Unfair Dismissal Changes

The Employment Rights Act 2025 introduces some of the most significant reforms to unfair dismissal law in over a decade. This blog by Arbor Law’s Fiona Morgan looks at three key changes that will reshape how all employers must manage dismissal risk, and what employers should be doing now to prepare.

1. Unfair dismissal qualifying period reduced to six months

Under current law, most employees must normally have two years’ continuous service before they can bring a claim for unfair dismissal.

With effect from 1 January 2027, the qualifying period for unfair dismissal claims will be reduced to six months. That means employees with six months’ service will be able to claim unfair dismissal — a move significantly expanding protection for newer employees.

This new rule applies to all dismissals that take place on or after 1 January 2027, no matter the reason for dismissal.  It will therefore include dismissals for misconduct, poor performance, and redundancies.

This change means that commonly-used 6 month probationary periods will be largely defunct, and employers will need to take action to terminate unsatisfactory employees much sooner.  Once employees have 6 months’ service, employers will need to follow a full performance management process before dismissing poor performers, or else risk successful claims for unfair dismissal.

It is also crucial to factor in the statutory minimum notice period under sections 86 and 97(2) Employment Rights Act 1996. Once an employee has one month’s service, they are entitled to at least one week’s statutory minimum notice (unless they have committed gross misconduct entitling the employer to terminate without notice). If an employee is dismissed with immediate effect, that statutory notice is added on to calculate the “effective date of termination” for the purposes of any unfair dismissal claim. What this means in practice is that employers must ensure dismissal happens early enough so that, including statutory notice, total service remains under six months.

2. Removal of compensation cap in unfair dismissal awards

Currently, compensatory awards for unfair dismissal are limited to the lower of 52 weeks’ pay or a statutory cap (currently £118,223).

From 1 January 2027, the statutory cap will be abolished completely.

This means that potential unfair dismissal awards could be extremely high, especially for senior or long-serving employees, those suffering career-long loss of earnings, or those with valuable packages including final salary pensions, LTIP schemes, share options and/or bonuses.

Furthermore, because of the huge backlog of tribunal claims, it could be several years before cases are heard and therefore the period of time over which past loss of earnings can be claimed will be longer – resulting in higher compensatory awards.

This will place huge importance on following proper processes and procedures when dismissing employees and keeping detailed records to reduce the legal risk to employers of a successful claim.

For the first time, high paid employees such as bankers and CEOs will have leverage in threatening and bringing unfair dismissal claims.

3. Extended time limits for tribunal claims

From October 2026, the time limit for bringing most employment tribunal claims — including unfair dismissal — will increase from three months to six months from the date of dismissal.

Employers should therefore be ready to deal with claims and preserve documents and evidence for a longer period.

Claims for breach of contract (e.g. for wrongful dismissal if an employee is dismissed without notice) and unlawful deductions from wages (e.g. failure to pay holiday pay) will still be subject to the existing three month time limits.

What can I do to prepare?

• Review contacts of employment and revise probationary clauses. Consider reducing probationary periods to 5 months.
• Ensure that all employment contracts have a PILON clause enabling dismissals to take immediate effect with a payment in lieu of notice.
• Ensure line managers are briefed on the new rules and the importance of robust and well-documented management from the outset of employment.
• Conduct a review now of all employees who will have less than 2 years’ but over 6 months’ service as of December 2026.
  • Consider whether any unsatisfactory employees should be terminated prior to 25 December 2026 to avoid accrual of unfair dismissal rights.
• Ensure that termination of employment of unsatisfactory employees takes effect within 5 months and 3 weeks from commencement of employment.
• Review probationary procedures and update processes and timelines to ensure final decisions are communicated in good time.
• Set clear probation objectives and adjust timescales.
• Conduct regular reviews with documented records.
• Conduct final reviews at 5 months.
• Ensure poor performance or conduct issues are addressed swiftly and fairly.
• Review disciplinary, performance management, and redundancy policies to align with the new regime.
• For termination of employees nearing or over 6 months’ service, ensuring that dismissals are procedurally fair will now be essential:
  • Meticulously follow the Acas Code of Practice on disciplinary and dismissal procedures, and all relevant internal policies, as you currently would for employees with over 2 years’ service.
  • Properly document investigations, meetings and outcomes.
  • Train managers on the legal requirements for fair processes.
• Maintain records and be prepared for disputes to surface months after termination.
• Plan for a possible increase in claims, depending on the size of your business.

Further help

For advice and support on the implications of these reforms on your business please contact Fiona.

About Fiona Morgan

Fiona is a senior employment lawyer with more than 18 years’ experience in advising a diverse range of corporate clients on employment law issues. Before joining Arbor Law, she was a partner and co-head of the Employment law department at Kennedys, working with a wide range of clients from multinational insurers and transport businesses to SMEs and start- ups. She advises clients on an array of employment matters, from day-to-day employment law queries to strategic guidance on long-term projects and corporate transactions.