Why Following Proper Procedures Has Never Been More Important for Employers

Recent government announcements have confirmed a major shift in employment law that could have far-reaching consequences for UK businesses.

On 16 December 2025, the Employment Rights Bill completed its passage through Parliament after the House of Lords withdrew its final amendment. This allows the Bill to progress to Royal Assent, which is scheduled for 18^thDecember. The legislation incorporates a significant government change regarding unlimited payouts for unfair dismissal.

Reports currently indicate that Ministers are set to remove the current £118,000 cap on compensation for unfair dismissal, meaning it becomes more worthwhile for higher earners to claim unfair dismissal, because they could soon receive unlimited payouts if they win their case at tribunal. Unfair dismissal as a result of industrial action is just one of the changes that will come into effect as soon as the Bill becomes law.

This forms part of a compromise deal to progress Labour’s wider Employment Rights Bill, which has been the subject of lengthy debate in both Houses of Parliament and has been on the Labour government’s agenda since their 2024 General Election manifesto. Although the change is expected to take effect on 1 January 2027, employers should pay close attention now. The potential financial exposure for mishandled dismissals will rise dramatically, even where there is no additional discrimination element, making it essential for organisations of all sizes to follow fair and consistent procedures.

What Is Changing?

At present (April 2025 to April 2026), compensation for unfair dismissal is capped at either the employee’s annual salary (52 weeks’ pay) or £118,233, whichever is lower. While most tribunal awards for unfair dismissal fall well below that limit, the cap provides an element of certainty for employers when assessing and quantifying risk.

Lord Sharpe of Epsom comments “The Ministry of Justice’s own data shows that the median award of just under £7,000 is derived from just 650 tribunal awards…The cap provides a known endpoint and encourages realism from both parties. Remove that ceiling and settlement becomes vastly more difficult. Claims run longer, positions harden and costs escalate—and tribunals, which are already overwhelmed, are left to pick up the pieces.”

Under the new law:

• The cap will be removed entirely
• Unfair dismissal claims could result in uncapped compensation
• Higher-paid employees could receive significantly larger awards than is possible under current law

In addition, the qualifying period for unfair dismissal will be reduced from two years to six months. The Labour government’s manifesto had pledged to make protection against unfair dismissal a day-one right, which still remains if there are unfair grounds, such as dismissal because of whistleblowing.

Employment specialists have warned that this shift may result in a surge of claims in an already stretched tribunal system. It should also make employers far more cautious about dismissals, restructures or performance management, especially for higher-paid, senior employees.

Why This Matters for Employers

The removal of the compensation cap – alongside the reduced qualifying period to be entitled to claim unfair dismissal – creates a new landscape for UK businesses. Even employers with strong HR processes will need to review how they manage dismissals, probation periods and ongoing staff performance. Reducing the qualifying period will require employers to have transparent, fair and reasonable approaches to probation, discipline and performance management. Even those with robust HR frameworks will need to stress-test how they manage dismissals and employee performance. This change also means that employers will no longer be able to risk manage or set a strategy based on whether an employee has a protected characteristic or not – until now, where there has been no discrimination issue, or whistleblowing issue, the employer’s risk of exposure to a large award has been lower, facilitating what some call commercial decisions and processes.

Key risks include:

• Significantly higher financial exposure if an unfair dismissal claim succeeds
• Greater pressure on HR teams to document decisions thoroughly from the outset
• More disputes of greater potential value reaching tribunal, increasing costs and management time
• Employees in senior roles holding greater bargaining power when negotiating exits, even where there is no discrimination or whistleblowing issue (claims which are already uncapped)
• Possible reluctance to recruit if employers fear long-term financial risk

Some employment commentators have noted that employers may become more “cold blooded” during probation periods, ending employment before the six-month mark to avoid perceived risks. Others warn of rushed dismissals before the law takes effect, which only increases the potential for procedural mistakes, and (again) successful claims.

The Importance of a Fair and Lawful Process

For many years, tribunals have focused as much on the outcome of a dismissal as on the process used. With the possibility of unlimited compensation, a flawed process is now an even bigger danger.

Employers should ensure:

• A clear and up-to-date disciplinary and dismissal policy
• Reasonable investigations before any decision is made
• A fair hearing and the chance for the employee to respond
• Consistent treatment of staff in similar situations
• Comprehensive notes and documentation
• Consideration of adjustments for employees with medical concerns or disabilities

Even where an employee is genuinely underperforming, tribunals can rule a dismissal unfair if steps were rushed or if expectations were unclear.

What Employers Should Be Doing Now

Although the changes are not expected until 2026 or 2027, employers should start preparing. Steps to consider include:

• Reviewing employment contracts, especially those for senior staff
• Checking all HR policies to ensure compliance with the ACAS Code of Practice as well as business culture and strategic aims
• Strengthening probation period procedures, including regular reviews well before the 6-month point
• Training managers to handle performance and conduct issues promptly, consistently and fairly
• Considering mediation or early resolution to avoid escalation
• Seeking legal advice well before dismissing long-serving or high-earning employees

The key message is simple: fairness, transparency and proper procedure matter more than ever.

FAQs

1. When will unlimited unfair dismissal compensation take effect?

The government has indicated that the change will come into force on 1 January 2027, but will be implemented on a phased basis over 2026 & 2027.

2. Will all employees qualify for uncapped compensation?

No. The government has confirmed that protection from unfair dismissal will apply after six months of service, rather than from day one as had been proposed in the Labour Manifesto.

3. Could this lead to more tribunal claims?

Many experts believe so. Removing the cap may make claims more attractive, particularly for higher-paid employees or those in lengthy disputes. Even employees without additional discrimination, whistleblowing claims, or other uncapped claims, might be more inclined to claim unfair dismissal.

4. How can employers protect themselves?

The safest approach is to follow a fair and thorough procedure for every dismissal. Clear documentation, early legal advice and well-trained managers are crucial.

Need Support With an Employment Issue?

If your business would like guidance on recruitment, managing probation and performance issues, managing dismissals, reviewing HR policies or preparing for the upcoming legal changes, our employment law team is here to help. We can advise on risk, process and best practice to keep your organisation protected.

Contact our employment law specialist, Clare Chappell, at clare.chappell@carbonlawpartners.com