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

From January 2027, unfair dismissal compensation will not be capped and an employee with 6 months' service can bring an unfair dismissal claim. From October 2026, the period in which to commence the process will be 6 months.

For employers, the risks will be increased considerably: there will be more claims to the employment tribunals and much greater financial exposure to unfair dismissal compensation. 

More Employees Will Be Able to Bring Claims

Many employers have historically taken comfort from the fact that unfair dismissal protection only arose after two years of employment. It was often looked at as an extended probationary period. The proposed changes mean the risk of an unfair dismissal claim will arise much earlier in employment. This means that decisions involving relatively new employees, particularly during or shortly after probation, need to attract greater scrutiny than before. 

Claims Could Be Brought Long After the Dismissal

The proposal to extend tribunal limitation periods is also significant. Three months was a tight limit for an employee to get the claim underway. The additional period affords an employee more time to consider bringing a claim, particularly in circumstances where they have not been able to find other employment and their potential unfair dismissal compensation is starting to increase. 

The Financial Stakes Are Increasing 

A very important change is the removal of the compensation limit for unfair dismissal claims. There will be many more high value and complex unfair dismissal compensation claims. In addition to salary, the components of a generous financial package offered to an employee on recruitment could be part of unfair dismissal compensation in the case of an employment that terminated little more than half a year later. This means employers may increasingly find themselves assessing employment decisions not only from an HR perspective but from a litigation-risk perspective. 

The Good News 

Often, unfair dismissal claims are not lost because employers lack a legitimate reason for dismissal. They are lost because documentation is poor, investigations are incomplete, managers are insufficiently trained, or procedures are not followed consistently. 

The employers that are most likely to adapt successfully to these reforms will be those that focus on process, evidence and consistency. The best time to review those arrangements is before the changes take effect. 

Unfair Dismissal: frequently asked questions 

What is unfair dismissal? 

Unfair dismissal occurs where an employee is dismissed without a permitted reason or where the employer fails to follow a fair procedure. In most cases, employment tribunals will consider both the reason for the dismissal and the steps taken by the employer before reaching that decision. 

Can an employee claim unfair dismissal with less than two years' service? 

Historically, employees needed a qualifying period of service before being able to bring most types of unfair dismissal claim. The Employment Rights Act 2025 will reduce that qualifying period from 1 January 2027 to 6 months, meaning employers will face the increased risk of claims from employees with significantly shorter service than has previously been the case. 

What is the average unfair dismissal compensation award in the UK? 

The average award is approximately £14,000 to £22,000, depending on the dataset and period analysed. However, each case is different. Unfair dismissal compensation varies considerably from one case to another, and with the removal of the cap, some very large awards will be made. 

When will the Employment Rights Act 2025 changes take effect? 

The increase in the time limit to 6 months for starting the process is effective from 1 October 2026. The 6-month qualifying period and the removal of the cap on compensation both take effect on 1 January 2027. 

Will probation periods still be important under the new unfair dismissal rules? 

Yes — probationary periods will be much more important under the new unfair dismissal rules. Employers will need to identify and address performance, conduct and suitability concerns at an earlier stage if they want to take advantage of the period before which an employee can bring an unfair dismissal claim. Effective probation management is therefore likely to be the key to risk reduction in the case of potential unfair dismissal claims. 

Can employers still dismiss employees for poor performance or misconduct? 

Yes. The proposed reforms do not prevent employers from dismissing employees where there is a fair reason for doing so. However, employers are likely to face greater scrutiny regarding the investigation undertaken, the procedure followed and the evidence supporting the decision. 

Next reads

• Fair reasons for dismissal in the new employment landscape

• The New Unfair Dismissal Landscape: Employment Law Changes 2026 and 2027

Our Employment team advises businesses, directors and contractors across London and beyond on employment law, risk management and the practical implications of legislative change. To discuss a review of your organisation's current position, call 020 8858 6971 or email employmentenquiries@grantsaw.co.uk.

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Disclaimer 

This article is for general information only and is not legal advice. Laws and guidance change and outcomes depend on facts. If you need advice on your situation, please contact us. Grant Saw Solicitors LLP is authorised and regulated by the Solicitors Regulation Authority. 

Last updated: 21 September 2026