Anyone reading this will know by now that the Government has made a major concession in order to break the deadlock on the Employment Rights Bill. Almost every employment lawyer I know has been saying for ages that a six-month qualifying period is the obvious compromise to make. It is a major improvement (from a claimant perspective) on the current qualifying period of two years and it avoids all the trouble of coming up with a ‘light touch’ approach to reasonableness during the initial period of employment. 

But just because the compromise is obvious, that does not mean that it was always inevitable. Without the cabinet reshuffle back in September I really don’t think we would be where we are now. It appears the compromise was reached as a result of intensive talks between trade unions and representatives of the business community but not every Labour MP will be happy about it. After all, a day one right to claim unfair dismissal was an express manifesto commitment. So it makes sense that concessions had to be made on the employer side to sweeten the pill. 

Lifting the Cap

But what exactly were they? Here is what the Government press release says:

“To further strengthen these protections, the Government has committed to ensure that the unfair dismissal qualifying period can only be varied by primary legislation and that the compensation cap will be lifted. ” 

Removing the ability of further changes to the qualifying period by statutory instrument makes sense. But what really took me aback was the reference to lifting the compensation cap. Where did that come from? And what exactly is the Government proposing to do? 

At the end of last week a number of us over on LinkedIn were looking at what this might mean and exactly how the law might be changed. In this post I want to set out the options as I see them. I won’t credit the individuals over on LinkedIn who have helped me try to understand what is going on and what might be proposed – but if you follow me over there you can see who was involved in the discussion. 

But first I want to set out a bit of the history of unfair dismissal compensation.  

Compensation limits through the ages!

In the Industrial Relations Act 1971 the new right to unfair dismissal was introduced with an overall limit on compensation set at either 104 weeks’ pay or £4,160 – whichever was the lower. For a bit of context, using the Bank of England’s Inflation calculator, £4,160 comes out as the equivalent of just over £53,000 today.

The annual increase I the limit continued to fall behind inflation – and even further behind wage inflation. When Labour came to power in 1997 they increased the limit from £11,300 to £12,000 but had a more radical change in mind. The Fairness at Work White Paper in 1998 said: 

“3.5… Although many awards are well below the current limit on compensation, which the Government has recently increased, the existence of a limit prevents some individuals from being fully compensated for their loss. The likelihood of proper compensation being awarded should also encourage employers to put proper voluntary systems in place. The current cap on compensation for unfair dismissal, which has steadily fallen in real terms, provides no such incentive. The Government therefore proposes to abolish the maximum limit on such awards.”

In the event the Government was persuaded not to abolish the limit altogether – but they did increase it significantly to £50,000. They also provided for that sum to be increased in line with inflation each year. Then in 2013 the Coalition Government introduced a new limiting factor. Instead of a simple limit on compensation – and in an echo of the 1971 Act – compensation was limited to the lower of a fixed sum of £74,200 and 52 weeks’ pay. That fixed sum has since increased with inflation and is now set at £118,223. 

So that means that someone earning £50,000 – a bit above national median earnings – has their compensatory award capped at one year’s pay. Someone earning £1,000,000 a year on the other hand can only get £118,213 – just over six weeks’ pay. Poor them.

Unfair dismissal compensation can be quite unpredictable. The compensatory award is based on the employee’s financial losses arising from the dismissal. If the employee finds a new job within the year then that will likely mean that their overall loss is below 52 weeks. A Tribunal also has a wide discretion to reduce the amount awarded to reflect the possibility that the employee would have been dismissed even if the employer had behaved reasonably or because of the employee’s ‘contributory fault’. 

Nevertheless for many potential claimants the limit on compensation for ordinary unfair dismissal is a frustration and means they will recover less than the amount they have lost. There is of course no such limit on discrimination cases or in cases where the employee was dismissed for making a public interest disclosure (whistleblowing). As a result, there are undoubtedly some cases where an employee seeks to shoehorn a discrimination or whistleblowing claim into what would otherwise be a normal unfair dismissal case – though opinions vary on the extent to which that is an issue. 

Labour’s pre-election approach

When the Employment Rights Bill was published back in 2024 it did not seek to make any changes to compensation for unfair dismissal. Nor was the issue mentioned in the Labour Manifesto or “Labour’s Plan to Make Work Pay” – the policy document that the manifesto promised to implement in full. 

But the proposal that was abandoned in 1998 is still discussed in Labour circles. Back to 2022 Labour’s Employment Rights Green Paper said: 

“Caps which limit the amount of compensation that workers can receive are unfair and discourage companies from following the law. Labour will ensure that workers will receive full compensation, without statutory limits, if they suffer loss because of employers’ breaches of the law.”

That Green paper emerged from Labour’s “Power in the Workplace Taskforce” chaired by Andy Mcdonald MP who soon afterwards resigned from Keir Starmer’s Shadow Cabinet citing a lack of support for his proposals to increase the Minimum Wage. So the Green Paper did not exactly emerge from Starmer’s inner circle. But it was still published and it’s proposal on compensation  would instinctively be supported by many Labour MP’s 

Options for ‘lifting the cap’

So given that background what do we think the Government is actually proposing? There are I think, three main options.

1. Abolish all limits on compensation for unfair dismissal
2. Abolish (or substantially increase) the limit of 52 weeks’ pay but keep the overall limit of just over £118,000 and continue to increase it in line with inflation
3. Increase the overall limit  by a significant, above inflation amount

I don’t know what deal has been done or indeed how specific the Government was when it made its deal to accept a six-month qualifying period. But it does seem to me that the most sensible option is to remove the 52-week limit imposed under the Coalition and revert to one overall limit that is uprated each year in line with inflation. 

Such a change would chiefly benefit workers on average (or just above average) wages. Those on low wages, without much in the way of pension entitlement, are unlikely to get anywhere near the 52 week limit if they are dismissed unfairly but not subject to any form of discrimination. 

But abolishing the limit altogether would mainly benefit those earning well above the average. It would also be disastrous for the Employment Tribunal system. Imagine an investment banker who claims unfair dismissal because he was not given an opportunity to improve his performance before being dismissed. With salary, bonus, share options and pension contributions his losses could easily run into the millions. That would be a claim worth investing in and he would be able to afford top-flight lawyers to represent him. The employer would also need to be seriously lawyered up and would put a great deal of effort into defending the case. Every issue would be litigated and much more Tribunal time would be taken up than for a normal unfair dismissal claim – crowding out claims from those who might be in much more need of the compensation they are seeking. 

I am not at all convinced that the parties in a case of that sort should have recourse to the Employment Tribunal system where there are no fees to pay and no significant cost risk if they lose. Altogether I think it would be odd if a Labour Government made a change that would mainly benefit the very highly paid (and those who represent them). 

As I write this, we don’t know what the Government’s proposal actually is. That in itself is a bit puzzling. The press release was ambiguous and we still don’t have any formal announcement clarifying the position. Perhaps there is all sorts of wrangling going on in the background. Perhaps there is a technical issue about whether it is now too late to make an amendment to the Bill that introduces a whole new topic rather than fine tune the detail of a provision that is already in there. Could it even be that talk of a deal is premature? 

We should find out very soon. The Bill returns to the Commons on 8 December and before then we should get an amendment paper indicating just what the Government is actually proposing. So far, the Bill’s website has posted 139 amendment papers since the Bill was introduced. Number 140 is going to be very interesting.    

[UPDATE: Actually I was wrong about that. Number 140 is just a single amendment from Andy McDonald MP insisting on rejecting the Lords amendment to the qualifying period. This is backed by a group of left wing MPs and will be rejected. We still need to see what amendments the Government puts forward]