Just as the Employment Rights Bill seemed stuck in parliamentary ping pong, a dramatic U-turn on the government’s manifesto promise of day one unfair dismissal rights looks set to smooth its passage to the statute book. A compromise of a 6 month qualifying period, coupled with a “lifting” of the compensation cap, significantly changes the legislative landscape. 

A cornerstone of the Employment Rights Bill was Labour’s manifesto commitment to day one unfair dismissal rights. However, with the House of Lords digging its heels in over an amendment that would impose a six-month qualifying period, the government has changed course. 

It announced on 27 November that rather than removing the qualifying period entirely, it would instead reduce it from two years to six months in accordance with the Lords proposal. In a step likely to minimise backbench backlash, this has been agreed with unions and business representatives.  However, it then also emerged that the government was planning to “lift” the cap on unfair dismissal compensation – without providing any details of what exactly it meant by this. 

The shift on day one rights will be a welcome change for employers who will now be able to assess how a new employee is getting on, and operate a probationary period within the usual confines of between three and six months, without risking an (ordinary) unfair dismissal claim if this ends in termination. It also allows employers to recruit people on short, fixed term contracts without needing to go through a full redundancy process on their planned expiry. The change will also go some way towards protecting the overburdened employment tribunal system, which was at risk of being completely overwhelmed by the potential influx of day one claims. 

Employers will, however, need to be diligent about managing probation and careful to avoid situations where an employee’s employment strays past the critical six month point without a proper assessment of their suitability. It will be especially important to bear in mind the statutory rules which add on a week’s service when calculating the qualifying period for unfair dismissal.

What do we know?

At this time the details are scant. In addition to setting the length of the qualifying period, the government has also confirmed that this change will not come at the expense of other day one rights such as the right to statutory sick pay and paternity leave. 

The government has also committed to protecting this change by ensuring that the unfair dismissal qualifying period can only be changed by primary legislation.  Previously, new governments have been able to change the qualifying service requirement through a simple statutory instrument (and often have).

What’s still unclear?

At the time the press release was published, the government had not yet released the specific legislative amendment. This means that several important details remain uncertain:

  • What will “lifting” the cap mean?

While they will welcome the shift on day one rights, employers will be rather more concerned by the announcement about “lifting” the unfair dismissal compensation cap.  At the moment, compensation for unfair dismissal is limited to 52 weeks’ gross pay or a statutory cap (whichever is lower). The compensatory award cap, which increases in line with inflation every April, currently sits at £118,223 . This is an important contrast to discrimination and whistleblowing claims for which damages are uncapped. 

Will lifting the cap on unfair dismissal compensation mean abolishing it altogether? Or abolishing the 52-week rule but not the statutory cap? Or does “lifting” actually mean raising, rather than abolishing? 

At this stage it seems most likely to mean abolishing the 52-week cap rather than the monetary £118,223 cap. This would benefit anyone earning up to £118,223 while retaining an element of certainty. The detail  remains to be seen, but any change could significantly alter the financial risk associated with dismissals. 

  • What about the “light touch” procedure?

The original “day one” version of the unfair dismissal reforms provided for a “light touch” procedure to allow dismissal during an initial period of employment. Although there were many details yet to be confirmed, including what the process would entail, the government had expressed a preference that this would last 9 months. 

The IPE had been retained in the House of Lords amendment, but we expect that the government will take the view that the 6 month qualifying period renders this unnecessary. This would certainly simplify the process and avoid a potential rerun of the infamous statutory dismissal procedure. It will, however, mean that there is a “cliff edge” – with employees moving from no unfair dismissal rights to full unfair dismissal rights at the six month point.

  • What about the exceptions?

The House of Lords proposal involved a six-month qualifying period for unfair dismissal with the usual exceptions (for example relating to pregnancy) plus one notable new exception: where dismissal is for a spent conviction. This exception was addressing an important legislative gap in protection, so there are convincing policy reasons to retain this carve out. 

  • What about the timing?

Day one unfair dismissal rights were originally scheduled to come into effect in 2027, giving employers time to prepare. Will a six-month qualifying period come in sooner? It’s possible, as there is no obvious reason to delay so long if a consultation on the detail of the initial period of employment is no longer needed.

Why the change?

Given the dramatic impact day one unfair dismissal rights would have on the legal and financial risk of taking on a new recruit, business leaders had long been voicing concerns over this aspect of the reform package. However, in recent months, the left-leaning think tank, the Resolution Foundation, also bolstered support for a rethink. 

Their recent analysis, cited repeatedly in recent debates in both Houses, essentially suggested that this reform was going too far – taking the UK from one end of the spectrum on employee protection to the other. Concerns were raised that this may make employers cautious about hiring - not attractive when the government is trying to stimulate growth. This compromise is consistent with these recommendations.  The reaction from our clients (who were attending our seminar on the ERB when the news broke), was overwhelmingly indicative that large employers welcome this move by the government.

What next?

We need to wait for the crucial details about compensation. We also need to see what happens with the other sticking points holding up the Bill. Also caught up in legislative ping pong were the complex proposals regarding guaranteed hours. Given the very significant concession the government has made on unfair dismissal, it remains to be seen if the quid pro quo is that the Lords will drop opposition on all other points.

What does seem clear, however, is that the government is determined to do what it takes to keep Bill on course for the implementation timetable it announced over the summer – meaning that, for example, day 1 sick pay, paternity leave and parental leave will be happening in April next year. 

It certainly looks set to be an interesting last few weeks before the Christmas recess. Keep track of what’s changing in our Employment Rights Bill dashboard. 

Authors