Unfair dismissal is changing – what do employers need to consider?

Recent employer surveys suggest that many businesses are still unclear about what is changing and, crucially, when. A new unfair dismissal regime is coming into force in January 2027 and should not be ignored.

The Ministry of Justice’s latest quarterly tribunal statistics show that the Employment Tribunal’s open single caseload has increased by 51% in a year. The Government itself estimates that the changes to unfair dismissal will extend protection to more than 6.3 million additional employees, potentially resulting in an increase in Employment Tribunal claims.

Now is the time to understand the changes and consider what action, if any, should be taken before January.

The unfair dismissal landscape changes are as follows:

• 1 October 2026 –­ the time limit for bringing most Employment Tribunal claims increases from three months to six months.

• 1 January 2027:
  • the current statutory cap on the compensatory award (currently the lower of 52 weeks’ gross pay or £123,543) is abolished; and
  • the qualifying period for ordinary unfair dismissal protection reduces to six months from two years.

Note, that day-one protections remain in place for discrimination, whistleblowing and certain other forms of automatically unfair dismissal, which already carry protection regardless of length of service. Those risks do not change because an employee has less than six months’ service.

What should employers be doing now?

If you’ve recruited someone recently, the next few months are an important opportunity to make sure expectations, performance standards and any concerns are being dealt with properly and promptly.

That doesn’t mean rushing decisions or treating employees differently simply because the law is changing. It means assessing early whether the role is working for both sides, giving people an opportunity to improve where appropriate and addressing issues.

For existing employees, including those who have already accrued two years’ service or who will have accrued six months’ service by 1 January 2027 (subject to the comments below regarding notice periods), any existing concerns about an employee’s suitability should be addressed now.  Waiting until the New Year may increase the potential financial exposure, as the statutory cap on compensation is removed on 1 January 2027.

Equally, don’t assume that ending employment before the new rules take effect automatically removes risk. Employees already have protection against discrimination and whistleblowing and other day-one claims remain relevant regardless of length of service.

Don’t overlook notice periods

One area that is particularly easy to get wrong is the date employment actually terminates.

If an employee is working their notice, their employment would need to terminate by 31 December 2026 for the new regime not to apply.

Where payment in lieu of notice (PILON) is being made, the position needs careful checking. Statutory notice provisions will affect the calculation of the employee’s qualifying period in order to present a claim for unfair dismissal.  Don’t assume that a termination date or PILON arrangement automatically keeps someone outside the new regime.

What does this mean for employers?

The removal of the compensation cap is likely to change the way employers assess risk. It doesn’t mean every dismissal will result in a large award, but where an employee has significant earnings or a lengthy period of future loss, the financial exposure could be materially higher.

It is expected that employers will put greater emphasis on well-structured probation periods, clear performance expectations and good employment documentation. For senior employees and higher-value exits, there may be an even greater focus on obtaining early advice and considering the commercial options available.

Fixed-term contracts should not be viewed as a simple workaround either. The end of a fixed-term contract can still give rise to unfair dismissal issues, so you should make sure these arrangements are being used for genuine business reasons and managed appropriately.

If you’d like to understand what the changes could mean for your business –­ particularly if you have recently recruited, are managing performance or capability concerns, or are considering a termination, please contact Employment partner Asha Kumar and Employment senior associate Velma Eyre.