Calendar (planned, date-driven)

Employment Rights Act 2025: unfair dismissal reforms from January 2027

The third major phase of the Employment Rights Act 2025 takes effect on 1 January 2027. The qualifying period for unfair dismissal claims drops from two years to six months, the compensatory award cap is removed entirely, and a new "initial period of employment" concept introduces lighter-touch dismissal procedures during the first six months. This editorial explains what is changing, the key dates, and what employers must do to prepare.

Change event: Employment Rights Act 2025: unfair dismissal reforms from January 2027 Effective 1 January 2027

What is changing

The Employment Rights Act 2025 is being implemented in phases. The first phase (day-one family leave, zero-hours contract reforms, statutory sick pay changes) took effect in April 2026. The second phase (fire and rehire restrictions, third-party harassment liability, extended tribunal time limits) took effect on 1 October 2026.

The third phase takes effect on 1 January 2027 and fundamentally changes unfair dismissal law. It affects every employer in England, Scotland, and Wales who employs staff, regardless of sector or size.

Effective date
1 January 2027
Qualifying period
Reduced from 2 years to 6 months of continuous employment
Compensatory award cap
Removed entirely — tribunals can award uncapped compensation
Initial period of employment
New concept: lighter-touch fair dismissal process during first 6 months
Day-one protections
No qualifying period for automatically unfair dismissals (pregnancy, whistleblowing, trade union membership)
Fire and rehire
Automatically unfair since October 2026 — continues to apply

Qualifying period drops to six months

From 1 January 2027, employees gain the right to claim ordinary unfair dismissal after six months of continuous employment, down from the current two years. This is the most significant change to unfair dismissal law in over a decade.

In practice, this means:

  • An employee dismissed after six months and one day can bring a tribunal claim if dismissal was for an unfair reason or followed an unfair procedure
  • Employers can no longer rely on the two-year qualifying period as a buffer against claims from newer employees
  • Fair procedures must be followed from much earlier in the employment relationship
  • Performance management, capability assessments, and conduct procedures should begin well within the first six months

Initial period of employment

To balance the shorter qualifying period, the Act introduces a new concept: the initial period of employment. During the first six months, employers may use a lighter-touch fair dismissal process.

This means:

  • Dismissal during the initial period must still be for a fair reason (capability, conduct, redundancy, or some other substantial reason)
  • The procedural requirements are less demanding than for an employee with full protection — but the dismissal must still be handled reasonably
  • Employers should align probation periods with the six-month initial period
  • Front-loading performance reviews and objectives-setting during probation becomes critical

The initial period is not a free pass to dismiss without cause. Employers must still demonstrate a fair reason and a reasonable process. Automatically unfair dismissals (pregnancy, whistleblowing, trade union membership) remain day-one rights with no lighter-touch process available.

Compensatory award cap removed

From 1 January 2027, the statutory cap on the compensatory award for unfair dismissal is removed. Currently capped at the lower of 52 weeks' pay or a statutory maximum, the compensatory award will instead be based entirely on the employee's actual financial losses.

This significantly increases the financial risk of unfair dismissal, particularly for:

  • High earners — losses could run to hundreds of thousands of pounds for senior employees who struggle to find equivalent roles
  • Long-serving employees — future loss of earnings can be substantial where the employee had long tenure and limited alternative employment prospects
  • Older employees — tribunals may award loss of earnings up to retirement age in some cases

The basic award continues to be calculated using the statutory week's pay cap and the existing formula based on age and length of service.

Extended tribunal time limits continue

The six-month time limit for bringing employment tribunal claims, introduced in October 2026, continues to apply. Combined with the shorter qualifying period and uncapped compensation, this creates a longer window of exposure for employers after any dismissal.

Employers should retain dismissal records, performance management documentation, and correspondence for at least 12 months after an employee's departure.

⚠️ Penalties and financial exposure

The removal of the compensatory award cap means that unfair dismissal claims can result in unlimited financial awards. Tribunals will assess compensation based on actual losses, which for higher earners could significantly exceed previous caps.

Additionally:

  • Failure to follow the ACAS Code of Practice on disciplinary and grievance procedures can result in a 25% uplift to any tribunal award
  • Fire and rehire dismissals (automatically unfair since October 2026) already carry no compensation cap
  • Employers who fail to adapt their processes risk a significant increase in claims from employees with six months' service

❗ What you need to do before 1 January 2027

  • Review probation policies — align probation periods with the six-month initial period of employment. Set clear objectives, regular check-ins, and documented performance reviews from day one.
  • Update dismissal procedures — ensure all dismissals, including during probation, follow a fair process with a clear reason, an opportunity for the employee to respond, and a right of appeal.
  • Train managers — line managers must understand that unfair dismissal protection applies from six months, not two years. Invest in training on fair performance management, capability procedures, and the new initial period rules.
  • Review employment contracts — update contracts and handbooks to reflect the new qualifying period and initial period of employment. Remove any references to a two-year qualifying period.
  • Assess financial risk — with uncapped compensation, consider whether your employer's liability insurance covers employment tribunal awards. Review settlement strategy for potential claims.
  • Strengthen record-keeping — document all performance management, disciplinary proceedings, and dismissal decisions thoroughly. Retain records for at least 12 months after departure.
  • Review hiring processes — with protection from six months, the cost of a poor hire increases. Invest in robust recruitment, induction, and early performance assessment.

ℹ️ Northern Ireland

Employment law is devolved in Northern Ireland. The Employment Rights Act 2025 does not apply in Northern Ireland. These changes apply in England, Scotland, and Wales only. Check with the Labour Relations Agency for equivalent Northern Ireland provisions.

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