New faces at the top, same storm for employers: Preparing for an unfair dismissal overhaul

Westminster's attention may be focused on leadership reshuffles, but while the political carousel turns, the substantive reforms to employment law enacted by the Employment Rights Act 2025 (ERA 2025) continue on their path to implementation. Regardless of who sits behind which ministerial desk, these changes are now on the statute book, and it is employers who must grapple with the practical consequences.

From 1 January 2027, the unfair dismissal landscape will shift significantly – one of the largest changes in UK employment law in 30 years. This briefing sets out the current framework, explains what is changing, and identifies the practical steps employers should be taking now to prepare.

Current unfair dismissal regime

Generally, an employee who has the applicable qualifying period of continuous service has the right not to be unfairly dismissed. The qualifying period is currently two years. The dismissal of a qualifying employee will be unfair unless the employer can satisfy a two-step test.

Step 1: Potentially fair reason

The employer must show that the reason for the dismissal was one of the following potentially fair reasons:

• Capability or qualifications – where the employee is unable to perform the job adequately or lacks the necessary qualifications;
• Conduct – misconduct by the employee;
• Redundancy – broadly, where the role is no longer required by the business;
• Statutory illegality – where continued employment would contravene a statutory restriction (e.g. an immigration restriction); and
• Some other substantial reason (SOSR) – a catch-all category covering situations such as business reorganisations, personality clashes, and reputational risks.

Step 2: Reasonableness

The tribunal must be satisfied that the employer acted reasonably in treating that reason as sufficient for dismissal. In cases of misconduct or poor performance, the Acas Code of Practice sets out the minimum standard of fairness that employers should follow prior to dismissal. Tribunals are required to take the Acas Code of Practice into consideration when determining whether an employer acted reasonably.

What is changing from 1 January 2027?

The ERA 2025 introduces two headline changes to the unfair dismissal regime, both of which come into force on 1 January 2027.

1. Reduction of the qualifying period

The qualifying period for ordinary unfair dismissal claims will be reduced from two years to six months. Employees who already have six months' service on 1 January 2027 will gain protection immediately. This means that a greater proportion of the workforce will have access to unfair dismissal rights far earlier in the employment relationship.

2. Removal of the compensatory award cap

Claims for ordinary unfair dismissal will effectively be uncapped. Importantly, the basis on which compensatory awards are calculated will not change - they will continue to be assessed on the basis of the actual and projected losses evidenced by an employee. However, for high-earning individuals, the removal of the cap significantly increases potential exposure.

What should employers do now?

With the changes coming into force on 1 January 2027, employers should take time to review and strengthen their practices:

1. Review policies and procedures: Disciplinary, capability/performance and dismissal policies should be reviewed and updated to ensure they are robust, up to date, and aligned with best practice. A fair process for any dismissal will matter much sooner in the employment relationship.

2. Review contracts and probationary periods: Employment contracts and offer letters should be reviewed, and employers should consider strengthening probationary period provisions and processes so that suitability is properly assessed early.

3. Consider manager training: Line managers and HR teams should be trained on performance management, conducting fair procedures, documenting concerns, and handling probation and capability issues correctly.

4. Strengthen record-keeping: The importance of contemporaneous documentation of performance concerns, warnings, and procedural steps cannot be overstated. Without a clear paper trail, employers will struggle to defend dismissal decisions before a tribunal.

How we can help

Our Employment team is on hand to help clients prepare for these changes. We can assist with:

• policy audits and updates to ensure compliance with the new unfair dismissal regime;

• employment contract and probation clause reviews;

• bespoke manager training on fair dismissal processes; and

• strategic advice on managing exits and settlement negotiations in the new landscape.

Please do not hesitate to contact us if you would like to discuss how these changes may affect your organisation.

Other authors: David Pemberton, Senior Associate.