Unfair Dismissal Reforms: What you need to know
Employment law continues to develop at pace. The Employment Rights Act 2025 received Royal Assent on 18 December 2025, and employers now have a fixed date for one of its most significant reforms: from 1 January 2027, the statutory cap on the compensatory award for ordinary unfair dismissal will be removed. For employers, this is an important change to risk, process and strategy in dismissal cases.
What is the current position?
At present, compensation for ordinary unfair dismissal generally comprises a basic award and a compensatory award. The basic award is calculated using a statutory formula that takes account of the employee’s age, length of service and gross weekly pay, subject to the current statutory cap on a week’s pay of £751.
The compensatory award is intended to reflect financial loss flowing from the dismissal. Under the current regime, that award is capped at the lower of 52 weeks’ gross pay and £123,543.
What changes on 1 January 2027?
From 1 January 2027, the statutory cap on the compensatory award for ordinary unfair dismissal will be removed.
That said, “uncapped” does not mean automatic, punitive or unlimited compensation in practice. Awards will remain loss-based and will still be assessed by the Employment Tribunal in the ordinary way. That means issues such as causation, mitigation of loss and the tribunal’s assessment of what compensation is properly recoverable will remain central.
Employers should also note what this change does not do. Ordinary unfair dismissal compensation does not ordinarily include an award for injury to feelings simply because the dismissal is unfair. That remains a separate issue in other types of claim, such as discrimination or whistleblowing detriment, and should not be conflated with the removal of the ordinary unfair dismissal compensatory cap.
The related qualifying period change
The same date brings another important change. From 1 January 2027, the qualifying period for ordinary unfair dismissal will reduce from two years to six months. In practical terms, more employees will be able to bring ordinary unfair dismissal claims, and they will do so in a regime where the compensatory award is no longer subject to the current statutory cap.
Transitional position: why the effective date of termination matters
The transitional position turns on the effective date of termination. That is an important point for employers managing dismissals close to the changeover date. The new uncapped regime applies where the effective date of termination falls on or after 1 January 2027, even if the dismissal decision was made, or notice was given, before that date. Conversely, where the effective date of termination falls before 1 January 2027, the current capped regime will continue to apply.
Practical implications for employers
These reforms are likely to increase the significance of ordinary unfair dismissal claims in both litigation and settlement discussions. Employers should expect closer scrutiny of dismissal processes and potentially greater value being attached to claims that might previously have been constrained by the statutory cap.
• review dismissal, disciplinary and capability procedures to ensure they are fair, up to date and consistently applied;
• check that investigations, hearings and appeal processes are properly documented;
• train managers on procedure, record-keeping and decision-making before difficult dismissals arise;
• consider the timing implications of dismissals and notice periods where the effective date of termination may fall on or after 1 January 2027; and
• reassess litigation and settlement strategy in cases where ordinary unfair dismissal risk may increase materially.
How CSJ Legal Can Help
At CSJ Legal, we are monitoring these developments closely. We can help employers review policies and procedures, advise on live dismissal situations, assess risk around the effective date of termination, support internal investigations and disciplinary processes, and assist with tribunal strategy and settlement discussions.
With 1 January 2027 approaching, now is the time to prepare. If your business would like practical advice on updating procedures or managing dismissal risk in light of these reforms, please contact CSJ Legal.
Sources Referenced
• Employment Rights Act 2025
• Employment Rights Act 2025 (Commencement No. 4 and Transitional and Saving Provisions) Regulations 2026
• Plan to Make Work Pay and Employment Rights Act: Timeline update
If any of these issues have affected you or your business and you wish to seek advice, please contact CSJ Legal here.