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The government’s flagship Employment Rights Bill has encountered further obstacles after the House of Lords dealt another blow to the legislation. This new setback follows closely on the heels of a government announcement just two weeks ago claiming a breakthrough agreement had been reached between business groups and trade unions concerning workers’ rights to unfair dismissal claims. At the time, ministers expressed hope that this deal would allow the bill to proceed smoothly through Parliament and become law.
Despite these assurances, members of the House of Lords have supported a Conservative motion calling for a thorough review before any move to remove the existing cap on compensation for unfair dismissal cases. The proposal to eliminate this compensation limit—which originated from discussions between unions and businesses—is a late addition to the bill and was not included in Labour’s original manifesto. The bill is now set to return to the House of Commons shortly, with the legislative process known as “ping-pong” continuing between the two houses until they reach an accord.
Intended to cover England, Scotland, and Wales (excluding Northern Ireland, where employment law is devolved), the Employment Rights Bill has been heralded by ministers as the most significant enhancement to workplace rights in decades. The legislation aims to introduce several new protections, such as guaranteeing sick pay and parental leave from an employee’s first day, banning exploitative zero-hour contracts, and expanding the right to request flexible working arrangements. Nonetheless, some business representatives have voiced concerns that these changes could increase operational costs.
Last month, the government abandoned its initial pledge to grant employees the right to claim unfair dismissal from their very first day of employment, after business organizations argued this would discourage hiring. Instead, the proposed legislation sets a six-month qualifying period before this right applies. As part of the recent compromise between industry groups and unions, ministers agreed to remove the current limits on compensation awards in standard unfair dismissal cases, which currently cap payouts at the employee’s annual salary or £118,223, whichever is lower. This move would align ordinary unfair dismissal compensation more closely with “automatic” cases—such as dismissals involving discrimination or whistleblowing—where payments are uncapped.
In the House of Lords debates, Conservative shadow business minister Lord Sharpe criticized uncapped compensation limits, arguing that they would disproportionately benefit higher earners and described the policy as “a recipe for the rich and a wrecking of justice for working people.” He also highlighted that the government introduced the changes at an unusually late stage without proper consultation, and insisted that requesting a review of compensation caps was not obstruction but the “bare minimum that a competent administration should undertake.” Independent peer Lord Londesborough echoed these concerns, describing backlash from businesses over the proposed uncapped compensation as “anti-entrepreneurial, anti-enterprise and, I fear, a job destroyer.”
Defending the government’s position, Business Minister Baroness Lloyd explained that the current cap incentivizes claimants to frame their cases as discrimination to access uncapped awards, noting that these claims are more complex and time-consuming for tribunals. By removing the cap on ordinary unfair dismissal claims, she argued, tribunals would reach judgments more quickly and reduce their workload. She emphasized the government’s collaboration with employers and unions in reaching this compromise and urged peers to let the bill proceed so workers could benefit without further delay.
However, the Federation of Small Businesses expressed reservations, warning that unlimited compensation could be challenging to manage and might clog tribunal processes further. Executive director Craig Beaumont stated that this particular concession was never discussed or agreed upon in negotiations. Meanwhile, TUC general secretary Paul Nowak denounced ongoing opposition to the bill from Tory peers as “undemocratic,” pointing out that the legislation reflects a clear manifesto commitment and has undergone extensive scrutiny, and accusing Lords of defying public and supporter opinion who largely back the bill’s measures
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