Draft Employment Rights Act 2025 (Unfair Dismissal) (Removal of Limit on Compensation) (Consequential Amendments) Regulations 2026
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The Committee divided: - Ayes: 10 / Noes: 4 - Question accordingly agreed to.
The Minister for the Future of Work (Kate Dearden)
I beg to move,
That the Committee has considered the draft Employment Rights Act 2025 (Unfair Dismissal) (Removal of Limit on Compensation) (Consequential Amendments) Regulations 2026.
It is a pleasure to serve under your chairmanship, Sir Alec. The draft regulations, which were laid before the House on 12 October, will make necessary consequential amendments arising from the Employment Rights Act 2025. Commencement regulations have been signed to confirm that, from 1 January 2027, the statutory cap on compensation awards for unfair dismissal will be removed. A number of other employment law provisions do not contain their own stand-alone compensation limits; instead, they cross-refer to the unfair dismissal cap. Once it is removed, those references would no longer operate as intended. The draft regulations therefore replace or remove them where necessary.
At present, compensatory awards for unfair dismissal are capped at the lower of £123,543 or 52 weeks’ gross pay. The 2025 Act removes the statutory cap by repealing section 124 of the Employment Rights Act 1996. Removing the compensatory award cap forms part of a wider package of reforms to strengthen unfair dismissal protections, which will reduce the qualifying period from two years to six months. Together, the changes will give more than 6 million employees greater security at work while ensuring that employers retain the flexibility to assess and, where appropriate, dismiss new recruits during the first months of employment.
Steve Barclay (North East Cambridgeshire) (Con)
Will the consequence of these provisions be felt more keenly in the public sector than the private sector, given the interaction of the regulations with final salary schemes, which are more generous in the public sector?
Kate Dearden
We do not think there will necessarily be a significant impact on employers. We are removing the cap—I will come on to the engagement we have had, and am happy to update the right hon. Gentleman on it—but a process will still be in place for unfair dismissal claims to be handled in an established, known way by judges.
Let me continue with the provisions affected by this statutory instrument. It will replace references to section 124 of the 1996 Act with references to section 123 of that Act. That means that tribunals will continue to determine compensatory awards based on what is
“just and equitable in all the circumstances”.
Compensation will remain based on evidence of actual and projected losses sustained by the claimant. In practice, most awards are expected to remain modest, reflecting the continued application of these well-established legal principles, as I have said. That is important, because most of these provisions concern claims for detriment brought by workers when that detriment consists of their contract being terminated.
Steve Barclay
The Minister just said that she thinks the implication of the provisions will be modest, but is it not the case that higher-paid potential claimants have been deterred by the cap, that removing the cap will open the door to many more higher-paid claimants, and that therefore their claims will not be modest, particularly, as per my previous intervention, when they relate to final salary pension schemes, such as those in the NHS?
Kate Dearden
As I have said, this change does not reset how tribunals calculate awards. Tribunals have well-established ways to calculate compensation that might be awarded for particular losses, and they will continue to base those awards on evidenced actual and projected financial losses. We are committed to ensuring that all employees receive fair compensation when they have been unfairly dismissed. We are talking about unfair dismissal here.
As I have said, the provisions concern claims for detriment brought by workers. Our long-standing approach is that such workers should receive neither more nor less compensation than they would have received as employees for bringing an unfair dismissal claim. These amendments preserve that alignment after the statutory cap is removed.
The regulations also amend section 140 of the Trade Union and Labour Relations (Consolidation) Act 1992. That provision concerns compensation where a person is refused employment or the services of an employment agency for reasons related to trade union membership. The amendment ensures that compensation in those cases continues to be aligned with the unfair dismissal compensation.
We are taking a different approach to sections 67 and 176 of the 1992 Act. Those provisions cover compensation payable by trade unions when members or former members have been unjustifiably disciplined, excluded or expelled. Parliament removed the compensation cap for unfair dismissal, but it did not intend to increase compensation limits for trade union discipline and expulsion cases. The regulations therefore preserve the existing limits in those provisions.
The regulations preserve the existing position by replacing the reference to section 124 with the fixed amount of £123,543, which is the current cap on unfair dismissal compensation. That amount will continue to be uprated annually in line with inflation using the retail prices index, and the additional limit based on 30 weeks’ pay will remain. That ensures that removing the unfair dismissal cap does not change the existing compensation limits that apply in these cases.
Finally, the regulations amend the ACAS Arbitration Scheme (Great Britain) Order 2004. They remove references to section 124 so that, following the removal of the unfair dismissal compensation cap, an arbitrator’s powers to award compensation continue to align with those of an employment tribunal.
The regulations are an important and necessary step in implementing the unfair dismissal reforms that Parliament has already agreed. They are necessary so that, when the unfair dismissal compensatory award cap is removed on 1 January, the wider statute book continues to work as intended. They preserve existing policy where appropriate, and ensure that related compensation provisions remain effective. I commend the regulations to the Committee.
Bradley Thomas (Bromsgrove) (Con)
It is a pleasure to serve under your chairmanship, Sir Alec. Removing the statutory cap on unfair dismissal compensation demonstrates yet again just how little this Government understand business. Insurance and legal specialists have warned that the removal of a legal limit on payouts, coupled with increasing the time limit for employment tribunal claims from three to six months, will trigger a substantial number of insurance claims. That will likely force insurance companies to pay higher rates to their own reinsurance, which ultimately will drive up prices for business customers.
Furthermore, it has been highlighted that as employment practices liability risks accelerate, speciality solutions will become increasingly valuable. This is yet another cost of employment, encompassing both direct financial expenditures and high-risk liabilities, which the Government expect employers to absorb without regard for the economic consequences. The domino effect of this policy is easy to predict: employers will become more risk averse and employment opportunities will decrease. When it becomes more expensive to hire, fewer people are employed. Furthermore, as there is no doubt that this policy will open the floodgates to claims, the already overstretched employment tribunal system will become all the more overwhelmed, inevitably leading to higher defence costs being incurred. That is good for lawyers; it is not good for businesses.
To be clear, we know the vital importance of employment rights, and we unequivocally support having comprehensive protection for workers, but the point we continue to emphasise, and that the Government keep dismissing, is that in order to have secure employment rights, there has to be secure employment in the first place. The Government continue inaccurately to imply that we do not care about workers and their rights, yet the Conservatives are the only ones fighting for policies that will actually protect jobs and get more people into work.
The removal of this cap will only deter employers further, push unemployment higher and compound the pressure on a tribunal system that is already over-extended. It is for those reasons that we will vote against it. To truly support the workforce, the Government must start listening to the businesses encountering the very hurdles that the Government continue to introduce. Creating an economic environment where businesses can thrive is the only way to drive hiring and sustain long-term job growth.
Sarah Olney (Richmond Park) (LD)
It is a pleasure to serve under your chairmanship, Sir Alec. The Liberal Democrats voted against plans to remove the compensation cap as the legislation made its way through the House, and we will oppose the SI today. The removal of the limit on compensation was a Government amendment at a very late stage in the progress of the Bill and was something that took a lot of people by surprise, which was why we were not able to support it on that occasion. We will continue to oppose it now.
The Minister said in her opening remarks that she would expect compensation payout awards to remain modest. I would challenge her on that point, because I do not know on what basis we can expect claims to remain modest if we remove a compensation cap. There will undoubtedly be an increase in claims from people who would now expect to receive an award above the cap, and that will not only increase the backlog, which is already immense in the tribunals and causing a huge amount of detriment to my constituents, and I am sure hers as well. It will contribute to increasing that backlog, and it will create massive disruption for employers. I am particularly concerned that where employers currently take out insurance and pay premiums to cover the cost of employment tribunals, those premium costs will either go up enormously, or some employers will find that their costs are simply uninsurable. That will create a knock-on impact so that some of these jobs will simply not be available. It will be too great a risk for employers to take people on.
Jo Stevens (Cardiff East) (Lab)
The easiest way to look at this is: if you do not dismiss somebody unfairly, you do not carry the risk of having to make a payout in compensation.
Sarah Olney
The whole point about a tribunal is to assess whether somebody has been dismissed unfairly. It will undoubtedly be the employer’s point of view that it is not an unfair dismissal, but the employee’s view that it has been. That is the point of a tribunal. The employer will not have been intending in any way to dismiss somebody unfairly. Nobody intends to dismiss unfairly. [Interruption.] The point of the tribunal is to test whether an unfair dismissal has taken place.
My final point to the Minister is this: as we go through this process, there is a fundamental shift at the moment between what humans will continue to do in the workplace versus what will be taken on by AI or other innovative tech. The changes will make it more difficult and more expensive for employers to take on human beings to do the work, which will undoubtedly accelerate the shift that is already taking place. For that reason, the Liberal Democrats will oppose this SI.
Steve Barclay
I am sure the hon. Member for Richmond Park will agree that it is quite rare for her and me to agree, but she is right to pick up on the Minister’s opening remarks and the oddity of the comments that claims will be modest, because, if claims are modest, why the need to remove the cap? The removal of the cap is because some claims will not be modest. It seems self-evident that a consequence of the regulations will be an increase in claims, and therefore an increase in the risk to employers and a deterrent to employers to hire, which is the point that my hon. Friend the Member for Bromsgrove made from the Opposition Front Bench.
First, it seems odd to suggest that claims will be modest while bringing forward the removal of a cap, which provides scope for unlimited claims moving forward. As I tried to suggest in my intervention, in the NHS, for example, some consultants at a senior level will be well paid. They will have final salary schemes and their claim could be quite significant. Indeed, some NHS managers are on salaries of several hundred thousand pounds and a claim in that instance could be significant. That brings me on, following the point from the hon. Member for Richmond Park, to a second consequence of the regulations. Not only will the quantum of claims increase, but the quantity of claims will increase. Currently, particularly for senior salaries, people might pursue other routes and not make a claim because the cap is such that it creates a deterrent. However, the removal of the cap acts as a pull factor because it is an incentive for those on the highest salaries, and that does not just apply to areas such as the NHS. If we think about financial services firms, some very large claims could flow from the removal, and someone in a modest role in such a firm will feel a sense of unfairness when they see the mega-payments that might come as a consequence, so the quantity of claims will increase.
Thirdly, I was a little surprised by the Minister’s opening remarks, because the draft regulations were not set in the wider context of the other changes that the Government are making, such as giving trade unions greater access to employers, making it easier to come in and harvest or encourage claims, or to create a grievance where there may not be one. The draft regulations should not be seen in isolation: they need to be seen alongside the other changes that the Government are making.
To respond to the right hon. Member for Cardiff East, surely the answer is not to have unfair dismissal. She has had a very respected legal career in this field— I think it was in this field, but she certainly has a lot of experience in this area—and no one wants to see claims or action by employers that justify an unfair dismissal claim. However, an employer is not guilty until proven innocent, and some people will be incentivised to bring claims that may not be justified. Therefore, there will be instances—although not all—where claims that are not valid are incentivised by the removal of the cap. Ultimately, that will be a further cost to employers, in addition to the many other costs that they face at a time of rising inflation and growing regulation.
That is why I find myself in the uncharacteristic position of agreeing with the hon. Member for Richmond Park. The quantum will increase, and the quantity will increase. This also sits alongside other changes that the Government are making, and it speaks to a Government who do not trust employers or back businesses, but who are happy to see additional costs on those businesses. They then seem surprised when youth unemployment, in particular, continues to rise as a direct consequence of the decisions they make, including the decision they are making today.
Kate Dearden
It was disappointing to hear what the Opposition said, as voting against the draft regulations does not mean that the removal of the compensation cap will not happen—that is already in place. What we are debating today is about keeping the statute book neat, and I hope I made that clear in my opening remarks. We discussed this issue at length during the passage of the Bill—I am old enough to remember last year—and today we are talking about keeping the statute book neat. I want to reflect on a few points, and I apologise if this is repetitive.
Sarah Olney
I want to challenge what the Minister said about us debating this measure at length. It was not introduced until a very late stage, so there was not a lengthy debate about removing the compensation cap.
Kate Dearden
I fondly remember debating it on the Floor of the House, and it was of course debated in the Lords too.
I will address some of the points made by Opposition Members. As I have said, employers will continue to comply with the law and will not be directly affected by these changes, so the impact on businesses will be limited. The vast majority of unfair dismissal awards are well below the existing cap, and tribunals rarely award compensation at the maximum level.
Removing the cap does not mean that large awards will become routine. In 2023-24, there were 646 awards for unfair dismissal from employment tribunals, and the median award was £6,746. Lifting the cap does not mean that compensatory awards will become impossible to anticipate. As I said in my opening remarks, tribunals follow well-established principles when calculating the compensation that might be awarded for particular types of losses resulting from unfair dismissal. I am glad that Opposition Members mentioned employment tribunals, because, under the Conservatives’ watch, unlawful fees were introduced. They presided over a substantial reduction in tribunal funding during austerity and left the tribunal system facing significant capacity and workload pressures. Yet again, we are trying to get the support and fix and improve the system.
That is why I have spoken at length with the shadow Minister, the hon. Member for Bromsgrove, about the really important work we are doing with colleagues in the Ministry of Justice to make the system more resilient and make sure that people get access to justice. This is about fairness and security and employees knowing that they can get the justice they absolutely deserve. The Conservatives made it harder for workers to access justice; we are strengthening the rights to make justice possible. I am going to choose not to bite on our wider approach on employment rights, because I could spend however long we have left talking about why that legislation is important and why I am proud that this Government are leading on it.
As I have explained, the decision to remove the unfair dismissal compensation cap has already been made by Parliament. These regulations make the consequential amendments needed to ensure the related compensation provisions continue to operate correctly once the statutory cap on unfair dismissal compensation is removed. They are necessary to maintain consistency across the statute book and preserve existing policy where appropriate. I therefore commend the regulations to the Committee.
Question put.