On 18 December 2025, the Employment Rights Act 2025 (“ERA 2025”) received Royal Assent, introducing a significant update to UK employment law. The legislation introduces a number of important reforms, including a shorter qualifying period for unfair dismissal protection and the removal of the statutory compensation cap.
These changes aim to modernise employment law and give workers stronger protections, especially in the initial stages of employment.
From 1 January 2027, employees will only need six months’ service with their employer to bring an unfair dismissal claim, instead of the current two years. Simultaneously, the removal of the compensation cap represents a significant financial risk for employers. Organisations can no longer rely on extended service periods to assess new hires safely; they must make informed, evidence-based decisions on performance and conduct much earlier.
Although the changes take effect in January 2027, employers should start preparing now. Employees hired from July 2026 may reach six months’ service just as the rules come into force, meaning they could gain protection immediately. Employers should review recruitment, onboarding, and performance management processes to ensure they are clear, consistent, and legally compliant.
Summary
- Understanding Ordinary Unfair Dismissal
- What Is Changing and Why?
- Reduction of the Qualifying Period to Six Months
- Removal of the Statutory Compensation Cap
- The ‘Probation Problem’: What Employers Need to Do Differently
- Process Essentials
- Risks Beyond Unfair Dismissal
- Compensation and Cost Implications
- What Employers Should Prioritise Now
Understanding Ordinary Unfair Dismissal
Most employees have the right not to be unfairly dismissed. This means employers must ensure that both the reason for dismissal and the process followed are fair. Ordinary unfair dismissal arises where an employee is dismissed without a fair reason or where a fair procedure has not been followed. This is distinct from automatically unfair dismissal, which covers specific situations, such as whistleblowing or pregnancy, where protection applies from day one.
Having unfair dismissal protection does not prevent an employer from dismissing an employee. Rather, it requires the employer to demonstrate a fair reason. To establish fairness, the dismissal must fall within one of five potentially fair reasons under the Employment Rights Act 1996: capability, conduct, redundancy, statutory restriction, or some other substantial reason. However, identifying a fair reason alone is not sufficient. Employers must also show that they acted reasonably in treating that reason as grounds for dismissal and that the decision fell within the range of reasonable responses.
A fair process is critical. In conduct and capability cases, this will typically involve following the Acas Code of Practice on disciplinary and grievance procedures including investigation, written notification, a hearing, and a right of appeal. In redundancy situations, employers must demonstrate a genuine redundancy, apply fair selection criteria, and carry out meaningful consultation.
Current Qualifying Period
Under the current framework, employees must have two years’ continuous service with the same employer to bring a claim for ordinary unfair dismissal. While probation periods are not regulated by statute and therefore offer employers flexibility, this approach has been criticised for leaving employees with limited protection in the initial stages of employment and discouraging job mobility.
What Is Changing and Why?
The UK’s unfair dismissal framework is set to undergo significant reform under the ERA 2025, with changes taking effect from 1 January 2027. These changes redefine the balance between qualifying service and employer flexibility.
They also reflect a broader shift in policy towards strengthening worker protections. Increased rights, combined with enhanced enforcement through bodies such as the Fair Work Agency, signal a move towards greater employer accountability and more consistent application of employment standards.
Employers must now manage unfair dismissal risk not only under the current framework but also in light of these new requirements, including their practical and financial implications.
Reduction of the Qualifying Period to Six Months
From 2027, employees with at least six months’ service will be able to challenge a dismissal if they believe it was unfair. Those who reach six months’ service by 1 January 2027, particularly employees starting from July 2026, may gain protection immediately.
As a result, employers are likely to adopt a more structured approach to recruitment and to manage probation periods more actively and consistently.
The reform reflects changing working patterns and expectations. With employees moving roles more frequently and placing greater emphasis on job security, the previous two-year qualifying period was increasingly viewed as misaligned with modern employment practices.
The government had considered introducing day-one unfair dismissal rights, but this was rejected because it was seen as overly burdensome for employers, particularly small and medium-sized businesses. Immediate protection could have made it difficult to manage probationary periods, assess suitability, and take early performance-related decisions without significant legal risk.
The six-month threshold represents a compromise between extending protection and maintaining operational flexibility for employers.
Removal of the Statutory Compensation Cap
Another important change is the removal of the statutory cap on compensation for ordinary unfair dismissal from 1 January 2027.
At present, compensation is capped at the lower of 52 weeks’ pay or the statutory maximum (currently £123,543), regardless of the employee’s actual loss. This gives employers some certainty and limits their financial exposure.
From 2027, compensation will instead be based on the employee’s actual loss. This can include lost wages, future earnings, and other related financial impacts. In some cases, especially for higher-paid employees or those out of work for a long time, awards could be much higher than under the current rules.
Employers may discover that the departure of senior staff is increasingly complex and financially risky, potentially resulting in a rise in unfair dismissal claims. Resolving these claims could also become more challenging, as employees may have stronger negotiating power and higher expectations for exit terms, particularly given the possibility of uncapped loss of earnings awards.
Together with the shorter qualifying period, this change significantly increases employer risk. It highlights the need for fair processes, clear documentation, and addressing issues early.
The ‘Probation Problem’: What Employers Need to Do Differently
With the qualifying period dropping to six months, probation periods have become a major area of risk for employers. Many organisations run probation for three to six months but manage it informally. Even when included in contracts, probation is often not actively enforced; reviews are delayed, difficult conversations avoided, and concerns poorly documented. Under the new rules, this approach is no longer sustainable.
Timing is now critical. Employees hired from July 2026 could gain unfair dismissal protection by January 2027, so any performance or conduct issues must be identified and addressed quickly. Employers can no longer rely on extended service periods to “wait and see.”
To manage this risk, employers should adopt a structured, proactive approach. Expectations should be clear from day one, with measurable objectives and performance standards. Regular review meetings should be held, with honest feedback that is properly documented.
Concerns must be addressed promptly and supported by evidence. If dismissal is considered, a fair process must be followed, including a proportionate investigation, clear communication of concerns, and, where appropriate, a right of appeal.
Employers should also reconsider how probation is structured. Shorter, actively managed probation periods, with the option to extend if needed, can provide flexibility while still allowing enough time to assess suitability.
In short, probation periods are no longer low risk. They require active management, clear documentation, and timely decision-making.
Process Essentials
The new rules reduce the time employers have to assess new hires without legal exposure. To manage this, internal processes should ensure underperformance or unsuitability is identified and addressed before the six-month threshold.
- Tightened probation cycles: Active management from day one, with clear expectations and structured feedback.
- Structured performance management: Post six-month dismissals require a full, fair process, including warnings and, if needed, a performance improvement plan (PIP).
- Early investigations: Even minor concerns should be recorded and investigated promptly.
- Robust record-keeping: Clear documentation of feedback, support, and decisions is vital to defend claims.
- Decision timing and notice: Aim to make decisions by the fifth month to prevent notice periods extending beyond six months.
- Updating contracts: Include clear probation clauses and, if appropriate, shorter notice periods early in employment.
- Manager training: Line managers must act promptly and fairly; passive management increases legal risk.
Recruitment decisions are also increasingly important. Employers should assess not just technical skills but also behaviours, values, and overall organisational fit.
What This Means for SMEs Without Dedicated HR
Small and medium-sized employers without in-house HR are likely to feel the impact of these changes most. With fewer resources and less formal structure, the combination of a six-month qualifying period and uncapped compensation increases both legal and financial risk. In many SMEs, people management responsibilities fall to business owners or line managers who may have limited experience with formal performance and dismissal procedures. Under the new framework, informal or ad hoc approaches are unlikely to be defensible.
Managers will need to take greater responsibility for actively managing probation, documenting concerns, and addressing issues promptly. Delaying difficult conversations or relying on informal processes increases the risk of costly claims, especially where notice periods extend employment beyond six months.
To mitigate this risk, SMEs should implement simple, structured probation processes with clear expectations and scheduled review points.
Even without a full HR function, basic documentation of performance concerns, meetings, and agreed actions can make a significant difference. Where necessary, external employment lawyers or HR consultants can provide support for key decisions. Training managers to give clear feedback, handle concerns consistently, and follow fair procedures will be essential.
By taking a disciplined, proactive approach, SMEs can manage risk effectively while maintaining operational flexibility and fairness for employees.
Risks Beyond Unfair Dismissal
As the qualifying period reduces to six months, employers must also remain alert to risks that arise from day one of employment. These risks sit alongside unfair dismissal and may carry greater financial exposure.
- Discrimination: Employers must ensure that all decisions, whether related to performance, conduct, or redundancy, are objective, evidence-based, and applied consistently. Any bias, direct or indirect, can expose the organisation to legal claims, even during probation.
- Whistleblowing is another area of immediate protection. Employees making protected disclosures are safeguarded from dismissal or detriment from the start. If any adverse employment action is linked, directly or indirectly, to a disclosure, the claim may be automatically unfair, highlighting the importance of separating whistleblowing matters from performance or conduct issues.
- Redundancy distinctions: Any dismissal labelled as redundancy must reflect a genuine reduction in the need for work. Misrepresenting performance-related dismissals as redundancy is unlikely to withstand legal scrutiny, particularly with stricter enforcement under the new framework.
In practice, employers should ensure that all decisions, regardless of the employee’s length of service, are consistent, well-documented, and supported by evidence. Clear communication, thorough investigation, and proper record-keeping are essential to demonstrate fairness and reduce the risk of costly claims.
Compensation and Cost Implications
The removal of the compensation cap, combined with earlier access to unfair dismissal rights, significantly increases the financial and operational risks associated with dismissal decisions. Employers may face higher-value claims at an earlier stage, alongside increased legal costs and management time.
Compensation will no longer be subject to a statutory limit and will instead reflect actual loss. This creates uncertainty and, in some cases, substantial financial exposure, particularly where employees experience prolonged periods out of work or are in higher-paid roles.
Beyond compensation, employers must also consider the wider costs of claims, including legal fees, internal resource, reputational impact, and disruption to the business. There may also be increased reliance on settlement agreements to manage risk, adding further cost considerations.
What Employers Should Prioritise Now
To reduce exposure, employers should prioritise early intervention. Addressing performance or conduct issues within the first three to five months helps prevent escalation. Equally important is ensuring managers are confident and capable in managing probation, giving feedback, and making fair decisions. Consistent, contemporaneous documentation of concerns, actions taken, and communications is critical in defending any claims.
Structured, disciplined processes are essential. Informal approaches or delayed actions are increasingly risky under the new framework. Finally, strategic hiring and robust onboarding play a key role in preventing early-stage issues, helping organisations balance legal compliance with operational needs.
In this new landscape, the cost of getting early employment decisions wrong is significantly higher. It is therefore important that organisations balance legal risk, commercial priorities, and fair treatment through proactive, structured, and well-documented practices.
Next Steps to Protect Your Business
The ERA 2025 represents a significant shift in UK employment law. With the reduction of the unfair dismissal qualifying period to six months and the removal of the statutory compensation cap, employers, particularly SMEs, may face greater legal and financial exposure. As a result, early preparation, structured probation management, clear documentation, and consistent decision-making are likely to become increasingly important.
Witan Solicitors can support businesses in navigating the evolving employment law landscape. Our Employment Law Team provides practical, tailored guidance to ensure your policies, contracts, and processes are fully compliant and defensible.
From reviewing recruitment and probation practices to managing risk around dismissals, we work with you to protect your organisation and its reputation.
For more information or to discuss how we can support your business through these changes, contact us on 0300 303 2071 or email us.
