In the final weeks of 2025, the United Kingdom’s much-anticipated overhaul of workers’ rights has hit a dramatic and unexpected snag in Parliament, throwing the fate of the landmark Employment Rights Bill into doubt just days before lawmakers are scheduled to break for Christmas. Despite months of intricate negotiations and a hard-won compromise between government ministers, business leaders, and trade unions, the House of Lords delivered a stinging defeat to the government’s flagship proposal on December 11, reviving deep divisions over how best to balance employee protections with business flexibility.
The legislation, heralded by the government as the "biggest upgrade to rights at work for a generation," was designed to modernize the employment landscape across England, Scotland, and Wales. Its headline measures include granting workers the right to sick pay and parental leave from their very first day on the job, banning exploitative zero-hour contracts, and strengthening the right to request flexible working. But it is the contentious issue of compensation for unfair dismissal that has now become the bill’s flashpoint, pitting the government against a skeptical upper chamber—and by extension, the business community and some crossbench peers.
At the heart of the dispute is a late-stage Labour proposal to abolish the cap on compensation in ordinary unfair dismissal cases. Currently, payouts are limited to either the employee’s annual salary or £118,223, whichever is lower. The plan to scrap this ceiling emerged from recent talks between unions and business groups, representing a significant shift meant to bring ordinary unfair dismissal awards into line with those for discrimination and whistleblowing, which are already uncapped. However, this proposal was not part of Labour’s original manifesto and was introduced at a notably advanced stage in the legislative process.
On Wednesday evening, the Lords voted 244 to 220 in favor of a Conservative-backed amendment requiring a formal review of compensation limits before any move to abolish them. Tory shadow business minister Lord Sharpe was blunt in his criticism, warning, “This policy is a recipe for the rich and a wrecking of justice for working people.” He argued that uncapped compensation would disproportionately benefit higher-paid workers—such as senior executives—and could prove a “job destroyer” for smaller businesses already facing economic headwinds. Lord Sharpe further cautioned against making such a significant policy change “at the 11th hour” without proper consultation, adding, “This is not obstruction. It is the bare minimum that a competent administration should undertake.”
Independent crossbenchers echoed these concerns. Lord Londesborough, an entrepreneur, described his inbox as “awash with anger and indignation” from business owners who felt the government was “sneaking in this clause on uncapped compensation.” He warned, “It is anti-entrepreneurial, anti-enterprise and, I fear, a job destroyer.” Similarly, Lord Vaux of Harrowden noted the irony that the main beneficiaries could be senior employees on high salaries, not the lower-paid workers the government claims to be helping.
Defending the government’s position, Business Minister Baroness Lloyd argued that removing the cap would actually streamline the tribunal process. “The Government believe that the current compensatory award caps incentivise claimants to construct complex cases which allege discrimination to access uncapped compensation. These types of claims are more complex and take longer for the tribunal to handle. Therefore, by our removing the compensation cap for ordinary unfair dismissal claims, this incentive will be lessened, making it easier for tribunals to reach a judgment more quickly and decreasing burdens on the system.” She insisted that the new proposal was the result of “collaborative” work with both employers and trade unions, urging peers to allow the bill to progress so that workers could benefit from the reforms “without any further delay.”
Yet, business groups remain wary. The Federation of Small Businesses warned that unlimited settlements could “further gum up tribunals” and complicate dispute resolution, a concern echoed by Craig Beaumont, the group’s executive director, who said, “That was not a concession discussed with us or agreed by us in the negotiations.” The government has already dropped a previous commitment to offer all workers the right to claim unfair dismissal from their first day in a job—another move designed to mollify business concerns. Now, the right will only begin after six months of employment, marking a significant retreat from Labour’s original position and angering some MPs, including Angela Rayner, who championed the package before stepping down in September.
Unions, meanwhile, have reacted with fury to the Lords’ intervention. TUC general secretary Paul Nowak declared, “Continuing to vote down the Employment Rights Bill, a clear manifesto commitment, is undemocratic. This bill has been debated and scrutinised for months. Tory peers are actively defying the will of the British public and their own supporters who overwhelmingly support measures in this bill.” Maryam Eslamdoust, general secretary of the TSSA, called on the government to treat the situation as an emergency: “The Labour government must now treat this an emergency and override the Lords’ attempts to override democracy. It’s imperative that the bill is delivered in full by Christmas, even if that means the Commons sitting at weekends to ensure it passes.”
The government, for its part, remains adamant that the bill will pass before Christmas, with Prime Minister Keir Starmer vowing to “work with the unions, businesses and legislators to get this done in line with our implementation road map.” In a move seen as an attempt to tip the balance in the upper chamber, Starmer recently appointed 25 new Labour peers to offset the Conservative majority, despite previously pledging to abolish the Lords altogether. Business minister Chris Bryant bluntly blamed “twenty-five Tory hereditary peers” for the defeat, while Labour’s shadow business secretary Andrew Griffith accused the government of “yet another humiliating defeat” and called for further compromise.
As the parliamentary “ping-pong” continues—with the bill set to return to the Commons on Monday—time is running short. The Christmas recess looms, and unions have called for MPs and peers to delay their break and sit through the weekend if necessary to ensure passage. The stakes are high: failure to enact the bill would not only delay long-promised upgrades to workers’ rights, but could also deepen political divisions and fuel accusations of constitutional crisis. Mike Clancy, general secretary of the Prospect union, warned, “The behaviour of the House of Lords can no longer be seen as constructive scrutiny and increasingly looks like cynical wrecking tactics that risk a constitutional crisis if they continue.”
For now, both sides are digging in. The government insists it has struck a fair compromise that balances the interests of workers and businesses, while critics in the Lords and business community argue that the late-stage changes are risky and insufficiently scrutinized. Unions and Labour supporters, meanwhile, see the Lords’ resistance as an affront to democracy and a betrayal of public will. As the clock ticks down, the outcome remains uncertain—and the future of workers’ rights in the UK hangs in the balance.
With Parliament’s Christmas break fast approaching, the fate of the Employment Rights Bill will be decided in a matter of days, not weeks. The coming showdown in Westminster promises to be both high-stakes and deeply consequential for millions of workers and employers across the country.
