Employment Rights Act 2025: focus on unfair dismissal - why employers need to prepare now and the implications if they don’t

It is often said that: “there is no such thing as bad weather… just bad preparation”. The same is unfortunately true of the storm that is the new unfair dismissal law swept in by the Employment Rights Act 2025 – a storm that is sure to create turbulence. Preparation needs to commence now as although the changes are only being implemented from 1 January 2027, as we explain below, decisions that are made now (and indeed which have already been made) could have significant financial implications for employers.

Here are the key issues to consider:-

Right to claim unfair dismissal after 6 months’ employment

Under the existing rules, employees can only claim unfair dismissal protection after 2 years of continuous employment. As of 1 January 2027, this service requirement is reduced so that employees with only six months' service at that date will be protected from unfair dismissal.  
So far, so good and employers could be forgiven for thinking that they can relax until next year… but this would be a mistake.  What the new rules mean in practice is that all employees employed as of today – and in fact anyone recruited as an employee on or before 1 July 2026 will immediately gain the right to claim unfair dismissal on 1 January 2027 (and a week earlier if they are dismissed without statutory notice).  Essentially, employees will gain the protection 18 months earlier than under the current law. So, the new law already impacts on recruiting decisions that are made now and indeed on any recruitment decisions that employers have already made in the past 12 months.

Unfair dismissal --> uncapped losses

The impact of the reduction in the continuous service requirement is compounded for employers by the Government’s decision to entirely remove the cap on losses in unfair dismissal claims from 1 January 2027.  We are all used to uncapped losses being applicable to discrimination and whistleblowing cases but for unfair dismissal claims there has always been a statutory cap (currently £118,233), or a cap of 52 weeks’ pay, whichever is lower. 

The lifting of the cap has three major implications for employers:-

1. employees will be able to claim losses for a longer period, (especially in times of economic uncertainty when even the most diligent of people may reasonably take a while to find a new role and mitigate their losses) 
2. unfair dismissal will become a much more attractive claim for high earners, who will claim lost earnings, bonuses, commission and potentially deferred pay losses in full.  Previously those who earned substantially in excess of £120k would have had to litigate any claim for these types of loss in the High Court which demands substantial court fees to issue claims and awards the victor approximately 70% of their costs – a major disincentive to litigate in that forum. Now these individuals can potentially claim all of their losses in the employment tribunal and not have to take the risk of paying their own legal costs as well as 70% of their employer’s legal costs – as the employment tribunal is, subject to certain limited exceptions, a cost neutral forum; and
3. as a result, employees can demand much higher pay offs in any end of service negotiation, to exert even more pressure on employers.

Finally, if we factor in the 25% increase in compensation for a failure to comply with the ACAS Code on disciplinary and grievance procedures, this means that the impact on employers from unfair dismissal claims becomes financially significant.

So what can employers do to prepare?

• Recruit the right people in the first place: ensure your recruitment, pre-employment screening and on-boarding processes are robust
• Review capability and performance of all employees so ensure that you take action before the new provision apply
• Implement a probation period review process for all new hires: introduce clear processes for managing capability and performance during the first 6 months of employment. We suggest mandatory line manager check-ins monthly with written documentation to support and evidence the process
• Amend your contracts now: consider introducing shorter notice periods (and probation periods) for the first 6 months of their employment and, if appropriate, terminate employment in good time prior to employees gaining the right not to be unfairly dismissed
• Change management: consider accelerating workforce changes in 2026 to avoid the risk of much more valuable uncapped claims and
• Training: 
  • arrange training for your recruiters, managers and HR advisory staff on the changes to processes and rationale behind them
  • roll-out revised training on workplace conduct (sexual harassment – see here) with a view to limiting misconduct requiring disciplinaries and conduct related dismissal as, for the reasons explained above, the cost of dismissals will increase.

How we can help you to prepare

 
We’ve summarised all you need to think about now to prepare. Please get in touch with your usual Clyde & Co Employment Department contact to discuss these.

Attend our webinar

Attend our webinar on 17 March 2026 to hear more on unfair dismissal and to learn about the other ways that the Employment Rights Act 2025 is changing the landscape for employers and what employers can do to best prepare.