Employment unfair dismissal regime

The ordinary unfair dismissal qualifying period of service has fluctuated over the years and has been generally between one year and two years. It last changed on 6 April 2012 when the qualifying period for ordinary unfair dismissal increased from one year to two years of continuous service. The rule of thumb is that Conservative governments tend to extend and lengthen these qualifying periods of service in favour of employers, whereas Labour governments tend to shorten them in favour of employees.

The current Labour government was originally committed to making ordinary unfair dismissal a day one right as part of its election manifesto commitments.

This is not to be confused with automatic unfair dismissal rights linked to, for example, whistleblowing and health and safety breaches, where there are already day one rights in place.

The elements of the Employment Rights Act 2025, which it was hoped would introduce day one rights for ordinary unfair dismissal, faced significant opposition from the House of Lords and also businesses on its journey through Parliament at the end of last year.

This resulted in the likelihood of a significant delay in the implementation of the government’s key manifesto pledge, and as a compromise, it agreed instead to a six-month qualifying period for ordinary unfair dismissal claims.

At the same time, the government, without prior warning, also removed the unfair dismissal compensation cap.  As a consequence, these changes to the unfair dismissal regime still remain the most impactful of the changes being introduced by the Employment Rights Act 2025.

What exactly is changing and when?

The Employment Rights Act 2025 is going to reduce the qualifying period for ordinary unfair dismissal from two years to six months.  It is also going to remove the current financial cap on compensatory awards (which increased for the last time to £123,543 on 6 April 2026).

These changes are expected to come into force on 1 January 2027.  This means that once the compensation cap is removed, employment tribunals will be able to award compensation which reflects loss of earnings and in full.  Financial losses will include base salary, bonuses, long-term incentive plan awards and employer pension contributions.  The duty to mitigate losses on the part of the employee still remains.

In reality the removal of the compensation cap is unlikely to affect most cases on the basis that very few successful cases reach the current cap. The average unfair dismissal award is around £13,700 and the median is around £6,747 according to the latest statistics issued in September 2025 by the employment tribunal service.

These changes to unfair dismissal laws will only really benefit high earning employees and senior executives.  Currently high-earning employees have little incentive to pursue ordinary unfair dismissal claims because of the financial limitations created by the current financial cap.   Once this is removed, claims for ordinary unfair dismissal will become more attractive to those high earning employees and senior executives.

In addition, we are likely to see exit strategies become much more complex and financially risky as the removal of the cap will mean that employees have greater leverage in any settlement negotiations.

The removal of the compensation cap, along with the reduction in the qualifying period to six months, is likely to lead to an increase in the number of ordinary unfair dismissal claims being pursued both by high earning employees and those whose claims can be labelled as nuisance claims.

These changes to the UK’s unfair dismissal landscape will not affect the obligation on an employee to try and mitigate their financial losses by seeking alternative employment and in taking up such alternative employment and in keeping records of their attempts to find work.

The concept of Polkey deductions also remains relevant, where employment tribunals will still be able to reduce compensation to take into account the fact that an employee would have been dismissed in any event, even if a fair process had been followed, and taking into account any contributory fault on behalf of the Claimant employee.

Conversely the uplift in any compensation of up to 25% remains intact for any employer’s failure to follow the ACAS Code of Practice on Disciplinary and Grievance Procedures.  Equally compensation can be reduced by up to 25% where employees fail to follow the recommended procedures and, for example, fail to raise grievance and where there is significant contributory fault.

Don’t forget as well, that limitation periods for employees to issue any claims for unfair dismissal are also going to increase from three months to six months, giving employees more time to think about and prepare such claims.  The ACAS Early Conciliation period is also still a mandatory requirement before a claim can be presented to the employment tribunal and the early conciliation period doubled from six weeks to twelve weeks back in December 2025.

How can employers best prepare for these changes?

There is no legal obligation on employers to have any form of probationary period in any written terms and conditions of employment.  It is a matter of contract, and we have seen a shift in probationary periods over the years, increasing to six months for most employers who implement them.

The changes in the law mean that from 1 January 2027, employees will have unfair dismissal rights after six months continuous service.  The one-week statutory notice period will also need to be taken into account and so any dismissals will need to take place by week 25 into the period of employment if not before, in order to ensure that an employee cannot pursue a claim of ordinary unfair dismissal.

Accordingly, employers will need to manage probationary periods more proactively, and it is recommended that clear objectives be set from day one of the employment relationship.

This will include having regular meetings with the new employee to discuss performance expectations and any issues, documenting where improvements are required so that if the employee does not pass their probationary period there should be no shocks or surprises.  Contemporaneous notes and records of all such meetings should also be arranged.

It is also recommended that employers implement a non-contractual performance improvement plan, however they will need to be mindful that if the length of the process goes over the six-month period, then the employee will obtain unfair dismissal protections.

It is likely that many employers will opt for a three-month probationary period to err on the safe side, and the time frame may mean that it is not practical to implement a full performance improvement plan.

There is not going to be any transition period for unfair dismissal reform and there are no retrospective provisions, which means that all employees hired before July 2026 will gain ordinary unfair dismissal rights from 1 January 2027.

Employers and HR teams should therefore review their current recruitment practices and any probationary periods and should think about updating any written policies and procedures and performance improvement plans.

1. Notice Periods

In the event of attempting to dismiss an under-performing employee before the six-month unfair dismissal protection is triggered, employers should ensure that statutory notice is applied correctly to prevent such employees gaining protection by default.

Employers who provide less than the minimum period of notice at the time of attempting to dismiss an employee means that it can result in any termination date being inadvertently pushed over the six-month threshold.  Notice periods should therefore be served in sufficient time to prevent employers from being caught out and this includes any pay in lieu of notice provisions.

2. Strengthen performance management and dismissal procedures

At the time that the government intended to implement day one rights for unfair dismissal, it was also talking about light touch dismissals and a statutory probationary period.

Now that these day one rights have been shelved in favour of a qualifying six-month period of continuity, and with no compensation cap, any procedural errors in dismissing an employee will carry more financial risk and legal exposure.

It is therefore recommended that employers implement more robust and fair processes for performance management of employees, and also for dealing with misconduct issues and any redundancies. It is also important to keep records of all meetings and performance gaps. In relation to redundancies employees will still require the current two-year period of service in order to qualify for any statutory redundancy pay.

Senior executives on high salaries should also be subject to such robust processes, as any failure to implement a fair process will subject the employer to a higher degree of financial risk.

3. Planning senior exits

As has been mentioned, it is going to become riskier for employers to exit high earning executives, especially if they have unfair dismissal protections in place and this is likely to influence any settlement negotiations.

Employers are advised to review their internal processes in dealing with exit arrangements and ensure that there is better alignment between management, HR, legal and finance teams.

At Board level it is recommended that discussions take place to address and understand any financial and governance issues associated with these changes and the introduction of uncapped compensation.

4. Audit and due diligence of settlement strategies

Mediation and alternative dispute resolution are going to become increasingly more common and important to navigate protected discussions, settlement agreement proposals, and in trying to manage financial and legal exposure and costs in general.   High earning employees will have higher settlement expectations and so legal budgets may need to reflect this.

5. Insurance cover

Employers are also advised to review their insurance cover to ensure that levels of cover adequately reflect the likely increased unfair dismissal exposure.  This may mean that insurance premiums increase as a consequence of these changes to the law on unfair dismissal.  Employers should therefore engage early with their insurers to ensure that they have the correct level of cover and in advance of any disputes that take place from 1 January 2027.

Summary

These changes to the UK unfair dismissal laws are significant and employers are advised to strengthen their recruitment practices, review current probationary periods, enhance performance management processes and ensure that they act fairly in dismissing employees.

The financial stakes are significantly raised for employers who get it wrong especially in dealing with high earning employees and senior executives.

Employers also need to be aware of how much of their valuable time can be eaten up in dealing with low value nuisance claims and the predicted increase in unfair dismissal claims in general, and the adverse publicity that so often is associated with such claims.

This article is part of a series being produced by Gilson Gray on the implementation of the Employment Rights Act 2025.

If you have any specific questions or concerns relating to complying with the new unfair dismissal laws or in general about the Employment Rights Act 2025 and how it may affect your business, then contact Steven Eckett, Partner and Head of Employment, England.