Employment Rights Act 2025 impact assessments published ahead of major unfair dismissal changes

Background

The government has published the first tranche of updated impact assessments on the Employment Rights Act 2025 (the Act).

The publications include a broad economic assessment of the Act as a whole, an updated summary factsheet, a focused assessment on restrictions to fire and rehire, and a research paper assessing the legal and economic implications of the Act, comparing UK employment protections against other OECD countries. Further updates are expected as consultations on regulations under the Act progress.

Of particular interest to employers are the assessments dealing with changes to unfair dismissal rights, which were introduced late in the Bill’s passage and attracted significant debate.

Assessment of unfair dismissal changes

The government’s economic analysis estimates that reducing the unfair dismissal qualifying period from two years to six months will bring an additional 6.3 million employees within scope of protection. This is expected to generate around 9,000 extra referrals to Acas each year, with approximately 3,000 progressing to tribunal claims and around 570 requiring judicial time. This is identified as the single largest anticipated impact on the tribunal system arising from the Act.

By contrast, the government acknowledges that it cannot reliably quantify the impact of removing the compensation cap for unfair dismissal. It cites uncertainty around how employers and employees may react to the changes. The analysis notes that relatively few awards currently reach the cap, but suggests that its removal will disproportionately benefit higher earners and those with limited re-employment opportunities.

The government has stated that it remains committed to implementing both the reduced qualifying period and the uncapped compensation regime on 1 January 2027,  indicating that it does not intend to consult further on the removal of the compensation cap. However, it plans to convene a series of stakeholder meetings in early 2026 to gather views on the unfair dismissal changes, with a summary of feedback to be published later that year. It will also consider whether additional guidance or support is needed.

Learning points

These impact assessments underline the scale of change employers should be preparing for in relation to unfair dismissal risks.

The removal of the compensation cap is now confirmed to proceed on 1 January 2027, with no further impact assessments or consultations planned. Coupled with the changes to the qualifying period, a larger proportion of the workforce will gain access to protection much earlier in their employment, and any subsequent awards will be uncapped, likely leading to an increase in early conciliation and tribunal activity.

While the precise practical effects remains uncertain, employers should anticipate  increased exposure to higher-value claims and review dismissal decision-making, probation processes and documentation well in advance of 2027. The planned stakeholder engagement in 2026 may provide further clarity, but the direction of travel is now firmly set.

For more information or advice, please contact Georgia Blesson in our Employment team.