Employment Rights Bill passed

Posted Monday 22nd December 2025

Unfair dismissal compensation cap removed

Parliament has now passed the Employment Rights Bill, which has now become the ‘Employment Rights Act 2025’. The Act represents the biggest change to employment laws that this country has seen in a generation.

Arguably the most significant changes were introduced into the Act in just the last few weeks. They affect Unfair Dismissal rights/claims by:

• Removing the statutory cap on compensation for successful claims (currently the lower of 52 weeks pay or £118,223). Compensation will therefore become potentially unlimited. This change was introduced particularly late in the parliamentary process, with minimal notice or formal consultation. The impact on business owners, management teams, HR teams, and employment lawyers is likely to be substantial, once the details are fully digested and implemented (see below); and
• Reducing the period of required service to bring claims (currently 2 years) to 6 months. This represented a compromise on the Government’s initial plan to introduce effective ‘day-1’ rights to bring unfair dismissal claims.

Key implications for employers

The removal of the cap will almost certainly affect the way employers approach dismissal and exit negotiations:

• Increased financial exposure: Employers will face greater risk and potential cost when exiting employees, particularly those with higher earnings.
• More complex negotiations: Lower-earning employees may now have unrealistic expectations, potentially leading to longer and more protracted settlement discussions.
• Reduced flexibility for commercial decisions: Employers may find it more challenging to make swift exit decisions at lower cost for senior or highly-paid staff.
• Uncertainty over claim value: Even the most straightforward unfair dismissal claims may become harder to value, as there will be no immediate financial parameters to guide settlements.

The removal of the cap is likely to take effect in 2027, but that is to be confirmed. Employers ought to begin preparing for its implementation in 2026 though, when planning ahead.

Joelson is ready to advise employers on navigating this change and managing the resulting risks. For guidance on this matter, the wider Employment Rights Act 2025 or any other employment law issues, please contact Jonathan Bruck, Partner and Head of Employment at Joelson.

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This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.

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