Unfair dismissal reform: how the 2027 changes will affect workplace risk

A major shift in employment law is approaching, and many employers may be underestimating its potential impact.

Currently, employers benefit from two important safeguards within the unfair dismissal regime: employees require two years’ service before they can bring an ordinary unfair dismissal claim, and compensation is capped at the lower of £123,543 or 52 weeks’ gross pay.

From 1 January 2027, both of those protections will change significantly. The Employment Rights Act 2025 is changing the qualifying period to six months’ service and removing the cap on compensatory awards altogether. For employers, particularly those with highly paid staff, this could mean more employees becoming eligible to bring claims and significantly greater financial exposure where dismissals are not handled fairly in accordance with the correct procedures.

The countdown has already begun

Many businesses will be concentrating on 1 January 2027, but 1 July 2026 also deserves attention. Any employees recruited on or after 1 July 2026 will have completed six months’ service by the time the new rules take effect. As a result, they will fall within the scope of the revised unfair dismissal framework as soon as it is introduced.

Employers hiring throughout 2026 should be considering whether their probation arrangements, performance management procedures, and review processes are sufficiently robust. Decisions made today could become far more significant once the new rules come into force.

Higher salaries, higher risks

Under the current system, employers can broadly assess potential unfair dismissal exposure because compensation is subject to a statutory limit. From January 2027, that upper boundary is set to disappear, allowing tribunals to focus on the losses actually suffered by the individual employee without being subject to a cap. For high earners, those losses can be substantial.

For organisations employing senior leaders, specialists, and high-earning professionals, the financial implications may be particularly acute.

According to HMRC data, approximately 840,000 individuals earned more than £123,543 during the 2025/26 tax year. Once the cap disappears in January 2027, this could expose employers who will not have the same level of certainty when assessing potential liabilities arising from dismissal disputes.

A senior executive who is dismissed unexpectedly and experiences a lengthy period before securing comparable employment may seek compensation reflecting a wide range of financial losses. Depending on the circumstances, considerations could extend beyond basic salary and include other elements of remuneration and benefits. The removal of the cap is likely to be felt most keenly in sectors where six-figure remuneration packages are commonplace, such as professional services, technology, financial services, and executive leadership positions.

Preparing for a different landscape

The reforms present employers with an opportunity to review whether their processes are fit for purpose before the changes take effect.

Employers should pay attention to:

  • Recruitment and onboarding procedures.
  • Probationary period management.
  • Performance improvement processes, particularly for underperforming high earners.
  • Disciplinary and grievance procedures.
  • Documentation and record-keeping practices.
  • Training for managers responsible for employment decisions.

Looking ahead

For employers, the key date remains Friday 1 January 2027, when unfair dismissal protection will become available after six months’ service and the cap on compensatory awards will be removed. Employers should also recognise that many employees hired during 2026 may have reached the six months’ service required to qualify for protection when the new regime takes effect.

For organisations employing higher earners, the potential financial consequences of an unfair dismissal claim could therefore be significantly greater than under the current rules. Preparing policies, procedures, and management teams now will help reduce risk when the changes arrive.

Care should also be taken in respect of dismissals in the lead up to this change, with particular attention on any individual’s statutory notice period. Dismissing an employee where their statutory minimum notice takes them (or, if dismissed with a payment in lieu of notice, would have taken them) to 1 January 2027 will mean the employee falls within the new rules and so will be eligible to claim unfair dismissal with no cap on compensation. Those with more than 12 years’ service would therefore be eligible to claim uncapped compensation if they receive notice of termination later than Thursday 8 October 2026.

 

The content of this article is intended to provide a general guide to the subject matter.

If you have any questions about the topics raised in this article, please feel free to contact a member of the Employment team.