Legal update
Managing the upcoming changes to unfair dismissal – what employers need to know
From 1 January 2027, two significant changes to the law concerning unfair dismissal in England and Wales come into force under the Employment Rights Act 2025:
- The reduction in the qualifying period to bring a claim for ordinary unfair dismissal from two years to six months of continuous employment; and
- The removal of the compensation cap for a successful ordinary unfair dismissal claim (currently the lower of 52 weeks’ pay or £123,543).
Paired with the increased time limit to bring a claim (from three months to six months) from October 2026, these changes are likely to increase the risk of employment tribunal claims against employers.
This article sets out practical steps employers can take, both in relation to managing employees who currently fall under the two years’ continuous service threshold, along with broader, forward-looking considerations.
The key point to note is that, while January 2027 may feel some way off, the changes will (in effect) impact on those in employment from 1 July 2026 – so employers should begin planning now.
Practical considerations prior to 1 January 2027
Review current workforce performance
The period leading up to January 2027 provides an opportunity for employers to take stock of their workforce and ensure that any existing concerns are being actively managed. Where there are questions around performance, conduct or role fit, it will be important to ensure that these concerns are clearly identified and discussed with the individual.
If, having done this, employers nonetheless have ongoing performance concerns or other issues with such employees, it will be generally more straightforward to manage these issues under the current legal framework. If concerns arise to such an extent that dismissal is required, then for employees under two years’ service, it will be much easier to address now rather than on 1 January 2027, when all employees with six months’ service or more will be protected from unfair dismissal.
Be mindful of timing and notice periods
One area that requires particular care is the interaction between dismissal and notice periods. As a matter of law, for the purposes of an unfair dismissal claim, employees are generally treated as having the service they would have accrued had they worked their full notice entitlement. This means that, depending on timing, notice periods can inadvertently bring an employee within unfair dismissal protection.
For example, a decision taken towards the end of 2026 in respect of an employee with fewer than six months’ service may still result in that employee qualifying for protection if their statutory notice takes them into 2027 (even if that employee has their notice paid out in lieu). Employers should therefore approach dismissal timing with care and ensure that notice periods are factored into any planning.
Looking ahead: key changes to workplace practices
Greater focus on probation periods
The traditional six-month probation period will increase in importance following the legislative changes, as employers will have to make decisions on the future of new employees much earlier than before.
Many employers currently operate probationary periods of three to six months. Under the new regime, this will mean that employees may acquire statutory protection around the same time that their probation is due to conclude if an employer tends to rely on longer probationary periods. As a result, employers may wish to review how their probation processes operate in practice.
In particular, there is likely to be greater emphasis on setting clear expectations/objectives from the outset, holding regular review meetings in the early months of employment, and addressing any concerns at an earlier stage.
It is also important to bear in mind the point we raise above in this article about notice periods – i.e. that notice periods are included when calculating continuous service. In practical terms, this means that decisions about an individual’s ongoing employment may need to be taken slightly earlier than the six‑month point in order to avoid unintentionally extending service beyond the continuous service threshold. By way of example, for those entitled to the minimum statutory notice period of one week, decisions should be finalised within five months and three weeks from the employee’s start date.
Review of policies and training of managers
More broadly, the unfair dismissal changes are likely to place increased scrutiny on internal processes and decision-making. It would therefore be sensible for employers to review their existing policies on probation, performance management, and disciplinary procedures, to ensure that they are clear and capable of being applied consistently in practice.
Equally important will be the role of line managers. Providing managers with practical guidance and training on how to identify and address performance or conduct concerns early on and, crucially, how to document those discussions appropriately, can make a significant difference in managing risk.
In this context, clear and accurate record-keeping is likely to become increasingly important. Records of meetings, feedback, and any agreed action plans can be critical in demonstrating that a fair and reasonable approach has been taken in the context of an employee’s dismissal.
Approach to fixed-term contracts
Employers should also be mindful of how these changes apply to fixed-term arrangements. It is important to remember that the expiry/non-renewal of a fixed-term contract constitutes a ‘dismissal’ for employment law purposes.
As a result, once an individual has reached the requisite length of service, any decision not to renew a fixed-term contract will need to be approached in much the same way as any other dismissal – namely, with a fair reason and a fair process.
It will therefore be important to ensure that the purpose and expected duration of any fixed-term engagement is clearly communicated at the outset (for example, the delivery of a particular project or as cover for an employee on maternity leave), and that decisions around renewal are considered and appropriately documented.
Consider higher-risk exits more carefully
The removal of the compensatory cap is also likely to impact senior exits. Traditionally, pursuing an unfair dismissal claim in the Employment Tribunal was not an attractive route for high earners as they would very quickly reach the compensation cap.
Removing the compensation cap means that, from 1 January 2027, it now becomes an avenue that high earners may be more willing to pursue. The practical effect of this is that, when entering into exit negotiations, it may not be as easy for employers to negotiate a settlement as senior earners may now have higher expectations as to what they are willing to settle for.
Budget for higher financial exposure & increased settlement agreements
Related to that, employers should anticipate increased Employment Tribunal claims and the costs associated with this process, which may not be solely financial as increased claims will take up more management and HR time. Budgets should consider an increased use of settlement agreements which, while a useful tool to avoid costly litigation, will likely now require higher settlement figures to mitigate the risk associated with the removal of the compensation cap.
Conclusion
In many respects, these changes are less about introducing entirely new concepts, and more about accelerating the point at which existing protections apply. For employers, the practical impact is that there will be a greater emphasis on early engagement, clear communication and, in relation to employees that an employer is considering dismissing, ensuring forward planning and robust processes.
Those who take steps now to review their practices and address any areas of uncertainty will be best placed to adapt smoothly to the new regime.
Disclaimer
This update should not be treated as legal advice and only provides general information on the issues discussed.
