For years, unfair dismissal has felt like a manageable risk for many employers. Two years’ service acted as a safety buffer, and compensation had a ceiling. That is about to change. If you hire, manage, or exit people in the UK, this reform is one you cannot leave to Human Resources (HR) alone.

What is the law now?

Most unfair dismissal claims can only be presented after two years’ continuous service.

If a claim succeeds, compensation is capped. The basic award is formulaic and modest. The compensatory award is limited to the lower of £118,223 or a year’s gross pay. That cap shapes behaviour. It influences settlement values, litigation strategy and how hard each side pushes.

What is changing?

The government plans two major reforms.

First, from 1st January 2027, the qualifying period will be reduced from two years to six months.

Second, the statutory cap on compensation will go. Tribunals will be able to award losses without an upper limit, based on what they consider just and equitable.

Why does it matter?

This is not just about law. It is about what you do and what it will cost if you get it wrong.

Shorter qualifying service means early decisions matter more. A poor probation process, a casual performance conversation, or a badly handled dismissal could now end up in a tribunal.

Removing the cap changes the dynamics entirely. Uncapped losses mean higher settlement expectations, greater leverage for claimants, and more pressure on employers to justify every decision.

Senior exits, restructures and managing underperformers all become more sensitive.

It also affects behaviour internally. Managers who cut corners will create risk that lands squarely with the board.

What should you do now?

• Audit probation processes and make sure they are real, structured and documented.
• Train managers to give clear feedback early and to record it properly.
• Tighten performance management so underperformance never comes as a surprise.
• Review disciplinary procedures and ensure consistency between teams.
• Document decision-making carefully, especially for dismissals in the first year.
• Revisit settlement strategies and model higher potential exposure.
• Align HR, legal and leadership on risk appetite and escalation thresholds.

Takeaway

The days of relying on length of service as a shield are ending. Strong management, good records and early intervention will matter more than ever. Get those right now, and unfair dismissal remains manageable. Ignore them, and the cost of getting it wrong could rise fast.

Source: Unfair dismissal factsheet