This is a seismic change to employment law as we know it.
Practitioners and commentators were expecting a reduction in the minimum service requirement for unfair dismissal – currently two years – but the removal of the cap appeared at the eleventh hour as the Employment Rights Bill 2025 (now the ERA 2025) finished its journey through Parliament. Labour has been promising to Make Work Pay. Whether this change is quite what British employers, workers and businesses needed remains to be seen.
How long after starting a new job can I claim unfair dismissal?
Currently and until 31 December 2026, you must have worked for two years in an employment to be able to claim unfair dismissal unless there is a discriminatory reason for your dismissal or unless you are a whistleblower. There are some other less common reasons provided for by statute. The promised Day One right to unfair dismissal rights has not become law, but from 1 January 2027, the service period is the much shorter timeframe of six months.
What does removing the cap on compensation mean?
Currently, a claim for unfair dismissal is limited to a value of either £118,223 or 52 weeks’ gross pay, whichever is lower. This cap has been in place since time began (well, almost) and is frequently updated in line with inflation annually. There will, from 1 January 2027, be no limit to compensation for unfair dismissal, and an employee who has been employed for 6 months will be able to bring this claim.
Employers ought to be looking now at contracts and procedures in order to prepare for this substantial change, which brings increased risk to all businesses.
Does this mean there will be more unfair dismissal claims and fewer for whistleblowing and discrimination?
Potentially. Currently, the compensation cap for unfair dismissal deters high earners from bringing unfair dismissal claims because the compensation is limited. For whistleblowing and discrimination claims, this limit does not exist, so often higher-earning individuals will elect to pursue those types of claims in order to “lift the cap”. From January 2027, this may no longer be necessary and could change the way claims are pleaded (“brought”).
What about bonuses, shares, etc?
The change could also mean that claims for loss of share awards or bonus payments and similar are also brought in the Employment Tribunal as part of unfair dismissal claims. Until now, these have been subject to the £25k cap on breach of contract claims in the ET, and high earners with complex packages have to bring claims in the High Court, which subjects them to adverse costs risk which is not such an issue in the ET.
Might employers be more willing to settle claims?
This change to the law might have the unintended consequence of encouraging employers to be more willing to enter into settlement agreements if there is no cap on unfair dismissal claims for them to hide behind. Currently, employers who are not particularly concerned about the strength of discrimination claims may be reluctant to settle claims to avoid litigation if they perceive the risk to be slight. If an “ordinary” unfair dismissal could now potentially be a high-value claim, might they have to rethink this approach?
If you’re starting a new job after 1 January 2027, beware…
The change could also mean that if you start a new job, you may be subjected to more vigorous performance management objectives in the early part of your job since employers will have a much shorter amount of time to decide whether you are suitable before you acquire unfair dismissal rights after six months.
We don’t fully understand the implications yet, but we won’t have to wait too long to see how they impact in practice.
This blog was written by Yavnik Ganguly, Senior Solicitor.
