Here’s what every business owner needs to know.

From 1 January 2027, employees will be able to bring an unfair dismissal claim after just six months in the job, down from two years. And there’s a second change that’s quietly even more significant: the compensation cap is being abolished entirely.

If you have people working for you, this affects you. And if you’re still running employment contracts and staff handbooks that were written with a two-year qualifying period in mind, you need to update them before the end of 2026.

Here’s a plain-English breakdown of what’s changing and what it means for growing businesses.

The Current Unfair Dismissal Position

At the moment, an employee generally needs two years’ continuous service before they can bring an ordinary unfair dismissal claim against you. That two-year window has given employers a degree of breathing room – time to assess a hire properly, manage a poor fit, or part ways before a situation becomes a legal risk.

That window is about to get a lot shorter.

What changes on 1 January 2027

Two things happen simultaneously, and they compound each other.

1.  The qualifying period drops to six months

Under the Employment Rights Act 2025, employees will gain the right to bring an unfair dismissal claim once they have six months’ continuous service – not two years. This is confirmed for 1 January 2027.

Crucially, the change is not purely prospective. Any employee who already has at least six months’ service on that date gains protection immediately. In practice, that means anyone you hired on or before 1 July 2026 – including people already in post today – will be covered from day one of the new regime.

There is also a technical wrinkle worth knowing: employment law adds an extra week of service when calculating the qualifying period for employees with more than one month’s service. An employee who started in early August 2026 could technically bring a claim from January 2027. That is not a reason to panic, but it is a reason to manage probation periods carefully and start performance conversations early.

2.  The unfair dismissal compensation cap is being removed

This is the change that has caught many employers off guard. Currently, compensation in an unfair dismissal claim is capped at the lower of one year’s gross pay or the statutory maximum (currently just over £118,000). From January 2027, that cap disappears.

Tribunals will instead award compensation based on the employee’s actual financial loss – uncapped. For most employees, average awards will not change dramatically. But for higher earners, employees with complex benefits packages, or anyone facing a difficult job market, the potential exposure increases substantially. Settlement negotiations will also shift, because claimants will be starting from a higher ceiling.

One important point before we get to probation: the six-month qualifying period only applies to ordinary unfair dismissal. Discrimination claims and certain automatically unfair dismissal claims, including those related to whistleblowing, health and safety, and trade union activity, have been day-one rights for some time and are not affected by these changes. That means you have always needed to manage people fairly from the moment they start, and that requirement does not change. The new rules simply bring ordinary unfair dismissal much closer to that same standard.

What this means for your probation periods

The two changes together create a straightforward problem for employers who have not thought this through: a standard three or six-month probation period that was never really designed to carry legal weight now needs to do a lot more work.

Probation periods are contractual, not statutory. The Act does not set a mandatory probation period. It does not require you to have one at all. But if you use one, and most businesses do, its length and how you run it now matters significantly more.

A six-month probation with no structured review process is a risk. If an employee reaches the six-month mark and you have not documented any performance concerns, held proper review meetings, or given clear and evidenced feedback, dismissing them becomes legally complicated. Poor documentation and process are common reasons employers struggle to defend claims.

A shorter, better-managed probation may serve you better than a longer, loosely run one. Some employment lawyers recommend businesses review whether their current probation arrangements are still right or whether they need adjusting to enable a fair review process and outcome prior to the six-month stage. This will ensure that any genuine performance concerns are identified, raised, and documented well before the six-month threshold. An extension clause, clearly drafted and consistently applied, can buy additional time where genuinely needed.

Probation does not disappear as a concept once an employee has unfair dismissal rights. Even after six months, you can still dismiss someone, but you need a fair reason and a fair process. That is not impossible, but it requires the groundwork to have been laid.

The bigger picture: how you manage people from day one

The two-year qualifying period has, in practice, allowed some employers to be less disciplined about early-stage performance management than they should have been. That buffer is largely gone.

From now on, or certainly from July 2026 for new hires, good people management from the first week of employment is not just best practice. It is commercial protection.

That means:

  • Clear role expectations set at the start, not discovered over time
  • Regular, documented one-to-ones during the probation period
  • Written feedback that reflects actual conversations, not just ticking a box at the end
  • Managers who understand what a probationary review is actually for and know how to have difficult conversations constructively

None of this is complicated. But it requires intention, and it requires your contracts and handbooks to reflect the way you actually work, not boilerplate from five years ago.

What about unfair dismissal claims by existing staff?

If someone you already employ has been with you for six months or more on 1 January 2027, they immediately gain unfair dismissal protection under the new rules. This is not a future consideration, it applies to your current workforce.

If you are already managing a performance issue with a longer-serving employee, nothing here changes the process fundamentally. The same principles apply: fair reason, fair process, documented evidence. But if you have been relying on the two-year period as a reason to delay having difficult conversations, that approach will not work for new hires from mid-2026 onwards.

What you should do now ahead of unfair dismissal changes

The practical priority for most businesses spans several areas. Specifically:

  • Employment contracts — do your probation clauses reflect the new risk environment? Are your extension provisions clear and defensible? Are your grounds and process for dismissal during probation properly drafted?
  • Staff handbooks — do your disciplinary and performance management policies still make sense given a six-month qualifying period? Are your managers following them in practice?
  • Manager training — are the people who run probation reviews actually equipped to do it properly?
  • Recruitment — with less time to course-correct after a poor hire, getting recruitment right matters more than ever. Are your job descriptions accurate? Are you assessing candidates against the right criteria from the start?
  • Onboarding and induction — does your onboarding process set clear expectations from day one? New starters should understand their role, their targets, and what good looks like well before the six-month mark arrives.

These are not dramatic changes, but they do need to be made before the new rules bite. Waiting until the end of 2026 creates unnecessary pressure.

A note on the compensation cap

We want to be clear about what the removal of the cap does and does not mean. The average unfair dismissal award in employment tribunals is currently around £14,000, that figure is unlikely to shift dramatically overnight. The change matters most where you have higher-paid employees, roles with significant bonus or equity arrangements, or situations where someone dismissed early in their career might face a long period without work.

The more immediate effect may be on settlement values and the dynamics of any dispute. Without a statutory ceiling, claimants and their solicitors will push harder. Getting the fundamentals right – documented process, genuine feedback, proper probation management – is the most effective way to reduce that risk.

How Farringford Legal can help

We work with ambitious, fast-growing businesses across England and Wales, and this is exactly the kind of change that has a real, practical impact on the way you run your team.

If your employment contracts or staff handbook still reference a two-year qualifying period for unfair dismissal, or if your probation clauses were written before these changes were on the horizon, now is the right time to get them updated.

We offer a contract and handbook review specifically designed for owner-managed businesses – straightforward, commercially focused, and built around how you actually operate.

Get in touch with the team at Farringford Legal to find out more.