The Labour government is considering a major shake-up of employment law that would see the statutory cap on compensation for unfair dismissal removed entirely. This move is being framed as a compromise to trade unions after ministers abandoned their manifesto pledge for 'day one' unfair dismissal rights last week.
A Shift in the Employment Rights Bill
After weeks of parliamentary debate, the government agreed to drop its commitment to granting unfair dismissal protection from an employee's first day in a job. Instead, it accepted a Lords amendment that will see this right accrue after six months of service. This is a significant reduction from the current two-year qualifying period.
Other proposed 'day-one' rights, such as those relating to parental leave and sick pay, are still expected to proceed. To offset union discontent over the climbdown on unfair dismissal, ministers are now reportedly looking to scrap the financial limit on tribunal awards for such cases.
The Potential for Unlimited Awards
Currently, the maximum compensatory award for unfair dismissal is capped at the lower of an employee's annual salary or £118,233. Government sources note that most awards fall well below this ceiling. However, Business Secretary Peter Kyle is set to lay out changes in Parliament on Monday, which are expected to include the removal of this cap entirely.
This proposal has already drawn fierce criticism from the opposition. Shadow Business Secretary Andrew Griffith stated the Conservatives would oppose what he called "this mad idea." The reforms were initially led by former Deputy Prime Minister Angela Rayner, who has welcomed an agreement to speed up implementation. The new unfair dismissal protections will now come into force on 1 January 2027.
"Workers recruited in July 2026 will automatically get protections from unfair dismissal when the law comes into force," Rayner said.
Business and Legal Backlash
Employment lawyers and business groups have reacted with alarm to the prospect of uncapped compensation, warning it could lead to a surge in complex and expensive tribunal claims.
Dan Pollard, a partner at law firm Charles Russell Speechlys, described the development as "frankly bonkers," suggesting it would make the UK a less attractive place to base staff within Europe.
Ben Smith, an associate at employment firm Littler, explained that removing the cap would make it harder to settle claims without going to court. "Dismissals will be more complex and potentially more expensive for employers," he added.
Colin Leckey, a partner at Lewis Silkin, pointed out the political complexity. He suggested the government's concession on 'day one' rights was a significant one, and ministers might have hoped it would smooth the bill's passage. "However, what initially looked like a compromise is now looking more like a Trojan horse," he said.
Leckey concluded that businesses reassured by the six-month compromise have been left "reeling by the prospect of facing compensation claims with no statutory cap."
