The Employment Rights Bill has passed and the compensation cap battle reveals what’s really at stake 

The Employment Rights Bill cleared its final parliamentary hurdle last week after months of debate and a tense standoff between the Commons and the House of Lords. Royal Assent is expected before Christmas, at which point it becomes the Employment Rights Act 2025. 

But for employers trying to understand what this means in practice, the real story isn’t just what’s changing, but when and how much room for manoeuvre remains. The fight that dominated the Bill’s final stages tells you everything about the scale of reform ahead. 

The government wanted to remove the statutory cap on unfair dismissal compensation entirely. Currently set at the lower of 52 weeks’ pay or £118,223, this cap has been a fixture of employment law for years. Removing it would bring unfair dismissal into line with discrimination and whistleblowing claims, where compensation is already unlimited. 

The Lords fought hard to preserve some form of cap. Then Lord Pannick KC intervened, arguing that the absence of a compensation cap in discrimination claims hasn’t caused chaos in the tribunal system and fears about unfair dismissal were likely just as overstated. It was a measured response from an experienced silk; The Lords backed down and the Bill passed. 

A key concession made 

But the government made one significant concession to secure that agreement. Before the uncapped compensation regime can take effect, it must publish a complete impact assessment examining the likely consequences for employers, tribunals and claim volumes. 

That means although the Act will soon be on the statute book, the uncapped compensation provisions won’t apply until secondary legislation is laid and that impact assessment is complete. For employers, it’s breathing space, but not a reprieve. 

The other headline change is the unfair dismissal qualifying period, which the government proposed to make a ‘day-one’ right, which would have been radical. After negotiations with business groups and peers, that was scaled back, with the qualifying period reduced from two years to six months. It’s less dramatic, but it still represents a material expansion of employee rights and will fundamentally change how employers approach probationary periods and early-stage dismissals. 

The reforms won’t all land at once. The government has published an indicative roadmap showing three waves of implementation. The first wave, expected around April 2026, will include statutory sick pay from day one of absence, removal of the lower earnings limit for sick pay, day-one paternity and unpaid parental leave, and establishment of the Fair Work Agency. 

The second wave, around October 2026, will bring fire and rehire reforms, strengthened duties to prevent sexual harassment, including third-party harassment, and further trade union and employment tribunal changes. The structural reforms, including the six-month unfair dismissal qualifying period and the potential removal of the compensation cap, are scheduled for 2027, subject to the promised impact assessment. 

What does this actually mean for employers? 

The six-month qualifying period will hit businesses with high turnover hardest. Manufacturing firms, hospitality businesses, seasonal employers and anyone who regularly makes decisions about newer staff during what would previously have been the safe harbour of the first two years will need to rethink their approach.  

Early dismissals will carry significantly more risk, and probationary processes will need to be tightened accordingly. 

The uncapped compensation threat is harder to quantify until that impact assessment lands, but the direction is clear. Even if the final regime includes a modified cap or bands, the ceiling is still rising. For senior hires or high-earning employees, the exposure on unfair dismissal claims could become substantial. That changes the approach to dismissal decisions and makes early legal advice more valuable, not less. 

The smart move for employers is to start planning now rather than waiting for final commencement dates. That means reviewing probationary and early-dismissal processes to ensure they’re robust enough for a lower qualifying period and preparing for higher-risk unfair dismissal claims once eligibility widens. 

It will be essential to monitor the government’s impact assessment closely when it’s published and build in budget for increased compliance costs and potential tribunal exposure. 

This Act represents a fundamental shift in the balance between employer flexibility and employee protection. The phased implementation gives businesses time to adapt, but that window is narrowing. 

The first changes are only months away and the structural reforms will follow soon after. For employers who treat this as just another compliance exercise, the risks are significant. However, for those who use the transition period strategically, there’s still time to get ahead of it. 

Coodes’ Employment team offer the full range of services and advice for supporting your business. We offer practical and business-specific solutions, on an ad hoc basis or through our Employment Retainer scheme. We can provide businesses with varying levels of support depending on their specific needs. 

To prepare for the Employment Rights Bill, get in touch with Steph Marsh, or Coodes’ Employment team today. Email steph.marsh@coodes.co.uk or call 01579 324017.