Employment Rights Act 2025 – Unfair Dismissal Update

The Department for Business and Trade have recently published what has been titled an ‘Unfair Dismissal Factsheet’, which can be found alongside a large number of other factsheets relating to the upcoming Employment Law changes here: Employment Rights Act 2025: factsheets – GOV.UK.

The two seismic changes outlined within this factsheet are as follows.

Removal of the Unfair Dismissal Compensation Cap

Currently, Claimants who are successful in an ‘ordinary’ unfair dismissal claim will see their compensation capped at one year’s gross pay or £118,223 (which typically increases each year), whichever is lower.

From 1 January 2027, the Employment Rights Act 2025 (formerly the Employment Rights Bill) will remove the compensation cap in its entirety. The practical impact is that the Employment Tribunal may see more claims from higher earners, such as senior executives, who would previously have been put off litigating in the Employment Tribunal due to the capped compensation.

Interestingly, the Government has also suggested that it will not consult unions or employers on this change, despite the House of Lords previously indicating that it would.

Unfair Dismissal Qualifying Period

As it stands, employees must have worked for their employer for two continuous years to obtain protection against unfair dismissal. As has been well documented, the Labour Government initially sought to make unfair dismissal protection a ‘Day One’ right and has since altered the regime to, among other things, the idea of having statutory ‘initial periods of employment’ (i.e. probationary periods).

The Government now appear to have settled on reducing the two-year ‘rule’ to ‘six months’, meaning that employees will obtain the aforementioned protection 18 months earlier.

The Government intends to bring this into force on 1 January 2027. This will also mean that employees who already have six months’ service or more will also obtain protection on this date. Other current employees will receive the same protection once they have completed six months’ service.

Once this comes into force (in less than a year’s time!), employers will need to ensure that their recruitment policies are robust, and that new recruits’ line managers are very much on top of performance and actively assessing the employees’ suitability for continued employment. Probationary periods will also be more critical, and probation reviews may need to be considered before the (common) six-month mark in case decisions need to be made.

It is also expected that the change in qualifying periods will see many more claims being brought before the Employment Tribunal.

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If you have any questions or concerns about the updates provided above, please contact a member of our Employment Law team. You can use our online enquiry form or call 0330 191 5713.