Employment Rights Bill finally passed: what does it mean for your organisation?
After months of debate, numerous amendments, and extensive back-and-forth in parliament, the Lords have now withdrawn their final amendment, paving the way for Royal Assent - expected on 18 December 2025 - after which the Employment Rights Bill will officially become law.
Why has the Bill now been approved?
The Lords' main objection centred on the government's proposal to make the right to claim unfair dismissal a day one entitlement. They argued instead for a six-month qualifying period, down from the current two years. As we explained in our article, ‘Breaking: day one unfair dismissal rights binned but compensation limits going up’, the government ultimately backed down on its manifesto pledge and agreed to set the qualifying period at six months.
While the Lords accepted this, they initially resisted the government's other late amendment to abolish the cap on the compensatory award for ordinary unfair dismissal claims which did not feature in its manifesto. This was the final sticking point. However, on Tuesday 16 December 2025, the Lords withdrew their amendment, allowing the Employment Rights Bill ('the Bill') to pass.
What is the unfair dismissal compensation cap?
Currently, if an employee succeeds in an ordinary unfair dismissal claim, they receive two elements: a basic award (similar to a statutory redundancy payment) and a compensatory award. The compensatory award is calculated on what the tribunal considers “just and equitable” in the circumstances. Typical heads of loss include:
- Loss of earnings
- Loss of benefits (for example, company car, private medical insurance)
- Loss of pension; and
- Loss of statutory rights
At present, the compensatory award is capped at the lower of £118,233 (reviewed annually in April) or 52 weeks' pay.
Initially, the government announced in its press release “…the compensation cap will be lifted.” This wording caused uncertainty - would the cap be raised or removed entirely? The government later confirmed the latter. This means there will be no maximum compensatory award for ordinary unfair dismissal claims.
What does this mean for employers?
High awards won't be the norm. The removal of the cap does not give tribunals free rein to award excessive sums. The usual principles still apply: compensation must be “just and equitable” and reflect the actual loss suffered by the employee. However, where losses are significant, such as for high earners or employees close to retirement who are unlikely to get another job, and where those losses can be evidenced, tribunals will no longer be constrained by the current caps.
Employees will still have a duty to mitigate their loss, meaning they cannot simply do nothing - they must show they are actively seeking alternative employment. Tribunals will also continue to apply a Polkey reduction where appropriate. This occurs when, despite procedural failings, the tribunal concludes the employee would have been dismissed anyway, reducing the award accordingly.
With the qualifying period dropping from two years to six months and the compensation cap being removed, it is more important than ever to act fairly and reasonably. Start training your managers now to ensure they are prepared for these changes when they come into force.
What happens next?
Once the Bill receives Royal Assent, the Strikes (Minimum Service Levels) Act 2023 (which allowed the Secretary of State to set minimum service levels during strikes in certain industries) will be repealed. However, this will have little impact as the Act was never actually used in practice.
Other changes relating to trade unions will come into force two months after the Bill becomes law, but many of the remaining reforms will take longer. For example, the reduction in the qualifying period for unfair dismissal claims to six months is expected to take effect from 1 January 2027. There are no transitional provisions which means that anyone with six months' service on or after that date will immediately get unfair dismissal rights.
It's not yet clear when the removal of the cap for compensatory awards will take place but we can expect an impact assessment from the government about it following Royal Assent.
Most of the detail will come from regulations which will set out how these changes will work in practice and when they will take effect. While passing the Bill is a significant milestone, there is still a long road ahead before all the changes are implemented.
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