The Employment Rights Act 2025 (“ERA 2025”) introduces significant reforms to unfair dismissal law. These changes form part of the Government’s wider objective to strengthen employee protections.
For employers, the reforms will mean earlier employee eligibility for claims and uncapped compensation exposure. Preparation is critical.
1. What is the current position?
Currently, employees must have two years’ continuous service to bring an ordinary unfair dismissal claim.
What does this mean in practice?
An employee with two years’ continuous service can only fairly be dismissed for one of the below reasons and employers must follow a fair and reasonable procedure.
- Conduct
- Capability
- Redundancy
- Statutory illegality
- Some other substantial reason
Employees with less than two years’ service cannot ordinarily claim unfair dismissal, provided the dismissal is not discriminatory, automatically unfair or linked to whistleblowing.
Current compensatory award
Where an unfair dismissal is established, compensation is:
- A basic award (calculated the same way as statutory redundancy payment); and
- A compensatory award reflecting the financial loss. This is capped at the lower of either:
- 52 weeks’ gross pay or;
- £118,223 (as of February 2026).
2. What is changing?
From 1 January 2027, two major reforms will take effect.
Six month qualifying period
The qualifying period for ordinary unfair dismissal claims will be reduced from two years to six months (five months and three weeks when taking into account statutory notice) . This means employees, with that reduced continuous service, will be able to bring claims in the Employment Tribunal. This significantly expands the pool of eligible claimants within statutory protection.
Removal of the compensatory award cap
The statutory cap on compensatory awards will be removed. There will be no upper limit on compensation for financial loss arising from unfair dismissal. Awards will better reflect employees’ situations including:
- Future loss of earnings;
- Loss of bonuses;
- Pension loss;
- Share options and long-term incentive plans;
- Other contractual benefits.
3. What does this mean for employers?
The legal and financial risk for employers will substantially change. For example:
1. Greater legal exposure
- Many more employees will be eligible to bring unfair dismissal claims.
- Dismissals after five months and three weeks must be supported by a fair reason and process.
- Informal or lightly documented probation dismissals will carry increased risk in the context of reduced qualifying service.
2. Higher financial risk
- Without a compensatory cap, senior executives may pursue claims reflecting long-term loss.
- Employers may face increased settlement costs and more complex quantum disputes.
4. Practical steps for employers
With implementation due in 1 January 2027, employers must prepare the following:
1. Review and strengthen probation policies
- Ensure contractual probation clauses align before the qualifying period for unfair dismissal.
- Introduce structured review meetings at regular intervals.
- Ensure concerns are raised and documented early.
2. Hiring new employees from June 2026 onwards
- Employees hired from June 2026 onwards will reach qualifying service on or shortly after 1 January 2027.
- Ensure robust recruitment processes.
- Address under performance promptly.
- Set clear performance expectations from the get-go.
3. Enhance documentation standards
- Maintain contemporaneous notes of performance and conduct.
- Ensure internal procedures are followed consistently.
- Improve communication between management and HR functions.
4. Train managers
- Give managers and HR training on unfair dismissal processes (including in relation to capability and conduct) and the reforms coming into place.
5. Update policies and contracts
- Ensure handbooks, employment contracts and dismissal procedures reflect the incoming new unfair dismissal landscape.
The reforms under the Employment Rights Act 2025 represent a significant shift in unfair dismissal risk and practically employers may not be aware of potential claims for an extended period of time given the limitation period to bring a Tribunal claim will be extended to six months.
Employers should use 2026 to strategically review procedures, train managers and reassess litigation exposure.
If you require advice on preparing for these changes, the employment team at B P Collins would be pleased to assist. Please email enquiries@bpcollins.co.uk or call 01753 889995.
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