Soundbite: Unfair Dismissal Reforms Taking Effect from 1 January 2027
Unfair Dismissal Reforms Taking Effect from 1 January 2027
Removal of the statutory cap on unfair dismissal compensation
From 1 January 2027, the statutory cap on compensation for unfair dismissal—currently the lower of one year’s pay or £118,000—will be removed. This change materially increases potential financial exposure for employers in unfair dismissal claims, as awards will no longer be constrained by the existing statutory maximum.
The Government has also indicated that it does not intend to consult with trade unions or employer representatives before implementing the removal of the cap. This approach departs from earlier indications given during the Bill’s passage through the House of Lords in December 2025.
Introduction of a six-month qualifying period for unfair dismissal rights
The Government has further confirmed its intention to implement a six-month qualifying period for ordinary unfair dismissal protection from 1 January 2027. It has now clarified the transitional operation as follows:
- Employees who, at 1 January 2027, already have six months’ continuous service (or more) will have unfair dismissal protection from that date. This means that employees who start on 1 July 2026 and are still in employment on 1 January 2027 will be protected.
- Employees with less than six months’ service at 1 January 2027 will acquire protection once they reach six months’ continuous service.
Practical implications for employers
These reforms are likely to increase both the likelihood and value of unfair dismissal claims. Employers should review their probationary review periods and processes, performance management processes, and disciplinary processes, in good time before January 2027. Employers should also ensure that managers receive updated training in relation to dealing with probationary reviews, performance management, and disciplinary processes. If you require assistance with any of these, please do get in touch with a member of the team.