In early December 2025, the UK government announced two key changes to the unfair dismissal regime: 1) that the period of qualifying service necessary to bring a claim will reduce to six months, and 2) that the cap on compensation for such claims will be lifted.
Summary of Unfair Dismissal Law
UK employees with at least two years’ service have a right not to be unfairly dismissed. For employers, this means that to lawfully terminate an employee, the employer must be able to identify a fair reason for the dismissal (which may be, for example, redundancy, conduct, or capability) and show that it has followed a fair process.
In some circumstances, the lawful process may be completed relatively quickly, for example, where the employee is believed to have committed an act of gross misconduct, such as fraud or serious insubordination (although even in these cases, it is necessary to complete certain formalities before effecting the dismissal). In other cases, however, completing a lawful dismissal process might take several months, meaning that employers sometimes opt to offer the employee an exit on mutually agreed terms as a way of expediting matters.
The Reforms
Reform of the UK unfair dismissal regime has been on the cards since before the general election in 2024, when, whilst in opposition, the Labour Party proposed a variety of employment law reforms, including proposals to make protection against unfair dismissal a “day one” right and remove existing caps on associated compensation. After debate in both Houses, the government decided against day-one rights and instead reduced the qualifying period from two years to six months.
This change, together with the removal of the compensation cap (currently the lower of 12 months’ remuneration or £118,233), was introduced through amendments to the Employment Rights Bill (ERB). The proposal to abolish the cap was controversial and the House of Lords initially opposed it, voting for a review rather than immediate abolition. However, the Commons maintained its position, and the Lords withdrew their amendment, allowing the ERB to pass. The ERB received Royal Assent on 18 December 2025.
Implementation
Regulations are expected early in 2026 and may bring the reduced qualifying period into force from 1 January 2027, ensuring that employees with at least six months’ service at that date would be protected from unfair dismissal.
The timing for the compensation cap’s removal has not yet been confirmed, but it may coincide with the change to the qualifying period. The government has committed to publishing an enactment impact assessment following Royal Assent and before commencement regulations are introduced, and to consulting with stakeholders early in 2026.
Potential Implications of the Changes
Whilst the qualifying period of service has fluctuated over the years since UK unfair dismissal laws were first introduced in 1972, compensation has always been capped. The move towards uncapped compensation is a significant one with potentially far-reaching consequences, especially when combined with a reduced period of qualifying service.
The forthcoming changes would mean that especially when managing the exit of more senior and highly paid employees, the cost of reaching a settlement would increase, with employees potentially holding out for a more generous package.
These reforms may also drive an increase in claims for unfair dismissal. In turn, this might result in longer delays before such cases can be heard, given that UK Employment Tribunals are already experiencing a backlog in claims.
Employers should also be aware of potential implications for Micklefield clauses, which seek to prevent employees from recovering damages for forfeited incentive rights following termination. Although the Employment Rights Act 2025 does not amend the law governing these clauses, the removal of the compensation cap may encourage employees, particularly those with valuable share options or similar incentives, to challenge their validity as part of unfair dismissal claims.
Practical Considerations for Employers
Going forward, employers of UK-based employees may wish to take legal advice prior to effecting any dismissals, particularly if the employee in question has six months’ service.
It may also be important to pay close attention to the performance of new hires during their first six months of employment, so that any underperforming recruits may be exited before they accrue unfair dismissal rights. The use of a probationary period might be helpful in facilitating these discussions, but this period should be documented in the employment contract, and the line manager should be aware of its operation so that they are able manage the situation proactively.
In addition, employers should review incentive plan drafting and consider taking advice to mitigate associated risks, particularly in light of the potential challenges to Micklefield clauses.