Employment Rights Act 2025: Major Changes to the Unfair Dismissal Regime

Some of the most significant changes introduced by the Employment Rights Act 2025 are those to the unfair dismissal regime. At present, employees need (just under) two years’ service to be able to claim “ordinary” unfair dismissal. If successful, the employee receives a basic award and a compensatory award. The compensatory award is “such sum as is just and equitable having regard to the employee’s loss” – but is capped at £118,223 or one year’s salary, whichever is the lower.

As of 1 January 2027, there will be two significant changes to the regime. The first is that employees will only need (just under) six months’ service to be able to claim ordinary unfair dismissal. The second is that the amount of any compensatory award will be uncapped. 

There are a number of issues to draw out of these changes, and some of them are set out below.

Transitional impact: existing employees will gain protection

Any employee who is in post on or before 1 July 2026 will have ordinary unfair dismissal protection as of 1 January 2027. Employers therefore need to take action to account for the changes in spring/summer 2026.

The increased importance of probationary periods

Probationary periods will become extremely important – even for employees who typically have not had them, such as senior employees. Employers will need to make sure that any new recruits are actively monitored and assessed during the probationary period to ensure they are suitable.

Employers may wish to update their employment contracts and onboarding policies to ensure this is done.

Managing the probation window effectively

The length of that probationary period will be dictated by the new (just under) six-month minimum service threshold. The probationary period needs to be long enough for a sensible assessment to be made, but short enough so that if the employee is not suitable, there is time to address that well before the qualifying period kicks in.

The statutory notice period complication

A statutory minimum notice period of one week is added to the period of qualifying service for any employee who has been employed for longer than a month – so, in fact, the qualifying period at present is one year and 51 weeks.

Once that is reduced, the actual minimum service period to qualify for unfair dismissal protection will be five months and three weeks. This “extra” week has far more impact on the shorter qualifying service period and further reduces the “window” within which employers need to act if an employee turns out to be unsuitable.

Uncapped compensation: procedural failures now carry greater risk

The Employment Tribunals have been used to dealing with uncapped awards for years – they apply in cases of, for example, discrimination and “whistleblowing” dismissals. However, these uncapped awards are made in cases where there has been a substantive failure by the employer (for example, unlawful discrimination).

For an ordinary unfair dismissal to be fair, an employer must both have a fair reason and have followed a fair procedure (which will depend on which of the five potentially fair reasons for dismissal is engaged). Employers therefore face the prospect of uncapped awards for procedural failures as well as substantive failures.

Employers are also at risk of a 25% uplift to compensatory awards if relevant ACAS Codes of Practice are not followed in certain dismissals. That 25% uplift will now apply to an uncapped amount, further increasing the potential financial jeopardy for procedural failures.

Increased claims from highly paid employees

Lifting the cap means that the number of claims from highly paid employees with complex and valuable benefit arrangements (whose unfair dismissal claims would have typically been settled for the payment of the maximum, or near maximum, compensatory award) is likely to rise.

The calculation of an award could include elements of bonus, share options, carry and co-invest schemes and pensions. The sums could be considerable, particularly if the employee takes some time to find alternative employment or claims “career loss”.

The need for more robust processes at senior levels

Given that a dismissal can be unfair for substantive and/or procedural reasons, employers will now need to consider the need to carry out a fair process for highly paid employees – something they might not have done in the past because of the cap.

Managers and boards may be unused to, for example, performance managing senior employees and executives. However, carrying out a dismissal without going through that process will risk a much more significant award than at present.

Employers should therefore consider ensuring that their managers and boards have training and the necessary skill set to carry out those procedures. 

Please contact Catrina Smith with any queries regarding this Client Alert.