For many employers, the financial risk associated with an unfair dismissal claim has historically been relatively limited when an employee has less than two years’ service.
From January 2027, that changes significantly.
Under the upcoming employment tribunal reforms, an employee with just eight months’ service could potentially bring an unfair dismissal claim where the relevant qualifying conditions are met. At the same time, the removal of the statutory cap on compensatory awards could allow successful claimants to recover their full financial loss, subject to the usual rules around mitigation and the assessment of loss.
The result is that a dismissal involving a shorter-serving employee could potentially carry significant financial exposure where a tribunal finds the dismissal unfair.
For SMEs, HR teams and payroll professionals, understanding what this could mean financially is becoming increasingly important.
Three significant changes to employment tribunal rules
The reforms introduce three major changes to the employment tribunal system, with the first coming into effect from 1 October 2026.
1. Tribunal claim time limits will double
Currently, employees generally have three months to bring an employment tribunal claim.
From 1 October 2026, this will increase to six months.
This gives employees considerably longer to consider their options and bring a claim following the end of their employment.
2. Unfair dismissal protection will start much earlier
Currently, employees generally need two years’ continuous service to qualify for ordinary unfair dismissal protection.
From 1 January 2027, the qualifying period will reduce to six months.
This means employers will need to consider unfair dismissal risk much earlier in the employment relationship. Probation failures, performance concerns, conduct issues and capability dismissals could all carry greater financial exposure where a dismissal is found to be unfair.
The change does not mean that employers will be unable to dismiss employees during or after this period. Employers will still be able to dismiss for legitimate reasons, provided the relevant legal requirements are met and the dismissal is fair.
3. The compensatory award cap will be removed
Currently, the compensatory award for unfair dismissal is subject to a statutory cap, with the applicable limit depending on the date of dismissal.
From 1 January 2027, the statutory cap on the compensatory award will be removed.
This means a successful claimant could potentially recover their full actual financial loss, subject to the usual principles governing compensation, including the requirement to mitigate losses.
For higher earners and employees who take longer to secure comparable employment, this could significantly increase the potential financial exposure associated with a successful unfair dismissal claim.
What could this mean in practice?
To understand the potential impact, we modelled several realistic dismissal scenarios using the following assumptions:
- Termination date: 10 September 2026
- Age at dismissal: 45
- Basic annual salary: £65,000
- Annual benefits: £4,000
- Employer pension contribution: 3%
- Net weekly pay: £1,250
- Assumed period of loss: 18 months to secure comparable employment
We then compared the potential award under the current rules with the position expected from January 2027.
These are illustrative scenarios rather than predictions of actual tribunal awards. The amount awarded in an individual case will depend on the circumstances, including the reason for dismissal, whether the dismissal is found to be unfair, the claimant’s actual financial losses and their efforts to mitigate those losses.
However, the modelling demonstrates how the potential financial exposure could change.
Scenario 1: An employee with 11 years’ service
For long-serving employees, the biggest impact comes from the removal of the compensatory award cap.
Under the current rules, our example employee would receive:
Basic award: £9,763
Compensatory award: £65,000
Total: £74,763
Under the new rules from January 2027:
Basic award: £9,763
Compensatory award: £106,925
Total: £116,688
That’s a modelled increase of £41,925.
The employee already has unfair dismissal protection under the current system, so the key change in this scenario is the potential increase in compensation resulting from the removal of the cap.
Scenario 2: An employee with just eight months’ service
The reduction in the qualifying period creates a much more significant change for shorter-serving employees.
Under the current rules, an employee with eight months’ service would generally not qualify for ordinary unfair dismissal protection.
On the assumptions used in our model:
Current rules: £0
From January 2027, an employee with eight months’ service would have passed the new six-month qualifying period. If a tribunal found their dismissal to be unfair, our scenario modelling produces:
Basic award: £0
Compensatory award: £106,925
Total: £106,925
That’s a potential difference of £106,925 compared with the current position.
Importantly, this figure is not an automatic award. It represents the potential compensation in this particular scenario, based on the assumptions above and an assumed 18-month period of loss.
The actual award in an individual case could be considerably lower or higher depending on the circumstances.
Scenario 3: An employee with 14 months’ service
The same principle applies to employees who have been with an organisation for just over a year.
Under the current rules, the employee would generally fall short of the two-year qualifying period:
Current rules: £0
Under the expected new rules:
Basic award: £1,126.50
Compensatory award: £106,925
Total: £108,051.50
That’s a modelled difference of £108,051.50 compared with the current position.
Again, this represents an illustrative scenario rather than a guaranteed tribunal award.
What do these figures tell us?
The modelling highlights two important changes for employers.
For longer-serving employees, removing the compensatory award cap could substantially increase the potential financial exposure associated with a successful unfair dismissal claim.
For shorter-serving employees, the reduction in the qualifying period creates an entirely different risk profile.
An employee who currently has no ordinary unfair dismissal protection could, from January 2027, potentially bring a claim after six months’ service. If the dismissal were found to be unfair, the potential compensation could be significant, particularly where the claimant has substantial financial losses.
This makes decisions around probation, performance, conduct, capability, ill health and dismissal increasingly important.
It also reinforces the importance of following a fair and well-documented process, even where an employee has relatively short service.
Financial forecasting will become increasingly important
These reforms aren’t simply an employment law issue. They could have a direct impact on an organisation’s financial risk.
For employers, this makes it increasingly important to understand the potential cost of dismissals before making decisions.
That could include considering:
- How long the employee has been employed
- Their salary and benefits
- Their likely period of unemployment
- Whether comparable employment is readily available
- The potential value of their financial losses
- Whether the dismissal process is fair and properly documented
- Whether there are any additional claims or protected characteristics involved
The figures above are scenario-based and should not be treated as predictions of what an individual claimant would receive. Actual awards will depend on the facts of each case, including the employee’s losses, mitigation and the circumstances surrounding the dismissal.
However, they demonstrate why 2027 dismissal costs could look very different from those employers are used to planning for today.
