The government has recently published the commencement regulations setting out the forthcoming changes to unfair dismissal law.

Effective from 1 January 2027, the Employment Rights Act 2025 will introduce significant amendments to the qualifying periods for certain employment protections and to the compensation rules for unfair dismissal claims.

Key changes include:

  • The qualifying period for protection against ‘ordinary’ unfair dismissal will be reduced to six months from two years.
  • Employees will be able to request written reasons for dismissal after six months of service,  rather than after two years.
  • The cap on the unfair dismissal compensatory award — previously the lower of 12 months’ pay or £123,543 — will be removed.  Compensation will therefore be such amount as that tribunal considers just and equitable in all the circumstances having regard to the loss sustained by the complainant in consequence of the dismissal.

Employees with six months’ service as of the commencement date of the above reforms will immediately benefit from these new protections. Employers should therefore begin to factor these changes into recruitment decisions from June 2026.

The regulations clarify that these changes will have effect where an employee is dismissed before 1January 2027 but the effective date of the termination falls on 1 January 2027 or later, any effective dates prior will not be subject to the new rules. Importantly, the Employment Rights Act 2025 does not change the current existing day-one protections against discrimination and automatically unfair grounds for dismissal.

Implications for Employers

With these reforms, employers should prepare for a broader range of employees being able to pursue unfair dismissal claims, which is likely to increase both the volume and potential value of such claims.

The elimination of the cap on the compensatory award means that settlements and tribunal awards, particularly for senior staff, could become significantly higher, altering bargaining dynamics between the parties. As a result, employers may face greater unpredictability and financial exposure when managing dismissals, making it essential to follow fair and robust procedures throughout the employment relationship.  Tribunals will have to assess complex arrangements to determine the loss suffered by the employees as a result of the dismissal.

Practical Steps for Employers

  • Recruitment – Update recruitment processes and pre-employment due diligence to ensure candidates, especially for senior roles, are appropriately qualified and vetted.  Ensuring the right fit for the role will be more crucial to manage the legal risk.
  • Probation periods – Review employment contracts and policies. Many contractual probationary periods are set at six months.  However, this will align with the unfair dismissal threshold, increasing the financial risk for an employer in dismissing the employee.  Consider setting contractual probation periods at 3 – 4 months to allow for reviews of performance and extensions if needed and implement performance metrics early. Ensure any concerns are raised and documented promptly and structure regular review meetings so that action can be taken before the six-month threshold.
  • Fixed-term contracts – Ensure fixed-term contracts do not inadvertently trigger the new six-month protections by exceeding this period.
  • Retention – Review incentives to retain senior executives and key employees given that they will no longer need to remain with an employer for two years to gain full protections.
  • Senior exits – Approach senior departures with increased caution, given the removal of the compensatory cap, as potential awards are now unlimited.
  • Document actions:  It will be even more necessary to have good paper trails in place for the decisions made.  These can help when considering any contributory fault in assessing compensation.
  • Disciplinary and dismissal policies and processes – Ensure management is properly trained to handle conduct and performance issues fairly and in compliance with the new requirements.

These reforms represent a fundamental shift in UK employment law and require proactive preparation by employers. For further guidance on how these changes may affect your organisation, please contact our Employment team.

Thank you to Hannah Featonby-Lyons for her help in preparing this post