Employment law insights
The unfair dismissal revolution
From 1 January 2027, unfair dismissal law will be very different. Not only will the qualification period be reduced from two years to six months, but the cap on compensation, which has always existed, will be removed completely.
The period of time an employee has needed to work before obtaining protection from unfair dismissal has always been a political football, varying with the colour of the government. Nevertheless, this Labour Government managed to ruffle feathers with its manifesto proposal to make protection from unfair dismissal a day-one right.
This was so controversial that the House of Lords forced a U-turn at the end of November, with the Government accepting a 6-month qualification period, which we have had before, albeit not since the 1970s.
This will inevitably lead to more litigation in a system which is already struggling under the strain of current workloads. That said, a hope is that fewer claimants with between 6 and 24 months’ service will feel the need to shoehorn their complaints into allegations of unlawful discrimination or whistleblowing detriment (both of which are already day-one rights) and will simply focus their complaints on what really bothers them – that they were dismissed without, in their view, a fair chance.
The unfair dismissal compensatory award is currently capped at the lower of a year’s pay or £118,223. In an unexpected twist, in connection with conceding a qualification period of six months rather than day one, the Government amended the Employment Rights Act 2025 to remove the cap on compensation entirely.
While the ability to obtain unlimited compensation won’t affect most cases, it will totally transform the landscape for highly-paid executives who will be able to bring claims for seven- or eight-figure sums. Companies will have to think more carefully before jettisoning their well-paid CEO and banks will have to pause before the next round of redundancies of wealthy traders.
Even among lower paid claimants, the prospect of unlimited compensation may also make any unreasonable claimants even more unreasonable.