The Employment Rights Bill is back in the Commons on Monday afternoon following yet another round of back and forth with the House of Lords over plans to scrap the cap on unfair dismissal compensation.
Business owners have said scrapping the cap will pile further pressure on small businesses and make them even more wary of hiring at a time when unemployment is rising. One said it would make taking on new staff “legal roulette”.
The government wants to remove the statutory cap on unfair dismissal compensation. Right now, it is the lower of 52 weeks’ gross pay or £118,223.
Peers argued that the removal of the cap on unfair dismissal compensation was neither in the manifesto nor consulted on — and could turn fairly standard dismissals into very expensive, and potentially unlimited, tribunal claims.
For small businesses, all of this lands at the same time as a brutal fiscal regime comprising increased Employers’ National Insurance (NI), higher minimum wages, business rates and general payroll pressure.
Day one unfair dismissal
Only last month, the government dropped day one protection from unfair dismissal, with the current version of the Bill moving ordinary unfair dismissal protection from a two-year qualifying period to six months. The new regime is due to start in January 2027.
While existing day one protection for discrimination and automatically unfair reasons stays, the symbolic day one unfair dismissal promise has gone.
Ministers are now signalling they are prepared to keep recalling MPs and peers and push the Bill through over the Christmas period to get it done before Parliament rises.
Policy wobble, not tweak
Kate Underwood, Founder at Southampton-based Kate Underwood HR and Training, said: “Westminster has backtracked on day one unfair dismissal, but has then tried to shove the Bill through fast so nobody can poke holes in it.
“They’ve quietly dropped the original day one plan and landed on a six-month qualifying period instead.
“That’s a big policy wobble, not a tweak. And it’s happened because the Lords have pushed back and the Government wants this wrapped up, pronto, with as few changes as possible.
“Meanwhile, business owners are left trying to keep up with the Employment Rights Bill, the Budget, the cost of living crisis, with many still rebuilding from Covid.
“Real businesses do not have time for constant rule changes and political point scoring. They need clarity that sticks, not HR whiplash every time Westminster changes its mind.”
Kate Allen, Owner at Kingsbridge-based Finest Stays, a luxury holiday let firm, said: “Scrapping the unfair dismissal cap would make employers even more nervous about hiring. On top of the NI hikes, there’s a growing sense that everything is shifting against SMEs.”
Kundan Bhaduri, Entrepreneur at London-based The Kushman Group, was equally critical of Labour and its Employment Rights Bill.
He said: “This Government has managed the peculiar feat of simultaneously claiming to champion small business whilst legislating precisely the opposite, a contradiction so glaring that even the most charitable interpretation requires suspension of disbelief.
“The Employment Rights Bill returns to Parliament on Monday after the House of Lords has repeatedly rejected the removal of the statutory cap on unfair dismissal compensation.
“The Lords’ rejection was rooted in the perfectly reasonable observation that transforming fairly standard dismissals into potentially unlimited financial liabilities was neither promised in Labour’s manifesto nor properly consulted upon.”
Meanwhile, Patricia McGirr, Founder at Burnley-based Repossession Rescue Network, claimed uncapped awards would further disincentivise employers from hiring.
She said: “Uncapped unfair dismissal awards would turn small business hiring into legal roulette. Most small employers support strong worker protections and already shoulder most of the risk. This Bill takes it further.
“Six months barely gives you time to know if someone is right for the job, and removing the compensation cap lets tribunals write cheques small firms must cash blind.
“Big corporates can absorb that hit. Small businesses cannot. When every hire carries unlimited downside, hiring stops.
“Jobs do not disappear, they are never created, and the workers this law claims to protect may never even get through the door.”
Colin Crooks MBE, CEO at Intentionality, believes that, overall, the Employment Rights Bill should not be an issue for most businesses that put their staff first, but removing the compensation cap is dangerous.
He said: “This Bill shouldn’t panic good businesses because they’re already running proper processes, giving regular feedback and setting clear expectations from day one. That’s not a burden, it’s basic professional management.
“The pandemic cost us hundreds of thousands of experienced workers. Over a third of 50-59 year-olds who left cited stress and work-life balance. If we want them back, we need workplaces that demonstrate respect from the start.
“But removing the compensation cap entirely creates unknowable, uninsurable risk that will hit small businesses hardest.
“Increase it to £150k if needed, but uncapped awards turn routine employment disputes into potential business-ending liabilities. The Lords are right to push back on this.””
Photo by Paul Donnellon on Unsplash
