A key part of the Government’s Plan to Make Work Pay had included “day one” unfair dismissal rights. However, the ERA 2025 was stuck in ping-pong in its final stages of Parliament and so on 27 November 2025, in a surprise last-minute move the Government announced that it had reached an agreement with stakeholders and in order to continue to deliver on the rest of the ERA 2025 it was no longer pursuing day one unfair dismissal rights.
Following several rounds of ping pong in Parliament to reach agreement, the ERA 2025 will amend the rules on unfair dismissal so as to:
- Reduce the current qualifying period for unfair dismissal from 2 years to 6 months – which, going forward will only be able to be changed by primary legislation making it more difficult for future governments to change; and
- Remove the compensation cap for unfair dismissal (currently the lower of 52 weeks’ pay or £118,223).
On the one hand, the reduction of the qualifying period, rather than its removal, is a less significant change to the law than originally anticipated as employers will have time to assess new hires before unfair dismissal rights kick in. However, the removal of the compensation cap is a surprising last-minute change, which will likely increase the risk and management time involved in dismissing an employee (particularly high earners). The combined changes will also have significant impacts on day-to-day HR processes including hiring, performance management and termination of employees.
Part of the debate during the bill’s passage was about the lack of impact assessment on the removal of the compensation cap, given the last-minute introduction of the amendment to Parliament. During such debates, the Government promised an impact assessment, which has now been published. The impact assessments make the following analyses in respect of the changes to unfair dismissal:
- Reducing the qualifying period to six months – The economic analysis estimates that the additional population in scope for unfair dismissal protections will be 6.3 million employees, which it considers will generate an additional 9,000 Acas early conciliation referrals a year, of which 3,000 will progress to a tribunal claim, and 570 will require judicial time.
- Removing the compensation cap – The analysis argues that the cost of removing the compensation cap for unfair dismissal is “likely to be limited at the aggregate”. It states that “in practice, few awards reach the cap. In 2023/24, there were 646 awards for unfair dismissal in employment tribunals reported, and the median award was £6,746. Fewer than 40 awards (around 6%) in 2023/24 for unfair dismissal were greater than £50,000.” The impact assessment, however, notes that the Government is unable to quantify the impact of removing the compensation cap on Acas and the tribunals: “the behavioural response from employers and employees of removing the compensation cap is uncertain based on the best available evidence, we were not able to quantify the impact of changes to the cap.” It does note, though, that this may impact particular groups such as high-earning employees or those with limited re-employment opportunities.
We understand that no further consultation is anticipated, but the Government intends to work with stakeholders to see what additional support or guidance is required.
Timing and developments
- Included in the ERA 2025.
- The Government has indicated during Parliamentary debates that it had agreed with stakeholders that changes will come into effect on 1 January 2027. During these debates, the Government also said their intention is to adopt a commencement approach that would extend protections immediately from that date to employees who already have six months’ service or more. In respect of the removal of the compensation cap, it is currently presumed that this will come into force at the same time, but this has not been officially confirmed.