For over a decade, employers have had two years to decide whether a new hire meets expectations before unfair dismissal protection kicks in. That extended, informal probation or trial period is changing. From 1 January 2027, the period of continuous service required to benefit from protection against unfair dismissal drops from two years to just six months under the Employment Rights Act 2025.
At the same time, and in a move that came as a genuine surprise to most, the statutory cap on unfair dismissal compensation is being removed entirely.
For businesses that have been running on autopilot when it comes to managing early-stage employees, July 2026 is the time to start paying attention. In this article, members of our employment team, James McConkey and Mike Tremeer delve into these changes, and what comes next.
What is changing?
At present, employees usually need two years of continuous service before they are able to bring an unfair dismissal claim. Within that window, an employer can exit someone who is not working out by giving contractual notice, without following any formal process. That model has been the backbone of probation management since the qualifying period was extended from one year to two in 2012.
From 1 January 2027, unfair dismissal protection applies after just six months’ service. Crucially, this applies to dismissals on or after that date, not just future hires: and so anyone with six months’ service on 1 January 2027 will be protected immediately. Despite not coming into effect until January, this change will therefore begin to affect employers now, since it will apply to those whose employment begins on or after1 July 2026.
In other words, the candidates you are interviewing right now will be among the first employees covered by the new regime. The lead-in period is not as long as it looks.
In the future, once employees have six months’ of continuous service, the full unfair dismissal protection framework applies: employers will need a potentially fair reason (capability, conduct, redundancy, statutory restriction or some other substantial reason) and to follow a fair procedure, following the ACAS Code where relevant to avoid liability for unfair dismissal.
Day-one protections against discrimination and automatically unfair dismissal are unaffected. It is important to also remember that non-renewal of a fixed-term contract counts as a dismissal too.
Why notice periods are now a trap
Many employment contracts include a shortened notice period during probation, typically one week, so that an underwhelming new recruit can be exited quickly in the early stages of their employment. That logic still holds for the first six months. But once an employee crosses the threshold, a contractually valid notice is not the same thing as a procedurally fair dismissal. The tribunal will look at reason and process, not just whether notice was given.
There is also a more technical issue to consider. Where an employer gives less than statutory minimum notice period (e.g. where dismissal is immediate with a payment in lieu), the effective date of termination is extended by the statutory notice the employee should have received. An employee dismissed without notice at five months and 28 days would therefore be treated as having over six months’ service.
Employers wanting a clean exit before the threshold must either give notice early enough for it to expire in time, or use a contractual payment in lieu of notice (PILON) clause to terminate immediately, bearing in mind the extension mentioned above. A contract without the right to make a PILON will certainly leave employers exposed.
The practical pinch point is months five to seven. Given how easy it is to let that deadline slip, particularly in businesses without a strong HR function, expect a wave of claims in the early years of the new regime. That will be a concern for many given the current backlogs and delay in the employment tribunal system (with final hearings currently being listed for 2030 in many cases).
The compensation cap is gone: but what does that actually mean?
Here is the change nobody saw coming. Currently, the compensation that can be awarded in an ordinary unfair dismissal claim for future loss is capped at the lower of 52 weeks’ gross pay or £123,543 (as uplifted from April 2026). From January 2027, both limits are abolished and tribunals will award whatever reflects actual financial loss. The basic award (reflecting historic loss) is unchanged.
To give this some deeper perspective, the average unfair dismissal award currently sits at around £14,000, claimants must still evidence loss and make efforts to mitigate it, and tribunals are not in the business of awarding windfalls. But at the higher end, this is transformative. A senior employee on £200,000 who is poorly managed out and takes time to find a comparable role now has very substantial losses to put before a tribunal with no ceiling, and for complex packages the recoverable heads extend well beyond salary: bonuses, forfeited equity, unvested options and pension loss are all in play. The ACAS uplift of up to 25% for procedural failures also takes on a different perspective: 25% of a capped award was painful but containable; 25% of an uncapped award for a senior employee is another matter entirely.
Settlement dynamics shift too. Negotiations for senior exits have always been anchored, at least in part, by the cap. The familiar strategy of exiting a senior leader without process and simply paying the statutory compensation cap is no longer viable, and employees and their solicitors will have every incentive to push expectations higher.
This change is also likely to result in a raft of unfair dismissal claims that we would not have seen before, leading to even more pressure on the employment tribunal system.
What should employers do before January 2027?
- Shorten probationary periods to three or four months, with a discretionary one-month extension, so decisions are made comfortably before the six-month (less one week) practical threshold.
- Ensure every contract of employment contains a clear PILON clause, so notice periods do not inadvertently push an employee over the line.
- Train line managers on why the six-month date now matters, and on documenting and tackling performance and conduct concerns proactively from day one, with probationary reviews that are substantive rather than a rubber stamp.
- Tighten recruitment processes, since the cost of a poor hire just went up materially.
- Factor uncapped exposure into risk assessments for contested exits, particularly higher earners, and review employment practices liability cover.
- Involve professional advisers early in any exit with the potential to become contentious, rather than after the decision has been taken.
One further date for the diary: the time limit for bringing tribunal claims extends from three to six months, expected to be implemented in October 2026, which will only add to employer considerations.
The key takeaway
Together, a shorter qualifying period, uncapped compensation and extended period to commence claims fundamentally change the risk calculus for dismissals in the first year of employment. The good news is the commencement date is known, and there is still time between now and January 2027 to take the necessary steps. None of this needs to happen overnight, but it should not be left until December either.
If you would like to discuss how these changes affect your business, or would like help reviewing your contracts and dismissal procedures, our employment team would be happy to assist.
