Employment Rights Bill passed with removal of cap on unfair dismissal compensation

The Employment Rights Bill has been passed, the House of Lords having agreed to reduce the qualifying period for unfair dismissal claims from two years to six months and remove the cap on unfair dismissal compensatory awards. What do these significant changes mean in practice for employers?

Original proposals

Currently, employees usually need two years' service to claim unfair dismissal, and the compensatory award is capped at the lower of £118,223 or 52 weeks' gross pay. The Government originally proposed to remove the qualifying period so that ordinary unfair dismissal claims could be made from day-one of employment and introduce a new 'statutory probationary period' during which there would be a 'lighter-touch' process allowing for fair dismissal subject to different standards of reasonableness. Initially the Government did not propose to make any changes to the compensatory regime.

Amendments to the Bill

The proposal to make protection against unfair dismissal a day-one right met with considerable resistance from the House of Lords and delayed the Bill becoming law. As a result, the Government changed its position and the current two-year qualifying period for most unfair dismissal claims will instead be replaced with a six-month period.

In addition, the Government made a last-minute and unexpected amendment to the Bill to remove the statutory cap on the compensatory award applied in successful unfair dismissal claims. Following some challenge by the House of Lords, the abolition of the cap was agreed and the Bill passed on 16 December 2025.

Protection against discrimination and automatically unfair dismissal (e.g. those relating to whistleblowing or health and safety) will remain as day-one rights. The basic award for unfair dismissal will also remain unchanged.

Timing of the changes

The new qualifying period and removal of the cap will apply to dismissals from 1 January 2027. 

The reduced qualifying period is expected to apply to existing employees - meaning that any employee who has at least six months' service by 1 January 2027 will have unfair dismissal protection from that date.

Impact of 6-month qualifying period and uncapped compensation

Although compensation will still be based on financial loss and the average award for unfair dismissal is currently around £14,000, having an uncapped compensatory regime is a huge change and one of the most significant measures in the Bill. 

Removing the cap will inevitably lead to increased dismissal costs and uncertainty for employers in terms of financial risk (particularly for businesses with high earners). It will influence settlement negotiations, with claimants potentially overstating their potential losses, and impact the length and complexity of remedies hearings with additional evidence on issues such as pension loss. We are also likely to see an increase in unfair dismissal claims from high earners who previously, because their losses were capped in the tribunal, sought remedy in the civil courts (e.g. in terms of breach of contract claims).

Once implemented, the reduced qualifying period coupled with the removal of the cap will mean that employers will no longer enjoy the same degree of flexibility when making decisions about continued employment. Employers will want to review their recruitment and performance management processes, as well as the length of employees’ probationary periods:

• Audit current recruitment practices and consider whether they are sufficiently robust to attract the best candidates. Decide whether any changes are needed to the assessment process such as introducing psychometric testing, work trials, presentations or written exercises.
• Review the length of probationary periods. As new employees will only need six months’ service to bring an unfair dismissal claim, a probationary period of around three months may be appropriate. This will allow sufficient time for the employee to start work and be assessed as to their suitability for continued employment before accruing six months' service. It would also allow time for a short extension of the probationary period if appropriate.
• Review other contract terms. Are benefits contingent on employees completing their probationary period, and what is the impact of reducing probationary periods? Can you make payments in lieu of notice (to secure earlier dismissal dates when necessary)?
• Ensure that managers are aware of the impact of the changes and the importance of properly assessing performance and suitability during the probationary period. Provide them with any necessary guidance, training and/or support.

Employment Rights Act 2025 timeline and webinar series

For details of all the Employment Rights Act 2025 reforms, see our timeline and insights. Also, we are running an Employment Rights Act webinar series, hosting 30-minute webinars providing practical guidance on key aspects of the Act. The next session will cover Trade unions - key changes and actions for employers on 27 August 2026. Further details and a link to register can be found here.

Workbox by Brodies

Workbox by Brodies, our HR and employment law site, has detailed information and resources covering the full spectrum of HR issues arising from the reforms. To arrange a short demo, please get in touch.

This blog was published on 17 December 2025. See also our blog published on 1 June 2026 on the unfair dismissal reforms: Employment Rights Act 2025: unfair dismissal, probationary periods and the new reality for new hires.