In December 2025, the Government proposed a new update to the (now) Employment Rights Act, which would remove the compensation cap on unfair dismissal claims, giving eligible employees the ability to seek uncapped financial loss.
This hit a significant roadblock on December 10th in the House of Lords, who voted 244 to 220 to reject the Government’s proposal, putting the Bill back into the House of Commons for further consideration.
As of the Bill’s Royal Assent and passage as law, the Lords since acquiesced to the government’s amendment and the cap on compensation for unfair dismissal has been removed. It is due to come into effect from January 2027 (see our dedicated employment laws page for more information). Despite this timescale, HR leaders and business decision-makers need to prepare for the impact now.
What’s the current compensation cap?
The compensatory award for unfair dismissal is capped at one year’s pay or £118,223, whichever is lower. Although the Government aimed to remove this cap, Peers instead insisted on a review and consultation within three months of the Bill becoming law. This sits alongside the earlier announcement that unfair dismissal rights are expected to apply from six months’ service from January 2027.
The impact of removing compensation caps
While the removal of the cap is uncertain, the debate confirms the direction of travel and requires businesses to prepare for potential uncapped liability. According to our legal experts, the impact will be felt most acutely in two areas: high-value cases and managing claimant expectations.
1. Strategic shift in high-value claims
The removal of the cap, should it proceed, would dramatically alter the risk profile for senior exits. Martin Cornforth, our Director of Litigation, believes the change will have the biggest impact in specific, higher-value scenarios:
“Tribunals and compensatory awards aren’t there to issue windfalls. This proposal is likely to make the biggest difference in cases for high earners, those with generous pension schemes, or individuals whose career prospects are significantly impacted.”
Historically, some high earners have avoided unfair dismissal claims because of the cap, opting for breach of contract claims instead. Cornforth notes that removing the cap changes that calculation, opening the door to higher-value unfair dismissal claims in situations involving:
- Senior employees in well-paid roles
- Individuals with significant pension arrangements
- Those facing long-term career impact
- Employees approaching retirement who may experience extended loss of earnings.
While the final details of the Employment Rights Bill are still being debated, proactive preparation will ensure your organisation is ready to adapt, whatever the outcome.
2. Managing the expectation gap
Jess Kelleher, our Head of Litigation, warns that the bigger challenge may come from how claimants perceive the value of their claim, rather than the awards tribunals actually make.
“We’re already seeing litigants in person using AI tools to draft claim submissions. These systems often pull from headline outcomes rather than the nuanced reality (the average award for these claims currently sits around £14k), so, with no cap we’re likely to see more claimants starting from unrealistic assumptions.”
Without a statutory compensation cap to anchor settlement discussions, expectations may drift further from what tribunals usually award, potentially clogging up an already overwhelmed ET system. Kelleher points out that even with the change, tribunals must act equitably and claimants must still show they’ve attempted to mitigate their losses.
“So in most cases, the practical impact is unlikely to be dramatic. But claimant expectations may rise, and claimant lawyers may take on more no-win, no-fee cases where the upside is suddenly far greater.”
That gap between expectation and reality may slow negotiations and make early resolution more challenging.
Preparing unfair dismissal change
Given the current uncertainty surrounding the potential removal of the unfair dismissal compensation cap, and with a required review pending, it is essential for HR and business leaders to proactively strengthen their organisational practices. The following sections outline areas that should be assessed to mitigate risk and prepare for possible legislative changes.
Strengthening senior exit processes
Organisations should implement closer scrutiny when managing senior exits. Dismissal decisions involving high-value employees must be supported by stronger documentation and policies, clearer processes and more detailed risk analysis to ensure compliance and reduce potential exposure.
Making decisive early employment decisions
With unfair dismissal rights taking effect after six months of employment, employers need to adopt a firmer approach to decision-making within the initial probation period. This proactive stance can help address potential risks before statutory protections apply. Hyper-efficient performance management processes and training managers to understand their responsibilities are essential.
Navigating complex settlement discussions
Negotiations around settlements may become more intricate, especially if compensation figures are not anchored to the current statutory cap. Employers should be prepared to robustly challenge exaggerated claims for losses and emphasise the duty of employees to mitigate their losses.
Comprehensive employment law support
With the potential removal of the unfair dismissal compensation cap, the need to review the foundations of your people practices has been significantly heightened. Sound documentation, confident decision-making and effective support for employees all play a role in reducing risk and increasing clarity. Here’s how we can support you.
Employment contracts and policy services
Well-structured employment documents is essential for making confident and defensible dismissal decisions. We ensure your contracts, handbooks, and policies are clearly written, closely aligned with your organisational values, and compliant with the latest regulations. This cohesive approach helps you withstand scrutiny and also accurately reflect the expectations of the workforce you wish to attract and retain.
Retained employment law support
Ongoing access to legal support and advice enables employers to respond swiftly and consistently in situations where the stakes may be heightened by the Employment Rights Bill. Our practical legal guidance is tailored to your organisation’s risk appetite and culture, supporting faster decision-making and positive business outcomes.
Keeping up to date with the Employment Rights Bill
Staying informed about the Employment Rights Bill can be challenging, especially given the recent ‘ping pong’ between the House of Commons and the House of Lords. We help you keep pace with these changes, ensuring your organisation remains compliant and prepared for any developments.
To help organisations and business leaders stay on top of the wider reforms shaping unfair dismissal and the Bill, our Employment Rights Bill tracker brings the latest developments together in one place. It summarises key updates and highlights what they mean for your contracts, policies and processes. Access it today and bookmark it for your future reference as we keep it up-to-date for you.
Get in touch with us
We’ll keep you updated on any developments in the Employment Rights Bill, but if you would like immediate support processes, policies or training, don’t hesitate to speak to our legal experts today.
