Government confirms timetable for unfair dismissal reforms
The government has published a summary of stakeholder feedback on the forthcoming unfair dismissal reforms, alongside regulations confirming that the changes will take effect from 1 January 2027.
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Background
The Department for Business and Trade (DBT) has published a summary of discussions held with employer and employee representative groups regarding the unfair dismissal reforms introduced by the Employment Rights Act 2025.
The publication coincides with the making of the Employment Rights Act 2025 (Commencement No. 4 and Transitional and Saving Provisions) Regulations 2026, which confirm that the key unfair dismissal reforms will take effect on 1 January 2027.
From that date, the qualifying period for ordinary unfair dismissal claims will reduce from two years to six months and the statutory cap on compensatory awards for unfair dismissal will be removed. The method used to calculate compensation will remain unchanged.
Summary of feedback
The stakeholder discussions considered the likely impact of the reforms, and the support employers and employees may need ahead of implementation.
Participants highlighted concerns about the removal of the compensatory award cap, particularly in relation to highly paid employees and senior executive exits. It was suggested that guidance on performance management, dismissal processes and compensation calculations in executive-level cases would be helpful.
The potential impact of the reforms on the employment tribunal system was also discussed. Participants highlighted concerns around the capacity and capability of the current system and stressed the importance of wider dispute resolution reforms and practical guidance to support implementation. The DBT has confirmed that it has set up the Dispute Resolution System Taskforce to consider further reforms.
The government noted that most unfair dismissal awards currently fall below the existing statutory cap and confirmed that the legal framework for calculating compensation will not change.
Commencement regulations
The commencement regulations provide important confirmation that the reduced qualifying period and removal of the compensatory award cap will apply where the effective date of termination falls on or after 1 January 2027.
Employers should note that, in some cases, an employee dismissed before that date may still benefit from the new regime if their effective date of termination falls on or after 1 January 2027, for example where statutory notice provisions extend the termination date.
Learning points
The publication of the commencement regulations means that employers can now prepare on the basis that the reforms will take effect from 1 January 2027.
Organisations may wish to review recruitment, probation, performance management and dismissal processes well in advance of implementation. Employers dealing with senior executive exits should also consider the potential implications of the removal of the compensatory award cap when assessing litigation risk and negotiating exit arrangements.
The DBT has confirmed that further guidance for employers and employees will be published before the reforms take effect.
For more information please contact Eleanor Searle in our Employment team.
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