Employment Rights Bill: Labour moves to scrap compensation cap for unfair dismissal
Businesses could face unlimited compensation for unfair dismissal claims as Labour seeks to appease unions after it abandoned ‘day one’ rights last week.
After weeks of Employment Rights Bill ping-ponging over the controversial ‘day one’ rights, the government agreed last week to drop its pledge of ‘day one’ rights in exchange for rights over six months, an amendment proposed by the Lords.
Other ‘day-one’ rights, such as parental leave and sick pay, are set to go ahead. But currently, workers can only claim for unfair dismissal at the Tribunal after two years of service.
Lawyers warned that a six-month threshold is still a significant reduction from the current two-year requirement and will result in a surge of claims at an overstretched Tribunal.
Now, the government seeks to ditch the £118,000 compensation limit as a quid pro quo to appease unions after dropping its ‘day one’ manifesto pledge. City PM understands that Neil Carberry of REC was one of the five business leaders in negotiations.
Currently, workers can be awarded either their annual salary or up to £118,233, whichever is lower, but government sources reported that most awards are far below the cap.
On Friday, business secretary Peter Kyle added a motion to the Lords’ amendments seeking to ‘omit section 124’, the Act that caps unfair dismissal compensation.
Kyle is set to lay out changes, including the removal of the cap, at Parliament on Monday.
The shadow business secretary Andrew Griffith has already said the Conservatives will oppose “this mad idea”.
Another compromise with former deputy Prime Minister Angela Rayner, who led the reforms, Kyle, agreed to speed up the implementation of the unfair dismissal protection, which will come into effect on 1 January 2027.
Rayner welcomed this move, saying, “Workers recruited in July 2026 will automatically get protections from unfair dismissal when the law comes into force.”
Backlash over Labour’s recent move
I find it astonishing that such a huge change could be made with no consultation and no debate,” stated employment lawyer Darren Newman.
Dan Pollard, a partner at law firm Charles Russell Speechlys, said: “This development is frankly bonkers. The change would undoubtedly make the UK a significantly less attractive place to base staff within Europe.”
Ben Smith, associate, at employment firm Littler, explained that if the government removes the cap on compensation, it will make it more difficult for unfair dismissal claims to be resolved without litigation.”
He added, “dismissals will be more complex and potentially more expensive for employers”.
Colin Leckey, partner at Lewis Silkin, pointed out that “this amendment might complicate things further”.
He explained, “Given the very significant concession the government made last week, it might have been hoping that in return, the Lords [would] drop all its other objections and allow the Bill to pass.”
However, what initially looked like a compromise is now looking more like a Trojan horse – businesses that were reassured by the concession on day one unfair dismissal protections, will now have been left reeling by the prospect of facing compensation claims with no statutory cap,” he added.