Employment Rights Act: Preparing for change: The impact of changes to unfair dismissal

19 March 2026 6 min read

By Rachel Chapman

At a glance

From 1 January 2027, the qualifying period for unfair dismissal will reduce from two years to six months.
The statutory caps on unfair dismissal compensation will be abolished, creating uncapped financial exposure.
Employees with six months’ service on commencement will gain protection immediately.
The reforms significantly increase risk for dismissals involving senior, highly paid or long‑serving employees.
Employers will need to reassess recruitment, probation management and dismissal strategies well in advance.

When the Employment Rights Bill was published in October 2024, the headline measure was the proposal to make unfair dismissal a ‘day 1 right’ by removing the qualifying period. At the 11^th hour a series of defeats in the House of Lords forced the government to U-turn on that proposal. Instead, the qualifying period for unfair dismissal rights will reduce to six months with effect from 1 January 2027. At the same time, in a development that no one saw coming, both statutory caps on unfair dismissal compensation , the lower of 52 weeks’ gross pay or (currently) GBP118,223, will be abolished. Both unfair dismissal changes will have a significant impact on employers.

The government’s latest timetable for implementation of the Employment Rights Act 2025 (ERA) confirms that both changes will come into force on 1 January 2027. The government also confirmed that it would not be carrying out further public consultation on the changes to unfair dismissal.

Employees who already have six months’ service on 1 January 2027 will gain protection immediately, meaning that anyone already in employment now plus any new hires up to the end of June 2026 will be covered immediately.

Reduction of the qualifying period

The qualifying period for unfair dismissal has been two years since April 2012. The reduction to six months represents a substantial change, and the ERA removes the power to vary the qualifying period by secondary legislation, meaning future changes will require primary legislation.

From January, employers will have a far shorter period of time to assess a new hire’s suitability for the role, placing greater emphasis on the importance of strong recruitment practices, shorter and better managed probationary periods with clearly defined performance standards and robust management of capability issues in the early period of employment.

Current practice is commonly to have a probationary period of three to six months, often extendable and sometimes automatically extended if either the employee or manager is absent. Best practice going forward is likely to be a maximum probationary period of three or four months, extendable at the employer’s discretion by ideally a maximum of one month. This will allow decisions to be made about the employee’s continued employment in good time before they qualify for unfair dismissal protection.

Removal of the compensation caps

The monetary cap on unfair dismissal compensation has been in place in its current form since 1999, when the then-Labour government increased it from GBP12,000 to GBP50,000 and established annual inflation‑linked uprating. The alternative 52 weeks’ pay cap came into force in 2013.

The removal of both caps represents a radical change to the unfair dismissal compensation framework and will require a similarly radical rethink in how employers approach unfair dismissal risks.

Average (median) awards for unfair dismissal may not actually change significantly. Most claimants do not suffer substantial financial loss, employees will still be required to mitigate their losses and tribunals will still be able to make Polkey deductions and deductions for contributory fault.

However, the removal of the cap will potentially have a huge impact in the case of (1) highly paid employees (2) employees with long-term loss of employment (mainly older employees or employees with a disability or ill health) and (3) employees with significant pension loss. Employees who are dismissed closer to retirement age may credibly be able to make a claim for career-long loss amounting to 15-20 years’ salary. Although employees are under a duty to mitigate their losses, if they are older or in poor health, they may be able to argue that they will never regain the earning potential of the job they were dismissed from.

An example of how this may play out:

Colin has been employed by B Ltd as a sales manager for 15 years. He was recently promoted but is struggling in his new role and B Ltd want to dismiss on performance grounds.

C’s annual (gross salary) was GBP79,114.54.
C’s net weekly pay was GBP1,027.
C received the following additional benefits:
- Private medical insurance: GBP161.92 per month.
- Dental insurance: GBP29.65 per month.
- C made employee pension contributions of GBP263 per month and received employer contributions of £395 per month.
C is age 50 at the date of termination.

C’s claim is unlikely to be heard for at least a year. Past loss of salary and benefits totals GBP63,598.84. C argues that the maximum he will be able to earn for the next 17 years until retirement is the GBP52,000 he earned in his previous role. His gross future loss of earnings is (GBP79,114,54 – GBP52,000 = GBP27,114.54) x 15 = GBP406,718.10. Where the 52 weeks’ cap would previously have meant the maximum value of the claim was just under GBP80,000, B Ltd is now looking at potential liability closer to half a million.

The removal of the caps on compensation makes it more important than ever that employers take steps to mitigate the risk that dismissals lead to successful unfair dismissal claims:

Manage probationary periods: Set clear expectations, monitor and take action where performance falls short.
Tackle any performance or conduct issues early: Implementing an absence or performance management plan may fix the issue, but if not places the employer in a better position to move to dismissal.
Adhere strictly to company policies and the ACAS Code of Practice on Disciplinary and Grievance Procedures.
Establish a fair reason: Ensure the dismissal is for a valid reason, such as capability, conduct, redundancy, or some other substantial reason.
Investigate thoroughly: Gather evidence, interview witnesses, and ensure an impartial investigation before taking action.
Hold disciplinary hearings: Inform the employee in writing of the allegations and allow them to defend themselves in a meeting.
Allow accompaniment: Employees have a statutory right to be accompanied by a colleague or trade union representative at disciplinary or grievance hearings.
Right to Appeal: Always offer the employee the right to appeal the decision, ideally heard by a more senior manager not previously involved.
Be Consistent: Apply rules and sanctions equally to all employees.
Document everything: Maintain detailed records of meetings, warnings, and evidence.

The changes could also reshape how companies handle underperformance (or perceived underperformance) of senior executives. There is seldom the appetite to run a full six‑month performance improvement process, with staged warnings, objectives, support and reviews. The most common approach in this scenario is that the board will seek to achieve a clean, swift exit; notice, a severance payment to cover the maximum unfair dismissal award and a settlement agreement. Where the alternative is potentially a GBP1 million plus award, the risk analysis will change.

Removal of the caps means that unfair dismissal claims may come to involve the type of complex evidence on valuing loss currently seen only in complex discrimination and whistleblowing claims: pricing share options, pension loss and deferred compensation, and expert evidence on mitigation. That would inevitably lead to longer hearings, which will exacerbate the current lengthy delays in the tribunal system.

It remains to be seen what the wider economic impact of the unfair dismissal changes will be. The introduction of uncapped compensation will put Great Britain in an anomalous position compared to most other European countries, including those traditionally seen as being employee friendly. Ireland, France, Italy, Spain and Sweden all operate statutory or formula‑based caps for dismissal compensation. Under German law, the primary remedy for unfair dismissal is reinstatement, but backed by structured compensation. Only Luxembourg currently has an entirely uncapped unfair dismissal compensation regime.

What is clear is that the unfair dismissal reforms have the potential to be the most impactful measures in the ERA.