Unfair dismissal and the Employment Rights Act 2025: impact assessments published

Updated government analysis has been published, providing a clearer picture of the economic and administrative consequences of the reforms set out within the Employment Rights Act 2025 (the Act), including reforms to unfair dismissal rights. The changes to unfair dismissal, which include reducing the qualifying period for protection from two years to six months and removing the compensation cap, are scheduled for implementation on 1 January 2027.

Six‑month qualifying period: expanding scope and tribunal demand

The centrepiece of the unfair dismissal reform is the reduction of the qualifying period from two years to six months. According to the government’s economic analysis, this shift will bring an additional 6.3 million employees within the scope of unfair dismissal protection.

This expansion is identified as the “largest expected impact on the existing system”. The government estimates that the change will generate around 9,000 extra referrals to Acas each year. Of these, approximately 3,000 are expected to progress to tribunal claims, with roughly 570 requiring judicial time.

While the 2024 impact assessment for “day one” unfair dismissal rights (which has now been scrapped) estimated a net direct cost to business of around £42 million per year, the government expects the actual cost of a six‑month qualifying period to be lower due to the reduced population in scope compared with a day‑one regime.

Removing the compensation cap: addressing high earners

In a significant shift for high‑value claims, the Act will remove the current cap on compensatory awards for unfair dismissal. Interestingly, the government acknowledges that it cannot reliably quantify the total impact of this change due to uncertainty about how employees and employers will respond.

Current data suggests that relatively few awards reach the existing cap. For example, in 2023/24 there were 646 awards for unfair dismissal in employment tribunals, of which only around 6% exceeded £50,000, and the median award was £6,746.

As a result, the analysis suggests that removing the cap will disproportionately benefit higher earners and individuals with limited opportunities for re‑employment. The report also highlights that small and micro‑businesses are more likely to be affected. Despite the difficulty in quantifying the impact, the government remains committed to an uncapped compensation regime and does not intend to consult further on this specific measure.

Economic benefits vs administrative burdens

While the new economic analysis highlights the direct costs being placed on businesses – estimated at around £1 billion per year for the Act as a whole—the government argues that these are modest, representing around 0.1% of total UK employment costs.

The anticipated benefits of the unfair dismissal changes include:

• Enhanced job security: 6.3 million workers gain protection significantly earlier in their tenure.
• Improved wellbeing: Earlier protection is expected to reduce worker anxiety, which may support higher productivity and better health outcomes.
• Performance management: The requirement to follow formal processes earlier may incentivise employers to invest more in effective probation and management practices.

Conversely, businesses face increased exposure to higher‑value claims and will need to review their dismissal decision‑making, documentation, and probation processes well ahead of 2027. The analysis also notes a potential risk that stronger dismissal protections could have a negative impact on hiring rates if not implemented carefully.

The road to 2027

The “direction of travel” for these reforms is now firmly set. We are not aware of any further impact assessments planned for the unfair dismissal measures. To support the transition, the government plans to convene a series of stakeholder meetings in early 2026 to gather feedback on the changes. A summary of responses will be published in 2026, and the government will consider what additional support or guidance might be needed.

Employers are advised to use this period to ensure internal procedures are operating effectively before the reforms take effect on 1 January 2027.