Under the Employment Rights Act 2025, from 1 January 2027 the qualifying period for an employee to gain protection from unfair dismissal will decrease from two years to six months, and the statutory cap on compensatory awards will be removed.
These changes will materially affect how employers manage probation periods, notice periods and dismissal processes. In particular, employers will need to make earlier decisions about new hires, manage probationary periods effectively, treat the non-renewal of fixed-term contracts with greater care, and reassess the financial exposure of senior-level unfair dismissal claims.
Effect of the reduced qualifying period
These changes take effect from 1 January 2027, which means that any employee who has at least six months’ service by 1 January 2027 will have protection from unfair dismissal from that date.
The qualifying period for unfair dismissal is measured up to the effective date of termination. Where an employee is dismissed without notice, the effective date of termination is the day on which the termination takes effect. Where an employee is dismissed with notice, the effective date of termination is the day on which the notice expires.
All employees are entitled to a minimum statutory period of notice once they have worked for the employer for at least one month. For the first two years of employment, that minimum period is one week, unless the employee is dismissed summarily for gross misconduct.
For the purposes of qualifying for unfair dismissal, the minimum notice period of one week is included in the overall period of employment. So, if an employee is dismissed without notice, their effective date of termination is extended to the end of the one week’s notice that they should have been given. That is still the case if the employer has made a payment in lieu of notice.
This means that, where the effective date of termination falls on or after 1 January 2027, an employer cannot wait until the final week of a six-month probation period to dismiss an employee without risking them qualifying for unfair dismissal protection. If the statutory notice period takes the employee over the six-month threshold, a payment in lieu of notice will not avoid that risk.
Effect on probationary periods
Although legislation does not directly regulate probationary periods, the practical effect of the new six-month qualifying period is that probationary periods will become more important in managing unfair dismissal risk.
Employers will need to assess a new starter’s suitability before the six-month point is reached. Any delay in making or communicating a probation decision may result in the employee acquiring unfair dismissal protection before the employer has decided whether their employment should continue.
Employers are advised to shorten probationary periods to around three months, build in the right to extend the probationary period where necessary and ensure that any dismissal takes effect (with notice) before an employee reaches the six-month threshold.
Fixed-term contracts
The shortened qualifying period will also make fixed-term arrangements more sensitive, because employees may acquire unfair dismissal protection during a relatively short engagement or before a fixed-term contract expires.
The expiry or non-renewal of a fixed-term contract is a dismissal for the purposes of claiming unfair dismissal. If an employee has the required six-month service, regardless of whether some or all of that service is under a fixed-term contract, they will have acquired the right not to be unfairly dismissed.
The employer must therefore be able to show a potentially fair reason for not renewing a fixed-term contract, such as redundancy, conduct, capability or ‘some other substantial reason’ and follow the correct dismissal process.
Increased litigation and financial risks
The removal of the compensation cap on the unfair dismissal compensatory award will inevitably create greater uncertainty for employers in terms of financial risk. The amount that can be awarded in a successful unfair dismissal claim could reflect the full loss of earnings, including base salary, bonuses and long-term incentives. This is likely to increase the value and attractiveness of claims, especially for senior and higher-paid employees.
Key takeaways
In light of these changes, employers should use the period before 1 January 2027 to review probation, notice and dismissal processes so that managers are equipped to make timely, well-documented decisions.
- Check notice periods: ensure statutory notice is applied correctly to avoid unintended unfair dismissal exposure.
- Shorten probationary periods and use them effectively: set clear objectives from day one, hold regular review meetings, document concerns early and take action where issues emerge.
- Strengthen dismissal procedures: ensure greater compliance with employment processes such as performance management, misconduct and redundancy.
- Assess settlement strategies: consider protected conversations, mediation and settlement agreements at an early stage as ways to manage exposure, control costs and reduce uncertainty.
We strongly recommend a review of your Company’s disciplinary and capability procedures, a clear and robust probationary period for new hires and training for line managers.
If you require assistance with any of the above, please contact a member of our Employment Team.