New unfair dismissal rules take effect soon
A major change to employment legislation is set to come into force on January 1, 2027, affecting how employers manage worker probation periods, performance issues, and early dismissals. The qualifying period for ordinary unfair dismissal protection will drop from two years to just six months, meaning any employee with six months’ service on January 1, 2027, will automatically gain unfair dismissal protection overnight.
This change should be seen as an alarm bell for business owners, particularly small business owners who often manage employees without formal HR training. Many small businesses wrongly assume they have breathing room because the new rules do not formally take effect until early next year, but this assumption could lead to costly and time-consuming employment tribunal claims.
Impact on Small Businesses
Large organisations have internal HR teams, legal advisers, and established processes to manage dismissals safely and mitigate risk to the organisation. In contrast, small businesses largely rely on short-service dismissals to manage unsuccessful hires, probation failures, or cultural misfits. However, once the new rules come into effect, dismissing someone with six months’ service will carry the same unfair dismissal risk as dismissing a worker who has two years’ service today.
According to the UK government, these changes are expected to create 9,000 additional early conciliation cases and 3,000 more employment tribunal claims each year. Without proper documentation, process, and advice, employers could find themselves facing claims they never expected and might not be able to afford.
Risk Factors and Mitigation
The shortened qualifying period is only part of the story. Two other changes amplify the risk: the tribunal claim window is doubling from three months to six months, and the compensation cap is being removed, meaning awards could be significantly higher. To mitigate these risks, small businesses must rethink how they recruit, onboard, manage, and dismiss employees.
Inaction is the biggest risk to small businesses. If an employee reaches six months’ service without documented concerns, clear feedback, or evidence of support, dismissing them becomes significantly more complex. Small businesses need to be far more rigorous in how they manage probation, with a practical safety buffer to protect themselves from potential unfair dismissal claims.
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Practical steps small businesses can take to mitigate risk include reviewing and updating probation procedures, strengthening recruitment processes, improving onboarding, documenting performance concerns from day one, training managers on early-stage performance management, and updating employment contracts. Seeking HR advice early can also prevent costly mistakes.
For instance, implementing a 5-month probation period instead of the traditional 6-month period can provide a timely review process before the 6-month qualifying period, allowing businesses to address any issues before they become more complex. Additionally, conducting regular check-ins and providing clear feedback during the probation period can help identify and address performance concerns early on.
Fixed Term Contracts and Unfair Dismissal
There is another aspect to the unfair dismissal changes that carries significant risk to employers: fixed term contracts. A fixed term contract is exactly what it says – a role created for a defined period of time. However, it is still categorised as a dismissal and has the potential to be deemed as unfair. To avoid a potential case against them, employers should explicitly state in the contract that the role is for the fixed term only, stipulating why it has been created and why it will end on a specific date with no alternative position envisaged.
Small businesses are resilient, adaptable, and resourceful, and with a few practical adjustments, they can protect their business and support their employees so that they can work through the new legal environment with confidence. The window for action is already open, and small business owners should take steps now to review and update their HR processes to mitigate the risks associated with the upcoming changes.
A Call to Action for Small Business Owners
January may feel far away, but the employees who will gain protection on January 1 are already in the business today. That means the window for action is already open. Small business owners do not need to become HR experts to protect their business from a potential unfair dismissal claim, but they do need to be aware of what these changes mean and take practical steps to mitigate the risks. If unsure where to start, small business owners can reach out for guidance and support.
