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Employment Rights Act 2025 – January 2027

Calendar User Roz
Category Contracts of employment, Employee Relations, Employment, Employment Law, Employment status, HR Policy, Human Resources, Leadership, Management, People management, Probationary Period

 

The Employment Rights Act 2025 brings major changes to unfair dismissal rules and fire and rehire practices, with reforms taking effect from 1st January 2027. It may feel a long way off, but these changes will significantly shift risk for employers — so now’s the time to get prepared.

 

Unfair dismissal: what’s the current position?

  • Qualifying period: Employees currently need two years’ service to claim ordinary unfair dismissal (unless automatically unfair).
  • Compensation cap: Awards are capped at £123,543 or 52 weeks’ pay (2026/27 rates).
 
What’s changing on 1st January 2027?
Qualifying period drops to six months

This means:

  • Anyone with six months’ service or more on 1st January 2027 immediately gains unfair dismissal protection.
  • Those under six months gain it as soon as they hit that milestone after 1st January 2027.
 
Unfair dismissal compensation becomes unlimited

With the implementation of the Employment Rights Act 2025, the government is removing the cap, bringing ordinary unfair dismissal awards in line with automatic unfair dismissal and discrimination cases.

 
What does this mean for employees under two years’ service?

This group is where employers will see the biggest shift.

  • Immediate protection for many: Anyone with more than six months’ service by January 2027 will be covered straight away.
  • More employees protected sooner: A group previously considered “low risk” will now have full rights after only six months.
  • Probation and performance management must tighten: Employers won’t have two years to assess suitability anymore.
  • Higher financial exposure: With compensation uncapped, dismissing newer employees carries greater risk.
 
What should employers be doing now?
 

Strengthen probation periods

  • Set clear expectations
  • Increase check‑ins
  • Document concerns early
 

Refresh performance & conduct processes

  • Train managers on procedural fairness
  • Ensure early intervention and solid documentation
 

Reassess dismissal risk & settlement strategies

  • Unlimited compensation changes the risk profile
  • Build stronger governance around dismissal decisions
 

Update HR documents

  • Handbooks, contracts, and internal guidance must reflect the six‑month qualifying period
 

Improve record‑keeping

  • Tribunals will scrutinise process — keep clear, consistent notes

 

Fire and Rehire: Major Restrictions from January 2027

The Act also introduces strict limits on fire and rehire, responding to concerns about employers using it to force through unwanted contractual changes, or replacing employees with self-employed freelancers.

 
What’s changing?

Historically, employers could consult, dismiss, and re‑engage employees on new terms if agreement couldn’t be reached. From 1 January 2027, that flexibility becomes extremely limited.

Under the new rules:

  • Fire and rehire is only lawful if the employer can show genuine, serious financial difficulty.
  • It cannot be used for cost‑cutting, convenience, or profit improvement.

The risk:

  • Automatic unfair dismissal risk – a dismissal for refusing contractual changes will be automatically unfair unless the employer can prove genuine financial distress, and show the changes were unavoidable.
  • Replacing employees with agency workers or contractors – dismissing employees to replace them with agency staff or contractors becomes automatically unfair unless unavoidable for financial reasons.

Ultimately, fire and rehire isn’t banned, but the bar is now so high that most employers should assume it’s no longer a routine option.

 
What should employers do now?
 

Review change‑management processes

  • Prioritise consultation and voluntary agreement
  • Treat fire and rehire as a last resort in genuine financial crisis only
 

Strengthen financial & governance evidence

  • Document financial difficulty
  • Record alternatives considered
  • Clearly justify why changes were necessary
 

Stress‑test your restructuring approach

  • Identify areas where current practice may no longer meet the new legal threshold
  • Develop alternative ways to maintain flexibility

 

There are a lot of changes coming, therefore if you need support in considering how you need to adapt your practices to minimise risk once these changes come in to effect, get in touch.