UK Dismissal Law is Changing. Are You Ready for the Risk?

From January 2027, a shorter qualifying period for unfair dismissal and uncapped awards will expose employers to significant new risks. Here’s what you need…

A significant shift in the UK’s employment landscape is on the horizon. From 1 January 2027, the Employment Rights Act 2025 will introduce two fundamental changes to dismissal law that every HR leader and employer must prepare for. The qualifying period for employees to claim ordinary unfair dismissal will be reduced from two years to just six months, and the statutory cap on the compensatory award for such claims will be removed entirely. These are not minor tweaks; they represent a new reality for managing performance, conduct, and organisational change.

For years, the two-year service requirement has acted as a de facto extended probation period for many organisations, allowing managers to address poor fit or performance issues with relatively low legal risk. That buffer is about to shrink dramatically. The changes mean that a vastly larger portion of the workforce will have day-one protection against automatically unfair dismissal and full protection against ordinary unfair dismissal after only six months. This puts an immediate and intense pressure on the quality of onboarding, performance management, and line manager capability from the very start of the employment relationship.

A fundamental shift in employer risk

The practitioner’s reality is that the legal distinctions between unfair, constructive, and wrongful dismissal—often a source of confusion for line managers—now carry far heavier consequences. A procedural misstep during a disciplinary process for an employee with just seven months’ service could soon lead to a tribunal claim that was previously impossible. A poorly handled grievance could escalate into a constructive dismissal claim far more quickly. The long-standing informal methods of 'managing out' an employee in their first two years have become a high-stakes gamble.

This legislative shift demands a move away from reactive, compliance-driven HR towards a proactive culture of procedural fairness. It forces organisations to professionalise management at every level. The focus must be on ensuring that performance and conduct are managed transparently, consistently, and with clear documentation from an employee’s first day. Waiting until a problem becomes critical is no longer a viable strategy. Managers must be trained not just on the letter of the law, but on how to have difficult conversations, set clear expectations, and follow fair, established processes every single time.

From HR process to balance sheet liability

The commercial implications of these changes are profound. Removing the cap on unfair dismissal compensation transforms the risk profile, particularly for senior and high-earning employees. Where a poorly managed exit might previously have resulted in a capped, five-figure award, the potential liability is now unlimited, reflecting the employee’s full actual and projected losses. A mishandled executive outplacement could become a seven-figure problem, moving the issue from a departmental concern to a board-level, balance sheet liability. This will inevitably increase the pressure to use settlement agreements to mitigate risk, likely driving up settlement values in the process.

Sensible leadership teams must treat this as more than just a legal update; it is a catalyst for strategic change. The cost of a bad hire, a weak manager, or a flawed dismissal process is about to skyrocket. Now is the time to audit all employment contracts and procedures, budget for mandatory and comprehensive manager training, and review insurance cover. But beyond mitigating risk, this is an opportunity to build a stronger, more resilient organisation. Investing in robust processes for managing redundancy and providing excellent employee support during redundancy isn't just about avoiding tribunals; it’s about protecting your employer brand and maintaining the morale of the employees who remain. This goes far beyond the tick box of legal compliance and gets to the heart of your people agenda.

For senior employees, the removal of the compensation cap means a poorly handled exit could become a seven-figure problem.

In this higher-stakes environment, the manner in which an organisation parts ways with its people becomes a critical business function. A fair, dignified, and supportive exit process is your strongest defence. It not only reduces the likelihood of a legal challenge but also addresses the human cost of restructuring, preserving relationships and protecting the company’s reputation. When exits are unavoidable, providing high-quality career transition services ceases to be simply a benefit for the departing employee; it becomes an essential tool for risk management and a tangible demonstration of corporate responsibility.

At ImaginativeHR, we help organisations navigate these complex workforce transitions. By partnering with HR teams to provide expert outplacement and career support, we ensure that every departure is managed with the care and professionalism that protects both the individual and the business. In a world of increased liability, investing in a positive, supportive offboarding experience is one of the smartest decisions a company can make.