UK Government Confirms Removal of Unfair Dismissal Cap and New Qualifying Period Changes

The UK government has recently published a fact sheet confirming major changes to unfair dismissal laws that will take effect from 1 January 2027. These changes include the removal of the current cap on unfair dismissal compensation and the introduction of a six-month qualifying period for unfair dismissal claims. This update comes as a surprise to many, especially since the government will not consult with unions or employers before removing the compensation cap, despite earlier indications to the contrary.

A wooden gavel lies on a table, symbolising upcoming changes in law and legal proceedings.

Removal of the Compensation Cap on Unfair Dismissal

Currently, unfair dismissal compensation is capped at the lower of a year’s pay or £118,000. From 1 January 2027, this cap will be completely removed. This means employees who win unfair dismissal claims could potentially receive unlimited compensation based on their actual losses.

This change marks a significant shift in employment law. The government’s decision to proceed without consulting unions or employers contradicts the assurances given in the House of Lords during the Bill’s passage in December. Initially, some believed the removal of the cap was a drafting error that the government would quietly reverse or delay. However, the government has confirmed it will move forward as planned.

What This Means for Employers and Employees

• For employees: The removal of the cap could lead to higher compensation awards in unfair dismissal cases, especially for senior employees with high salaries.

• For employers: Businesses may face increased financial risk in dismissal claims, which could lead to more cautious approaches to termination and possibly higher insurance premiums.

  
  

Employers should review their dismissal procedures and consider seeking legal advice to prepare for this change. Employees should understand their rights and the potential for increased compensation if unfairly dismissed.

Introduction of a Six-Month Qualifying Period

Alongside the removal of the compensation cap, the government confirmed it will introduce a six-month qualifying period for unfair dismissal claims starting 1 January 2027. This means employees will need to have worked for an employer for at least six months before they can bring a claim for unfair dismissal.

Key Details of the New Qualifying Period

• Employees who already have six months’ service or more by 1 January 2027 will immediately gain protection.

• Employees with less than six months’ service on that date will gain protection once they reach six months’ continuous employment.

• This change aims to balance employee protection with employer flexibility, particularly for smaller businesses.

  
  

Calendar highlighting January 2027, the start date for new employment rules

Impact on the Workforce

This change will affect new hires and probationary employees, currently you have to have 2 years service to be able to make a claim for unfair dismissal. With the new change clarified, this will affect any new employee employeed from 1 July 2026. This leads to an increase importance of the probationary period, with clear touch points, enabling Employers to assess new employees without the risk of unfair dismissal claims, but they must still comply with other employment laws.

Preparing for the Changes

Both employers and employees should prepare for these upcoming changes:

• Employers should update their HR policies, train managers on fair dismissal procedures, and review contracts to reflect the new qualifying period.

• Employees should keep track of their employment length and understand when they gain protection under the new rules.

  
  

HR professionals will play a crucial role in guiding organisations and workers through this transition.

Final Thoughts

The removal of the unfair dismissal compensation cap and the introduction of a six-month qualifying period represent significant changes to UK employment law. These changes will affect how dismissal claims are handled and the potential compensation employees can receive.

Employers must take proactive steps to manage risks, while employees should stay informed about their rights. The government’s decision to proceed without consultation underscores the importance of staying up to date on official announcements and preparing accordingly.

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