Choy Lau
- Legal Director
- Employment
Unfair dismissal reform: what employers need to know now
The UK unfair dismissal regime is about to undergo its most significant reform in decades. Under the Employment Rights Act 2025, employees will soon gain protection from unfair dismissal after six months’ continuous service (the “Qualifying Period”), rather than the current two years. At the same time, the longstanding cap on the unfair dismissal compensatory award (currently £123,543 or 52 weeks’ pay, whichever is lower) will be abolished.
Taken together, these changes mark a fundamental shift in risk for employers. Decisions that were once low‑risk — dismissals during probation or exiting senior employees on settlement agreements close to the “cap” — will require a more considered approach.
A shorter runway: unfair dismissal rights after six months
Reducing the Qualifying Period to six months dramatically expands the pool of employees able to bring unfair dismissal claims. The change has retrospective effect, meaning that any employee with six months service as at January 2027 will qualify. The Government estimates that a further 6.3 million employees will gain protection[1]. It remains unclear how the anticipated increase in claims will be absorbed by an Employment Tribunal system that is already heavily backlogged, with some cases now being listed in 2029.
For employers, the practical consequence is a much shorter window in which to assess new hires. Dismissals after six months’ service will attract essentially the same legal risk as those involving long‑serving employees.
Probation periods will therefore need reconsideration. The traditionally used, six‑month probationary period, long the norm, will become risky, as employees will have acquired unfair dismissal protection by the time an end of probation meeting is held. Probation periods of three to four months are likely to become standard practice. This will require stronger management, earlier and more frequent reviews and feedback, clearer expectations, early intervention to performance or conduct concerns and more decisive action than many organisations are used to. Some employers may respond by dismissing more readily before the six‑month point, or by using agency workers as a “try before you buy” model.
Employers should also carefully evaluate their recruitment procedures. Hiring errors will be more difficult — and more costly — to reverse after six months of employment.
The end of certainty: uncapped compensation
Equally significant is the removal of the statutory cap on the compensatory award. Uncapped unfair dismissal awards are unusual by international standards, even in employee friendly jurisdictions, firmly placing the UK as a global outlier.
In many cases, this change will not materially affect Tribunal awards. Most claimants will still recover relatively modest sums. The Government stated that the median award in 2023-24 was £6,746[2], and that only 6% of awards exceeded £50,000 in the same period[3]. This is because the compensatory element of an award relates to losses i.e. loss of earnings, benefits etc. and most employees are able to mitigate their losses by securing alternative employment. There is also an expectation on claimants to mitigate their losses rather than wait for the outcome of a claim. However, for certain categories of employee — particularly high earners, those with valuable benefits, or individuals with limited re‑employment prospects — the potential exposure for employers increases substantially.
This change will likely change claimant behaviour, especially those representing themselves without legal guidance. Employees will be more inclined to pursue unfair dismissal claims and may have higher settlement expectations which could prolong negotiations and/or result in more cases reaching the Tribunal.
A new risk profile for senior exits
This shift will be felt more acutely in the exit of senior or highly paid employees. Employers have historically relied on the certainty of the compensation cap when negotiating executive departures, often agreeing swift, commercial settlements. When employers offer notice pay with a severance package that meets or slightly exceeds the compensation cap, litigation is rarely pursued; most employees are unwilling to risk high legal costs to recover a similar amount years later at the Tribunal.
Once that cap is removed, this approach becomes far less predictable. Employers may be pushed towards running full performance, conduct or redundancy processes — even for senior leaders — to mitigate the risk of potentially uncapped liability. While settlements will not disappear, negotiations are likely to become more complex with employers needing stronger evidence, clearer reasoning and greater procedural discipline to retain leverage in negotiations.
Longer time limits, longer uncertainty
From October 2026, the limitation period for most Employment Tribunal claims will double from three to six months. This is in addition to the extension of the ACAS early conciliation period from six to twelve weeks, which took effect in December 2025.
The combined effect is that employers may not know whether a claim is going to be brought until many months after the relevant events. These longer timelines increase the risk of faded memories, unavailable witnesses and evidential gaps, while further adding pressure to an already overstretched tribunal system. Rather than accelerating dispute resolution, these changes are likely to prolong periods of uncertainty for both employers and employees.
What employers should be doing now
Although most of these changes will not take effect until 2027, employers should use the lead‑in period carefully. Here are our top tips for employers to prepare for these changes.
- Probation periods should be reviewed and reduced where necessary. Template contracts of employment should be updated before June 2026.
- Manager training will be critical. Early underperformance that is poorly handled or inadequately recorded may have far more serious consequences – managers should be trained on how to properly utilise probationary periods, performance improvement procedures and disciplinary procedures.
- Dismissal processes and policies should be audited. With uncapped compensation on the horizon, strict adherence to internal procedures and the ACAS Code of Practice on Disciplinary and Grievance Procedures becomes even more important.
- Managers and HR should ensure that all HR processes are properly and accurately recorded given the length of time it will take to get to a full hearing. Preserving evidence will be even more important given that by the time a hearing takes place, witnesses may no longer be employed by the employer and memories fade.
- Employers should plan strategically for senior exits. If senior departures are anticipated, it may be sensible to review timing, process and risk before the new regime comes into force. Waiting until after January 2027 may materially change the negotiation dynamics.
Looking ahead
The combined effect of a shorter qualifying period, uncapped compensation and longer procedural timelines will reshape the employment dispute landscape. Employers that respond early — by tightening recruitment, strengthening probation management and embedding robust processes — will be far better placed to manage the new risk profile than those who wait.
Vento band increases
Employers should also note the uplift to Vento bands for injury to feelings awards in discrimination and whistleblowing claims. From April 2026, the bands increased to £1,300–£12,600 (lower band), £12,600–£37,700 (middle band) and £37,700–£62,900 (higher band). Last year, they stood at £1,200–£12,100, £12,100–£36,400 and £36,400–£60,700 respectively.
The increases are incremental rather than significant and broadly reflect inflation. They do not, in isolation, transform employer risk. However, when viewed alongside uncapped unfair dismissal compensation and extended limitation periods, they contribute to a broader trend of increased exposure where disputes escalate.
If you have any questions arising from this article, need assistance with updating employment contracts or HR policies and procedures, or manager training, please contact a member of our Employment Team.
[1] Department for Business and Trade analysis of Labour Force Survey as set out in the Government’s paper: Employment Rights Act 2025 Economic Analysis January 2026 (Employment Rights Act 2025: economic analysis).
[2] Ministry of Justice. ‘Employment Tribunal Data 2023-24’.
[3] Employment Rights Act 2025 Economic Analysis January 2026 (Employment Rights Act 2025: economic analysis).
This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.
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George Cornell
- Solicitor
- Employment
