A fundamental shift in Unfair Dismissal law: Compensation cap to be removed and qualifying period cut to six months

Removal of the cap on Unfair Dismissal Compensation

The current position

At present, a successful unfair dismissal claimant may receive:

• A basic award (calculated in a similar way to a statutory redundancy payment) and
• A compensatory award, intended to reflect financial loss flowing from the dismissal.

The compensatory award is currently capped at the lower of either:

• 52 weeks’ gross pay; or
• A statutory maximum (currently £118,223).

This cap has long acted as a ceiling on employers’ financial exposure in ordinary unfair dismissal claims.

What is changing?

From 1 January 2027, section 124 of the Employment Rights Act 1996 (which imposes the compensatory award cap) will be removed entirely. There will be no statutory limit on the level of compensation an employment tribunal may award for unfair dismissal.

Practical impact on employers

For employers, this materially alters litigation risk:

• Unfair dismissal claims will become more financially unpredictable.

• High-earning employees with long periods of unemployment post-dismissal may claim significantly higher sums than was previously possible.

• Settlement values are likely to increase, particularly where dismissal processes are weak or poorly documented.

• The historical comfort that “ordinary” unfair dismissal claims were financially contained will no longer apply.

Whilst the most recent quarterly Tribunal statistics show that the median unfair dismissal award is £6,746, well below the current cap, the removal of any ceiling changes how risk must be assessed at the point of dismissal.

Practical impact on employees

For employees, the change strengthens the remedial purpose of unfair dismissal law:

• Compensation will be more closely aligned to actual financial loss.

• Employees will no longer be under pressure to frame claims as discrimination cases purely to access uncapped compensation.

• Claimants who struggle to find alternative employment may receive awards that better reflect their real economic position.

Reduction of the qualifying period to six months

The current position

Currently, an employee must have two years’ continuous service to bring a claim for ordinary unfair dismissal. This is not to be confused with protections in place from day one of employment such as discrimination or other automatically unfair dismissal.

What is changing?

From 1 January 2027, the qualifying period will be reduced to six months.

Importantly, the Government has confirmed a transitional approach:

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

It is worth noting that previously, the qualifying period for unfair dismissal could be altered by secondary legislation. The new Act removes that power, meaning the six-month qualifying period is fixed in primary legislation and can now only be changed by a further Act of Parliament.

Practical impact on employers

This change significantly narrows the “risk-free” dismissal window:

• Many dismissals that would previously have fallen outside unfair dismissal law will now be open to challenge.
• Probationary processes will need to be taken more seriously, with clearer objectives and regular reviews.
• Employers will need to ensure that dismissals at or around the six-month mark can be objectively justified and procedurally fair.

In practice, informal or poorly managed probation dismissals are likely to attract greater attention and scrutiny.

Practical impact on employees

For employees, the reduction improves job security at an earlier stage:

• Employees gain meaningful protection after six months rather than two years.
• Access to written reasons for dismissal is also brought forward to six months meaning there will be greater clarity for dismissed employees, making it easier for them to identify f they may have a claim.
• The change particularly benefits those in sectors with short probationary periods or high turnover.

However, it remains the case that employees must still show that a dismissal was substantively and procedurally unfair. Protection does not equate to guaranteed job security.

A shift in the balance of Unfair Dismissal law

Taken together, these reforms materially shift the balance of unfair dismissal law:

• Employers face earlier exposure to claims and potentially uncapped compensation.
• Employees gain earlier access to protection and more realistic remedies for financial loss.
• Tribunal claims may become more focused on unfair dismissal alone, rather than being combined with discrimination claims purely to avoid compensation limits. This may lead to claims that are more focused and straightforward, potentially reducing the complexity, length, procedural burden and cost of tribunal proceedings.

How can we help

For employers:

• reviewing and updating probationary, disciplinary and dismissal policies to reflect the six-month qualifying period
• advising on probation management, performance concerns and early dismissals to minimise tribunal risk
• supporting HR and managers with investigations, hearings and appeals that will withstand tribunal scrutiny

For employees:

• advising on whether you qualify to bring an unfair dismissal claim under the new six-month threshold
• assessing the merits and potential value of unfair dismissal claims, including loss of earnings
• advising on settlement negotiations and exits where dismissal is disputed
• representing employees in employment tribunal proceedings

If you would like to discuss how these changes may affect you or your organisation, please contact us on 020 8290 0440 or speak to a member of our Employment team.