Unfair Dismissal Reforms Under the Employment Rights Act 2025: What Employers and Employees Need to Know

The Employment Rights Act 2025 (“the Act”) marks one of the most significant shifts in UK employment law in a generation. While the Act introduces wide‑ranging reforms across trade union rights, family leave and statutory sick pay, changes to unfair dismissal are widely regarded as the most impactful.

By reducing the qualifying period and removing the long‑standing cap on compensation, the Act fundamentally alters the risk landscape for dismissal decisions. This blog outlines the key changes to unfair dismissal law and explores their practical implications for both employers and employees. 

Under the existing framework, employees generally required two years’ continuous service to bring a claim for ordinary unfair dismissal. Although some dismissals were protected from day one (including dismissals linked to discrimination, whistleblowing, pregnancy or trade union activity), the two‑year qualifying period gave employers considerable flexibility in managing early exits.

Compensation for unfair dismissal was also capped, at the lower of 52 weeks’ gross pay or the statutory maximum (currently £118,223). This cap often limited financial exposure and played a central role in settlement negotiations.

Qualifying Period Reduced to Six Months

The most significant reform is the reduction of the qualifying period for ordinary unfair dismissal from two years to six months.

This dramatically expands the number of employees who can challenge a dismissal at tribunal, bringing protection much earlier in the employment relationship. Although the government originally proposed making unfair dismissal a day‑one right, parliamentary compromise resulted in the six‑month threshold.

Crucially, the Act removes the government’s power to vary the qualifying period by secondary legislation, meaning any future changes will require full parliamentary scrutiny.

Removal of the Compensation Cap

From 1 January 2027, the statutory cap on compensatory awards for unfair dismissal will be abolished.

Tribunals will instead award compensation based on the employee’s actual financial loss, subject to the requirement that awards are “just and equitable”. The basic award remains unchanged, but compensatory awards will now be uncapped, aligning unfair dismissal with discrimination and whistleblowing claims.

While most unfair dismissal awards have historically fallen well below the cap, this reform significantly increases potential exposure in cases involving senior, specialist or highly‑paid employees.

It was initially indicated by the Government in the House of Lords debate that they would be consulting with union and employers before removing the cap, however the Government now does not intend to hold such consultations. 

Written Reasons For Dismissal

The qualifying period for an employee’s right to request written reasons for dismissal will also reduce from two years to six months. This reinforces the expectation that employers can clearly articulate and evidence dismissal decisions much earlier than before.

Fire and Rehire as Automatically Unfair Dismissal

The Act also tightens restrictions on so‑called “fire and rehire” practices. Where an employee is dismissed or replaced for refusing to accept certain detrimental contractual changes and re‑engagement is offered on new terms, the dismissal will generally be treated as automatically unfair. These terms will be regarded as “restricted variations”. 

These provisions are expected to take effect in January 2027, following consultation and secondary legislation.

The unfair dismissal reforms will come into force on 1 January 2027.

From that date:

• employees with six months’ or more service will qualify for ordinary unfair dismissal protection
• compensatory awards for unfair dismissal will be uncapped
• the reduced qualifying period for written reasons will apply

Employees hired in mid‑2026 may therefore acquire unfair dismissal protection shortly after the reforms come into force, an important point for employers planning recruitment and restructuring activity.

The consultations for the Fire and Rehire provisions are currently underway and will close on 1 April 2026. The provisions relating to fire and rehire (previously expected to come into force in October 2026) have been pushed back to 2027.

For employees, the reforms significantly strengthen workplace protection:

• Earlier access to unfair dismissal rights, improving job security
• Increased leverage in settlement negotiations due to uncapped compensation
• Greater transparency, through easier access to written reasons for dismissal

However, compensation will still depend on proving actual financial loss, and tribunals will continue to scrutinise fairness of process and reason.

For employers, the reforms represent a material shift in dismissal risk:

• Shorter “risk‑free” period: six months rather than two years
• Higher financial exposure, particularly for senior hires
• Greater procedural discipline required from the outset of employment
• Increased likelihood of early‑stage disputes and tribunal claims

Probation management, early performance intervention and robust documentation will become more important than ever.

Although the changes do not take effect until 2027, employers should begin preparing now by:

• reviewing probation, performance and capability procedures
• training managers on fair dismissal principles
• auditing dismissal and re‑engagement practices
• budgeting for increased litigation and settlement risk

Early preparation will be critical to navigating the new unfair dismissal landscape confidently and compliantly.

Recently the Government has published a ‘Unfair Dismissal Factsheet’ which offers more guidance and information. Here is a link to the factsheet and if you would like any advice or assistance with this, please do contact Ruby Rai, Head of Employment on ruby.rai@thomasflavell.co.uk or calling our office on 01926 887700.