Employment Rights Bill clears Lords

The Employment Rights Bill has passed the House of Lords, clearing its final parliamentary hurdle at the fourth attempt. It will now become law as the Employment Rights Act 2025, receiving Royal Assent in the coming days.

Opposition peers withdrew an amendment that would have retained a compensation cap on awards for unfair dismissal, the only remaining measure blocking the Bill's passage, following assurances from government and pressure from business groups to end the stalemate that began in September.

Employers will now face a six-month qualifying period for unfair dismissal protections for new employees hired from July 2026, down from the current two-year period.

Business secretary Peter Kyle said he was delighted peers had backed down. "This landmark legislation, now soon to be in law, will drag Britain's outdated employment laws into the 21st century and offer dignity and respect to millions more in the workplace," he said.

Business groups including the CIPD, CBI and the REC wrote to ministers this week saying "now is the time for Parliament to pass the Bill".

Business minister Baroness Lloyd of Effra told peers: "We have heard the House's concerns around the compensatory cap, and it is important to reiterate what was said in the last debate: in practice, few awards get anywhere close to these caps, with a median average award for unfair dismissal being £6,746 in 2023-24. Employment tribunals will also continue to assess compensation based on evidence of specific losses when determining awards."

She reiterated last week's commitment that the government will publish an enactment impact assessment when the Bill achieves Royal Assent and before commencement regulations on the unfair dismissal package are brought to Parliament.

"This assessment will be public and will include an assessment of the impact of removing the compensation cap," she said. "We will also convene meetings early in the new year so that stakeholders can share their views on the impact of this measure. Based on the outcomes of these discussions, I can confirm that the government will consider what additional dedicated support or guidance might be appropriate as we implement these measures."

Misrepresentation

Lord Sharpe of Epsom, Conservative, accused the government of misrepresenting the agreement reached in tripartite negotiations with trade unions and business associations.

"The agreement - I choose that word carefully - was to remove the 52-week salary cap while retaining and increasing the overall monetary cap, which is currently just over £118,000. That was the compromise that was understood by the business community, but the government have now chosen not only to abandon that agreement but to misrepresent it to the House.

"To prove that point, I will quote from the same letter from the six business organisations, which states: 'Unfortunately, we have not been able to reach a compromise that satisfies both the unions' request for removal of the cash cap and our position of retaining it while raising the overall limit.'"

He added: "This is made all the more serious by the government compounding the error by behaving unconstitutionally. The removal of the compensation cap was introduced at ping-pong, having been debated at no previous stage of this Bill, neither in your Lordships' House nor in another place. This House exists to scrutinise legislation, not to rubber-stamp late-stage surprises, still less ones accompanied by misleading assurances."

Lord Sharpe's amendment had called for a formal review and consultation of the unfair dismissal compensation cap, as had happened in 1999 and 2013 when it was previously changed.

Constitutional question

The thrust of the opposition against scrapping the monetary limit on compensation is that it will attract unfair dismissal claims from high-earners to an already overwhelmed tribunal system that would currently be settled without litigation.

Crossbench peer Lord Sentamu, former Archbishop of York, said: "What is most concerning, at least for me, is not the limit or the reducing of the compensation package - that is not the question - but the use of ping-pong to produce a new clause that has never been debated in your Lordships' House or even in the Commons. That is a constitutional question that bothers most of us."

Lord Sharpe said he was "somewhat reassured" by the commitment to undertake an impact assessment of scrapping the caps before commencement, and withdrew his motion to amend.

Peter Cheese, chief executive of the CIPD, said: "There remain many concerns on key provisions within the bill, including compensation caps for unfair dismissal, the need for the wider review of the tribunal system and enforcement practices, along with reference periods for zero hours contracts, changes to trade union recognition, and proposed reforms to collective consultation rules. These should all be part of proper consultation and we welcome the government's statements in this regard.

"With so much change, it will be crucial for the government to provide clear advance communication, alongside practical guidance and support for employers. And to provide this in good time, particularly for smaller organisations that don't have in-house HR support."

Colin Leckey, partner at Lewis Silkin, said: "There will definitely be a sense of relief among employers that it's the end of the road and an end to prolonged uncertainty.

"That said, this will also be mixed with annoyance at the process and outcome. Rushing the Bill into Parliament within first 100 days meant some very bad ideas were included in the first draft and have had to be substantially amended."

He added that the "astounding last-minute decision" to remove the limit on unfair dismissal compensation without any prior consultation or costing, lacked any understanding that very highly paid employees do not bring unfair dismissal claims at the moment because of the cap.

"The end result is that the government is going to have to work quite hard going into 2026 to restore confidence that the measures in what is now the Act will be developed and implemented with proper thought and understanding," he said. "Meanwhile it is a mixed bag for employers, but the sheer number of changes means that they will all be impacted to some extent. Every HR team in the country will need to invest time in understanding what this means for their policies, and processes."

"Given the prospect of unlimited unfair dismissal compensation and six-month qualifying periods from 1 January 2027… it won't just be Santa getting the sack at Christmas 2026. Indeed, it would come as no surprise if we were to see the biggest mass dismissal of British staff in history in advance of that deadline, as employers bring forward any plans they might have to re-size or restructure their workforce or exit highly-paid employees who are not performing as strongly as they would wish."

'Historic day'

TUC general secretary Paul Nowak said: "This is a historic day and early Christmas present for working people across the country, and the trade unions who represent them.

"Banning exploitative zero-hours contracts, sick pay for all, expanding parental and bereavement leave, strengthening protections for pregnant women, whistleblowers and victims of sexual harassment, repealing Tory anti-union laws, ensuring union access to workplaces, establishing a social care fair pay agreement - these are just some of the watershed measures this Bill will now deliver.

"Unions and workers have long campaigned for these vital rights. Together, we have broken a decades-long economic status quo defined by insecurity, weak rights and poor pay. Finally, working people will enjoy more security, better pay and dignity at work thanks to this Bill.

"It's now vital that workers start feeling the benefits of this legislation in their lives as soon as possible. That means the legislation must be implemented in full, and at speed - with watertight secondary legislation to ensure there are no loopholes for bad bosses to exploit."