Jobs cliff-edge looms ahead of workers’ rights overhaul

Since the summer, a growing number of highly paid professionals across Britain have been getting an unexpected tap on the shoulder.

“What we’re seeing is quite often they’re just summoned into a meeting and they’re not told in advance what it is about,” says Jo Keddie, head of employment at law firm Forsters.

“Then they’re told in that meeting that a decision has been made to make their role redundant and they’re offered a settlement package.”

In many cases, the offer is precisely £123,543 – the current cap on claims for unfair dismissal.

“It is people at a senior level, often earning comfortably over £150,000,” Keddie says.

These may be the lucky ones. In many other cases, employees still have no idea that their contracts are about to be terminated.

Lawyers expect a Christmas Eve clear-out across offices ahead of a Jan 1 deadline set under Labour’s Employment Rights Act. This, they say, will be a cliff-edge for job losses.

Two key changes to the unfair dismissal claims process will come into effect from the start of next year: a cap on claims for unfair dismissal, currently set at £123,543, will be scrapped; and the time a worker needs to have been employed before they can make a claim for unfair dismissal will be slashed from two years to six months.

The first change means people will be able to lodge tribunal claims for potentially unlimited sums if they feel they’ve been wrongly let go. And the second change means far more will be able to do so.

Bosses are terrified that they will face a tidal wave of multimillion-pound claims that could be big enough to bankrupt start-ups, or swamp financial services firms in protracted, years-long legal battles.

To protect themselves, they are dismissing highly paid staff pre-emptively. Employment lawyers say staff turnover at some companies is as much as double normal levels in the run-up to Christmas.

Companies are also pulling back on hiring, slashing probation periods and enforcing ruthless performance reviews to weed out the worst staff.

Adding to anxiety in boardrooms is the fact that the Jan 1 changes come just as AI is upending companies’ workforce strategies.

“All the Government is doing by putting in this new legislation – rightly or wrongly – is you’re going to reduce the number of people who are employed,” says Sir Martin Sorrell, the founder of WPP and executive chairman of S4 Capital.

Britain is already in a hiring downturn, with companies still reeling from Labour’s £25bn increase in employer National Insurance contributions, which drove up the cost of employing people.

Angela Rayner, the Housing Secretary, who as deputy prime minister championed the Employment Rights Act, promised it would deliver “the biggest upgrade of workers’ rights in a generation”.

Yet executives view it very differently. The chairman of one major UK company that employs several thousand staff says: “The entire Employment Rights Act is a catastrophe for jobs, for investment and the economy as a whole. I think it’s sheer madness.”

‘Plan to make work pay’

Labour’s workers’ rights shake-up was billed as “Labour’s plan to make work pay” and was a key manifesto pledge in 2024.

Sir Keir Starmer declared that the act would increase living standards, boost productivity and bring “security and dignity for people in work”.

From the outset, opponents warned that the reforms would backfire. Kemi Badenoch, the Tory party leader, said last year that the act was “the single measure that is complained about more than any other in this government’s programme” and promised to repeal every measure within it.

She branded it a “330-page assault on flexible working, written in the TUC’s headquarters, designed to drag Britain back to a world where unions call the shots and employers carry the blame”.

The act’s headline policy was banning “exploitative” zero-hours contracts and Rayner’s focus was on rights for lower-paid workers.

Whether you agree with these policies or not, they are clearly red meat for many Labour voters. But Labour’s decision to change the unfair dismissal claims process has baffled many.

Scrapping the cap on claims is a policy that exclusively affects people earning triple the average full-time salary, points out Michael Burd, a consultant partner at Lewis Silkin, a law firm.

The median award for unfair dismissal in the employment tribunal courts is lower than £10,000 – less than a tenth of the current £123,543 cap. The main people affected by the changes will be executives and bankers.

“The honest truth is that for your ordinary worker, blowing away the cap isn’t going to make much difference because they never came anywhere near it anyway,” Burd says.

Scrapping the cap was a policy adopted after Labour was forced to back down on its manifesto promise to introduce certain day-one rights for workers, such as the right to claim for unfair dismissal.

In December 2025, after a lengthy negotiation with trade unions and business groups, the Government climbed down from this pledge and instead announced that workers would get protections against dismissal after six months.

‘An odd priority’

At the same time, ministers announced the cap on claims would be scrapped.

“It’s certainly an odd priority. I think there was an element of, they were climbing down from a big commitment on day-one rights and they needed a bit of a ladder to climb down,” says Neil Carberry, the chief executive of the Chartered Institute of Personnel and Development.

Traditionally, highly paid staff heading for the chop were given a “take it or leave it” offer of £125,000 as a settlement because employers knew £123,543 was the cap, says Burd.

“That person had no incentive to take any action because they would not be able to get any more.”

Suddenly, that has changed. High earners will have a route to claiming potentially vastly higher sums based on their projected losses not just from their salaries, bonuses and stock options but also their pensions.

Civil servants could make large claims too, given generous final salary pension schemes.

“You can lose hundreds of thousands of pounds in pension value,” says Alex Mizzi, the legal director in the employment team at Howard Kennedy.

However, it is financial services and insurance firms that are most vulnerable because they have the highest concentrations of highly paid staff, with even junior staff members on salaries above £100,000.

“Lifting the compensation cap in particular will focus minds in a sector with a lot of senior and specialist roles,” says Kevin Spencer, the chief executive of Markerstudy Group, an insurance firm that employs more than 4,500 people.

In banking, private equity and asset management, the use of complicated forms of compensation, such as carried interest and bonuses, can also further inflate claims.

John Godfrey, of TheCityUK, says firms are worried that claims could spiral as high as £20m: “It will be multi-millions, absolutely.”

Some precedent for this has already been set in discrimination cases, which have uncapped compensation.

In 2024, for example, the employment tribunal ordered the London Borough of Hammersmith and Fulham to pay its former director of public services £4.6m over disability discrimination and harassment.

“I can’t imagine that it was part of the Government’s game plan when the first case comes to tribunal where some head of a swaps desk has been got rid of quickly and is claiming £15m for it,” Godfrey says.

Redundancies were largely stable in September, according to Office for National Statistics figures. However, these numbers are based on HR1 forms, which companies only have to complete if they intend to make at least 20 staff redundant. They are therefore unlikely to capture small-scale clear-outs of senior leadership.

Drilling down into certain sectors also shows a different picture. Redundancies in financial services and banking were up 13pc in the nine months to September, reaching 61,000. That was the highest nine-month total in the sector since March 2021, when the economy was hammered by lockdown.

Bosses in the tech sector are similarly concerned about the looming changes. Executives are particularly conscious that staff who have stock options could be able to claim for enormous lost earnings if the company is working towards an investment or a sale.

“We’ve seen a couple of scale-ups that have been looking to get rid of staff who have not necessarily been seriously underperforming, but they have been coasting along. They are moderate achievers but they’re not super achievers,” says Mizzi.

Lawyers acting for dismissed workers say companies are making sudden decisions without following conventional consultation processes, instead offering enhanced packages to cut a quick deal.

“A number are taking shortcuts and are prepared to offer higher compensation in acknowledgement that they haven’t complied with their legal obligations,” says Keddie.

“As the time gets closer to the end of December, some employers are becoming either reckless or ruthless.”

Susannah Kintish, who chairs the employment department at Mishcon de Reya, says: “They’re cutting the deadwood people. I’ve got clients doing this in the music industry, the financial services industry, the insurance industry, the beauty industry...”

‘Dangers have risen markedly’

The impact of the coming changes can be measured not just in redundancies but in hiring too.

“We’re being a great deal more cautious about hiring policies in every way because you can’t afford to get things wrong, obviously particularly for highly paid staff,” the UK chairman says.

“We’re doing much more in-depth referencing. We’re not taking the risk of creating a new role unless we have absolutely no choice. The dangers of getting an appointment wrong have risen markedly.”

Lord Sharpe of Epsom, a Conservative peer, accused the Government last year of “importing continental sclerosis” by emulating European’s more regulated jobs market.

The change is coming just as companies are already reassessing their recruitment strategies because of the rise of artificial intelligence.

“You have a more rigid labour market when people are already taking a more jaundiced view of hiring and adding to the workforce,” says Sir Martin. “Those two things are coming together.”

Confidence in hiring has already been in negative territory since mid-2025 and businesses are wary of increasing their headcounts, says Maxine Bligh, the interim chief executive at the Recruitment and Employment Confederation.

“Particularly now, this focus on protecting people in work is coming at the expense of getting people into work,” says Bligh.

Hiring processes are getting much tougher as companies try to protect themselves from expensive mistakes. Larger corporates have been embedding more scrupulous probation policies. Six-month probation periods are being cut to three to ensure that bad hires can be let go before the new rights come in.

Eleanor Rowswell, a partner in employment law at Farrer & Co, adds: “It might end up with some quite brutal decisions being made early on in people’s employment before they’ve really had a proper chance to prove themselves.”

Keddie says companies are being “much more scrupulous about new starters, monitoring them, making sure that within the first six months, if they’re not going to be good enough, there’s a really good track record to explain why they’re going to be let go”.

Sir Martin adds: “We are seeing people in the UK with large workforces looking at those rights and saying we ought to look carefully at who we employ. People are looking at it seriously.”

The Government argues that the change to the unfair dismissal claims process will only be relevant to workers who have lost their jobs wrongfully.

Yet bosses fear a wave of disgruntled workers, encouraged by ChatGPT, will use the policy to chance their arm and drive a surge in claims.

“AI is an issue. Where you were getting grievances that were maybe five pages, they’re now 50 pages and they are doing legal gymnastics that don’t really make sense. But HR departments have to go through them and investigate them,” says Kintish.

The employment tribunal system is already overwhelmed. In the first three months of this year, the backlog of cases surpassed 70,000 for the first time – up 90pc in two years. It can take three or four years to get a hearing.

One remarkable example of the AI effect in the tribunal system is a recent surge in applications for interim relief for whistleblowing claims.

This is an urgent application that allows workers who have been dismissed because they blew the whistle on bad practice to make an injunction. It gives the tribunal special power to reinstate them on full pay until a final hearing, which can take three or four years.

In theory, it is an extremely powerful weapon, but in reality it is wholly ineffective. Analysis by Mishcon de Reya shows that there is not one reported case of a claimant ever successfully claiming interim relief.

Yet in June this year, the Presidents of the Employment Tribunals warned of an enormous surge in these applications. Tribunal offices typically used to receive 20 interim relief applications per year. Now, they receive 20 per month. The presidents warned applications were “often indicating use of artificial intelligence”.

“If you put into ChatGPT ‘I think I’ve got a whistleblowing claim’, it tells you to claim interim relief,” Kintish says.

As a wave of fresh redundancies looms, she is worried about what comes next.

“The tribunal system is already on its knees. I don’t know how it’s going to cope.”

‘Employment lawyers have never been busier’

Not everyone is suffering, however.

Employment lawyers are so swamped they are racing to hire new staff and are being forced to turn away work.

“I don’t think employment lawyers who act for senior people have ever been busier in terms of new inquiries,” says Rowswell.

Keddie says her law firm often receives five new inquiries per day from individuals facing removal.

“It is easily up by 25pc if not a third higher than we would normally expect at this time of year and I think it will accelerate,” she says.

“You’re not normally this busy except when you’re in the height of a recession and you’re seeing widespread collective redundancies across many sectors.

“This is busy in a different way. We’ve got a raft of companies of all sizes and across most sectors reviewing their workforces.”

Kintish says: “I don’t think we’ve seen the worst of it yet. I think as we get closer to Christmas, which is always the busiest period with clients wanting to get their shop in order, it is just going to be on speed.”

The changes to the unfair dismissal claims process are just one element of the Employment Rights Act that bosses are scrambling to come to terms with.

Since Friday, companies have a new obligation to let trade unions enter workplaces to speak to employees and they must prove that they have taken “all reasonable steps” to prevent sexual harassment. Changes to zero-hours contracts, restrictions to fire and rehire practices, and reforms on flexible working are all in the pipeline.

Bosses are overwhelmed.

“If we weren’t in a global state of disruption and uncertainty, it would be different,” says Burd. “But this is a very bad cocktail at a moment of deep uncertainty which is causing employers to have to worry more about control of overheads.”

Bosses who were hoping that Andy Burnham would follow through on his promise to be a “pro-business” leader had their hopes dashed last week. John Healey, the Chancellor, launched fresh taxes on banks and landlords and was forced to admit there will be no cuts to Britain’s ballooning welfare bill before the next election.

It was a populist “TikTok Budget” that used tax rises to pay for a voter-pleasing energy subsidy, says Sir Martin.

The Employment Rights Act was introduced by Sir Keir’s government but Burnham’s administration has pressed ahead with the reforms. It used the Budget to announce incoming legislation to pare back non-compete clauses – another measure that has sparked fear in the financial services sector.

The Office for Budget Responsibility (OBR) issued a damning verdict on the act last week in its economic and fiscal outlook.

The watchdog warned that the legislation was likely to have a negative economic impact through higher uncertainty, higher labour costs and increased uncertainty. This “will more than offset any potential positive impact on worker productivity”, the OBR said.

“I think it’s one of those horrible pieces of legislation where the true damage will only emerge over time as claims arise and people realise that problems with staff become much more expensive and onerous,” the UK company chairman says.

“It makes it much more dangerous for companies to employ staff in this country. Any employer with their heads screwed on will be offshoring or automating every job they can.”