At present, employees need two years’ qualifying service to claim unfair dismissal and the compensatory award is capped at £123,543 (or 52 weeks’ pay, if lower). From 1 Jan 2027, this is all going to change. Employees will gain the right not to be unfairly dismissed after just six months’ service, and there will be no ceiling on compensatory awards (the basic award will, however, stay the same).

The decision to lift the cap on compensation came as a surprise to many and has attracted much criticism, but there seems vanishingly little prospect of a U-turn. In fact, quite the opposite – the government has already issued the regulations to bring it into effect. There are no signals that a Burnham administration would have an appetite for reversal, so it’s time for employers to face up to the prospect of uncapped compensation and get as ready as possible. 

The reduced qualifying period is also written into the legislation and, since it would now take a future Act of Parliament to change it, employers can expect to live with a six-month qualifying period for the foreseeable future. In fact, since the right to claim unfair dismissal will apply to all existing employees with six months’ service on 1 January 2027, it will immediately benefit anyone you hired on or before 1 July this year.

What follows is our distillation of 10 key areas of impact, and the steps employers can take to prepare. 

1. Recruitment

Stronger employment rights increase the importance of hiring the right employees to begin with.   Whether employers respond by becoming more cautious remains to be seen, but all employers should pay attention to the robustness of their selection processes.

Will we see more CVs with four- or five-month stints at previous employers? It’s common to see 12- or 18-month employment records now, but we may need to get used to seeing much shorter periods of employment on CVs. 

In summary, the emphasis will become recruiting well rather than managing people out later.

2. Shortened probationary periods

Although it is difficult to predict how recruitment practices will evolve, one concrete change already emerging relates to probationary periods. Many employers are introducing probationary periods for the first time or shortening existing ones to ensure that decisions are made in good time before the employee reaches the six-month qualifying mark.  The rules around adding a notional week of service mean that, in practice, you need to dismiss a clear week before the employee reaches six months if you want to avoid them qualifying for unfair dismissal rights and you are dismissing without notice. A three- or four-month probationary period with the possibility of a short extension is a popular choice and is what we generally recommend where feasible. 

Employers will also need tighter probation management. Probation can no longer be treated as an informal “try before you buy” period.

It’s sensible to start putting some systems in place now, if you haven’t already done so. We are seeing employers use existing HR systems to ensure that reviews are automatically diarised and reminders sent, with some employers asking for clearer objectives to be agreed and set at the outset.

3. If less than six months isn’t enough

Many employers have considered shortening probationary periods but eventually stuck with six months (or more) on the basis that they cannot realistically assess performance in any shorter period. Other employers have opted to retain a six-month probationary period for consistency across different jurisdictions.

If you are sticking with a six-month probationary period (or longer), it means that employees will have unfair dismissal rights when their probationary period ends. This may require changing how you handle end-of-probation reviews.

You may find it helpful to adopt a standalone probation policy explaining how you will assess suitability, how extensions work and what process will be followed.

If extending probation beyond six months, consider setting out very clearly exactly what the employee must demonstrate in the extended period to continue in employment beyond that time, to put you in the best position to deal with a scenario where performance concerns continue. 

It will be important to ensure that your termination process meets the minimum requirements for a procedurally fair dismissal if the employee will have gained six months’ service by the time they are dismissed, even if they are still in their probationary period at that time. This includes warnings, right to be accompanied and an appeal. 

4. Performance management processes

Lots of organisations have written performance improvement processes but shy away from using them, with the preferred route being a negotiated exit.  However, with negotiated exits set to become more challenging (more on that below) now is a good time to review your approach. Is your performance improvement policy really about improving performance, or just a path to an exit? Are managers getting any better at giving appraisal feedback? Effective performance management can be hard to implement, but employers that can crack this will be much better placed.

If your standard performance management policy is lengthy and multi-stepped, you may want to carve very senior employees out of scope. A policy that ostensibly applies to all employees but is never actually followed for some cohorts can be used against you, so it may be sensible to create separate policy documents which are more suitable for those cohorts.

5. Fixed-term contracts

One area that hasn't received enough attention is the effect of these unfair dismissal changes on fixed-term contracts. In some jurisdictions, fixed-term contracts can operate as a route around employment protections. That's not the position under British law, and the changes will have a material impact on how these contracts operate in practice, as we’ve explored in our other article here.

6. Line manager competencies

The renewed emphasis on performance management and new uncapped compensation regime will add to the pressure on line managers. It will be even more important that they can have honest conversations about performance, make redundancy selections fairly and objectively, take good (date-stamped) notes and manage conflict effectively. Managers have a key role to play in fostering a stronger workplace culture, where employees are encouraged to speak up, expect to be listened to and where conflict is resolved informally where possible. All of this makes investing in developing your line managers’ skills even more worthwhile. The need for line managers to get careful advice and support from HR professionals is also likely to increase, putting more pressure on an often over-stretched resource.

7. Tribunal claims

The changes are widely expected to result in an increase in tribunal claims. Additionally, if an unfair dismissal claim succeeds at an employment tribunal, the lack of a ceiling on potential compensation will mean lengthier, more complicated and more contentious remedy hearings in cases where the employee is highly paid, has suffered health issues putting them out of work for many years, has a complex remuneration structure, or was in receipt of hard-to-replace benefits (such as a final salary pension scheme).  Hearings could involve, for example, expert evidence on pricing share options, calculating pension loss, valuing deferred compensation, the employee’s health prognosis and the scope for securing a new role in the relevant job market.

Employers can expect the cost of litigation and the time it takes to resolve disputes to go up – impacting on your budgets.

8. Negotiated exits

With the unfair dismissal changes amplifying the cost and delay involved in tribunal claims, it’s widely expected that employers will more closely consider alternative forms of dispute resolution, shifting the focus to facilitated conversations and mediation.

Achieving a negotiated settlement with a departing employee is going to be more difficult in some cases. In our experience, employees already overestimate the value of a potential unfair dismissal claim and AI‑assisted negotiations are making this much worse. Once the ceiling on compensation is removed, claims for career-long loss could become the typical AI-generated starting point. To help negotiate settlements at sensible levels, leverage is going to be key...

9. Leverage

Considering all the above, we’re having many conversations with employers about strategies to mitigate the impact of uncapped compensatory awards.  There are a range of options which we can discuss with you, but some steps to take include reworking deferred remuneration schemes (where this is within your company’s control) and various options to help ensure that employees take steps to mitigate their loss.

10. Timing

Given the significant impact of these changes, we expect employers will want to time any planned dismissals so that they take effect well before 1 January 2027 and therefore stay within the current regime.  To achieve this, you will want to bear in mind that:

• If you want to terminate employment without notice before an employee reaches the six-month qualifying mark, the rules around adding the statutory minimum notice period when calculating qualifying service will need to be factored in. In practice, this means you need to dismiss a clear week before the employee reaches six months.
• If you want to avoid uncapped compensation for unfair dismissal, you need to make sure that the employee’s effective date of termination is before 1 January 2027. If, for example, the employee is dismissed on notice (and is asked to work their notice or stay on garden leave) then it’s the point at which their employment actually ends that counts (not the point at which you give notice).
• We are often asked if employees will be able to claim uncapped compensation if their case is heard next year, even if they are dismissed this year. The answer is no. Whether or not the uncapped regime applies depends on the effective date of termination, not the hearing date (and we now have the regulations confirming this).
• As many have pointed out, rushing to terminate anyone’s employment at Christmas is undesirable. Alongside the employee relations implications, you may also face practical and logistical challenges if you leave it this close to the deadline – for example the availability of HR support and qualified solicitors able to sign settlement agreements may be limited. For all these reasons, it is sensible to plan ahead.

All of this is going to require the biggest mindset shift in years.  Many employers have been used to viewing an unfair dismissal claim as a relatively limited risk, or at least a quantifiable one, and most tend to view the first two years of an individual’s employment as a period in which they have limited rights.

With so much change on the horizon, we’re happy to help – so please do be in touch if you’d like support with your preparations for the unfair dismissal changes or any other aspect of the Employment Rights Act.