From 1st January 2027, there will be major reforms to unfair dismissal law, including a significantly shorter qualifying period and the expected removal of the compensation cap. For business owners, these changes mean less time to assess new hires, greater exposure to claims and a need for tighter internal processes.

This update explains what is changing, when the changes take effect, and what employers must do now to remain compliant and protected.

What is changing?

1. Reduced qualifying period

Under new legislation, the qualifying period for ordinary unfair dismissal will fall from two years to six months.

Although the new rights will be in force from 1st January 2027, the practical impact begins on 1st July 2026. Any employee hired on or after this date may have six months’ service by January 2027 and therefore gain ordinary unfair dismissal protection automatically.

2. Compensation cap removal

The new legislation will also abolish the cap on compensatory awards for unfair dismissal.

Currently, compensation is limited to the lower of 12 months’ pay or £123,543. Once the cap is removed, there will be no upper limit, meaning awards could be significantly higher.

The cap removal is expected to take effect alongside the new qualifying period in January 2027.

How your business can be impacted

The consequences for employers who fail to prepare could be significant. For example, businesses may be subjected to:

  • Higher number of claims due to more employees qualifying for protection
  • Increased settlement costs due to the removal of the compensation cap
  • Greater HR burden as dismissals will require more robust processes
  • Less freedom to dismiss unsuitable hires – action will need to be taken quickly
  • Reputational risk, with poorly handled dismissals possibly leading to public tribunal decisions

Businesses that rely on high turnover, seasonal staff, or rapid recruitment cycles will feel the impact the most, so ensure you are up to date and understand your obligations.

What employers should do now

To stay compliant, employers should take proactive steps from 1st July 2026. Here are some ways businesses can stay ahead and minimise risks:

  • Review and strengthen probationary periods — Ensure they are structured, monitored, and documented. Regularly review employees during the probationary period. Consider whether your current probation length is still fit for purpose.

  • Improve recruitment processes — With less time to assess suitability, hiring decisions must be more rigorous.

  • Enhance performance management — Early identification and documentation of performance/conduct issues will be essential to help justify decisions.

  • Audit dismissal procedures — Ensure managers understand what constitutes a potentially fair reason for dismissal, how to keep the process fair, and the increased risks of inadequate dismissals.

  • Update employment contracts — Ensure you have probationary clauses within your contract of employment.

  • Train line managers — Managers are often the first to spot issues. They must understand the new timelines and legal risks.

Help from Backhouse Solicitors

With new responsibilities and obligations placed on employers, the world of employment law is changing. The Employment Team at Backhouse are here to help you navigate what’s ahead. Contact our experts for tailored legal advice or ask about our employment law packages, designed to help you stay compliant and avoid time-consuming and costly claims.

More information about our packages can be found here:

HR and Employment Law Protection Package.

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