Employers Should Prepare for UK’s Enhanced Unfair Dismissal Rights, Including Longer Claim Period and Unlimited Compensation

Effective Jan. 1, 2027, the Employment Rights Act 2025 (ERA 2025) will enhance unfair dismissal protection for all employees working in England, Scotland and Wales, including those employed by overseas companies or their UK subsidiaries. These changes will have potentially serious implications for all employers in most of the UK.

In contrast to the U.S. regime of “at-will” employment, in the UK, employees have a statutory right not to be unfairly dismissed. This protection applies even when an employer has a contractual right to dismiss, allowing employers only five potentially fair reasons to dismiss, including redundancy/layoff, capability or conduct. The protection also ensures that a dismissal is fair on the particular facts and that employers follow a fair process before making a decision to dismiss.

Absent a fair reason for dismissal or a fair procedure preceding a dismissal, employees will likely succeed claims for unfair dismissal in the employment tribunal, the UK’s specialist employment “court.” Claims for unfair dismissal are relatively easy for employees to bring, and the threat of such claims has long complicated how UK employers handle dismissals.

Currently, there are three main features of unfair dismissal law that mitigate the practical and legal risks arising from such claims:

Qualifying service requirement: Currently, in most cases, employees must have two years’ continuous employment to bring a claim for unfair dismissal.

Capped compensation: The amount of compensation that an employee may recover in an unfair dismissal claim is subject to a statutory maximum. The most important element of this statutory cap on compensation applies to the “compensatory award,” which is intended to compensate the employee for financial losses arising from an unfair dismissal, such as lost or reduced earnings. Currently, the compensatory award is capped at the lower of 52 weeks’ gross pay or £123,543 ($165,177).

Short limitation period: Currently employees must commence the process of bringing a claim within just three months of the date of dismissal.

ERA 2025 will make significant changes to all three of these features, potentially increasing the risks associated with dismissing employees, especially for employers who fail to take steps now to address them.

Reduction of Qualifying Period

The qualifying period for ordinary unfair dismissal protection for employees will be reduced from two years’ continuous service to six months, as of Jan. 1, 2027.

Anyone who already has six months’ qualifying service as of Jan. 1, 2027, will qualify for unfair dismissal rights. Therefore, this is not an issue that can be put off until the new year, because new hires on-boarded on or before July 1, 2026, will immediately qualify for unfair dismissal rights on Jan. 1, 2027.

An immediate consequence is that a common six-month probationary period is now of limited protective value, as employers who wait that long to make a performance determination will be at risk of unfair dismissal claims. Consequently, employers need shorter and better managed probation periods, with early assessment of the suitability of new hires so that underperforming or misbehaving employees can be dismissed before they accrue unfair dismissal rights.

Employers should consider steps to reduce these risks, including:

1. Take greater care with recruitment processes. Getting hires right at the front-end will save headaches later.
2. Immediately review probationary periods. Periods of three months or less are likely to be more helpful for employers.
3. Review performance management and dismissal processes, especially during probationary periods, tightening check-in intervals, introducing key performance metrics and milestones, and ensuring managers are aware of when new hires will reach six months’ employment milestone.

Uncapped Compensation

The ERA 2025 will also remove the cap on unfair dismissal compensation. Tribunals will, from Jan. 1, 2027, be able to award unlimited compensation, reflecting all loss of earnings suffered by an unfairly dismissed employee. For well-remunerated employees paid in excess of the cap and/or with long-term financial incentives, such as bonuses or equity awards, this raises the prospect of unfair dismissal claims of high value.

Traditionally, employers have been able to manage the risk of unfair dismissal claims from highly remunerated employees pragmatically, because the effect of the statutory cap on compensation meant that unfair dismissal rights did not hold sufficient value to make a claim realistic. Once the cap on compensation is removed, employers will need to treat such dismissals with greater care or be exposed to high-value unfair dismissal claims.

Limitation Period

This risk is compounded by the changes to the limitation period for many employment claims. Currently, UK employees generally have a three-month window to start the process of bringing an unfair dismissal claim following their termination date. This period is to be extended to six months, giving employees twice as much time to file and/or stretch out negotiations for a favorable settlement to avoid litigation.

In summary, the financial and strategic value for employees to threaten and bring unfair dismissal claims is set to increase materially, and settlement discussions are likely to become more complex and protracted.

Proactive employers can prepare to better manage these scenarios. For advice on how employers can prepare for these changes or manage unfair dismissal challenges generally, contact the authors or a member of the Employment Litigation and Labor-Management Relations Practice Groups.