HR Update - The Unfair Dismissal Time Bomb: What Every Employer Hiring from July 2026 Needs to Know

From 1 January 2027, the qualifying period for unfair dismissal claims drops from two years to six months - and the compensation cap disappears. If you are hiring now, the clock is already ticking.

And in reality, any employee hired since January 2025 is affected, as their employment will be less than 2 years by the time this comes into effect. So, they qualify from that date if you dismiss them unfairly.

The Change - and why it matters right now

1^st January 2027 is important, but it is not the key date for employers to watch. The change applies based on when a dismissal takes effect - not when the employee joined.

So, any employee hired from around the end of June 2026 onwards could reach the six-month threshold by 1^st January 2027, and immediately have the right to bring an unfair dismissal claim.

Put simply: if you are recruiting right now, the people you hire over the coming months will have unfair dismissal protection within six months of starting. The two-year buffer that many small employers have historically relied upon is almost gone.

The Compensation Cap is also going

The qualifying period change does not stand alone. From the same date, the statutory cap on unfair dismissal compensation will be removed.

Currently, the compensatory award in an unfair dismissal case is capped at either 52 weeks' gross pay or £118,223 - whichever is lower. From January 2027, that ceiling disappears. Tribunal awards will reflect the employee's actual financial loss, with no upper limit.  It also means that senior employees on high salaries can now put forward claims for loss of future earnings equivalent to several years, which could prove very expensive.

For a small or medium sized employer, SME, the financial exposure from a single mishandled dismissal could be substantial. This makes getting the process right - documented, fair, and evidenced - more important than it has ever been.

What this means for Probation

Many smaller employers use a probationary period of three, four or six months for new starters. Under the old regime, this sat comfortably within the two-year qualifying period - meaning that even if a probationer was dismissed, there was no unfair dismissal risk.

That comfort is now gone. From January 2027, a six-month probation period and a six-month qualifying period are the same thing. An employee dismissed at the end of their probation - or shortly after it - could have the right to claim unfair dismissal.

In our view, any probation period longer than four months is inviting trouble. Why? Because you may want to give an extension to see if the employee can demonstrate that they can improve and meet your expectations, but it is advisable that this is for only a short time frame.  For instance, if they are initially on 3 months’ probation, you should only give a 2-month extension.  Alternatively, giving 4 months’ probation means you should only provide a 1-month extension. This is because if they are not working out, you need to dismiss within the 6^th month of employment without fail. And, don’t forget that six months is less than that, as you have to allow at least a week's notice to calculate the effective date of dismissal.

This does not mean you cannot dismiss people who are not working out. It means you must be able to show that you followed a fair process. Specifically:

• The employee was made aware of what was expected of them.

• They were told clearly, and in writing, where their performance/conduct fell short.

• They were given a reasonable opportunity to improve.

• A fair decision was reached and properly documented.

An Employment Tribunal will look at the substance of the decision, and the fairness of the process. Small employers, in particular, who have historically treated probation as an informal arrangement - with little documentation and ad hoc conversations - really need to change their approach before the end of 2026.

Building a Robust Probation Process: A Practical Framework

Before Day One

• Ensure the offer letter and contract clearly state the probationary period length and what it entails.

• Set out the performance standards and behavioural expectations in writing before the employee starts - ideally as part of onboarding documentation.

• Confirm who will manage the probation review and on what timeline.

During Probation

• Hold structured review meetings - the minimum being at one and three months, and before the end of the probation period as a minimum.

• Document each meeting: what was discussed, any concerns raised, and what was agreed.

• If there are performance or conduct issues, address them in writing promptly. Do not wait until the end of the probation period to raise concerns that existed weeks earlier.

• Give the employee a genuine opportunity to respond to any concerns and to improve.

Ending Probation — Either Way

• Confirm the outcome of the probation period in writing, whether the employee is confirmed in post or their employment is ending.

• If dismissing at the end of probation, ensure the reasons are evidenced and consistent with concerns raised during the period. A dismissal that comes as a surprise to the employee - because concerns were never communicated - is a dismissal that is difficult to defend.

• Provide the correct notice period as set out in the contract (or the statutory minimum if greater).

• Keep all documentation for at least two years after the employment ends.

⚠️ What about day one automatically unfair dismissal rights?

It is worth remembering that certain dismissals are already automatically unfair from day one of employment - including dismissals related to pregnancy, whistleblowing, trade union membership, and protected characteristics under the Equality Act 2010. The six-month qualifying period applies only to "ordinary" unfair dismissal. If any of these protected categories is involved, length of service is irrelevant.

The Bigger Picture: Performance Management Culture

The shift to a six-month qualifying period is not just a procedural change - it requires a shift in how SME employers think about performance management from the moment someone joins.

The employers who will be most exposed are those who rely on informal management, avoid difficult conversations, and lack documentation. The employers who will be best placed are those who set clear expectations, have regular structured conversations, and keep a contemporaneous written record.

This does not require a large HR team or complex systems. It requires consistent habits: a brief written note after a performance conversation, a confirmation email after a review meeting, a record of what was agreed. Done properly, this documentation protects both the employer and the employee - it ensures fairness and creates a clear audit trail.

Action Points for Employers - Before the End of 2026

• Review your probation timeline for new starters and ensure it reflects a structured, documented approach.

• Train Line Managers on how to conduct probation reviews and how to document performance concerns.

• Update your employment contracts to remove any reference to the two-year unfair dismissal qualifying period.

• Introduce or refresh probation review templates for use from now onwards.

• Ensure your disciplinary procedure is up to date and that Managers understand when and how to use it during probation.

• If you have current employees on probation who joined in the past few months, review their progress and ensure any concerns are documented now.

🔵 How BackupHR can help

We can review your probation process, update your policy documentation, and provide practical manager training to ensure your business is ready for the January 2027 changes. With the right processes in place before the end of 2026, you can manage new hires with confidence - and without unnecessary tribunal risk. Contact us to find out more.

This article is for general guidance only and does not constitute legal advice. Employment law is complex and the facts of individual situations vary. If you are unsure how the changes apply to your business, please seek specific advice.