Unfair Dismissal Rights Are Changing in January

Of all the changes in the Employment Rights Act 2025, the reform of unfair dismissal is likely to have the greatest practical effect on how businesses operate.

It is due in January 2027, which sounds distant but is not, given the process changes required beforehand.

Here is what is changing and why it matters.

The qualifying period is falling.

Currently, most employees need two years of continuous service before they can bring an ordinary unfair dismissal claim.

That period is due to reduce to six months. The practical effect is that a substantial group of employees who currently have no protection will acquire it.

For businesses, this removes what has functioned as an extended informal probation. Decisions taken in the first two years, which could previously be made with limited process, will need to be fair and procedurally sound from six months onwards.

Certain dismissals already carry protection from day one regardless of service, including those connected to discrimination, whistleblowing, trade union activity, pregnancy and asserting a statutory right. Those are unaffected and remain available immediately.

The compensation cap is due to be removed.

Compensation for ordinary unfair dismissal is currently subject to a statutory cap, based on the lower of a set figure or a year's pay.

The removal of that cap changes the risk calculation significantly, particularly for higher-paid employees where the cap has historically limited exposure well below actual loss.

Employers who have made commercial decisions on the basis of a known maximum exposure will need to revisit that analysis.

Fire and rehire is also being addressed.

Changes to dismissal and re-engagement, commonly called fire and rehire, are expected at the same point.

The practice involves dismissing employees and offering re-engagement on changed terms, and it has been used to impose contractual variations where agreement could not be reached.

The reforms restrict its use, and employers contemplating contractual change should expect the route to be considerably narrower.

Why this matters more to smaller employers.

Larger businesses generally have HR functions, documented processes and legal support, and are already operating to standards close to what will be required.

Smaller employers have frequently relied on the two-year period, dealing with performance and conduct issues informally and parting company without a formal process where things did not work out.

That approach becomes risky from six months. For businesses across Newcastle with fewer than fifty employees, which is the great majority, this is the change requiring most preparation.

What a fair dismissal requires.

A fair dismissal requires a potentially fair reason and a fair procedure.

The potentially fair reasons are conduct, capability, redundancy, statutory illegality and some other substantial reason.

Procedure matters as much as reason. That generally means investigating, putting concerns to the employee, holding a meeting at which they can respond and be accompanied, considering their response genuinely, and offering an appeal.

For capability and performance, it usually means setting clear expectations, providing support and training, giving a reasonable opportunity to improve, and warning that failure to improve may lead to dismissal.

None of this is complicated. It does require doing it, and documenting it.

Probation periods will need to work properly.

Many employers operate probation periods that exist in the contract but are not actively managed, with no structured review and no decision point.

That will not be sufficient. Probation needs to involve genuine assessment against defined expectations, with feedback recorded and a decision made before protection attaches.

The government has indicated that a lighter-touch process may apply during an initial period, so the detail of what that involves is worth watching as regulations emerge.

Recruitment becomes more consequential.

If it becomes harder to part company after six months, the cost of a poor hiring decision rises.

That points towards more structured recruitment: clearer role definitions, better-designed interviews, work sample assessment where appropriate, and proper reference checking.

It also points towards more use of fixed-term contracts and probationary structures, though fixed-term employees have their own protections and cannot be treated less favourably without justification.

What employers should do now.

Review contracts and handbooks, particularly probation clauses, disciplinary and capability procedures and any reference to the two-year period.

Train managers in conducting performance conversations and documenting them. In practice, the quality of manager decision-making determines exposure more than the quality of the policy.

Start documenting now. Records created contemporaneously carry far more weight than accounts reconstructed afterwards.

Consider whether any decisions currently under contemplation should be resolved before the change takes effect, taking advice on doing so properly rather than rushing.

Confirm the timing before acting.

Commencement dates for the Act's provisions have moved during its passage and could move again, particularly following the change of government in July 2026.

Anyone planning around January 2027 should confirm the date rather than relying on earlier coverage.

Acas provides free guidance and template procedures, and the Fair Work Agency, operating since April 2026, is the enforcement body for employment rights.

Share your thoughts.

Will the change make you more cautious about hiring?