Two of the most important changes to employment law found in the Employment Rights Act 2025 will come into force on 1 January 2027:

  • A reduction to the qualifying period for ordinary unfair dismissal claims from two years’ continuous service to six months continuous service; and
  • The removal of the cap on compensatory awards for ordinary unfair dismissal claims.

The relevant commencement regulations were made on 26 May 2026.

Immediate concerns for employers

The six-month qualifying period will take account of service accrued by an employee before the reforms come into force. Employees who have completed six months’ service by 1 January 2027 will gain unfair dismissal protection on that date.

For example, if an employee commences employment on 1 July 2026, they will reach six months’ service on 1 January 2027 and acquire the right to claim unfair dismissal should they be dismissed on or after that date.

This will mean that a large group of employees will gain unfair protection at the same time on 1 January 2027; those with service above 6 months and less than 2 years at that date.

Removal of the Cap on Compensation

Currently the maximum compensatory award for a successful unfair dismissal claim is 52 weeks gross pay or, if higher, £123,543. This statutory cap is being removed from 1 January 2027.  An employer will thereafter risk being ordered to compensate the employee for all financial losses arising from their unfair dismissal, without limit. The usual principles that can limit compensation will still apply. For example, the Claimant’s duty to search for work and account for earnings from new employment and the Tribunal’s discretion to reduce compensation for the employee’s fault or if the Tribunal concludes that dismissal was unavoidable. But all claims will potentially be more valuable, and in some circumstances, claims may be of very high value.

Uncapped compensatory awards are likely to be particularly large for employees:

  • Who are on high salaries
  • Who have particularly valuable benefits packages, including share options
  • Who must overcome major obstacles to find new work – for example, difficulties resulting from age, pregnancy, illness, or labour market conditions.

Behavioural Impact

These changes will encourage employers to address performance, conduct and capability concerns before employees acquire six months’ service, using probation procedures. Once qualifying service is reached, employers will need to show:

  • that the reason for dismissal is a lawful one, such as capability, conduct or redundancy (failure to pass probation will not in itself be a fair reason); and
  • that a fair process has been followed before the decision to dismiss was made, in accordance with the ACAS codes of practice where applicable.

What Employers Should Do Now

  1. Recruitment practices – Consider implementing additional tests and assessments during the selection process to reduce the risk of unsuitable employees being appointed.
  2. Review probationary periods and procedures – Ensure clear objectives, regular reviews and documented feedback within the first six months and that decisions are not delayed. A decision to dismiss a person for failing their probation must be implemented before 6 months’ service is reached if a potential claim for unfair dismissal is to be avoided.
  3. Review notice clauses – Contractual and statutory notice can affect the effective date of termination (EDT) and therefore qualifying service. The law specifies how qualifying service is impacted if notice is not worked and payment in lieu of notice is given instead. Employers should review their contractual notice periods that apply during the probation period.  When a decision is taken to dismiss, termination timings will have to be checked to avoid unintentionally extending employment beyond six months.
  4. Ensure fair processes for qualifying employees – Once employees reach six months’ service, they will be protected by unfair dismissal law and must be managed through fair procedures. Employers should ensure processes are robust, consistently applied and well-documented to reduce the risk of successful claims.
  5. Review settlement strategy – some organisations routinely use settlement agreements and ask employees to waive claims in return for enhanced payments. These will still be an important tool and will help avoid the heightened risks.  The removal of the cap may, however, make it harder to negotiate settlement payments in certain circumstances.  Employers may need to pay significantly more to avoid litigation – particularly in the case of higher earners and be more cautious when proposing exit discussions.

How Bower Bailey Can Help

Bower Bailey advises on dismissal procedures and unfair dismissal claims. If you are affected by these reforms or planning ahead of January 2027, our employment team can provide practical guidance on managing risk, reviewing contracts and policies, strengthening probation and performance processes.

This article is for guidance only.

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