HR Update - Unfair Dismissal Changes - What SMEs need to know

Overview

The Government intends to reduce the unfair dismissal qualifying period from 2 years to 6 months under the Employment Rights Bill. It is also considering removing the caps on unfair dismissal compensation. While the Bill is still progressing, employers should plan on the basis that these changes are likely, although as yet we are not sure when.

For SMEs, where Management resources are stretched, this significantly increases the early-stage risk of Tribunal action. And, with rumours around this could be introduced within the next year, this risk has to be addressed now.

What This Means for You

1. Unfair dismissal rights will arise sooner

After 6 months’ service, most dismissals will require:

• A fair reason (conduct, capability, redundancy, etc.)

• A fair process, which in most cases will be the full disciplinary process

The long “low-risk” service criteria and much quicker period for removing employees of up to two years will disappear.  It will be replaced with lengthy and time-consuming performance management processes, meticulously followed and thoroughly documented.

Management decisions must also be made much quicker about whether new starters are actually settling in, and are beginning to grasp the job requirements.

2. Potential for higher compensation

If the unfair dismissal cap is now removed, and employees cannot find alternative job roles easily, or they are in work but not at the same pay levels as before, awards could reflect full financial loss, which can be substantial even in smaller organisations.

3. More disputes around probation

Probation periods commonly run up to six months, with the contractual right to extend further if so required.  This latter option will still be possible, but probationary extensions beyond the fixed period of 6 months will now attract unfair dismissal claims.

Key Risks for SMEs

• Informal management: No notes, unclear feedback, or undocumented concerns weaken your position.

• Late action: Waiting until month 7–9 to address issues will fall squarely within unfair dismissal territory.

• Redundancies: Staff with less than two years’ service will gain the right to challenge selection and consultation processes.

• Continuity traps: Short or repeat contracts may build up 6 months’ service surprisingly quickly.

How to Prepare Now

1.       Get your recruitment and selection right first time

• Be clear on what skills, experience, (qualifications if necessary) and competencies

  that are required.

• Do not just rely on interviews; use other means to assess people’s abilities, e.g. psychometric profiling, aptitude tests, practical trial days or exercises etc.

• Do not appoint unless you are sure they are the right person for the job.

• Check verbal references before making appointments.

2.       Strengthen probationary management procedures

• Provide meaningful induction that assists the employee to settle into the organisation, team and job role as quickly as possible. 

• Schedule review points at the 1^st, 3^rd and in the 6^th month. Leaving a final probationary review until after 6 months will be too late if the outcome is to dismiss them, without risk.

• Provide relevant and written feedback, and set clear expectations on job delivery at the crucial 3^rd and in the 6^th month stages.

• Address issues early - do not wait for the end of probation. By raising concerns early, you will be giving the new starter the opportunity to demonstrate corrective action.  Dismissing people in probation. 

3. Update contracts and policies

• Check probation clauses, notice provisions and extension wording.

• Ensure disciplinary procedures are well understood and followed by Managers.

4. Give Managers practical guidance

• What counts as a fair reason for dismissal.

• The need for fair processes, properly followed.

• How to document concerns quickly and proportionately.

5. Plan exits earlier

If a dismissal is likely, begin the process before 6 months’ service where justified. Avoid last-minute decisions that could appear unfair.  Remember, it is not actually 6 months - it is 6 months minus one week’s statutory notice.

6. Prepare for increased exposure

Leadership teams (including Trustees within SME charities) should expect:

• A potential rise in claims.

• Increased settlement values.

• Greater importance of early HR/legal advice.

BackupHR will be covering off all of the above as part of our planned Autumn public training - so watch out for details. 

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