Employment Law Update: Key Unfair Dismissal Changes Coming in 2027

On 21 January 2026, the Government published five updated factsheets on key aspects of the Employment Rights Act 2025 (ERA 2025). Some of the most significant updates relate to unfair dismissal rights, with major implications for employers ahead of their implementation on 1 January 2027.

Removal of cap on Unfair Dismissal compensation

The Government has confirmed that the current cap on unfair dismissal compensation (the lower of one year’s pay or £118,223) will be removed from 1 January 2027.

It has also stated that it does not intend to consult further with unions or employer groups before implementing this change, describing the measures as the outcome of “constructive, government‑convened conversations between trade unions and business representatives, following rigorous parliamentary debate.”

What this means for employers:

• Compensation for unfair dismissal will no longer be capped.
• Potential awards could rise significantly, especially for higher‑earning employees or cases involving substantial losses.
• Employers should review dismissal processes, risk assessments, and settlement strategies well ahead of implementation.

Qualifying period reduced to six months from 1 January 2027

The Government has also confirmed that the qualifying period for bringing an ordinary unfair dismissal claim will be reduced from two years to six months from 1 January 2027.

The newly published factsheet has now clarified how this will apply:

• Employees who already have six months’ service or more on 1 January 2027 will gain unfair dismissal protection immediately.
• Employees with less than six months’ service on that date will gain protection once they reach the six‑month threshold.

A larger proportion of the workforce will acquire unfair dismissal rights earlier, meaning employers may need to update probationary periods, onboarding processes, and performance management frameworks ahead of the new measures coming into force.

Employers should begin preparing early to ensure policies, procedures, and risk management strategies are aligned well before January 2027.