As part of Labour's 'Make Work Pay' initiative the British Government has made the most significant changes to English employment law for a generation. There are many changes planned that are enshrined in the Employment Rights Act 2025. The changes will be introduced over the next two years with the first changes planned from 6 April 2026. Every employer needs to be aware of the changes as they bring significant changes to the current employment law regime.
There are a number of changes planned but in this article we are focusing on the two changes that will have the most dramatic impact for employers:
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the reduction of the qualifying period for unfair dismissal claims from two years to six months
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the removal of the statutory cap on compensatory awards (currently the lower of a year’s pay or £118,223).
These changes are expected to take effect from 1 January 2027.
As a reminder the current position is that any employee working in the UK with more than two years' service can claim unfair dismissal if they are either dismissed for an unfair reason or dismissed as a result of an unfair procedure. This two year time limit is reducing to six months' service. This means that any employees hired from 1 July 2025 will come under the scope of the protection if they remain employed after 1 January 2027.
The removal of the statutory cap will eliminate the current limit on compensatory awards for unfair dismissal. The compensatory award is calculated by an employment tribunal to compensate the unfairly dismissed employee for financial losses they have incurred as result of being dismissed unfairly - so loss of salary and benefits. The removal of the cap on compensation will mean that employers risk paying more if they dismiss senior employees earning salaries in excess of £118,000.
Although the impact of the changes could be significant from a financial perspective if things go wrong, they also present a genuine opportunity to drive cultural and operational improvements within businesses.
What will be the impact of the changes for UK business?
A focus on improving hiring strategy
The reduced qualifying period will force employers to review employment contracts and how they manage their employees. Whilst this requires adjustment, it presents a meaningful opportunity for employers to sharpen their recruitment and onboarding practices.
The reforms act as a powerful incentive for employers to invest more thoroughly in the recruitment process from the outset. Knowing that the window for straightforward dismissal is shorter, employers will be encouraged to be more deliberate and rigorous when selecting candidates, ensuring the right person is placed in the right role. This upfront investment, though it may increase short-term recruitment costs, is likely to yield significant long-term savings by reducing the need to rehire or replace employees who were not a good fit.
Review contracts and shorten probationary periods
Most employers have probationary periods in their employment contracts, typically ranging between three and six months. After the changes, a six-month probationary period is no longer appropriate because employers must serve notice before the expiry of six months to avoid the employee having rights to claim unfair dismissal.
This creates a strong incentive for employers to be more structured and proactive during the probationary period itself, setting clearer expectations, conducting more frequent check-ins, and providing better support and feedback to new starters from day one.
Take action quicker to dismiss underperforming staff
Under the current rules, it is relatively easy for employers to dismiss an unsatisfactory employee before they reach the two-year qualifying requirement. This gives plenty of time to assess performance and give an employee time to improve, implementing an improvement plan knowing that dismissal is a "safe" option. In practice many businesses use the two year qualifying period as an informal probationary period.
Under the new regime, this has disappeared. Employers must make definitive decisions before six months service , and any extension of a probation beyond six months means the employee will have unfair dismissal protection during the extended probationary period. Consequently, employers must adopt more rigorous assessment criteria at an earlier stage and are likely to be less willing to give borderline employees the benefit of the doubt.
Viewed positively, this shift encourages a more disciplined, data-driven approach to performance management. Rather than allowing underperformance to drift, employers will be incentivised to engage early, document concerns clearly, and make considered decisions - the hallmarks of good employment practice.
Make better hiring decisions
Better hiring decisions and stronger early-stage management are also likely to contribute to improved employee productivity and stronger long-term business growth, as organisations build workforces that are better aligned to their needs from the start.
Once employees reach the six-month threshold and gain unfair dismissal protection, they will have an incentive to remain with their employer and build on that protected status. This is likely to reduce voluntary turnover, as employees will be reluctant to walk away from the security they have earned. For employers, this translates directly into lower recruitment and training costs, more stable teams, and the retention of knowledge that takes time to develop.
A workforce where employees feel secure, valued, and fairly treated is one that performs better, innovates more readily, and contributes to sustained business growth. The Act therefore provides a structural prompt for employers to take talent retention seriously as a strategic business priority, not merely an HR concern.
Improved Productivity, Stability, and Workplace Culture
The positive impact of the Act extends well beyond the hiring process. By establishing clearer, fairer working conditions, including measures to end exploitative "one-sided" flexible working contracts, employers can expect to see meaningful improvements in staff morale, loyalty, and day-to-day productivity. A workforce that feels protected and fairly treated is demonstrably more engaged, and a more engaged workforce is a more effective one. The link between employee wellbeing and business performance is well established: happier, healthier employees take fewer sick days, collaborate more effectively, and are more likely to go above and beyond in their roles.
A focus on robust HR policies
One of the less-discussed but significant benefits of the Act is the incentive it creates for employers to build robust, consistent HR policies and management practices. By investing in clear, compliant procedures now, employers can significantly reduce their exposure to costly Tribunal claims, financial penalties, and reputational damage in the future. The reforms encourage HR teams and line managers to apply consistent standards across the workforce, a practice that not only reduces legal risk but also improves fairness and transparency for all employees.
A reduction in discrimination claims?
Under the current rules, unfair dismissal claims are capped, whilst discrimination claims are uncapped. This creates a strategic incentive for employees to include discrimination claims alongside unfair dismissal claims, even where the discrimination element may be weak, to increase the value of their claim or settlement. Currently, around 35% of claims involve a discrimination element, and employees bring an average of 2.3 jurisdictional complaints per claim.
When an employee's primary complaint is unfair dismissal, the removal of the cap may reduce the incentive to add a discrimination claim purely for tactical reasons. This could lead to a reduction in the proportion of claims involving discrimination complaints.
Such a shift could have implications for the Tribunal backlog. Discrimination claims are typically more complex than unfair dismissal claims as they involve additional legal tests, more extensive disclosure, and longer hearings. A reduction in discrimination claims could therefore lead to shorter Tribunal hearings and more efficient case processing, potentially providing some relief to the overstretched Tribunal system. This is a genuinely positive development, a Tribunal system where claims better reflect their true legal basis is a more efficient and fairer system for all parties, including employers.
There will not be a wholesale reduction in discrimination claims. Employees with less than six months' service cannot claim unfair dismissal and so discrimination claims will be their main avenue for redress. More fundamentally, many discrimination claims are brought because employees genuinely believe they have been discriminated against, not merely as a tactical addition to access higher compensation.
Will the tribunal system be overwhelmed with claims?
Government figures indicate that 6 million employees will benefit from the reduction in the qualifying period. This is a substantial expansion of potential claimants. The Tribunal service has announced plans to employ a further 36 salaried judges and 150 non-legal members in 2026 — a respective increase of 7% and 21%. This investment in Tribunal resources is a welcome step and signals a commitment to dealing effectively with an increase in number of claims.
Demands for larger pay outs?
The removal of the compensation cap may further exacerbate delays by discouraging settlements. Currently, ACAS settles 71% of claims that do not progress to Tribunal. However, the elimination of the statutory cap may encourage employees, particularly high earners, to reject settlement offers in anticipation of substantially increased awards at the Tribunal.
Next steps
The Employment Rights Act will force employers to review their employment contracts and hiring practices. Employers that fail to react before 1 January 2027 will face increased difficulty and cost when dismissing underperforming employees. Employers should review their workforce to determine if any employees are underperforming and should act now.
Crucially, though, the reforms should not simply be viewed as a compliance burden. Organisations that respond by investing in better recruitment, more structured onboarding, stronger performance management, and a fairer workplace culture will be better placed to build productive, committed workforces and are likely to avoid the cost and disruption of dismissal disputes altogether.
Finally, employers should also review the budget they assign to paying damages for an employment claim. Particularly when the first uncapped awards are made, there will be uncertainty about how high awards will be. Employers defending claims soon after the change, particularly if the employee is a high earner, should prepare for potentially very high awards. Additionally, if an employer has an insurance policy in place, they should consider whether the terms of the policy would cover an unlimited award for unfair dismissal.
The Employment Rights Act 2025 undoubtedly raises the stakes for employers but it also raises the standard of employment practice across the United Kingdom. Those employers who embrace that challenge proactively are likely to emerge stronger, leaner, and better equipped for sustainable long-term growth.
