The unfair dismissal new rules coming into force from 1 January 2027 will bring two important changes for employers.
The qualifying period for ordinary unfair dismissal protection will fall from two years to six months. At the same time, the current cap on compensatory awards will be removed.
For businesses, that means dismissal decisions could carry greater risk much earlier in an employee’s time with you.
How the rules work now
At the moment, an employee will generally need at least two years’ service before they can bring an ordinary unfair dismissal claim.
A dismissal may be considered unfair if there is no fair reason for it, or if the reason is not enough to justify dismissal.
There are several reasons that may support a fair dismissal. These include conduct, capability and situations where continuing to employ someone would break the law.
For example, gross misconduct could include fraud, physically assaulting another employee or refusing to follow reasonable instructions.
Capability may apply where someone is unable to carry out the work they were employed to do or does not have the required qualifications. It can also cover long-term illness, although employers need to take particular care here and dismissal should only be considered as a last resort.
A legal reason might apply where an employee can no longer legally carry out their role, such as a lorry driver who has been banned from driving.
What changes from January 2027?
From 1 January 2027, employees will only need six months’ service before they gain ordinary unfair dismissal protection.
That is a significant reduction from the current two-year qualifying period.
However, some protections already apply from day one and that will not change.
Employees can already be protected against automatically unfair dismissal, for example where the reason relates to pregnancy or making a flexible working request.
Wrongful dismissal can also apply regardless of length of service. One example would be where an employer does not give the correct notice period.
The changes will apply across England, Scotland and Wales. Northern Ireland has separate unfair dismissal legislation, so the new rules will not apply there.
The compensation cap is also being removed
Unfair dismissal compensation is currently made up of two parts.
The first is the basic award, which is based on the employee’s age, length of service and weekly pay. This is not changing.
The second is the compensatory award, which is intended to reflect the employee’s actual financial loss.
At present, this is capped at the lower of 52 weeks’ gross pay or £123,543.
From 1 January 2027, that cap will be removed.
Most unfair dismissal awards are not currently affected by the ceiling. However, removing it could make a difference in higher-value cases, particularly where a highly paid employee is involved.
For employers, the combination of a much shorter qualifying period and an uncapped compensatory award makes it even more important to follow a fair process when considering dismissal.
Acas provides further guidance for employers on dismissals and unfair dismissal.