Update on the Employment Rights Bill: Important changes to unfair dismissal

One of the government’s flagship policies under the Employment Rights Bill was the introduction of “day one” unfair dismissal rights. This generated significant concern amongst employers and genuine confusion amongst HR professionals, particularly around what a new “reasonable test” and lighter-touch process might look like in practice. However, with the Bill seemingly stalled in parliamentary “ping-pong” and the House of Lords refusing to concede, something had to give.

What has changed?

First, the proposal to introduce “day one” unfair dismissal rights has been scrapped. However, this will not affect those types of dismissals which are potentially automatically unfair e.g. by reason of discrimination, whistleblowing or connected to health & safety. Those automatic categories remain with no qualifying period required to bring a claim.

Instead, the government has agreed to the House of Lords’ amendment to set a six-month qualifying period, replacing the current period which requires two years’ service. For background, the threshold has shifted several times in previous administrations; having also been a one year requirement between 1999 and 2012 and a six-month period back in the late 1970s (both under a Labour government). In some senses this seems like a political football always being kicked about, but Labour intends to make this change by way of new legislation and not by existing powers, as had been done previously. This approach will make it more difficult for future governments to change.

What about the Initial Period of Employment (IPE)?

Good question. There has been speculation that the introduction of a new IPE and lighter touch process will now be scrapped. However, this is not yet certain as the House of Lords’ suggested amendment to a qualifying period of six months did still have this procedure attached.

However, if the intention is to retain the same law and process, but simply move the threshold for claiming, it would not make sense to implement new tests and rules now that this concession on the qualifying period has been made. Time will tell!

Possible changes to unfair dismissal compensation

A further development is that the government has said it will now “lift the compensation cap”. This seems to be a new idea. Currently compensation in an unfair dismissal case comprises two elements:

• a basic award, calculated using the same formula as statutory redundancy pay; and
• a compensatory award, capped at the lower of (i) 52 weeks’ pay at the time of dismissal or (ii) the statutory maximum of £118,223 (whichever is the lower)

As the statutory cap increases annually it seems more likely the government would scrap the 52-week cap rather than the statutory rate. Either way, this is a significant change and one which will mean greater risk to employers, greater payouts and a new approach to considering value and possible settlement. It may also encourage more claims by employees.

What employers should do now

Further detail is expected, but employers can begin to implement several actions:

Probationary periods

Continue to use probationary periods actively. While the six-month threshold shortens the timeframe for assessing whether a new starter is a suitable fit, it still provides more flexibility than the previously proposed day-one rights. Our employers guide to probation periods, covers how the ERB could change probation periods and how employers can utilise them to avoid possible unfair dismissal claims.

Manager engagement and record-keeping

Managers will need to address performance and conduct issues promptly and keep clear records to justify terminating employment at any point. If your current probationary periods run for six months, you may wish to consider reducing them to five months to ensure sufficient time to make and implement decisions before the qualifying period is reached.

To this end, the six-month mark is somewhat of a “cliff edge” and you may wish to buckle up in advance! The ERB roadmap had set the change for 2027 but with the reduced qualification period being agreed, this could become law as soon as 2026.