The New Unfair Dismissal Regime

By Harriet Calver on 14 July 2026

The upcoming reforms to unfair dismissal protection represent one of the most significant employment law changes introduced by the Employment Rights Act 2025. The reforms will materially increase both the number of employees able to bring unfair dismissal claims and the potential cost of getting a dismissal wrong.

Although the key unfair dismissal changes are not due to take effect until 1 January 2027, employers should be reviewing their recruitment, probationary and dismissal procedures now in preparation for these changes.

What is changing?

1. Reduction of the unfair dismissal qualifying period to six months

From 1 January 2027, the qualifying period required to bring a claim for ordinary unfair dismissal will reduce from two years’ continuous service to six months’ continuous service. This is a substantial shift in employee protection.

By way of example, an employee who starts employment on 2 July 2026 will have accrued six months’ continuous employment by 1 January 2027 and will benefit from the reduced qualifying period from that date. This is because both the first and last day of a period of continuous employment are counted when calculating continuity of employment.

Similarly, an employee who commenced employment on 1 January 2026 will have one year’s service on 1 January 2027 and will automatically benefit from the new qualifying period.

Employers considering the dismissal of employees with less than two years’ service before 1 January 2027, should act with caution before serving notice and as the rules relating to the impact of notice periods on the effective date of termination for statutory purposes is fairly complex (see below “Dismissals before 1 January 2027”).

2. Removal of the statutory cap on the compensatory award

The second major reform is the abolition of the statutory cap on the compensatory award in unfair dismissal claims.

Currently, the compensatory award is capped at the lower of:

• 52 weeks’ gross pay; or
• £123,543.

From 1 January 2027, this statutory cap will be removed entirely.

The basic award remains unchanged and will continue to be calculated by reference to the employee’s age, length of service and weekly pay.

The practical effect of removing the statutory cap is that the financial consequences of an unfair dismissal claim could become significantly greater, particularly in respect of highly remunerated employees as compensation will no longer be artificially constrained by reference to a statutory maximum and can instead reflect the employee’s actual losses.

3. Extension of Employment Tribunal time limits

From October 2026, the time limit for most Employment Tribunal claims will increase from three months (less one day) to six months (less one day).

Although this change applies to Tribunal claims more generally, it is likely to have a particular impact in the unfair dismissal context. Employees will have longer to obtain legal advice, engage in settlement discussions, gather evidence and consider whether to commence proceedings.

While the change may reduce the number of protective claims lodged simply to preserve limitation periods, it is also likely to prolong periods of uncertainty for employers following dismissals.

Dismissals before 1 January 2027 — be careful with notice periods

A natural consequence of these reforms is that some employers may seek to conclude employment relationships before 1 January 2027 to avoid employees acquiring unfair dismissal protection under the new six-month qualifying period, or to avoid exposure to uncapped compensation.

Employers should, however, proceed with caution.

For unfair dismissal purposes, the effective date of termination — or EDT — is not always the date on which employment actually ends. Where an employee is dismissed without notice and receives a payment in lieu of notice, section 97(2) of the Employment Rights Act 1996 can operate to extend the EDT for certain statutory purposes to the date on which the employee’s statutory minimum notice would have expired.

We have included some examples below to demonstrate the above in practice.

Example 1 — employee entitled to one week’s notice

The employer serves notice on 24 December 2026 and requires the employee to work their notice period, or places them on garden leave.

• Notice commences on 25 December 2026.
• Notice expires on 31 December 2026.
• The EDT is 31 December 2026.

Result: the current regime applies. The employee requires two years’ service to bring an ordinary unfair dismissal claim.

Example 2 — employee entitled to one week’s notice

The employer serves notice on 25 December 2026 and requires the employee to work their notice period, or places them on garden leave.

• Notice commences on 26 December 2026.
• Notice expires on 1 January 2027.
• The EDT is 1 January 2027.

Result: the new regime applies. The employee requires only six months’ service to qualify for unfair dismissal protection.

Example 3 — employee entitled to one month’s contractual notice and dismissed with a payment in lieu of notice

The employer terminates employment with immediate effect on 27 December 2026 and makes a payment in lieu of the employee’s one-month contractual notice entitlement.

• Actual dismissal date: 27 December 2026.
• Statutory notice entitlement: one week.
• Notional EDT for unfair dismissal purposes: 3 January 2027.

Result: the employee will benefit from the reduced six-month qualifying period because the statutory extension takes the relevant EDT into 2027.

It is important to note that the statutory extension of the EDT does not apply when determining whether the compensatory award cap applies. In those circumstances, the actual termination date remains relevant.

What do these changes mean in practice?

In simple terms, many more employees will acquire unfair dismissal protection much earlier in their employment. Employers will have a substantially shorter period in which to assess a new recruit’s suitability, capability and cultural fit before the possibility of an unfair dismissal claim arises.

The removal of the compensatory award cap further increases risk and the implications extend beyond Tribunal litigation.

At present, many executive exits are negotiated against the backdrop of a known maximum unfair dismissal award. While contractual claims, discrimination claims and whistleblowing claims can already give rise to substantial liabilities, the statutory cap on unfair dismissal compensation has historically provided employers with a degree of certainty when assessing litigation risk.

Once compensation becomes uncapped, there will be considerably greater uncertainty. An executive’s actual losses may include not only salary and benefits, but also annual bonus, long-term incentive awards, share options, deferred remuneration and loss of future earning opportunities. While tribunals will continue to apply principles such as mitigation and Polkey reductions, employers will no longer be able to rely on a statutory ceiling to limit exposure.

This is likely to have a significant impact on the dynamics of executive exits. Senior executives may be more willing to pursue unfair dismissal claims than under the current regime, and settlement discussions may become more complex and protracted as parties attempt to assess the value of potentially substantial future losses.

Employers are also likely to adjust their approach to early-stage employment. Risk-averse organisations may seek to identify and address concerns much earlier, particularly in relation to performance, strategic alignment, leadership style or cultural fit.

What should employers be doing now?

These changes will affect employers of all sizes and across all sectors and planning ahead will be essential.

Recruitment

Getting recruitment decisions right will become increasingly important.

Employers should review their recruitment processes to ensure that candidates are being assessed as thoroughly as possible before appointment. Additional focus on competency-based interviewing, practical assessments, and pre-employment due diligence may help reduce the risk of unsuitable hires progressing beyond the first six months.

Probationary periods

Probationary arrangements should be reviewed as a matter of priority.

Under the new regime, a standard six-month probationary period may leave insufficient time to identify concerns, implement improvement measures and complete a dismissal process before unfair dismissal protection arises.

Employers should therefore consider whether slightly shorter probationary periods, coupled with structured review processes, would be more effective and provide greater flexibility. For example, a four-month probationary period supported by clear objectives, regular review meetings and documented decision-making, with the ability to extend by a further month if necessary.

Most importantly, probationary periods must be actively managed. A probation process that relies on a single review meeting shortly before expiry is unlikely to be sufficient.

For senior executives, where probationary periods are unusual and often resisted. Employers should ensure that role expectations, reporting lines, strategic objectives and performance metrics are clearly articulated at the outset. Where concerns arise, they should be addressed promptly and documented carefully.

Employment contracts, incentive arrangements and bonus schemes

Employers should review employment contracts and remuneration documentation, particularly for senior employees as disputes about the value of lost remuneration are likely to become more significant.

Where an employee’s remuneration package includes discretionary bonus, commission, share options, LTIPs, or deferred compensation, the drafting should be clear as to eligibility, discretion, performance conditions, good leaver and bad leaver treatment, and the consequences of termination.

Fixed-term contracts

The non-renewal of a fixed-term contract on expiry constitutes a dismissal for unfair dismissal purposes, and this will remain unchanged. Employees on fixed-term contracts who have at least six months’ service will therefore generally be entitled to challenge non-renewal as an unfair dismissal.

Employers should therefore ensure that any decision not to renew a fixed-term contract is supported by a fair reason and a fair process.

Performance management and dismissals

Employers will need to ensure that fair procedures are followed in relation to employees with six months’ service or more.

This is likely to increase the number of investigations, disciplinary processes and capability procedures undertaken by employers, particularly where higher-paid employees are involved.

Line managers should be trained to identify and address performance concerns at an early stage, rather than waiting until problems become entrenched. Regular review meetings with new joiners, clear feedback and documented action plans will become increasingly important.

Employers should also review disciplinary, capability, probationary and other dismissal-related policies to ensure they remain fit for purpose under the new regime.

Finally, maintaining clear documentary records from the outset of employment will be essential. If performance, conduct or capability concerns later result in dismissal, those records are likely to become critical evidence in defending any subsequent claim.

 

Get in touch

Our Employment Team is on hand to guide your organisation through these changes. To find out more about how we can help, contact Harriet Calver or call us on +44 (0) 117 928 1910.