Unlimited Compensation After Only Six Months Of Employment

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UK employers face a dramatic shift in employment law as unfair dismissal protections expand significantly from January 2027. The qualifying period drops from two years to just six months, while compensation caps are eliminated entirely, creating unlimited liability for wrongful terminations. These changes demand immediate action on probationary periods, recruitment processes, and performance management strategies.

United Kingdom Employment and HR

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Unfair dismissal law is changing from January 1, 2027

It's more important than ever for employers to do proper due diligence on new hires. Not only to make sure the recruitment decision itself and vetting process is right, but also by using a probationary period to actively monitor and assess the person's suitability for the role.

What's changing?

From January 1, 2027, employees will only need six months' service (as at that date) to gain unfair dismissal rights. Currently they need two years.

Damages for unfair dismissal are currently capped at the lesser of 12 months' salary or a statutory cap of GBP£123,543. Compensation for unfair dismissal taking effect on or after January 1, 2027 will be unlimited. This is a seismic change.

Statutory notice: a hidden risk

In reality, the new rules will impact employers before they take effect on January 1, 2027. For example, an employer who dismisses an employee on December 28, 2026 with immediate effect won't avoid the effect of the changes. Statutory rules on an employer giving notice will add on a week to make the employee's last day of employment January 4, 2027. This would bring the employee within the scope of the new unfair dismissal rights. It applies even if the employer has the right to make a payment in lieu of notice.

Quantifying loss

Unfair dismissal loss is awarded based on ongoing financial loss, with a duty on the employee to mitigate their loss. The loss can include salary, lost benefits (such as health insurance, permanent health insurance), as well as loss in relation to share options, long term incentive plans, and pension rights. Calculations can be complex and significant.

In the current job market, it might not be easy for an employee to find another job after say a few months. The ramifications of the lifting of the compensation cap will be particularly marked for high earners, those with long-term health conditions, and women returning from maternity leave, who might find it harder to re-enter the job market. Employers will be keen to monitor possible job opportunities in the market, to demonstrate whether or not an employee has taken adequate steps to seek alternative work.

Probationary periods

Employers commonly use six months' probationary periods knowing that they have two years to assess employees' performance or conduct, and potentially part company, without the risk of an unfair dismissal claim. This will change. Probationary periods will need to be shorter, structured, and extended with care. Active management and reviews will be key.

Reforms create uncertainty

The removal of the compensatory cap and the reduction of the qualifying period to bring an unfair dismissal claim will bring more employees into scope and have implications for executive terminations. Removal of the cap, coupled with often informal termination processes may present unpredictability in assessing potential losses for employers negotiating senior level exits and settlements.

How we can help

Our lawyers can advise you in relation to your workforce on:

Effective use of probationary periods: considering their length, drafting clauses correctly, and managing the probationary period process.
Recruitment processes and employment offers: managing the recruitment process, making employment offers and drafting employment contracts.
Fixed term contracts: consideration of job role, and for periods in length of 6 months or more.
Performance management, particularly where there is concern about current employees acquiring unfair dismissal rights from next year.
Reviewing and strengthening disciplinary and grievance procedures and other HR policies.
Settlement strategy and exit negotiations for employees.

We can also provide training in all these areas. Please contact a member of the Labor and Employment Team for more information.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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