HR Update - Government Confirms Major Unfair Dismissal Changes – With No Consultation

When this Government set out on their journey, they were ambitious in the scale of the changes they wanted to make to the employment relationship, but reassured us all that there would be lots of consultation. They said the same to the House of Lords.

However, last week, they quietly released an update with potentially significant consequences for employers. With little fanfare, an Unfair Dismissal Factsheet was added to the Employment Rights Act 2025 webpage.

It revealed two major policy decisions that will materially change the unfair dismissal landscape from 1^st January 2027, less than a year away. There may have been little in the way of announcement or consultation, but its implications are anything but minor.

1. The Unfair Dismissal Compensation Cap Will Be Removed

From 1^st January 2027, the statutory cap on unfair dismissal compensation will be abolished.

At present, compensation for unfair dismissal is limited to the lower of:

• One year’s gross pay, or

• £118,223 (current statutory maximum)

The removal of this cap means that, in theory, compensation will be uncapped and limited only by what an Employment Tribunal considers just and equitable in the circumstances.

What is particularly striking is how this change is being implemented. The Government has confirmed that it will not consult with unions or employers before removing the cap. This directly contradicts assurances given very recently in the House of Lords during the Bill’s passage in December, where consultation was indicated as part of securing parliamentary support.

Practical implication for employers:

Unfair dismissal claims will carry significantly higher financial risk, particularly for senior or highly-paid employees. Settlement negotiations and values, litigation strategy, and dismissal decision-making will all need to be revisited well in advance of 2027.

2. Six-Month Qualifying Period Confirmed – With Transitional Protection

The Government has also confirmed that it still intends to reduce the unfair dismissal qualifying period from two years to six months, effective from 1^st January 2027.

However, the factsheet clarifies how this will work in practice:

• Employees who already have six months’ service or more on 1^st January 2027 will immediately gain unfair dismissal protection.

• Employees with less than six months’ service on that date will become protected once they individually reach the six-month threshold.

This means there will be no “grace period” for employers after the law comes into force. From day one, a large proportion of the workforce will already be protected. And employees already on your payroll will be protected fully from the start of next year, when you might have thought you had longer to make tough decisions.

Practical implication for employers:

Probation processes, performance management and early exits will need to be far more robust. Employers will have a much narrower window in which dismissals can be made without unfair dismissal risk.

Why This Matters Now

Although these changes do not take effect until the start of 2027, the direction of travel is clear. Employers who wait until the last minute to adjust policies, contracts and Management practices are likely to be exposed.

Key areas to review include:

• Probation, discipline and dismissal procedures

• Manager training on fair dismissals

• Settlement considerations and potential litigation risks

• Decision-making around senior exits

The lack of consultation also raises the risk of further unexpected developments, as other parts of the new Employment Rights Act are rolled out over the next year or two, hopefully with more discussion, but it would appear that such an assumption cannot be guaranteed.

The guidance provided in this article is just that - guidance. Before taking any action, make sure that you know what you are doing, or call an expert for specific advice