The UK government is drafting a significant legal change that could see employees win unlimited compensation for unfair dismissal claims, removing the current statutory cap. This potential reform is causing concern among businesses who fear it could lead to massive financial payouts.
What is the Current Law and What's Changing?
Under the existing rules, workers who successfully claim unfair dismissal face a compensation limit. They can receive a maximum of £118,000 or their annual salary, whichever figure is lower. This cap has been in place for years, setting a clear financial boundary for employers.
The new Labour government, however, is now preparing to abolish this ceiling entirely. The change would be enacted through an amendment to the flagship Employment Rights Bill, which is expected to become law by the end of 2025. If confirmed, the reforms would be introduced in stages, starting from April 2026.
Backtrack on 'Day One' Rights and New Claim Window
This move comes after the government abandoned a more radical proposal. Prime Minister Sir Keir Starmer had initially pledged to allow workers to claim unfair dismissal from their very first day in a job, eliminating the standard two-year qualifying period.
That plan was dropped last year following strong backlash from businesses nationwide. The revised legislation now proposes a different adjustment to the qualifying period. Instead of two years, employees would need to have worked for six months before being eligible to bring an unfair dismissal claim, a significant reduction but not the 'day one' right originally promised.
Business Fears and Legal Reaction
The prospect of uncapped compensation has alarmed the business community. Legal experts have been quick to voice their concerns about the potential impact.
Dan Pollard from the law firm Charles Russell Speechlys described the policy as "frankly bonkers" in comments to the Daily Mail. He warned, "Unless introduced overnight it has the potential to create a bloodbath as employers seek to exit underperforming senior staff ahead of time."
Meanwhile, Colin Leckey, a partner at Lewis Silkin, highlighted who would gain the most, stating that "higher paid employees will stand to benefit the most" from what he called a "seismic change." The Sun has reported that the government may be introducing these plans to compensate for breaking earlier manifesto promises made to workers and trade unions.
The proposed removal of the compensation cap marks one of the most substantial shifts in UK employment law in recent years, setting the stage for a major debate between worker protections and business flexibility.
