to procedure. The employer had a genuine concern about performance or absence, but they rushed to dismissal without proper warnings, without a real improvement plan, or without considering whether adjustments would have made a difference. Tribunals do not expect perfection, but they do expect employers to have taken the process seriously. When they clearly haven’t, unfair dismissal findings follow.”

Tom Street Principal Solicitor, Tom Street & Co.

When Is a Capability Dismissal Unfair?

A capability dismissal can be unfair on procedural grounds, substantive grounds, or both.

Procedural unfairness is the most common finding. It occurs where the employer had a genuine capability concern but failed to follow the correct process. Common examples include: dismissing without any prior warnings; setting an unreasonably short or unachievable improvement plan; failing to provide training or support before dismissing; not allowing the employee to be accompanied at formal meetings; failing to consider alternatives to dismissal; or not offering a right of appeal.

Where a procedural failure is identified, the tribunal will apply the principle from Polkey v AE Dayton Services Ltd [1987] UKHL 8, considering whether the employee would still have been dismissed had a fair procedure been followed. If dismissal was inevitable regardless of process, compensation may be reduced to reflect this. However, if a fair process might have led to a different outcome, the full loss can be awarded.

Substantive unfairness arises where the employer’s decision to dismiss, even after proper procedure, falls outside the band of reasonable responses. Examples include: dismissing after a single capability meeting when the employee’s performance had only recently dipped; dismissing for ill health after only a short absence with a good prognosis; setting performance targets that were unreasonable or unachievable; or using performance management as a vehicle to remove an employee for other unstated reasons.

Disguised dismissals are common and worth highlighting. If your employer was genuinely trying to make you redundant, or if the capability process was triggered shortly after you raised a grievance, requested flexible working, or took protected family leave, that timing may indicate that capability was not the real reason. A tribunal will look beyond the stated reason if there is evidence of an ulterior motive.

Capability Dismissal and Disability

This is where capability dismissal and discrimination law overlap, and it is an area many employees do not fully understand.

If your illness or health condition amounts to a disability under the Equality Act 2010, which covers any physical or mental impairment that has a substantial and long-term adverse effect on your ability to carry out normal day-to-day activities, your employer has additional obligations before dismissing you.

Under section 20 of the Equality Act 2010, employers must make reasonable adjustments where a provision, criterion or practice puts a disabled person at a substantial disadvantage compared to non-disabled employees. In a capability context, this might mean adjusting absence trigger points, modifying duties, providing specialist equipment, allowing phased returns, or offering flexible working arrangements.

A dismissal that would otherwise be a fair capability dismissal can still constitute disability discrimination if the employer failed to make reasonable adjustments, or if the dismissal was for a reason arising in consequence of the disability and the employer cannot justify it.

The practical significance is real: an unfair dismissal claim is capped at £123,543 (from 6 April 2026). A disability discrimination claim is uncapped. If your health condition amounts to a disability and your employer failed to make reasonable adjustments, you may have two separate claims of very different values. Getting advice early, before the three-month time limit expires, is essential.

What Compensation Can You Get?

If your capability dismissal is found to be unfair, you can be awarded two types of compensation.

The basic award is calculated using the same formula as a statutory redundancy payment: your weekly pay (capped at £751 from 6 April 2026) multiplied by the number of years’ service, with a multiplier based on your age. The maximum basic award is £22,530.

The compensatory award covers your actual financial loss: lost earnings, pension contributions, and the value of any benefits. It is capped at the lower of one year’s gross pay or £123,543 (from 6 April 2026). The tribunal will also consider whether you acted to mitigate your loss by looking for alternative work. This cap is expected to be abolished from 1 January 2027 under the Employment Rights Act 2025, alongside the qualifying period reduction, meaning future claimants will be able to recover their full financial loss with no ceiling.

Both awards can be adjusted. If your employer unreasonably failed to follow the Acas Code, the tribunal can increase your compensation by up to 25%. If you unreasonably failed to follow the Code yourself, your compensation can be reduced by up to 25%. The tribunal will also apply any Polkey reduction if it finds that a fair procedure might still have led to dismissal.

Where a disability discrimination claim succeeds alongside an unfair dismissal claim, the discrimination award can include injury to feelings, which is not available in ordinary unfair dismissal claims, as well as uncapped compensation for financial loss.

How Long Do You Have to Make a Claim?

You must start the Acas Early Conciliation (EC) process before submitting any employment tribunal claim. EC is free, confidential, and handled by Acas (the Advisory, Conciliation and Arbitration Service). It allows the parties to try to resolve the dispute without going to tribunal. Early Conciliation can last up to 12 weeks.

The time limit for unfair dismissal claims is three months less one day from your effective date of termination (the date your employment ended). The EC process pauses this clock, but the original deadline still applies once EC concludes. Most people have significantly less than three months between dismissal and the end of EC, so time pressure is real.

Under the Employment Rights Act 2025, these time limits will extend to six months, no earlier than October 2026, once the relevant commencement regulations are made. Until then, the three-month limit applies.

There is no qualifying period requirement for disability discrimination claims. But for ordinary unfair dismissal, you currently need two years’ continuous employment. That threshold reduces to six months from 1 January 2027.

What Should You Do If You’ve Been Dismissed for Capability?

“The question I get asked most often is: ‘but my employer did put me on a PIP, so doesn’t that mean the process was fair?’ Not necessarily. A PIP that was designed to fail, an improvement period that was unreasonably short, or targets that were moved without warning, can all indicate that the employer had already decided to dismiss before the process had properly run its course. We look very carefully at the substance of the procedure, not just whether it formally took place.”

Tom Street Principal Solicitor, Tom Street & Co.