The government’s confirmation that the Employment Rights Act 2025 will remove the statutory cap on unfair dismissal compensation from January 2027 represents one of the most significant shifts in UK employment law in more than a decade. Currently, compensation for ordinary unfair dismissal is limited to the lower of £118,223 or 52 weeks’ pay. Once the cap is removed, awards could become effectively unlimited, bringing them much closer to the compensation levels already seen in discrimination and whistleblowing claims.
Alongside this, the qualifying period for unfair dismissal rights will also fall from two years to just six months for both existing and new employees. Together, these reforms will significantly reshape the risk landscape for employers. Employees will gain the right to bring unfair dismissal claims more quickly, while the potential value of those claims could increase substantially.
For employers, the greatest financial exposure is likely to arise in relation to senior or highly paid employees. Where remuneration packages include bonuses, commission structures or high pension contributions, compensation awards could quickly escalate. As a result, dismissal decisions and settlement negotiations may become far more complex and costly for businesses.
Although the reforms will not come into effect until January 2027, employers should not assume they have ample time to react. Preparing early will be critical to ensuring organisations are equipped to manage the increased legal and financial risk associated with dismissal decisions.
Employers should begin by reviewing their current contracts and internal procedures around probation periods, performance management, disciplinary action, attendance and termination. Organisations that rely on informal processes or inconsistent approaches may find themselves particularly vulnerable if a decision is challenged before an employment tribunal.
Probationary periods will take on greater importance once the qualifying period is reduced. Employers may need to ensure probation reviews are more structured, meaningful and carried out within appropriate timeframes so that issues can be identified and action can be taken early.
Clear documentation will become more important than ever. Employers should ensure that performance, conduct and attendance concerns are properly recorded, expectations are communicated clearly, and employees are given reasonable opportunities to improve before dismissal is considered.
Training managers will also play a crucial role. Line managers are often responsible for day-to-day performance, behaviour and attendance discussions, yet many lack confidence in handling such important conversations. Providing practical training can help ensure issues are managed fairly and consistently, as well as enhance an employer’s culture and mitigate legal risk.
As the employment law landscape evolves, organisations that take proactive steps now will be far better positioned to manage the risks ahead.
Deborah Warren is a partner in employment at Clarion
