Employment Rights Bill Ping Pong Continues, With The House Of Lords Rejecting The Government's Plans To Remove The Unfair Dismissal Compensation Cap

The House of Lords has this evening (10 December) rejected the government's amended unfair dismissal provisions in the Employment Rights Bill and sent the Bill back to the Commons once again (by 244 votes to 220). The government's position on all the other outstanding issues was agreed. [Update: the next Commons debate on the Bill has now been scheduled for Monday 15 December. The government has opted not to offer any compromise drafting but instead to table a motion simply rejecting the Lords' amendment.]

On Monday the House of Commons agreed various government amendments to the Bill; most were minor and imposed obligations to consult before making various regulations, but a more controversial amendment was the complete abolition of the cap on compensation for unfair dismissal as a sweetener for retaining a six month qualifying period (rather than providing rights from day one), a position which the government considered had been agreed in discussions with business leaders and unions in order to break the deadlock. This would not require detailed secondary legislation and so could be implemented more quickly than the original proposals. In the Commons debate, Kate Dearden MP, Parliamentary Under-Secretary State for Business and Trade, confirmed that the government planned to apply the reduced qualifying period for unfair dismissal from 1 January 2027, with commencement regulations promised early in 2026. She also acknowledged the need to make the employment tribunal system more efficient and promised a taskforce to assist with this.

However, the government's recollection of what was agreed with business and unions appears to be at odds with that of some of the business leaders in the room. Opposition members reported having been told by those individuals that removing the numerical £118,223 cap, in addition to removing the 12 months' pay cap, was not what they had understood by the (ambiguous) reference to 'lifting' the cap. Copies of minutes of the discussions were sought, but Baroness Lloyd of Effra responded that, although civil servant notes were made, they had not been shared with attendees of the discussions and it would therefore be impolite to share them more widely. Significant concerns were expressed in the House of Lords as to the lack of consultation and opportunity for debate before making such a significant change so late in the parliamentary process. The government did commit to publish an impact assessment before the removal of the cap is brought into force, but this failed to persuade sufficient members to vote in favour of the government's proposal. Instead their Lordships agreed an amendment providing for the Secretary of State, within three months of the Bill being passed, to conduct a review of the compensation cap, to include consultation with unions, business, employment law practitioners and appropriate others. The ball is now firmly back in the government's court; it has been suggested that it could move a compromise amendment requiring a review and consultation but adding specific provision to enable the cap to be removed thereafter by secondary legislation, or it may decide to double down and simply ask the Commons to reject the Lords' amendment. 

The removal of the cap could have a substantial impact if it is ultimately agreed. It would significantly increase the value of claims for high earners (including impacting how board exits are handled) and for older workers with potential career loss claims (where the loss of earnings would exceed the current cap), heighten the impact of breaches of the Acas statutory code on discipline and grievance (for which compensation can be increased or decreased by up to 25%) and make ordinary unfair dismissal claims harder to settle particularly where there are arguments about valuation of generous benefits, mitigation or contributory fault. Although the change would not affect the compensation awarded to many employees on average wages, they would still be impacted by heightened delays caused by additional complex claims clogging up an employment tribunal system already under pressure. A possible silver lining for employers is that these changes would remove some of the incentive for framing a dismissal as due to whistleblowing or discrimination, although these claims retain other advantages over ordinary unfair dismissal claims (eg interim relief for whistleblowing claims, injury to feelings for discrimination and whistleblowing detriment claims, claims against individual colleagues, the threat of reputational damage). 

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