Employment Rights Act 2025: Unfair Dismissal Reforms Explained

The Employment Rights Act 2025 introduces major changes to the UK's unfair dismissal regime, with reforms due to take effect from 1 January 2027. Together, these changes are expected to increase both the number of unfair dismissal claims and the potential cost of those claims for employers.

The reforms centre on two key developments: the reduction of the qualifying period required to bring most unfair dismissal claims and the removal of the statutory cap on compensation. For employers, the changes will place greater scrutiny on dismissal decisions at a much earlier stage in the employment relationship and increase the importance of robust procedures and documentation. For employees, they will provide earlier access to legal protection and the potential for greater compensation where unfair dismissal occurs.

In this article, associate Jannine Gennaris discusses two of the most significant unfair dismissal reforms under the Employment Rights Act 2025: the reduction of the qualifying period for claims and the cap.

Currently, employees generally require two years' continuous service before they can bring a claim for ordinary unfair dismissal. From 1 January 2027, that qualifying period will reduce significantly to just six months.

The change means employees will gain protection against unfair dismissal much earlier in their employment, strengthening job security after only a relatively short period of service.

For employers, however, the reform represents a significant shift in risk. Many employees who would previously have had no right to challenge a dismissal will now be able to do so after six months of employment. As a result, employers can expect a greater number of individuals to fall within the scope of unfair dismissal protection.

Perhaps the most significant practical consequence of the reform is its impact on probationary periods.

Many employers have traditionally viewed the early stages of employment as a relatively low-risk period from an unfair dismissal perspective. The reduction of the qualifying period means that the point at which unfair dismissal rights arise will now sit much closer to the end of many probationary arrangements.

This will require organisations to ensure that employment concerns are identified and addressed much sooner and that decisions are supported by appropriate evidence and documentation.

In practice, employers will increasingly need to demonstrate:

• A fair reason for dismissal

• Consistent and documented decision-making

• An appropriate level of procedural fairness before dismissing an employee

Given the shorter qualifying period, employers should review existing people-management practices well before the reforms take effect.

Key steps may include:

• Strengthening probationary review processes

• Improving performance management procedures

• Training managers to identify and address concerns at an early stage

• Maintaining comprehensive records from the start of employment

• Ensuring dismissal decisions are properly documented and supported by evidence

Taking a proactive approach will help reduce legal risk and place employers in a stronger position should a dismissal be challenged.

The second major reform concerns the amount of compensation available in unfair dismissal claims.

Under the current regime, compensation is generally limited to the lower of a statutory cap or one year's gross pay. This restriction has historically provided employers with a degree of certainty regarding financial exposure when defending unfair dismissal claims.

From 1 January 2027, that cap will be removed. This means compensation for unfair dismissal will no longer be subject to the same upper limit, potentially resulting in significantly larger awards in certain cases.

For employees, the change creates the possibility of recovering a greater proportion of their financial losses arising from an unfair dismissal.

This is likely to be particularly significant where an individual experiences extended periods of unemployment or substantial losses of salary, bonuses, benefits or other remuneration following dismissal.

For employers, the removal of the compensation cap substantially increases potential liability. The financial implications may be especially significant where claims involve senior employees, high earners or circumstances in which losses continue for an extended period.

Taken together, the two reforms are likely to have a cumulative effect on employers.

The reduction in the qualifying period means more employees will be able to bring unfair dismissal claims. At the same time, the removal of the compensation cap means those claims may become significantly more expensive if successful.

As a result, employers will need to place even greater emphasis on:

• Identifying and documenting fair reasons for dismissal

• Following fair and consistent procedures

• Maintaining detailed records of decision-making

• Training managers to handle performance and conduct issues effectively

• Seeking legal advice where appropriate before dismissing employees

Although the reforms will not take effect until January 2027, employers should begin reviewing their practices now.

Organisations should consider whether existing probationary procedures, performance management frameworks and dismissal processes are capable of withstanding greater scrutiny. Early preparation will help reduce risk and ensure managers understand the heightened obligations that the changes will bring.

For many employers, these reforms will require a cultural shift towards earlier intervention, stronger documentation and more rigorous decision-making throughout the employment lifecycle.

Jannine Genaris is an associate in the employment law team. Jannine advises both employees and employers on all aspects of employment law including contracts of employment, settlement agreements, internal grievances and disciplinary matters as well as employment tribunal litigation.