The Employment Rights Bill received Royal Assent on 16 December 2025, creating the Employment Rights Act 2025 and laying the groundwork for a series of significant employment law reforms due to take effect throughout 2026 and 2027.
One of the most contentious elements of the reforms centred on the proposed changes to unfair dismissal rights. While the government initially sought to introduce day one protection, this proposal faced strong opposition in the House of Lords, particularly with concerns about the potential impact on recruitment, probationary periods and the likely increase in employment tribunal litigation.
The legislation that ultimately emerged represents a substantial shift. From 1 January 2027, the qualifying period for unfair dismissal will be reduced from two years to six months. Perhaps more significantly, the statutory cap on the compensatory award will be removed. Unfair dismissal compensation will therefore sit alongside discrimination and whistleblowing claims as an uncapped financial risk for employers.
This article explores how these reforms are likely to affect employers and highlights the steps businesses should take now to ensure they are fully prepared for the new legal landscape.
Budgeting
The reduction in the qualifying period to six months is likely to result in a marked increase in the number of employees eligible to bring unfair dismissal claims. Employers will no longer be able to rely on the two-year threshold as a practical filter for early service dismissals, and decisions taken within the first year of employment will carry materially greater litigation risk. A corresponding rise in Employment Tribunal claims should therefore be anticipated, with increased legal spend, management time and settlement costs forming part of the overall financial impact.
In addition, the removal of the financial cap on compensatory awards significantly increases the potential financial exposure for employers, particularly in cases involving high earners. Although claimants will still need to prove they have suffered a financial loss and that they took reasonable steps to mitigate it, any losses they can demonstrate may now be fully recoverable.
Together, these changes create a far greater uncertainty for businesses, especially where employees receive substantial remuneration packages including enhanced pension contributions, bonuses, commission, and share or stock options. In such cases, the value of a claim could easily exceed the current statutory cap of £118,223 or one year’s salary, whichever was lower, making it essential for employers to adopt more robust risk management and dismissal processes.
Employers should now be factoring these reforms into forward-looking financial planning. Budget assumptions for 2027 and beyond should reflect both the increased likelihood of claims and the potential for significantly higher awards. This may involve revisiting budgeting processes, reviewing insurance arrangements, and stress testing dismissal scenarios to understand the possible financial exposure. Taking these steps in advance will enable organisations to approach the new regime with greater financial certainty and strategic control.
Planning
Recruitment
Recruitment practices will need to become more rigorous as employees who have six months’ service by 1 January 2026 will gain unfair dismissal rights, reducing the flexibility employers previously relied on. This shift encourages organisations to strengthen their hiring processes, placing greater emphasis on thorough due diligence and more robust selection methods.
At the same time, probationary periods should be managed more deliberately, with clear expectations, structured reviews, and a consistent approach to extensions.
Probationary periods
Probationary periods, which are typically set at three or six months, will need to be reconsidered in light of the upcoming changes to unfair dismissal rights. Organisations operating six-month probationary periods will need to plan carefully, as the end of probation will coincide with the point at which unfair dismissal protection arises. There is already discussion within the legal profession about whether employers may feel compelled to reach decisions on probationary periods before the six-month threshold is reached and contracts/handbooks may need to be updated to reflect the same.
Commentators have also suggested that the reform may encourage greater use of temporary to permanent models, with a short break between contracts designed to interrupt continuity of employment. While such arrangements may appear to offer increased flexibility and allow employers to truly review an employee’s suitability before a permanent appointment, they carry legal and reputational risk. Employers would need to consider carefully the rules on continuity, the potential for challenge, and the broader ethical and cultural implications of structuring engagements in this way.
Potential pitfall
A key pitfall for employers is forgetting that the six‑month qualifying period for unfair dismissal protection effectively includes the statutory one‑week notice period. This means that if an employer intends to dismiss someone before they gain unfair dismissal rights, the dismissal must take place at least one week before the employee reaches six months’ service. Missing this window could unintentionally grant the employee protection, exposing the business to potential claims.
Current workforce
Organisations will also need to look closely at their existing workforce to ensure they are prepared for the shift in unfair dismissal rights. Conducting audits of current staff can help identify any ongoing underperformance issues that may need to be addressed before employees reach the new six month threshold. This makes it even more important for managers to be equipped with the skills to handle performance concerns promptly and fairly. Strengthening manager training, particularly around giving feedback, documenting concerns, and following consistent processes, will help ensure that issues are managed early and effectively, reducing the risk of disputes and supporting a more capable, well managed workforce.
Contracts, policies and procedures
Employers will also need to review their contractual and procedural framework to ensure it aligns with the new six-month unfair dismissal rules. This includes reviewing employment contracts to determine whether probationary clauses need updating and revising them if required. Alongside contractual changes, organisations should ensure that their performance management policies and procedures are fully compliant with the ACAS Code of Practice, providing a fair, consistent structure for addressing capability concerns. Strengthening these now will help create a clearer, more secure process for managing new starters and existing staff as these reforms are introduced.
Risk
Taken together, these reforms materially recalibrate dismissal risk. The combination of a shorter qualifying period and uncapped compensation increases both the likelihood and potential value of claims, shifting unfair dismissal closer to discrimination and whistleblowing in terms of financial exposure. Beyond direct liability, employers face wider risks including increased tribunal activity, management time diverted to litigation, reputational impact, and upward pressure on settlement values. Organisations should therefore reassess their overall risk appetite, governance oversight and internal decision-making frameworks to ensure dismissal decisions are robust, evidence-based and defensible under the new regime.
BPE’s Employment team offer legal advice to both individuals and businesses. If you are looking for legal advice relating to the contents of this article, please get in touch with one of the team who will be happy to help you.
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