The UK Employment Rights Act: unfair dismissal

Why should I read this?

Significant changes to unfair dismissal take effect from 1 January 2027, reducing the qualifying period to six months and removing the cap on compensation. Employers should prepare now by reviewing recruitment, probation, performance management, remuneration arrangements and settlement strategies.

What does the Act say?

The Act reduces the current qualifying period for ordinary unfair dismissal claims from two years’ continuous service to six months. Any employee who has six months' service on or after 1 January 2027 will be protected, including employees who started on or before 1 July 2026.

The unfair dismissal compensation cap will also be abolished, removing both the limit of 52 weeks’ pay and the fixed statutory maximum, currently £123,543. The cap will be removed for dismissals taking effect on or after 1 January 2027.

The changes do not affect claims which are already uncapped, such as whistleblowing and discrimination claims. Nor do the changes affect the existing principles governing unfair dismissal claims, including the potentially fair reasons for dismissal, the requirement to follow a fair process and the tribunal's ability to reduce compensation in certain circumstances. Most automatically unfair dismissal claims do not require any qualifying period of employment.

Practical implications

Reducing the qualifying period to six months will considerably shorten the period employers have to assess whether a new employee is suitable for a role before ordinary unfair dismissal protection applies. This will put greater emphasis on effective recruitment, well-managed probationary periods and identifying and addressing performance or conduct concerns at an early stage.

The removal of the compensation cap will also have significant implications for many employers. Currently, the cap may limit an employer's exposure to an ordinary unfair dismissal claim even where the employee's actual financial losses are much greater. From 1 January 2027, that limitation will no longer apply, although the basis on which compensation is calculated will not otherwise change: employees will still need to establish the actual and future losses caused by the unfair dismissal.

Particular areas of risk include:

• Senior executives and high earners, where loss of earnings alone could substantially exceed the current cap
• Bonus, commission, shares and other incentives connected to the employment relationship, where a claim may include significant variable or deferred remuneration
• Defined benefit pensions, where losses can be substantial and difficult to calculate
• Older employees or those approaching retirement, where difficulty finding comparable work could result in a much longer period of loss
• Employees whose health affects their ability to work or find alternative employment, where loss of earnings could continue for a significant period for unfair dismissal purposes alone, even without a successful disability discrimination claim

The removal of the compensation cap is likely to make it harder for employers to assess potential exposure, particularly where losses include future earnings, bonuses, pensions, shares or other incentives. These losses can be difficult to value and, in some cases, may require expert evidence. The combination of greater uncertainty and potentially higher awards is also likely to make exit and settlement negotiations more challenging. This places greater importance on following established processes and keeping clear records, which may be relevant both to whether a dismissal is fair and to the level of compensation that may be payable.

What are employers considering?

There is no single solution to the increased risk to employers presented by these changes, and the appropriate approach will depend on the employer, the role and its remuneration arrangements. We are seeing a range of contractual and practical approaches being considered, particularly for senior and highly paid employees. Many of these approaches raise significant legal, commercial or practical issues and, in some cases, their effectiveness has not been tested in the context of the new regime. Employers should therefore approach them with caution and take legal advice before seeking to implement them. The approaches being discussed include:

• Share and incentive arrangements: reviewing leaver, forfeiture, vesting and discretion provisions
• Alternative dispute resolution: including provisions encouraging mediation or another form of ADR before proceedings are commenced, without restricting an employee's statutory right to bring a claim
• Alternative engagement models: considering consultancy, LLP or other structures where these genuinely reflect the relationship, noting that contractual labels alone will not determine employment status
• Employee shareholder status: some employers may revisit employee shareholder status, under which an employee receives shares in return for giving up certain statutory rights, including ordinary unfair dismissal rights. However, the previous tax advantages have been removed and there are practical and reputational considerations associated with its use
• Pre-agreed termination arrangements: agreed at the outset of employment, potentially linked to a settlement agreement. Such arrangements raise difficult questions around enforceability and the statutory restrictions on contracting out of employment rights
• Short-form dismissal processes: considering whether a shorter process could be established for particular roles, particularly for C-suite or other senior employees, sometimes alongside a longer notice period. A shorter process does not, however, mean that a dismissal will automatically be fair and tribunals will continue to assess the overall reasonableness of the employer's actions in the circumstances. Further, there are particular risks where a process is made contractual

Key actions for employers

To ensure they are ready for the changes, employers should:

• Review recruitment processes so that suitability for the role is assessed as effectively as possible before employment begins
• Review the length of probation periods, including any extension provisions, and ensure probationary reviews take place early enough to address concerns and make decisions before six months’ service
• Set clear objectives and performance standards, supported by regular feedback and appropriate documentation
• Update HR systems to flag probationary reviews, notice periods and the six-month qualifying period well in advance
• Provide training to HR and line managers to ensure they understand the shorter timeframe and the importance of raising and recording concerns promptly
• Review performance, capability and conduct processes to ensure issues are identified and managed effectively
• Review fixed-term arrangements, as the non-renewal of a fixed-term contract will continue to count as a dismissal and employees will qualify for protection after six months
• Review bonus, share, pension and other incentive arrangements, to understand how they could affect losses following dismissal
• Review dismissal and settlement strategies, noting that the removal of the cap may change the cost and attractiveness of agreed exits
• Review relevant insurance arrangements to understand whether existing cover remains adequate given the potential increase in unfair dismissal exposure

Further reading

The Employment Rights Act (“Act”) received Royal Assent on 18 December 2025 and the government plans a staged implementation over 2026 and 2027.

The Act includes 28 employment reforms and, cumulatively, the scale, breadth and complexity of the changes are significant for employers (read our tracker to keep abreast of developments across the Act and timescales for implementation).

For our briefings focusing on the Act’s changes to:

• zero hours and low hours contracts, read our update
• trade union and collective rights, read our update
• collective redundancies, read our update
• family-friendly rights and SSP, read our update
• enforcement, read our update
• dismissal and re-engagement (“fire and rehire”), read our update
• equality and harassment duties, read our update

How we can help

These reforms are prompting many employers to re-evaluate core aspects of their people strategy, including recruitment, probationary periods, performance management, remuneration structures and exit strategies. The issues extend beyond employment law and often require careful consideration of incentives, pensions, corporate governance, employee relations and litigation risk. Our multidisciplinary team can help employers assess the strategic implications of the reforms, identify solutions that align with their workforce objectives and risk profile, and implement changes in a practical and commercially effective way. We are advising clients on both immediate actions and longer-term workforce planning to take account of the changes.