The second in our series of blogs about the changes introduced by the Employment Rights Act 2025 will focus on the changes to the unfair dismissal regime, which are due to be introduced on 1 January 2027.
These changes are expected to significantly impact the employment relationship. Throughout this blog, we will explore the current law and the changes that are to be introduced, the effect that these changes are likely to have and how employers can prepare for these changes.
What is the current law and what changes are being introduced?
New 6-month qualifying period
At present, an employee must have completed two years’ service if they want to bring an unfair dismissal claim. From 1 January 2027, this will change and an employee will only need to have completed six months’ service to be eligible to bring a claim.
This change means that employees who start work as soon as 1 July 2026 will gain immediate protection from unfair dismissal if they are still employed by the same employer by 1 January 2027, rather than having to wait two years to gain protection.
Removal of compensation cap
Furthermore, there is currently a cap on the compensation that can be awarded to employees who bring a successful unfair dismissal claim. The cap is the lower of 52 weeks’ pay or £118,223. From 1 January 2027, this cap will be removed.
What effect are these changes likely to have?
Impact on probationary periods
Once the changes are introduced, employers will have a far shorter period of time to assess a new hire’s suitability for the role (this will need to be assessed before the six month mark). This will place greater emphasis on the importance of strong recruitment practices, shorter and better managed probationary periods, clearly defined performance standards and robust management of capability issues in the early period of employment.
Impact on notice periods
Unless circumstances are such that the employer is entitled to dismiss an employee without notice (e.g. for gross misconduct), the six month service calculation must include the mandatory statutory minimum notice period. After an employee has worked for one month, the minimum period is one week for the first two years of employment. An employee dismissed with immediate effect just before completing six months’ service could still qualify for unfair dismissal protection if their statutory notice period would take them over the threshold. Therefore, this is something that employers should keep in mind.
Financial impact
The removal of the compensation cap represents a major change and will create significant financial uncertainty for employers, who could potentially be liable for far greater awards if they dismiss unfairly, especially with regards to senior employees on higher salaries who may face greater losses. Employers will therefore need to think carefully about how they approach unfair dismissal risks.
What should employers do next to prepare for the changes?
In order to prepare for the changes ahead, it is recommended that employers consider taking the following steps:
- Review recruitment processes
The shorter six-month service threshold will put more pressure on employers at the beginning of the employment relationship. There will need to be more focus on getting the right candidates and ensuring that they are the right fit for the organisation as recruiting the wrong person will carry a far greater financial and administrative consequences.
- Restructure probationary periods
Six-month probationary periods are standard in many firms. However, the changes mean that probationary periods will need to be shorter and better managed to ensure that any decisions about candidates are made before the six-month mark. An employee’s suitability should be assessed through regular meetings, documented feedback, ongoing support and a structured evaluation process.
- Improve manager training
With the number of unfair dismissal claims expected to increase substantially, it will be vital to ensure that managers have received appropriate training on handling disciplinary and capability issues. They will also need to ensure that they follow fair and reasonable dismissal processes which can stand up to scrutiny from the Employment Tribunal.
- Consider exit strategy for high earners
Uncapped compensation means that unfair dismissal claims will become a much more attractive option for high earners. At the moment, a strategy used by many firms is to exit high earners without a process and pay the compensation cap however this will no longer be an option. It will therefore become more important for employers to ensure that their dismissal processes are watertight, so that they retain the leverage to negotiate.
For expert advice on an employment law matter, email partner and head of employment Nick Smith on nsmith@mincoffs.co.uk or call the office on 0191 281 6151 to speak to a member of the team.
