Unfair Dismissal Rights

Businesses are being urged to prepare for significant changes to unfair dismissal law, which will come into force on 1 January 2027.

Under the Employment Rights Act 2025, employees will gain the right to claim ordinary unfair dismissal after just six months' service, compared with the current two-year qualifying period.

At the same time, the existing cap on compensation for ordinary unfair dismissal will be removed.

For employers, particularly smaller businesses without dedicated HR teams, these changes make effective recruitment, probation and performance management increasingly important.

Unfair dismissal: what is changing?

At present, employees generally need two years' continuous service before they can bring an ordinary unfair dismissal claim.

From 1 January 2027, this will reduce to six months. This means that employees dismissed on or after 1 January 2027 will only need six months of continuous employment to bring a claim for unfair dismissal, provided their effective date of termination (EDT) falls on or after that date. Where employment is terminated with notice, the EDT is usually the date on which the notice period expires. Where employment is terminated without notice, the EDT is usually the date on which termination takes effect.

Importantly, this is not the previously proposed ‘day one’ unfair dismissal right.

The Government changed its approach before the Employment Rights Act became law.

The Government also intends the new protection to apply immediately from 1 January 2027 to employees who already have at least six months' service on that date.

Existing day-one protections, including certain claims relating to discrimination, whistleblowing and automatically unfair reasons for dismissal, will continue to apply.

The compensation cap will be removed

Another significant change is the removal of the cap on compensatory awards for ordinary unfair dismissal.

Currently, compensatory awards are generally capped at the lower of 52 weeks' gross pay or £123,543 for dismissals taking place on or after 6 April 2026.

From 1 January 2027, that cap will be removed. This means that employment tribunals will be able to award compensation based on what is "just and equitable" in all the circumstances, without being constrained by a maximum limit.

This could increase the financial consequences of getting a dismissal wrong, particularly where highly paid employees or employees who suffer significant financial loss are involved.

Why could this be particularly important for small businesses?

Smaller employers can often rely on the first two years of employment as a longer period in which to assess whether someone is right for the business, subject, of course, to existing protections against discrimination and automatically unfair dismissal.

That window is about to become considerably shorter.

After six months, employers will generally need both a fair reason for dismissal and a fair procedure if they are to defend an ordinary unfair dismissal claim successfully.

For businesses without an in-house HR department, careful management and record-keeping will be particularly important.

What should employers do before January 2027?

With the qualifying period for ordinary unfair dismissal reducing to six months, employers will have a shorter window in which to identify and address concerns about a new employee. Businesses should therefore consider the following steps before the changes take effect:

• Review employment contracts and probationary periods. Check that contracts contain clear and appropriate probationary provisions, including how long probation lasts, how it can be extended and what notice applies during this period. Employers should also ensure that their contracts and staff policies accurately reflect how probation is managed in practice.
• Set clear expectations from the outset. New employees should understand what is expected of them in terms of performance, conduct, attendance and other requirements of their role. Clear objectives and measurable standards can make it easier to identify problems at an early stage and demonstrate what the employee was expected to achieve.
• Carry out probationary reviews on time. Probation should be actively managed rather than treated simply as a date in the diary. Regular reviews give employers an opportunity to discuss progress, recognise good performance and address concerns. Waiting until an employee is approaching six months' service before considering their suitability could leave very little time to deal with problems appropriately.
• Keep appropriate records. Where concerns arise about an employee's conduct, capability, attendance or performance, employers should keep accurate records of the issues identified, meetings held and any agreed actions. Good documentation can become particularly important if an employment decision is subsequently challenged.
• Give employees feedback and an opportunity to improve. Where performance falls below the required standard, employers should normally explain the concerns clearly and give the employee a reasonable opportunity to improve where appropriate. This may include additional training, support, agreed objectives and a reasonable review period.
• Train managers on fair procedures. Line managers are often the first people to identify problems with new employees. They should understand how to manage probation, performance and conduct concerns consistently and when to seek HR or legal advice. Employers should also ensure managers understand that some employment rights already apply from the first day of employment, including protection against discrimination and dismissal for certain automatically unfair reasons.

The reduction of the qualifying period does not mean that employers will be unable to dismiss an employee after six months. However, once an employee qualifies for ordinary unfair dismissal protection, employers will generally need to demonstrate both a potentially fair reason for dismissal and a fair process.

For smaller businesses in particular, reviewing procedures and training managers before 1 January 2027 could help prevent relatively straightforward performance or conduct issues from developing into costly employment disputes.

Don't wait until January

The change may feel some way off, but employers should start preparing now.

An employee who already has six months' service on 1 January 2027 is intended to benefit from the new protection immediately. This means employment decisions being made during 2026 could have consequences once the new rules take effect.

Reviewing procedures and training managers now can help businesses identify problems earlier and reduce the risk of costly disputes later.

How Coles Miller can help

Employment law is changing quickly. Businesses need to ensure that their contracts, policies and procedures keep pace.

Coles Miller's experienced Employment Law solicitors advise employers on unfair and wrongful dismissal, disciplinary and grievance procedures, employment contracts, redundancy, discrimination, settlement agreements, TUPE, sickness absence and termination of employment.

We can also review existing employment contracts, staff handbooks and workplace policies, and advise employers on managing performance or conduct concerns before they develop into more serious disputes.

As unfair dismissal protection moves from two years to six months and the compensation cap is removed, taking advice before dismissing an employee will become increasingly important.

If you employ staff and would like advice on preparing your business for the changes taking effect on 1 January 2027, contact our Employment Law Team today.

Get Expert Legal Advice

Phone or email Coles Miller employment solicitor Hugh Reid for specialist legal advice on employment contracts, disciplinary procedures, terminating contracts of employment and making workers and employees redundant. He is based at our Poole town centre head office (44-46 Parkstone Road, Poole, Dorset, BH15 2PG).