The Government has now successfully passed the Employment Rights Bill.
While the Bill is now law including changes to National Minimum Wage and more, one of its most controversial elements—the removal of the statutory cap on unfair dismissal compensation—has not yet been implemented.
The Government has formally committed to a consultation process and the publication of an impact assessment before any change to the compensation cap takes effect. That said, all indications are that removal of the cap remains very much on the table.
But, what do you need to know right now? We’ve covered everything you need below.
What was proposed?
The Government had made clear its intention to abolish the statutory cap on unfair dismissal compensation. This is currently set at £118,223 or one year’s gross pay (whichever is lower).
Removing the cap would align unfair dismissal with other claims such as discrimination and whistleblowing, where compensation is already uncapped.
Why has the cap not been removed?
During the Bill’s passage, the House of Lords blocked the immediate abolition of the cap, largely due to concerns about:
- the late introduction of such a significant change without consultation or scrutiny, and,
- disagreement over whether employer groups had consented to a full abolition (many have stated they only discussed a lifting or raising of the cap, not its removal).
As a result, the Government has now committed to:
- a formal consultation, and,
- a published impact assessment before proceeding any further.
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Why the Government is still likely to remove the cap
A pivotal moment in the Lords debate was a powerful intervention by Lord David Pannick KC, who argued that:
- The absence of an unfair dismissal compensation cap in discrimination claims has not led to chaos.
- And, there is, therefore, no evidential basis to suggest that uncapped unfair dismissal compensation would destabilise the tribunal system.
This argument appears to have gained significant traction and strongly signals the Government’s ongoing intention to proceed once consultation is complete.
Why does this matter to employers?
While the median unfair dismissal compensation award remains relatively modest (around £7,000), the compensation cap plays a critical role in managing risk and settlement strategy.
If the cap is removed:
- High-earning and senior employees could pursue substantially higher claims.
- Settlement negotiations are likely to become longer, more complex and less predictable.
- Legal and exit costs could increase materially.
- Employers may face greater pressure to settle rather than litigate.
- Tribunal capacity issues could be exacerbated by higher-value claims.
And, this is why business groups continue to raise serious concerns.
What happens next?
The compensation cap is now the final unresolved issue flowing from the Employment Rights Bill.
We expect:
- A consultation period to be launched,
- an impact assessment to be published, and,
- further legislation (likely via secondary legislation) to follow if the Government proceeds with removal.
While the timescales are not yet confirmed, this is now a live and imminent policy risk rather than a hypothetical one.
What should you do now?
The good news is that there are no immediate changes needed at this stage as the existing compensation cap is in place.
However, we strongly recommend that you:
- Review dismissal and investigation processes, particularly for senior or high-earning roles.
- Make sure your procedures, decision-making, and documentation are robust and justifiable.
- Seek advice before initiating any high-risk dismissal.
Keeping you informed about developments
The passing of the Employment Rights Bill marks a real shift in the employment law landscape and one that will directly affect how you manage risk, people processes, and day to day decision making.
Understanding what has changed, what comes next, and where the pressure points are likely to sit will help you move from reactive to ready. This works best when policies are reviewed early, managers are briefed clearly, and advice is taken before issues escalate. And Cintra are here to help you every step of the way.
We’ll continue to break down what the Bill means in practice and what to prioritise first. If you want to talk through the implications for your organisation or sanity check your next steps, get in touch to see how we can help.
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