Changes to unfair dismissal: what you need to know to stay ahead
One of the widely anticipated changes being introduced under the Employment Rights Act (ERA) 2025, are the reforms to unfair dismissal laws.
Effective from 1 January 2027, these changes mark a significant shift in the employment landscape. Reducing the qualifying period for unfair dismissal claims from two years to six months and abolishing the cap on compensation awards, will have a significant impact for employers. Organisations will need to be proactive in addressing the increased risks and financial exposure that accompany these reforms. We explore the key changes and provide a practical checklist to help you prepare effectively.
Unfair dismissal Reforms
Key changes
- Employees gain unfair dismissal rights after six months service.
- The cap on compensation awards (currently £118,223 or one year’s pay) will be abolished, allowing the potential for significantly higher payouts.
Checklist for employers
- Review recruitment processes
- Strengthen hiring practices to minimise the risk of unsuitable hires.
- Restructure probationary periods
- Ensure probationary periods are shorter than six months.
- Actively monitor performance during probation and address concerns promptly.
- Train managers
- Provide training on fair dismissal processes and compliance with the Acas Code of Practice.
- Equip managers to handle performance and conduct issues early.
- Update employment contracts
- Align notice periods with the six-month qualifying period.
- Include payment in lieu of notice (PILON) clauses for flexibility.
- Reassess insurance coverage
- Review policies to ensure adequate protection against the increased financial risks of unfair dismissal claims.
There is no doubt that the January 2027 reforms to unfair dismissal laws will create new challenges for employers, particularly in managing increased claims risks and potentially higher compensation awards. By taking a proactive approach – such as ensuring recruitment processes are robust, actively managing performance during probation, restructuring probationary periods, training managers and updating employment contracts – you can better safeguard your organisation. Preparing now will ensure compliance and reduce the likelihood of costly disputes and will allow you to navigate these changes with confidence.
