Unlimited compensation and tighter turnarounds – How is unfair dismissal protection changing?

Employers are facing greater scrutiny in how they handle dismissing employees who are not able to perform the job satisfactorily.

While not as severe as it was initially planned to be, unfair dismissal protections are sharply increasing, leaving employers facing uncapped compensation claims should the matter make it to a tribunal.

Prevention is better than a cure, so understanding how HR support can limit risk is vital ahead of the upcoming changes.

How is unfair dismissal protection changing?

From 1 January 2027, the cap on unfair dismissal compensation will be removed.

At the same time, the length of time an employee can work without unfair dismissal protection drops from two years to six months.

This will apply to all current and future employees, meaning that any employee who has been with your business for more than six months will get immediate protection on New Year’s Day.

Currently, unfair dismissal compensation is capped at the lower of one year’s gross salary or £188,223.

Unfortunately, this has created an environment where employers can factor in the cost of an unfair dismissal claim and embark on the illegitimate action regardless.

Lower-paid employees are especially vulnerable to this, with larger companies more easily able to absorb the cost.

The new system will see the real financial impact of unfair dismissal being considered and a tribunal has a greater scope to factor in individual circumstances.

How an employer conducts themselves more generally will be in greater focus, as there may be a price tag for specific interactions that led up to the unfair dismissal.

How can businesses prepare for new unfair dismissal rules?

It would be better for everyone if there were fewer cases of unfair dismissal so that employees can feel respected and businesses are not placed at financial risk.

The changes align unfair dismissal with discrimination and whistleblowing protections, meaning that it should be treated with the same seriousness by employers.

However, while there is never a need to discriminate and whistleblowing should be unnecessary, there are instances where employees will have to be let go.

This is most common during probation periods and it is here where the focus needs to be.

From 1 January 2027, probation periods will be better kept to three months, with a final decision on employment being reached no later than five months after the start date.

Unfortunately, this does not give employees or employers as much time to align and fully determine whether the job is the right fit.

Instead, there may be a rise in cutthroat probation periods, with new employees being cycled out swiftly if they underperform.

Hopefully, additional training can be implemented to facilitate a promising employee’s transition into the company, especially once a decision has been made to keep them on.

HR support will be vital in managing this process, but the reality is that many businesses lack the ability to handle this in-house.

This is where outsourced HR can be effective and our team are here to assist you.

Fully aware of and up-to-date with the latest employment laws and regulations, we can review your policies and practices to ensure that you do not risk facing compliance issues.

Having external HR support can let you focus on running your business without risking issues developing within your team.

Where issues do form, we can help to resolve them effectively and compliantly with the detached objectivity that cannot be achieved through an in-house team.

We want to help you handle all of the changes being introduced by the Employment Rights Act.

Don’t risk unlimited compensation claims for unfair dismissal. Speak to our team today.