ERA 2025 unfair dismissal reform: what is changing and how employers might prepare
From 1 January 2027, the unfair dismissal regime as we know it is all set to change. This article focuses on two changes coming into force on that date, bringing opportunity for individuals and risks for employers:
- The qualifying period for ordinary unfair dismissal protection will reduce from the current two years’ service to only six months.
- The statutory cap on the compensatory award for ordinary unfair dismissal claims, which is currently fixed at the lower of £123,543 or 12 months’ pay, will also be lifted.
Those employed on or before 2 July 2026 will have the requisite qualifying service for protection against unfair dismissal come the new year. Therefore, it is paramount that employers give their employment processes due attention to manage the risk they face under the new rules, and that they do so now.
The changes will also affect the leverage of high-earning individuals and senior executives in unfair dismissal cases. From 1 January 2027, many who would not otherwise have been able to challenge their dismissal, will be able to bring a claim; and for some – particularly senior individuals with complex remuneration and benefits packages whose financial losses on dismissal go beyond their base salary – those claims will carry far greater financial significance.
6-month qualifying period
Under the current framework, employers have a relatively long period of two years in which to assess an employee’s suitability for the role, with limited exposure to claims. Employers will need to start identifying problems much earlier following the reduction in the qualifying period, with the reality being that probation periods will no longer represent a welcoming period of bedding in and adjustment for both the individual and the business. Rather, they will become the employer’s only genuine opportunity to dismiss without the risk of an ordinary unfair dismissal claim. Poorly managed probation processes, delayed performance conversations or informal decisions to “wait and see” will carry more risk; by the time concerns have been escalated, the employee may already have acquired protection.
From 1 January 2027, employers will need to justify the reason for dismissal, the process followed, and why dismissal was reasonable in the circumstances, all at a much earlier stage.
Of course, some dismissal claims already do not carry a qualifying period and can give rise to claims from day one, such as those connected with whistleblowing, pregnancy, maternity or discrimination. The caveat is that even where an employee has not yet acquired ordinary unfair dismissal protection, a poorly handled dismissal can still create litigation risk.
Removing the cap
Although the cap on compensatory awards in unfair dismissal claims will be removed, compensation for ordinary unfair dismissal will remain compensatory rather than punitive (i.e. where only actual losses can be sought from the employer at Tribunal). In a situation where an employee is dismissed unfairly, he or she would still need to account for their losses to the Tribunal, evidence how they have actively mitigated their losses (e.g. show their efforts to secure new employment), and may face reductions where they contributed to their dismissal or where the employer can demonstrate that dismissal would have occurred in any event.
So while removing the cap does lift a fixed statutory ceiling that has often anchored employers’ risk assessments and framed settlement negotiations, quantum will still have an upper bound in each case calculated with reference to actual losses suffered.
Senior executives and high earners
At present, a senior executive or senior individual with under two years’ service will not have ordinary unfair dismissal protection, and would not have recourse against dismissal unless the facts of their case make it possible to bring another type of claim. From 1 January 2027, that position will change following six months’ service.
The quantified statutory cap is an impediment on compensation where an individual has a high base salary or their losses on dismissal extend well beyond base salary and may include bonus entitlement, deferred compensation, share awards, carried interest, long-term incentives, pension rights, or where reputational and/or regulatory factors may affect the time taken to secure a comparable role. If employers will no longer be able to approach ordinary unfair dismissal risk by reference to the existing statutory maximum, their cost-benefit will need reevaluating, and so we expect to see the dynamic of settlement negotiations shift on senior exits.
Consequently senior employees may be more willing to rely on ordinary unfair dismissal as a substantive claim in its own right, rather than seeking to bring an uncapped claim through the “back door” (e.g. argue a more creative/complex whistleblowing or discrimination claim) where previously the cap may have limited its practical value.
The flip side of this is that individuals should expect the first six months of employment to become a more closely-managed testing period, and senior executives will not be immune from such heightened scrutiny. Employers may seek to strengthen their pre-appointment due diligence and then monitor new senior recruits more actively.
The changes may encourage mobility in senior positions if protection can be achieved after only six months. However, the offer stage will gain a new importance for senior executives, when the individual is in the strongest bargaining position, especially in situations where they are being recruited away from an existing role. The terms agreed prior to joining – including notice provisions, probation terms, bonus arrangements, long-term incentive plans, sign-on payments, restrictive covenants and post-termination restrictions – may prove decisive in the event of early dismissal and where appropriate it will be essential that these form part of the written employment contract.
Considerations for employers – reducing the qualifying period
- Anticipate the relevant timings for exits
The relevant date for the legislation will be the employee’s effective date of termination rather than the date on which notice is served, so employers will need to plan any late-2026 exits carefully, particularly where notice periods may take the termination date into the new year.
Employees’ statutory notice entitlements will need to be part of the equation when calculating qualifying service where employers are seeking to dismiss shortly before the six-month mark; even a dismissal at five months and three weeks’ continuous service may not be safely outside the new regime.
Similarly, many fixed-term contracts which would ordinarily (under the current regime) terminate prior to the individual accruing unfair dismissal protection, will now generate a new risk for employers.
This is not to suggest that employers become more aggressive in managing staff or rush to dismiss employees before they acquire protection. Rather, employers should ensure that employment decisions are made promptly, fairly and with proper evidential basis.
- Review hiring processes
Hiring processes should be reviewed, as these will remain the first line of defence for every employer. A shorter qualifying period will exacerbate the risk from poor recruitment decisions and so employers may wish to consider whether their processes are sufficiently rigorous, particularly for senior appointments and other roles where the cost of a failed hire is high.
In practice, this means examining patterns in early departures or business-specific turnover, and reviewing job descriptions, interview questions, competency criteria, reference screening processes, and the involvement of senior decision-makers. We recommend that employers seek to improve their evidence-based recruitment (e.g. strengthening pre-appointment due diligence for senior executives) without tipping into an overly risk-averse approach: being too defensive could inadvertently increase discrimination risk if certain candidates are perceived as a less “safe” option, or because assumptions are made about who would be more likely to succeed.
- Probation and process
As probation periods will gain a new importance, employers will likely look to extract as much value from them as possible. However, a shorter probation with a limited right to extension by the employer may be preferable to a longer probation which leaves insufficient headroom for managing a low-risk exit.
During the probation period itself, employers should build in clear review points, train managers on how best to escalate concerns, and ensure that employees’ expectations are communicated clearly. Managers will need to document performance and meetings closely, and ideally receive training on HR involvement and around timings (of decision-making, the communication of decisions, and on how long is required to run a fair process should the possibility of termination arise).
Employers should aim to check existing contracts and handbooks for consistency with the new regime (including notice, probation and PILON provisions); consider senior exit strategy (especially where dismissals may include bonus, equity, pension or other valuable benefits); and review other policies and procedures (namely disciplinary, capability, performance management, redundancy and probation).
How employers can prepare for the removal of the cap
As employers should prepare for both higher-value and more routine claims, they may need to revisit how they assess financial exposure on termination. With the removal of the cap, risk assessment will need to focus more closely on the individual’s likely actual loss, rather than – as is currently the position – by reference to a maximum, capped exposure. This will be more important where the employee is highly paid, specialised, works in a narrow market, or has valuable incentive arrangements.
Employers should also prepare for a change in the power dynamic in settlement negotiations, as an uncapped claim may be reason for a higher settlement figure. Whether that is right will depend on the evidence of loss, mitigation prospects and the merits of the claim.
Our comment
The incoming changes to unfair dismissal laws will increase both access to claims and their potential value.
For employees, particularly in the case of senior executives and high earners, ordinary unfair dismissal protection will become available earlier on and may carry greater commercial weight. We consider that even if one consequence is that higher earners will no longer need to bring more complex claims (i.e. finding a whistleblowing / discrimination angle) as a way to sidestep the cap on ordinary unfair dismissal claims, there are still other reasons such clients would be incentivised to bring complex claims.
For all employers, preparation will be essential given the period for assessing new hires will be shorter, the consequences of poor process may be greater, and the statutory cap will no longer provide a ceiling on compensatory awards. We anticipate that the safest employers will not be those that rush to dismiss before the six-month mark, but rather those that hire carefully, manage early concerns in a timely manner, apply fair processes proportionately and leave enough headroom to make termination decisions before statutory notice and qualifying-service rules become problematic.
It may be that smaller employers are disproportionately affected by these changes, in the absence of formal HR infrastructure, established probation processes and with more limited access to legal support. The shorter qualifying period may expose gaps in process that larger employers are better placed to absorb.
Our team assist both employers and senior executives with unfair dismissal cases, and we would be glad to help you or your business prepare for the changes ahead. Please contact us if you would like to discuss any of the issues raised in this article further.
For more information, please contact someone in the Employment Department. Alternatively, call us on 020 7465 4300.
This article featured in our Spring edition of ‘IN CASE’, our Employment newsletter for HR Directors.
