Unfair dismissal reform under the Employment Rights Act 2025 marks a significant shift for employers

With the Employment Rights Bill (ERB) receiving Royal Assent and becoming the Employment Rights Act 2025 (ERA) on 18 December 2025, landmark changes to unfair dismissal law have now been ushered in. These reforms mark a significant shift in the balance between employee rights and employer responsibilities with major implications for how businesses manage recruitment, probationary periods, performance and dismissal.

Here, Amber Ward explores what the changes will mean in practice — from the new six‑month qualifying period to the removal of the statutory cap on the compensatory award.

Six-month qualifying period 

Currently, most employees need two years of continuous service before they can bring a claim for unfair dismissal, except in certain cases such as discrimination or whistleblowing.

The Government promised to change this by introducing a ‘day-one’ right to protection against unfair dismissal under the ERB. This would have given employees protection from the very start of their employment alongside a formal probationary period.

However, the proposal faced strong opposition from employers, business groups and members of the House of Lords. Critics argued that immediate protection would make it harder for businesses to manage performance and recruitment during the early stages of employment.

As a result, the Government revised its plans. Instead of a day-one right, employees will qualify for unfair dismissal protection after six months of service. 

During a debate in the House of Commons on 8 December 2025, the Minister for Employment Rights and Consumer Protection announced that the unfair dismissal provisions are intended to take effect from 1 January 2027. This means that employees with six months’ or more service on that date will gain protection immediately, while those with less than six months’ service will become protected as soon as they reach the six-month threshold. 

Increase to the compensation cap 

The maximum compensatory award for unfair dismissal is currently capped at £118,223 or 52 weeks’ gross pay — whichever is lower. This cap limits the amount that an employee can recover, even if they suffer significant financial loss.

Alongside changing its position on the qualifying period, the Government proposed removing this cap entirely, arguing that doing so would better reflect modern earnings and provide stronger protection for employees who lose their jobs unfairly.

Following debate in the House of Lords, the removal of the cap on compensatory awards for unfair dismissal was ultimately agreed. 

The removal of the cap doesn’t affect the calculation of the basic award or statutory redundancy pay and both will continue to be determined by established criteria: 

• The employee’s age.
• Their length of service.
• Their weekly pay. 

The Government has published an impact assessment to evaluate the consequences of removing the cap in the form of the Employment Rights Act 2025: economic analysis document. According to the Government’s factsheet on unfair dismissal, no further consultation is intended to take place before the changes are implemented. 

What does this mean for employers?

Reducing the qualifying period from two years to six months means that employees have unfair dismissal protection much sooner. For employers, this shortens the time available to assess new starters and address any performance issues before those rights apply. Analysis suggests that an extra 6.3 million employees will have the right to protection from unfair dismissal which will inevitably lead to more claims. 

To manage this effectively, recruitment procedures should be reviewed and tightened if needed to ensure that suitable candidates are recruited. In addition, probationary periods need to be well-structured with clear expectations, regular reviews and proper documentation. Acting early and keeping accurate records will be essential to avoid disputes later on.

With the cap on compensatory awards due to be removed, employers will face significantly increased financial exposure in unfair dismissal cases. This change is likely to result in higher settlement costs and a greater risk of litigation, particularly for organisations employing senior or highly paid staff. It’s advisable for employers to review their risk management strategies, assess the adequacy of existing insurance arrangements and ensure that disciplinary and dismissal procedures are robust and compliant in order to minimise potential liability.

Together, these changes could make dismissals more complex and costly, reinforcing the need for proactive HR practices and early legal advice when issues arise.

Talk to us

If you need advice on what these reforms mean for your business and how to prepare, we’re here to help.

Our award-winning employment law specialists support businesses in navigating the ERA with confidence, offering expert advice on everything from policy updates to manager training.   

Talk to us by calling 0333 004 4488, emailing hello@brabners.com or completing our contact form below.