‘Unfair dismissal’ and why the agreement between unions and employers is a win for delivering improved workers’ rights  

Last week saw an important change to the Employment Rights Bill that is currently going through Parliament. In the main, all new laws need to be agreed by the House of Commons, where the Labour Party currently has a large majority, and the House of Lords, where no party has a majority and the Conservatives are the largest party. 

In general, the Lords do not entirely block laws passed in the Commons, recognising that MPs have been elected by the public. However, they can suggest amendments and delay new laws. 

The Employment Rights Bill has been passing through Parliament for well over a year. For several months the Lords were insisting on a number of changes to the Bill, including on the issue of day-one access to unfair dismissal. 

What is unfair dismissal? 

An unfair dismissal happens when there is no fair reason for ending an employee’s contract, the reason wasn’t enough to justify dismissing them, or the employer did not follow a fair procedure. Ultimately, an employee can take their employer to a special kind of court (the Employment Tribunal) if they believe they have been unfairly dismissed, and if they win their case they may be entitled to compensation. 

Currently, in most cases, employees can’t make claims for unfair dismissal until they have worked in a job for two years (“an ordinary unfair dismissal claim”). This qualifying period is exceptionally long by international standards. There are some exceptions to this, for example when an employee is dismissed for being pregnant or for being a union member.  

What was the proposed change to the unfair dismissal right in the Employment Rights Bill? 

The Employment Rights Bill proposed that this two-year period for bringing a claim of ordinary unfair dismissal would be removed. A new probation period would also have been introduced in law, which likely would have applied for the first nine months of being in a job. During this period, many of the rules around what constitutes an unfair dismissal would not have applied. Therefore, in reality it would have been hard for many workers to show that an unfair dismissal had taken place in the first nine months. 

Despite this, many employer groups were worried about dealing with more claims being made against them in the Employment Tribunal, even if they were to ultimately win their cases. This concern was compounded by existing backlogs in the Employment Tribunal system due to long term under resourcing. 

Business groups were extensively lobbying Peers (the Lords) about the importance of these concerns from their perspective, helping contribute to the impasse in Parliament over passing the Bill. 

A report by the Resolution Foundation also pointed out that most European countries do have some kind of qualifying period, however normally much less than two years. 

What was the compromise reached between unions, employers and the government? 

Unions need to see the Employment Rights Bill become law. After fifteen years of the erosion of trade union and employment rights it marks a real and major step in strengthening workers’ rights.  

Many of these new rights require regulations and codes of practice to be drawn up and consulted on before they can come into force. In July the Government published a road map of when key changes in the Bill would take place. At that time the expectation was that the Bill would be passed by Parliament in early autumn. But the ongoing impasse in Parliament risked adding months or even years of delay to the new rights becoming a reality. 

Unions were very keen to prevent any further delays to the passing of this historic bill. To try and address concerns of members of the Lords and business groups, a group of unions, employer bodies and government came together to find a compromise on unfair dismissal. 

This meant that both business and employers had to give some ground. 

What does this agreement involve? 

Like any agreement that unions negotiate, each side needed to move their position. The key move on the union side was accepting that unfair dismissal will only be able to be claimed from six months in a job, but not from day one. It’s important to note that this is still a significant decrease, down from the current two years, and also that this is without the probation period originally envisaged. Full unfair dismissal rights will now kick in from six months. 

Employer bodies conceded that they would now work with government and unions to make sure the Bill is passed quickly by Parliament, seeking to work through their remaining concerns constructively in the consultation process mentioned above. 

The second key concession, which has perhaps been less well understood, was on lifting the cap on compensation for unfair dismissal. 

What is the compensation cap and what does lifting it mean? 

If a worker is found to have been unfairly dismissed by the Employment Tribunal they can potentially be reinstated to their role or re-engaged by their employer (however this is very rare), or provided with compensation. 

There are two parts to the compensation. The basic award, which is based on how long you have worked for the employer who dismissed you, how old you are and your gross weekly pay (up to a maximum of £719) a week. Workers receive half a week’s pay for each full year worked under age 22, one week for every year between 22 and 41, and one and a half weeks for every year after that. 20 years is the most service that can be recognised. 

The second part is the compensatory award. This is compensation for the money you have lost because you lost your job. This is generally the loss of pay and benefits for the period the employee is out of work, and the person who has been dismissed must show they are making efforts to find new work. This is currently capped at the lower of a year’s gross pay or £118,223.  

Securing the lifting of the cap is a major win for unions, that they have been calling for nearly 30 years. 

Why is lifting the cap on compensation important? 

While most successful unfair dismissal claims do not reach the cap, removing it is important for three key reasons: 

1. It delivers equal treatment. Workers at all salary levels should be properly protected by the law. It is also a basic legal principle that when someone improperly incurs losses, they should be able to recover them from the person (in this case the employer) who causes them to suffer that loss. 

2. The cap penalised those who might not be able to find a job within a year. In the case of some of the highly specialised fields where Prospect represents members, this can be a particular problem. It is not unusual to meet Prospect members who are the only people in the UK working in a particular specialist field or role. 

3. The presence of the cap allowed some unscrupulous employers to ‘price in’ the cost of an Employment Tribunal claim and therefore act in ways they knew to be deliberately unfair. There is now a much better incentive for employers to try to resolve issues rather than dismiss employees unfairly and risk an unfair dismissal claim being made against them. 

What will happen next? 

As Prospect General Secretary Mike Clancy has said: 

“The deal we have agreed to is both a good deal for our members and a necessary one. We have significantly strengthened unfair dismissal rights for millions of workers, created a compelling deterrent against bad employer behaviour, and given ourselves the best possible chance of getting this legislation into law.”  

The Government has now put forward an amended version of the Employment Rights Bill, which will be voted on next week and then it will go back to the Lords on Wednesday. 

Many of the Peers’ key concerns have been listened to and met by the Commons. The Lords rightly have scrutinised this Bill in detail for nearly nine months. So, we hope there will be no further delays. 

It seems likely that the new six month right to unfair dismissal, will begin on 1 January 2027.