From 1 January 2027, two things happen simultaneously under the Employment Rights Act 2025 that will significantly impact your business.
Firstly, the qualifying period for unfair dismissal drops from two years to six months. This means that whilst previously an employee had to wait 2 years to bring a claim for unfair dismissal, any employee who has been employed by you for six months will be able to bring an unfair dismissal claim. Not only is this a dramatic expansion of the pool of people who can take you to tribunal but it significantly increases your risk when recruiting new staff.
Secondly the cap on compensatory awards is to be abolished. Currently, even if an employee is successful in an unfair dismissal claim, the maximum compensation is capped at roughly a year’s salary. From January 2027 that cap is removed and there is no limit on the compensation an employee could potentially claim. A senior employee with limited re-employment prospects could recover several years’ loss of earnings, again significantly increasing your risk when dealing with your staff.
Taken together, these two changes transform the risk calculation for every hiring and firing decision your business makes.
To try and mitigate these risks your disciplinary and capability procedures need to be built to a higher standard than ‘broadly fair.’ Line managers who currently make informal decisions about new starters need to understand that those decisions now carry potential unlimited liability and need to be made much earlier in the employment relationship. Your approach to performance management from the first day of employment needs to generate a paper trail that would stand up to tribunal scrutiny. These are not matters that can simply be left to HR to deal with, all managers must be on top of these changes.
We would strongly recommend a review of your Company’s disciplinary and capability procedures; a clear and robust performance management framework for new starters; and training for all line managers on what changes from January 2027 and why it matters.
If you would like assistance with this please contact our team on 0345 646 0406 or fill in our online enquiry form and will be more than happy to assist.