The Employment Rights Act 2025 (the ERA 2025) received Royal Assent today and will significantly expand access to ordinary unfair dismissal protection. The ERA 2025 reduces the qualifying period from two years to six months and removes the statutory cap on compensation for unfair dismissal claims, materially increasing potential exposure for employers once the changes are brought into force.
Timing
The reduction in the qualifying period is due to take effect on 1 January 2027. The government has not yet confirmed when the removal of the compensation cap will come into force. During the final debate in the House of Lords, it indicated that it would publish an impact assessment on the removal of the cap before bringing forward commencement regulations.
We published a summary of the implementation plan in the summer (here) but the government delayed some of the consultations until after the Bill received Royal Assent. The change to the unfair dismissal qualifying period, rather than it becoming a day-one right, means there is no longer a need to consult on those provisions. The government has indicated, however, that it will publish a consultation on the zero hours contracts measures now that the ERA 2025 has received Royal Assent. It is not yet clear if it will make other changes to the implementation timetable.
One measure comes into force today: the repeal of the legislation that allowed employers in certain sectors to impose minimum service levels in the event of a strike.
These reforms are likely to have a material impact on employer risk exposure and workforce planning, particularly once the unfair dismissal qualifying period is six months and the compensation cap is no more. Employers may wish to consider how their dismissal processes, probationary arrangements and litigation risk management will need to adapt in light of these changes.
Without the compensation cap, the employment tribunal may become a more attractive forum for high earners, with its absence of fees and awards of costs or expenses being the exception rather than the rule. High earners are likely to bring other heads of loss into the remit of compensation for unfair dismissal in a more significant way, including pension loss, incentives and future loss of bonuses and other benefits.
Implications for Micklefield clauses
Micklefield clauses are intended to prevent employees from recovering damages for the loss of rights under incentive arrangements where they forfeit those rights as a result of termination, even if the termination itself is later found to be unfair or in breach of contract. Given the potentially significant value of such rights, these clauses often feature prominently in disputes involving senior employees, which until now would usually take place in the civil courts.
The ERA 2025 does not amend the law governing Micklefield clauses or incentive plan drafting directly. However, its reforms to unfair dismissal protection may materially increase the circumstances in which employees test these clauses in practice. Whilst the financial limit on breach of contract claims in the employment tribunal remains at £25,000, we may see claimants who enjoyed valuable share options or similar incentives from their former employer seeking to challenge the validity of a Micklefield clause and introducing loss of these rights as a head of claim when pursuing an unfair dismissal claim.
Starting to prepare
We recommend reviewing your approach and contractual drafting in relation to incentives, bonuses and benefits, and taking advice on how you can mitigate any associated risk. We will shortly publish our quarterly horizon scan insight, with a high-level overview of what to expect in the coming year and practical points to consider in preparing for the various changes the ERA 2025 will bring.
