Employment Rights Bill: latest updates

It's been an interesting week for employment lawyers  - and their clients.  On 5 December, it was confirmed that the Government intends to remove both elements of the cap on unfair dismissal compensation (both the 52 week limit and the overall financial cap of £118,223).   This could have a huge impact on exit negotiations and the dynamics of litigation and settlement, particularly for highly-paid senior staff and those with valuable benefits such as income protection and final salary pension schemes.  This radical change appears to have been negotiated with employers' groups and trade unions as a quid pro quo for unfair dismissal rights accruing after 6 months' service rather than as a day 1 right.  However, there is some debate about whether this is actually what was agreed (and the Government has so far declined to make public the notes of the discussions).  It's suggested by some that only lifting the 52 week cap was agreed, rather than both elements of the cap, but the Government is so far holding firm to its view that both elements must be lifted. 

The House of Lords has now had an opportunity to debate this rather late change to the Employment Rights Bill and has rejected the Government amendment which would have abolished the cap, although it has now accepted all other elements of the Bill.   For now, this means that the Bill has still not become an Act of Parliament and is not yet law.    

The question now is whether this final point will be resolved in time for the Bill to become law before Christmas.   The Bill will be considered again in the House of Commons on 15 December.  

Even if the Bill is passed pre-Christmas, the change will not come into force until January 2027, but as it will apply to dismissals from that date (rather than employees who are hired after that date) businesses will need to factor this into their 2026 plans immediately.   We anticipate that employers will want to consider now whether there are senior or high-paid employees in the organisation who are currently underperforming, or whose roles are likely to be affected by redundancy or restructure in the foreseeable future, and consider implementing necessary changes now, while the cost of any unfair dismissal claims is more readily quantifiable.   However, employers will need to tread carefully to avoid exposing themselves to unnecessary liability if, for example, the employee already has 2 years' service (the current service qualification which will reduce to 6 months under the changes proposed) and no fair reason for dismissal currently exists, and ensure that the haste to deal with underperformers now does not stray into discrimination (with health and disability issues a common risk area). 

The key takeaway for employers is that the Bill is very nearly over the line and, whatever the outcome, employers need to engage with it fully now.