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An “Unfair Dismissal Factsheet” was added to the government’s page on the Employment Rights Act 2025. This sets out two very important changes which come into effect in January 2027. While this didn’t attract much attention at first, the changes are significant.
Let’s break it down…
1. The statutory cap on unfair dismissal compensation is being removed
The current cap on unfair dismissal compensation will be abolished. This means, there will no longer be a maximum limit on how much compensation an employee can be awarded for unfair dismissal.
What is the cap now?
At present, compensation for unfair dismissal is capped at the lower of:
One year’s gross pay, or
£118,223 (current statutory limit)
From 2027, this cap will no longer apply.
Removing the cap means:
Compensation awards could be significantly higher
Financial risk for employers will increase
Tribunal claims may become more valuable and more contested
2. The six-month qualifying period is still going ahead
The government has also confirmed that the new six-month qualifying period for unfair dismissal will come into force in January 2027.
How this will work:
Employees who already have six months’ service will automatically gain unfair dismissal protection from that date.
Employees with less than six months’ service will gain protection once they reach six months.
This is a major change and a world away from the current two-year qualifying period.
What does this mean in practice?
For employers:
Higher financial exposure in unfair dismissal claims
Greater importance on:
- Clear procedures
- Proper documentation
- Fair decision-making from much earlier in employment
- Increased need for training managers on dismissals and performance management
For employees:
- Earlier access to unfair dismissal protection
- Potentially higher compensation where dismissals are found to be unfair
- Stronger legal position in workplace disputes
What should you be doing now?
Although these changes don’t take effect until 2027, they are significant enough that businesses and HR teams should start planning ahead now, including:
- Reviewing contracts and policies
- Re-thinking probation and dismissal processes
- Budgeting for increased employment tribunal risk
If you have any queries, or would like to discuss your situation, please contact our Head of Employment Ilinca Mardarescu.
T: 01753 486 777
