As we wrote about last week, the government has decided to step back from “day one” unfair dismissal protection and will instead set a six‑month qualifying period. Reports now suggest that this will apply from 1 January 2027.

News of the government’s compromise on day one rights was widely welcomed by employers when the announcement came last week. However, this compromise over day one rights is now looking a bit like a Trojan horse, because it’s clear that it will come with a radical change to the compensation framework. According to the Financial Times, several sources have reported that, in the government’s next round of updates to the Bill, it will set out that employees must have six months’ service before they can claim unfair dismissal – but after that point employees would be able to claim unfair dismissal with no statutory cap on the compensatory award. 

The basic award for unfair dismissal would remain unchanged (and capped) but employees could then get unlimited compensation for their financial loss. This would bring unfair dismissal more in line with whistleblowing and discrimination claims, where compensation for financial loss is also uncapped. The key difference would be injury to feelings (which would not be available for simple unfair dismissal claims).

The idea of uncapped compensation for unfair dismissal was floated by the Labour party before the last general election but had effectively disappeared – until now.

Where we are now - reminder

At present, the compensatory award for unfair dismissal is limited to the lower of 52 weeks’ pay or £118,223. 

The monetary cap can be traced back to a framework set by the last Labour government. In 1999, the Blair government increased the cap from £12,000 to £50,000, and baked annual inflation‑linked increases into the law. Those increases have gradually taken the cap up to £118,223 where it stands today.

In 2013, the Coalition government added the alternative cap of 52 weeks’ pay, responding to concerns that a single rising monetary cap inflated expectations and was disproportionate in some cases. 

The government now plans to remove both limits.

What this means in practice

On the positive side, for all employees other than those with less than six months’ service removing the cap will remove all incentive to bolt on spurious whistleblowing or discrimination claims simply to get around the unfair dismissal cap - there won’t be one to get around.

Employees would not be able to “double recover” if they also have a successful discrimination or whistleblowing claim. But they would be able to claim uncapped compensation for a simple unfair dismissal, even if there was no extra factor such as whistleblowing or discrimination.

Would there be a flood of higher awards? Median awards for unfair dismissal may not actually change all that much. Most claimants don’t suffer losses that run into six figures; tribunals are supposed to focus on equitable compensation based on realistic financial loss rather than windfalls, and employees must still mitigate their losses. There would still be deductions for contributory fault.

But median awards are not the whole story.  In our experience, claimants can overestimate both the prospects of their claim and its potential value – and the trend of AI‑assisted pleadings isn’t helping. If the ceiling is removed, it will be harder to negotiate settlements at sensible levels. Claims for career-long loss could become the typical AI-generated starting point.

Higher paid employees will stand to benefit the most. We could expect complex evidence on valuing loss for senior roles including pricing share options, pension loss and deferred compensation, and expert evidence on mitigation. We see this kind of evidence in complex discrimination and whistleblowing claims of course, but it could become the norm in simple unfair dismissal claims. This could worsen tribunal delays, as lengthy hearings about compensation will need to be scheduled in high value cases, resulting in claims taking longer to reach final resolution (and likely pushing wait times to three years, up from the two year waits we currently see in many regions). Employers would face greater uncertainty.  

Presumably the potential uplift for not complying with Acas Codes would also remain in place, meaning that any procedural mishap could result in significant monetary amounts which are not kept in check by any upper limit.

Senior hires and boardroom decisions

The change could also reshape how boards handle underperformance at the top. Consider the scenario of an underperforming CEO on £1m+. Today, many boards reach a clean exit: notice, payment to cover the maximum unfair dismissal award and a swift settlement. Under an uncapped regime, the risk analysis will change. Will a board be expected to run a full six‑month performance improvement process, with staged warnings, objectives, support and reviews, to reduce the risk of a seven‑figure claim? 

How will employers react?

It’s hard to predict the longer-term impact as we’ve never had uncapped compensation for unfair dismissal before. Aside from making employers want to run procedurally impeccable processes, it may make employers more reluctant to dismiss employees, and increase the popularity of voluntary severance exercises. For some employers, it could impact decisions on whether to recruit at all, or recruit in Great Britain. It could certainly increase the attractiveness of consultancy or alternative resourcing models. We would expect employers to be a lot more ruthless in operating probationary periods and terminating employment before employees reach the six-month mark. This does not sound like a recipe for growth.

How we compare to others in Europe

Introducing uncapped compensation would put Great Britain at odds with several European neighbours. For example, Ireland, France and Spain all operate with statutory or formula‑based caps for dismissal compensation.

What next?

It’s not a certainty that this change will make it through to law. Assuming the House of Commons votes through this latest change when they next debate the Employment Rights Bill on 8 December, it must still get through the House of Lords to become law – and the Lords have shown themselves very willing to put up a fight so far. 

There’s also a major question mark about whether the government would consult before issuing the regulations needed to commence this change. Before the one-off hike to the cap in 1999, there was a consultation. When the alternative 52‑week cap was introduced in 2015, there was also a consultation. Scrapping the cap altogether without due consultation would be an extraordinary move, given the impact of this measure. It was not part of Labour’s election manifesto and has not featured in the various calls for evidence or indeed the government’s impact assessment of the Employment Rights Bill. At this stage, the government has not confirmed its plans for consultation one way or the other.

We will be keeping you updated as the Bill progresses.