From 1 January 2027, two significant changes to unfair dismissal law are due to come into effect. The qualifying period for bringing an ordinary unfair dismissal claim will reduce from two years to six months, while the existing cap on compensatory awards will be removed.
These changes will extend unfair dismissal protection to many more employees and could considerably increase the financial consequences for employers where a dismissal is found to be unfair. For businesses, this makes it increasingly important to recruit carefully, manage probationary periods effectively and follow a fair process when employment needs to end.
The qualifying period will reduce to six months
Currently, most employees need two years of continuous service before they can bring an ordinary unfair dismissal claim. There are already circumstances where no qualifying period applies, including certain automatically unfair dismissals. From 1 January 2027, the general qualifying period for ordinary unfair dismissal will reduce to six months.
This does not mean that an employee cannot be dismissed once they have reached six months of service. It does mean that an employer will normally need to demonstrate a potentially fair reason for dismissal and show that the decision was reasonable in the circumstances. In practical terms, employers will have considerably less time to identify and address concerns relating to conduct, capability, performance or suitability for the role.
Probationary periods will become increasingly important
Many employers already use six month probationary periods, but simply including a probation clause in a contract is not enough. Probation should be actively managed from the beginning of employment, with regular reviews, clear expectations and early conversations about any areas of concern.
Where improvement is required, employees should understand what needs to change and be given appropriate support, training and reasonable opportunities to improve. Waiting until somebody is approaching the end of probation before raising concerns that have existed for several months could make the situation considerably more difficult to manage.
Employers should also think carefully before extending probation. An extension could take an employee beyond the new six month qualifying period. Statutory notice can also count towards continuous service when determining whether an employee has reached the qualifying period, so advice should be taken where dismissal is being considered close to the six month point.
The cap on unfair dismissal compensation will be removed
Unfair dismissal compensatory awards are currently subject to a statutory limit. From 1 January 2027, that cap is due to be removed. Compensation will continue to be based on the actual and projected financial losses evidenced by the employee, rather than becoming automatically unlimited simply because the statutory cap has disappeared.
However, removing the cap could create significantly greater exposure in cases involving substantial or long term financial losses. Future earnings may become particularly important where an employee is likely to remain out of work for an extended period, perhaps because they have specialist skills, work within a limited employment market or experience other barriers to finding comparable work.
The employee will still be expected to take reasonable steps to reduce their losses by seeking suitable alternative employment. Nevertheless, where it reasonably takes longer to secure another role, the value of the claim could increase.
Pension, shares and other financial losses
Salary may only represent part of an employee’s overall remuneration. Some employees receive significant value through bonuses, commission, share options, equity arrangements and other incentive schemes. If a dismissal causes an employee to lose the opportunity to benefit from these arrangements, those losses may become relevant when compensation is assessed.
Pension losses can also be important, particularly for employees who are members of final salary or defined benefit schemes. In appropriate cases, a tribunal may need to consider the longer term effect that dismissal has had on the employee’s expected retirement benefits.
The removal of the compensatory award cap therefore makes it particularly important for employers to understand the complete financial implications of dismissing higher earning employees or individuals with valuable pension and incentive arrangements.
Could tribunal delays increase the impact?
Reducing the qualifying period from two years to six months will mean that many more employees have ordinary unfair dismissal protection. This could result in additional claims entering the employment tribunal system.
For employers, a lengthy dispute can create costs beyond any eventual compensation award, including management time and legal expenses. Where an employee remains unable to secure suitable alternative employment, a longer period without earnings may also form part of the losses they seek to recover, although any award will depend on the individual circumstances and evidence.
Not every employment dispute needs to reach a tribunal. Early discussions, mediation, protected conversations and appropriate settlement negotiations can sometimes resolve matters before proceedings progress further. These discussions need to be handled carefully, particularly where discrimination, whistleblowing or other legal protections may be relevant.
What should employers do before January 2027?
Employers should use the time before the changes take effect to review how recruitment, probation, performance and dismissal decisions are currently managed.
Contracts and HR procedures are a sensible place to start. Employment contracts should clearly explain probationary arrangements, notice requirements and any provisions relating to extending probation. Disciplinary, capability and performance procedures should also be reviewed to ensure they remain practical and support consistent and fair decision making.
Recruitment processes deserve similar attention. Reducing the risk of an unsuitable appointment begins before somebody joins the organisation. Job descriptions and person specifications should accurately reflect the position, interviews should be structured and appropriate checks should be completed. Where relevant to the role, practical assessments can also help establish whether a candidate has the necessary skills and aptitude.
Once somebody starts work, probation should be actively managed rather than treated simply as a date in the calendar. Expectations should be clear from the outset and reviews should take place throughout the probationary period. Concerns should be raised when they arise, with agreed improvements, appropriate support and accurate records of the conversations that have taken place.
Managers will need to be prepared
Managers are often the first people to identify concerns about performance, conduct or capability, which means they need to understand how to respond appropriately. They should know when an informal conversation is sufficient, when a more formal process may be necessary and when HR advice should be sought.
It will also be important for managers to understand that describing a dismissal as a failed probation does not remove the need to consider the underlying reason for the decision and the process that has been followed.
Good record keeping will support this. Employers should maintain clear and factual records of probation and performance reviews, concerns that have been raised, objectives and improvements required, training and support provided, relevant meetings and the employee’s response. Where dismissal is eventually considered, records should also demonstrate what alternatives were considered and why the final decision was reached.
Preparing for greater dismissal risk
The reduction of the ordinary unfair dismissal qualifying period from two years to six months represents a significant change for employers. Removing the compensatory award cap also increases the potential financial exposure in cases where an employee can demonstrate substantial losses.
Employers should therefore use the period before January 2027 to make sure recruitment, probationary processes, employment contracts and manager training are ready for the new rules. Better processes at the beginning of employment can make concerns easier to identify and address before they develop into more difficult and potentially costly disputes.
Where dismissal is being considered, particularly when an employee is approaching six months of service or there are potential discrimination, whistleblowing, health or family related considerations, obtaining advice before acting can help prevent mistakes that may be difficult to correct afterwards.
If you need support reviewing your contracts, probationary processes or approach to managing employee concerns, EC Human Resources can help you prepare for the changes ahead.
For support with managing dismissals fairly and correctly, find out more about our Dismissal Support service.