‘Day one’ unfair dismissal pledge dropped and compensation cap removed – the Employment Right Bill is finally approved by parliament! [17 December 2025]

With the Government completely abandoning its original plan to make unfair dismissal a day-one right, we are now very close to the Employment Rights Bill receiving Royal Asset. The final bill instead reduces the qualifying period from two years to six months—a major policy shift which eventually broke the parliamentary deadlock and kept the Employment Rights Bill on track. 

However, the final form bill included further last minute and unexpected Government changes. Most likely in an effort to appease Trade Unions, the Government proposed removing the statutory cap on the unfair dismissal compensatory award. The unfair dismissal compensatory award is currently capped at 52 weeks’ earnings or £118,223 (whichever is the lower). 

Both of these compensatory ceilings have been removed and while initially objected to by the House of Lords, the objection has been withdrawn to allow the bill to progress.

What was originally proposed?

Ahead of the 2024 general election, Labour committed to introducing day-one unfair dismissal rights. This proposal appeared in the draft Employment Rights Bill published in October 2024, alongside a suggested ‘initial period of employment’ - expected to last nine months - during which a lighter-touch process could be used for dismissals (other than redundancy).

There was no proposal to change the compensatory award for unfair dismissal in the Employment Rights Bill as originally published, so this was a last-minute surprise. 

Why the change to six months?

The House of Lords repeatedly rejected the day-one provisions. To avoid further delay, the Government adopted a compromise: a six-month qualifying period. It has also announced that the qualifying period will no longer be alterable via statutory instrument. Any future change will instead require primary legislation, meaning the six-month threshold is likely to remain in place for the foreseeable future.

What about the compensatory cap?

The current s124 Employment Rights Act 1996 which sets out the caps on the compensatory award for unfair dismissal are being removed entirety. This was unexpected as it did not form part of Labour’s manifesto commitment and neither was it included in the initial drafts of the Employment Rights Bill. 

This was likely to have been a way to ensure the final progression of the bill as while the House of Lords did eventually approve the move to a six-month qualifying period for unfair dismissal, this was also initially voted down. The Lords then proposed a further amendment to retain the cap, but with a consultation prior to any removal. This proposal was then sent back to the Commons for further consideration and the final bill has been approved through parliament including an commitment to have an impact assessment.  

What does this all mean for HR?

Nothing will change immediately. Even if the bill receive Royal Asset this week, the implementation date of 1st January 2027 for the six-month qualifying period remains, although other changes are expected from October 2026 (such as the extension of the limitation periods). 

Therefore, HR teams should already be preparing for the new regime:

• Review probation processes. A six-month qualifying period means decisions on performance, conduct and fit must be made early. Policies should be refined so managers are prompted to act well before the six-month point.
• Build in timing safeguards. Allow flexibility in review schedules to avoid eligibility being reached due to rearranged meetings or delays.
• Consider the ‘statutory week’. A dismissal without notice adds one statutory week to service; an intended pre-six-month dismissal could unintentionally cross the threshold.
• Prepare for higher-value claims. The removal of the compensation cap means employees maybe more likely to claim. The current ceiling makes unfair dismissal unattractive to high earners – this disincentive will be removed. Settlement negotiations will become more difficult as employers will not have the statutory cap to fall back on as a ceiling. There will be a greater risk when dismissing older workers or those with long-term health conditions impacting their ability to work – future loss of earnings claims could be career-long. Robust processes and clear medical evidence will be needed. In all cases, the collation of early evidence around mitigation will be essential.

The shift away from day-one rights offers employers breathing space - but the move to a six-month threshold, especially when combined with the proposed removal of the statutory compensation cap which may be coming down the road, still represents a substantial change in the current legal position requiring early planning.

We are here to help with any questions or concerns you may have about the Employment Rights bill – contact us today. 

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Disclaimer: This summary is for general awareness and insight, not legal or professional advice and readers should seek professional advice for their situation.