Major reforms to the UK unfair dismissal regime are set to take effect from 1 January 2027, materially increasing exposure to risk for employers and require careful planning in the months ahead.
Introduction of a six-month qualifying period
Currently, employees must have two years’ continuous service to bring an ordinary unfair dismissal claim. From 1 January 2027, this threshold will drop to just six months.
The Government has clarified the arrangements:
- Employees who already have six months’ service or more on 1 January 2027 will immediately gain unfair dismissal protection (meaning decisions made in late 2026 may therefore carry increased litigation risk if not handled properly); and
- Employees with less than six months’ service on that date will acquire protection once they reach six months’ continuous service.
This change means claims can be brought much sooner, increasing litigation risk for employers when making decisions that could result in termination and meaning that it’s all the more important to follow fair and proper procedures when taking any action.
Removal of the statutory compensation cap
Currently, the compensatory award for unfair dismissal is capped at the lower of one year’s gross pay or £118,000 (subject to annual uprating). From 1 January 2027, this statutory cap will be removed.
This represents a significant shift in financial exposure for employers, especially when dealing with higher earners. As compensation will no longer be artificially limited, awards could rise substantially in cases involving long periods of unemployment, bonus structures, share schemes or other valuable benefits.
While tribunals will still require awards to be just and equitable and claimants must mitigate their loss, the potential exposure in senior or specialist dismissals will increase markedly. Employers should expect greater scrutiny of dismissal decisions—particularly for senior hires and strategic exits—and higher claim values where claimants can demonstrate substantial ongoing loss.
Practical implications for employers
Although the formal change takes effect on 1 January 2027, employers should begin preparing well in advance.
Employers should:
- Audit start dates and map which employees will have six months’ service by 1 January 2027.
- Review and strengthen probationary processes to ensure they are meaningful, documented and actively managed.
- Avoid delaying disciplinary action or performance management in the expectation that claims cannot be brought.
- Ensure that any dismissals taking place close to the implementation date are procedurally fair and well evidenced.
The importance of process
With a shorter qualifying period and uncapped compensation, procedural fairness becomes even more critical. Employers should ensure managers are trained in:
- Conducting fair investigations.
- Providing clear written allegations or performance concerns.
- Holding proper meetings with the right to accompaniment where required.
- Considering alternatives to dismissal.
- Offering and handling appeals appropriately.
A robust paper trail will be essential. Tribunals will continue to assess whether dismissal was for a potentially fair reason and whether the employer acted reasonably in treating that reason as sufficient. The reduction in qualifying service simply means that more employees will be able to challenge those decisions.
Looking ahead
While the headlines may suggest a dramatic shift in favour of employees, in practice these reforms should not cause undue alarm for responsible employers. It is entirely understandable that businesses will feel concerned about a shorter qualifying period and the removal of the compensation cap. However, in reality, the changes largely reinforce what employers should already be doing: addressing suitability within the first six months (often the ‘probationary period’), tackling conduct and performance issues promptly, and following fair procedures from an early stage.
Requiring fair processes within the first six months is, in our view, more likely to result in defensible and fair dismissals rather than an increase in successful claims. Employers who engage properly with probationary reviews, document concerns and decisions clearly and follow a reasonable process will continue to be well placed to justify their decisions.
In relation to compensation, although the removal of the statutory cap increases theoretical exposure, it is worth remembering that the current maximum award is rarely seen in day-to-day practice. Tribunals remain guided by what is just and equitable, and claimants are under a duty to mitigate their losses. Significant awards tend to arise only in irregular and fact-specific cases. For the “standard” employee dismissal, particularly where new employment is secured relatively quickly, the practical financial impact is unlikely to be as dramatic as the headline change might suggest.
Ultimately, these reforms place greater emphasis on early, fair and well-documented decision-making. Although 1 January 2027 may seem distant, workforce planning and manager training should begin well before that date. Employers who proactively review their probation, performance management and disciplinary processes now will be best placed to manage risk under the new regime.
If you would like assistance auditing your current practices or reviewing template documentation in light of the upcoming changes, please get in touch with our employment team here.
