Workers in the UK who win unfair dismissal cases against their employers could receive unlimited compensation, following a dramatic last-minute change to Labour's flagship employment legislation. The move, branded 'bonkers' by leading lawyers, forms part of a deal to pass the Employment Rights Bill through Parliament.
The End of the Compensation Cap
Under the current system, payouts for standard unfair dismissal claims are capped at the lower of an employee's annual salary or £118,223. This limit will be completely abolished under the agreement thrashed out between the Government, trade unions, and business groups last week. The deal was necessary to break a deadlock in the House of Lords and get the bill moving.
In a significant concession, ministers also abandoned their manifesto promise to grant a 'day one' right to claim unfair dismissal. Instead, the qualifying period will be reduced from the existing two years to six months. This compromise has triggered a backlash from some Labour MPs and union leaders who feel the core pledge has been diluted.
Lawyers Warn of Employer 'Bloodbath' and Ransom Demands
The proposal to scrap the compensation ceiling has stunned employment law experts, who warn it will place a heavy burden on businesses. They argue it will encourage high-earning employees to pursue tribunal claims or demand massive severance packages, knowing there is no upper limit on potential awards.
Dan Pollard, a partner at law firm Charles Russell Speechlys, did not mince his words: "Today's development is frankly bonkers. One of the sensible features of the current scheme is the ability to 'buy out' most unfair dismissal claims for £118,223. With the cap removed, employers will have no choice but to embark upon an extremely time-consuming and bureaucratic process."
He gave a stark example of the potential consequences: "One example is poorly performing bosses being able to hold employers to ransom." Pollard further warned that unless introduced overnight, the change "has the potential to create a bloodbath as employers seek to exit underperforming senior staff ahead of time."
Other legal voices echoed the concern. Ben Smith of Littler said removing the cap would make it harder to settle claims without litigation, as claimants may have unrealistic expectations. Colin Leckey of Lewis Silkin called it a 'seismic' change that would "significantly increase the cost and complexity" of settling with well-paid staff.
Government Insists Awards Are Typically Low
Government figures have pushed back against these warnings, pointing out that compensation awarded by Employment Tribunal judges is usually far below the existing cap. The average award for unfair dismissal is currently less than £7,000.
They also note that in discrimination or whistleblowing cases, where compensation is already unlimited, awards rarely reach six figures. The implication is that the removal of the cap may have less practical impact than lawyers fear.
Rayner Secures Faster Rollout of New Rights
Meanwhile, Angela Rayner, the architect of the workers' rights reforms, successfully lobbied to accelerate the introduction of the new six-month qualifying period. She argued it should come into force early next year rather than at an unspecified point in 2027.
In a compromise with Business Secretary Peter Kyle, it was agreed the new regime will now start in January 2027. This means workers recruited from July 2026 onward will automatically gain protection from unfair dismissal when the law takes effect.
In her first public comments since the U-turn on the 'day one' right, Ms Rayner wrote on social media: "Delighted workers will now benefit quicker from our landmark Employment Rights Bill. Workers recruited in July 2026 will automatically get protections from Unfair Dismissal when the law comes into force. Real change for workers."
The Employment Rights Bill, now set for passage, promises to reshape the UK's workplace landscape, but its final form has sparked intense debate about the balance between worker protection and business burden.
