Employees who win claims for ordinary unfair dismissal look set to receive full compensation for their financial losses under changes being prepared by the UK government, HRreview understands.
The existing limit on awards would be removed and the qualifying period for bringing a claim shortened. The adjustments form part of the latest agreement on the Employment Rights Bill, which is due to return to the House of Commons after encountering setbacks in the Lords.
Ministers intend to remove the maximum award currently applied to most unfair dismissal cases, and the change would allow employment tribunals to award total proven losses without a set upper boundary. At present a claimant can usually recover only the lower of their annual salary or the existing statutory cap if they win a case. Tribunal data shows that most awards are much lower, yet the removal of the cap would mark a major change to the framework of compensation.
Negotiations between ministers, business groups and trade unions led to a wider compromise that kept the Bill moving through Parliament. As part of it, the government agreed that the right to claim unfair dismissal would apply after six months in a job. It’s believed the protection will start in January 2027 and apply to anyone who has built up the necessary service by that time.
Legal experts warn of rising costs for employers
Employment lawyers believe the removal of the compensation limit would fundamentally alter the dynamics of dismissal settlements. The Financial Times quoted Colin Leckey of international law firm Lewis Silkin as saying the change would be a seismic and “significantly increase the cost and complexity” for employers of agreeing severance packages for high earners. He said it would give those employees greater leverage in negotiations.
The same report noted that there are already categories of case where awards are uncapped, including discrimination claims and those involving whistleblowing. A government source told the paper that even in those areas, awards rarely reach high levels because tribunals base their decisions on evidence of loss. The source said the policy aims to ensure a fairer outcome when someone is forced out of work.
Political fallout continues as unions express frustration
The compromise reflects pressure from the House of Lords, where peers had raised concerns about the original plan to grant immediate dismissal protection on day one of employment. Ministers faced criticism for scaling back the ambition of the Bill.
Reports over the weekend say that Angela Rayner, the former deputy prime minister and architect of the original reforms, pushed ministers to accelerate implementation of the six-month threshold. The Guardian reported that she had been planning to table an amendment but agreed not to proceed following discussions with Business Secretary Peter Kyle after the government confirmed a fixed start date.
The Telegraph reported union anger over the dilution of the day-one pledge. It said Unite, Labour’s largest union backer, described the revised Bill as a shell of its former self. Union officials were discussing whether to call a vote on disaffiliation from the Labour Party as a result of frustration with current policy direction, the paper said. It quoted sources expressing concern that the watered down protections do not match promises made to workers.
Labour MPs believed more people would benefit sooner than originally expected under the new compromise, the Guardian reported. It quoted a Labour source who said the outcome would be viewed as a significant win that could be campaigned on next year, even though the day one protection had been lost.
The paper also quoted a government source as saying: “We are happy to have a clear date for this change. Now the House of Lords need to get on and pass this landmark bill so business can get the clarity they need and workers can get the security they deserve.”
Wider protections remain part of the reform package
Although immediate protection from unfair dismissal has been dropped, other parts of the Bill are set to progress. Statutory sick pay, paternity leave, parental leave and bereavement leave would become entitlements from the first day of employment. Provisions to support workers on zero hours and variable contracts are also included, along with measures to strengthen safeguards for those taking part in union activity.
These changes will require employers to update policies and HR systems, including recruitment processes, absence management and contractual documentation. Organisations may also need to review their approach to managing performance concerns and extending probation arrangements. Many HR teams will seek legal advice to assess how the new approach to compensation alters risk exposure in tribunal disputes and settlements.
The Bill has been delayed due to continued debate over the most contentious measures but ministers hope it will pass before the end of the year. Some parts of the legislation will still require consultation, which means the full package will be introduced over time.
The removal of the compensation limit has drawn sharp attention because it directly affects financial outcomes for both parties when employment relationships end in conflict. The six-month qualifying period will also bring more cases into the tribunal system than at present. It increases the need for careful process, documentary evidence and fair treatment throughout the employment lifecycle.
The Employment Rights Bill represents one of the most significant reforms to UK employment law in many years. Its passage is taking place against a backdrop of political tension and changing alliances within the Labour movement.
