The Employment Rights Bill becomes an Act

The Employment Rights Bill cleared the final Parliamentary hurdle on 16 December, when the House of Lords agreed it. The Government had to make a major concession to unfair dismissal rights in order to get the Bill through the House of Lords. This article focuses on that change (and some other late changes to unfair dismissal law) and the possible implications.

Changes to unfair dismissal proposals

In order to get the Bill through Parliament, the Government had to make some last-minute amendments to what was seen as one of the key proposals in the Bill, namely day one unfair dismissal rights. We know from talking to clients that this is one of the proposed changes employers were most concerned about and the good news is that the proposal is no more. However, the approach that has been passed into law still significantly increases risks for employers.

The Government had been struggling to get the Employment Rights Bill passed, due to the House of Lords repeatedly rejecting some of the proposals. They therefore decided to compromise in order for some of the measures in the Bill to come in as soon as possible, rather than risk a substantial delay to all of their proposals.

As a result, there are three key changes to the provisions in relation to unfair dismissal:

• It is no longer going to be a day one right – rather employees will attain the right not to be unfairly dismissed after six months
• There will be significant changes to how compensation is calculated in unfair dismissal claims
• The changes are likely to come into force earlier than we thought.

Six-month qualifying period

Is this good for news for business? We know that employers were concerned about day one rights. If a move from day one rights to six-month unfair dismissal rights was the only change, then many businesses would definitely be breathing a sigh of relief. That is because a six-month qualifying period should enable employers to be able to continue using probationary periods to assess employees' performance and conduct, with dismissals within the first six months of employment continuing to be low risk unless an employee has a protected characteristic or can assert they are a whistleblower or rely on one of the other less common automatic unfair dismissal reasons. 

The original day one rights proposal did allow for a statutory probationary period but that was likely to involve some specific procedural requirements. Additionally, we were expecting employees to have some form of modified right to claim unfair dismissal during that period. Employers will now be faced with a much simpler picture, where they still have relative freedom during the first six months of employment.

However, there will be less flexibility in relation to probation periods than under the current law. A probation period of more than six months is unlikely to be of much benefit when employees attain unfair dismissal rights at that point. Additionally, we can envisage that there could be challenges where an employee is off sick for much of the probation period and the absence is linked to a disability. Under the current law, the lower risk option may be to work on the basis that extending the probation period is a reasonable adjustment. However, in the future, employers may feel pressured to make a decision within six months even if they have seen little of what an employee can do. That could give rise to disability discrimination risks.

No cap on compensation

This is a major change and one that businesses will be concerned about. Most readers will know that the compensatory award in an unfair dismissal claim is capped at a statutory amount, which is currently £118,223, or 52 weeks' gross pay if lower. This cap will be removed, which could have a significant impact on all unfair dismissal claims and would particularly benefit low earning employees. For example, taking some rough figures, under the current law if someone on a salary of £25,000 a year is unfairly dismissed they could, say, be out of work for four years and only be able to recover £25,000 in compensation despite having £100,000 of losses. Whereas someone on £100,000 a year could recover all of their losses if they are out of work for only one year. Arguably that is unfair to lower earners, who might suffer more as a result of an unfair dismissal than higher earners who will often have better prospects of finding a new role.

The changes will, however, also benefit higher earners. That is particularly the case for employees with share options and bonuses. While those can be awarded as part of unfair dismissal compensation they are of little relevance where there is a statutory cap, meaning that employees might be forced to pursue more difficult contractual claims under the current law. That will no longer be the case.

Removing the cap on compensation therefore means significant increased risk for employers. Organisations sometimes decide to make a commercial decision on the basis that they don't consider the financial risk of an unfair dismissal claim worth the statutory cap to be significant. That is particularly the case when dismissing senior executives, for whom the statutory cap may only be worth a few months' pay. Those types of cases often lead to negotiations over settlement agreements and those will become more difficult in the future because employees will have much higher expectations. 

Given the above, we anticipate that cases are likely to become harder to settle. In addition, remedy hearings in unfair dismissal cases are likely to become longer and more complex.

There is one potential positive for employers. A common frustration for employment lawyers and businesses is employees threatening weak whistleblowing or discrimination claims in an attempt to negotiate higher settlements. They currently do that because the statutory cap does not apply to those claims and they are therefore more attractive than pure unfair dismissal. However, there should be no tactical incentive to do that if unfair dismissal compensation is unlimited. The change could therefore result in many of the claims we see being less complex and having more realistic prospects of success. If that was the case then it could help speed up the employment tribunal system (or at least avoid further adding to the backlog). However there will still be incentives for claimants to allege discrimination or whistleblowing, not least because of the reputational impacts for employers of losing such claims.

Timing

The Government intends that the six-month unfair dismissal right will come into force on 1 January 2027, with no transitional provisions. We always knew it would be some time in 2027 but employment law changes often come into effect in April or October so employers might have expected to have more time to prepare. 

The really significant point is that the Government intends to extend protection immediately from that date to employees who already have six months' employment. This means that anyone who is employed between now and July 2026 will gain unfair dismissal rights with effect from 1 January 2027. Employers should therefore start looking at their probation procedures and how to improve performance management during the early days of employment sooner rather than later.

The Government has not said when it intends to abolish the cap on compensation. It would make sense for this to happen at the same time as the change to the qualifying period and we expect it to apply to all claims issued on or after the implementation date.

What happens next

The Bill is due to receive Royal Assent on 18 December and will become the Employment Rights Act 2025. We can then expect to see numerous public consultations, before its provisions come into force gradually over the next two years via a series of statutory instruments. 

However, there will be one immediate change. The Government published a roadmap for implementation of the Bill in July, which stated that the Strikes (Minimum Service Levels) Act 2023 – which allows employers in key public services to specify employees who have to work during industrial action - would be abolished when the Bill receives Royal Assent. So that will happen on 18 December, although the provisions of the Act have never been used so this is largely symbolic.

As always, if you have any queries on the contents of this article please get in touch with one of the authors or your usual WBD contact.