Unfair Dismissal Compensation Cap to be Removed
The government has published an amendment to the Employment Rights Bill which would remove the statutory cap on the compensatory award for ordinary unfair dismissal. The amendment deletes section 124 of the Employment Rights Act 1996, which is the provision that currently limits compensation to the lower of 52 weeks’ pay or the annual statutory maximum. If brought into force in this form, unfair dismissal compensation will be uncapped for standard claims, not just in the existing categories such as whistleblowing or health and safety.
For employers, the removal of section 124 would reshape dismissal risk. Current settlement modelling and board assumptions rely on the cap as a concrete reference point. Without it, loss assessments become fully fact driven and open ended, subject only to existing tribunal controls such as mitigation, Polkey reductions and contributory conduct. Senior exits and roles where re-employment is difficult will carry the highest exposure, and those cases are likely to become more expensive and harder to forecast.
If enacted, ordinary unfair dismissal compensatory awards would no longer be limited by a statutory ceiling. Tribunals would retain their current power to award such compensation as they consider just and equitable, but without any reference back to section 124. In practical terms, this aligns ordinary unfair dismissal with discrimination and whistleblowing in terms of loss scope, even though unfair dismissal does not bring injury to feelings awards.
The highest financial risk sits with longer-serving or higher-earning employees, and with those whose realistic re-employment prospects are weaker because of sector, geography or role profile. These are the cases where claimants can evidence extended loss and where employers have historically relied most heavily on the statutory cap. Without that framework, boards and HR teams will need tighter evidence and clearer internal sign-off processes around dismissals and negotiated exits.
Uncapped awards already arise in claims such as discrimination and whistleblowing. Removing section 124 does not change those routes. Instead, it would extend the potential for high-value awards into standard unfair dismissal cases, where discrimination or whistleblowing is not alleged. Employers therefore face a wider set of scenarios in which financial exposure can run significantly beyond the traditional cap, while still needing to manage the existing uncapped regimes in parallel.
Six-Month Unfair Dismissal Qualifying Period
The same amendment also confirms that the qualifying period for ordinary unfair dismissal is to be reduced from two years to six months, through changes to section 108 ERA 1996. Once in force, employees will reach unfair dismissal protection far earlier in their employment. You already have separate, detailed guidance on the six-month qualifying period which can be linked from this section.
The six-month threshold represents the policy compromise in place of earlier proposals for day one unfair dismissal rights. Current indications are that the change is intended to take effect from 1 January 2027, although the date is not yet confirmed in legislation.
From a workforce planning perspective, protection from unfair dismissal is therefore expected to start halfway through the first year rather than after two years, which compresses the timeframe for performance management and probation decision making.
Once the amendment is in force, an employee who reaches six months’ continuous service will generally have unfair dismissal protection, subject to the usual exemptions and exceptions. This pulls a large number of employees into the unfair dismissal regime who would previously have been outside scope for another eighteen months. For HR and line managers, that shift will require much earlier engagement with capability, conduct and fit issues.
The combined effect of earlier qualifying rights and uncapped compensation is what shifts the overall risk profile. Protection arrives sooner and the financial consequences of a flawed dismissal potentially become more severe. That combination drives a need for better early-stage supervision of new hires, stronger documentation and earlier legal input on problematic exits, even where discrimination or whistleblowing is not in play.
How the Amendment will Work
Legally, the amendment is straightforward. It substitutes the words “six months” for “two years” in the relevant parts of section 108 ERA 1996. It then removes section 124 entirely and deletes references to it in other provisions, including those that deal with indexation and ministerial powers to vary the cap. The basic award provisions, weekly pay cap and the structure of section 123 are left intact.
That approach leaves the architecture of unfair dismissal awards in place but removes the statutory ceiling for compensatory awards. Tribunals still look at actual financial loss, they still apply mitigation and they still consider whether a fair dismissal would have occurred in any event. The difference is that they no longer step back at a fixed maximum, so in high-value cases awards could continue for longer periods of loss where the evidence supports it.
1. Basic and compensatory awards
The basic award continues to mirror statutory redundancy pay, with the weekly pay cap and maximum basic award still limiting that part of the remedy. The compensatory award remains focused on loss arising from the dismissal, including wages, benefits and sometimes pension loss. With section 124 removed, that compensatory element is no longer constrained by a statutory figure, so evidential loss becomes the sole boundary, aside from mitigation and tribunal discretion.
2. Alignment with other uncapped regimes
Once uncapped, unfair dismissal compensation sits closer to discrimination and whistleblowing in financial terms. There are still structural differences. Unfair dismissal does not include injury to feelings or aggravated damages. However, the headline message for employers is that the absence of a cap will allow higher, evidence-based loss claims to run in more cases, even where no protected characteristic or protected disclosure is involved.
3. Transitional and commencement issues
The amendment itself does not set the commencement date or the transitional rules, which are expected to follow in secondary legislation. The working assumption in the market is that the new regime will apply based on the effective date of termination falling after the commencement date, rather than applying retrospectively, but the exact position will only be confirmed once commencement regulations and any accompanying guidance are published. Employers will need to watch for the final text to understand exactly when the uncapped regime and shorter qualifying period begin to apply to real-life dismissal decisions.
Impact on Settlement Agreement Strategies
Removing the compensatory cap alters the dynamics of settlement. Without a statutory maximum, claimants are likely to frame their loss claims over longer periods, sometimes ambitiously. Employers will need to think more carefully about evidence on job search efforts, sector conditions and likely re-employment timeframes to keep negotiations grounded in reality. The statutory cap will no longer provide a convenient ceiling around which to cluster settlement offers.
For larger employers, the impact will be felt most keenly in senior exits and contentious departures. Where settlement discussions already involve substantial sums, the absence of a statutory cap may embolden some employees and advisers to argue for extended loss, potentially up to retirement in certain scenarios. That does not mean tribunals will award that level of compensation, but it shifts the tone and starting point of negotiations, which has a knock-on effect on budgets and expectations.
Settlement templates and internal approval thresholds often use the statutory cap as a reference figure. Those frameworks will need rethinking. Organisations are likely to move towards more bespoke assessments, factoring in seniority, length of service, the strength of the legal case and realistic re-employment prospects. HR and legal teams will also need clearer instructions on when to seek board-level approval for proposed packages, particularly where exposure has the potential to exceed former cap levels.
The uncapped regime also affects how and when to hold protected conversations and without prejudice discussions. Employers may take a more cautious approach to making quick financial offers in the absence of any process, because the cost of getting the strategy wrong could be higher. Worked-through options that balance process, risk and cost will become more important, especially in situations where there are hints of discrimination or whistleblowing issues alongside potential unfair dismissal.
Standard settlement agreement templates and guidance will need updating to reflect the new environment. That includes the way offers are framed, the ranges that HR can propose without further approval and the assumptions used for legal risk assessments. Internal guidance that still refers to the statutory cap as a benchmark will quickly become misleading once section 124 is removed.
Impact on Probation Periods
A six-month qualifying period concentrates risk management into a much shorter timeframe. Probation periods, early reviews and clear expectations in the first months of employment will take on a greater significance. Employers will want to avoid situations where issues are identified but not acted on until after the six-month point, because that delay will carry unfair dismissal risk that does not exist under the current two-year model.
That does not mean employers should push marginal decisions into short-service dismissals to avoid liability. Discrimination and whistleblowing protection already applies from day one, and rushed or poorly documented exits in that window can still generate high-value claims. The more sustainable strategy is to improve early supervision, invest in clear feedback and ensure that managers escalate concerns promptly, so decisions taken within probation are informed and defensible.
Employers should review probation policies and practices to check that review points fall early enough to be meaningful under a six-month threshold. In many cases that will mean more structured check-ins during the first three to four months and clearer triggers for extending probation where there are concerns. Training for line managers will also be important, so they understand the legal and financial consequences of allowing issues to drift past the qualifying point.
Good documentation becomes more important. Notes of performance discussions, records of objectives and evidence of any support offered will all feed into both risk assessment and defence if a claim arises. Under an uncapped regime, tribunals will look closely at the reasonableness of the employer’s actions, especially where the dismissal has serious financial consequences for the employee. Weak records increase the risk of adverse findings and higher awards.
There is a risk that some organisations respond by becoming more cautious or conservative in hiring, particularly for borderline candidates. Employers should be mindful that overly risk-averse approaches can create their own issues, including indirect discrimination. The better focus is on improving recruitment processes, making thoughtful hiring decisions and then managing the first six months actively rather than assuming that risk only really starts after two years.
Tribunal Claims & Litigation Impact
Uncapped awards are likely to lengthen certain tribunal cases. Higher-value claims usually require more extensive evidence on loss, including expert evidence in some cases, and more detailed disclosure on job search efforts and vacancies. That drives longer hearings and increases the strain on already pressured tribunal lists. Employers can expect more time and management resource to be diverted into defending these claims.
The risk of higher awards may also encourage some claimants to pursue litigation rather than settle at an early stage, particularly if they have legal expenses insurance or trade union support. On the employer side, there may be a greater appetite for early risk assessment and structured settlement discussions before positions become entrenched. Both trends will influence caseloads and costs for in-house legal and HR teams.
Without a statutory cap, case valuation becomes an exercise in scenario planning rather than simple reference to a maximum figure. Employers will need to look more carefully at the individual circumstances of each claimant, including age, skills, sector conditions and any health factors, when setting reserves. Insurance arrangements and self-insured excess levels may also need review in light of the potential for higher awards.
The tribunals already face delays in listing hearings. Longer, higher-value cases will add to that pressure. For employers, that means more drawn-out timelines between dismissal and final resolution, which can create uncertainty in financial reporting and workforce planning. It may also increase the attractiveness of mediation and other alternative dispute resolution options as a way to avoid protracted litigation.
Litigation strategies may need recalibration. Some cases that might previously have been defended robustly on principle may now be better suited to early, pragmatic resolution if the downside risk is materially higher. Conversely, employers may be more motivated to contest claims that they regard as weak, to avoid sending a signal that high demands will always be met. Clear internal criteria for when to settle and when to fight will help keep decision making consistent.
DMS Perspective
The amendment is not yet in force, and commencement and transitional details are still awaited. However, it is government-backed and there is a real prospect that some form of uncapped regime will reach the statute book. Employers have an opportunity now to prepare, rather than reacting once the changes are live. Early planning will help smooth the eventual transition into an environment of earlier protection and uncapped compensation:
- Audit dismissal and settlement procedures for high-risk roles and senior exits.
- Review probation policies, review points and escalation processes in light of a six-month qualifying period.
- Update internal guidance and training materials that currently rely on the statutory cap as a reference point.
- Plan for more evidence-driven settlement negotiations, with greater focus on mitigation and labour market conditions.
- Monitor the Bill’s progress and be ready to update contracts, policies and playbooks once commencement dates and transitional rules are confirmed.
Key areas to review include exit processes, probation management, internal guidance on dismissals and the way settlement decisions are made and approved. HR and legal teams should also start briefing senior leadership, so boards understand that assumptions based on the current compensatory cap are likely to become outdated. That understanding will support more realistic budgeting and better-informed workforce decisions over the next two years.
