On 18 December 2025, the Employment Rights Bill received Royal Assent becoming the Employment Rights Act 2025. The Employment Rights Act 2025 introduces more than 30 reforms to employment legislation in England, Scotland and Wales.
In a significant and welcome development for employers, in December 2025, the Government backed down on its original proposal to introduce day-one unfair dismissal rights under the Employment Rights Bill, following campaigning by FSB. Instead, the Act reduces the qualifying period to just six months for unfair dismissal rights and introduces a major change to how compensation for unfair dismissal is calculated.
Please note, however, timescales for measures introduced under the Act are subject to change. The FSB External Affairs team has been working hard to mitigate the effect these changes will have on small employers.
What’s changing?
Three key changes will apply and these are likely to take effect from 1 January 2027:
1. Shorter qualifying period for unfair dismissal claims
The current two-year qualifying period for employees to claim ordinary unfair dismissal will be cut to six months. This means employees will be able to bring unfair dismissal claims much earlier than before, increasing legal risk during probationary periods and early employment. For example, if as expected the reduction to qualifying periods takes effect on 1 January 2027, anyone employed before 1 July 2026 will gain protection against unfair dismissal on 1 January 2027. Those employed after 1 January 2027 will gain protection once they have been employed for six months from that date.
2. Removal of the cap on unfair dismissal compensation
The cap on compensatory awards for unfair dismissal is also removed. At present, compensation is limited to the lower of:
- 52 weeks’ pay, or
- £118,233 (Great Britain cap)
It is anticipated that the entire removal of the cap on compensatory awards for unfair dismissal will also apply from 1 January 2027. From this date, tribunals will be able to award compensation based on actual financial loss, even where this exceeds current limits. This change marks the most significant overhaul of dismissal compensation in decades.
3. Six-month qualifying period locked into law
The amendments to the unfair dismissal qualifying period also remove the Government’s power to change the qualifying period by regulations (as could be done previously). Any future changes will require full primary legislation, to be passed by Parliament for the change to take effect.
Why this matters for small businesses
These changes could significantly increase both risk and cost for employers:
- From 1 January 2027, employees gain unfair dismissal protection much sooner, reducing current flexibility to dismiss without following a full fair procedure during the first two years of employment.
- The removal of the compensation cap could encourage higher-value and more complex claims, particularly from very senior or specialist employees; or those who are seeking very long-term damages. The change may also lead to a higher number of more complex claims from older workers due to losses of career where they are unable to work again, or find future employment in a similarly paid job, following an unfair dismissal.
- Settlement negotiations may become more difficult and expensive for ex-employers of high earners or those claiming higher losses, as there will be no clear upper limit on potential compensatory awards.
For small businesses who typically do not have in-house Human Resources or legal teams, this increases the importance of:
- A structured recruitment process.
- Properly managed probation processes.
- Clear performance management and documentation.
- Fair and consistent dismissal procedures, including in the first year of employment.
- Taking legal advice prior to dismissing employees.
What should employers do?
With unfair dismissal rights anticipated to apply much earlier in employment (from 1 January 2027), probation periods will become more important than ever if the qualifying period for dismissal is lowered to six months. A well-run probation process helps you identify issues early, support employees properly and reduce the risk of disputes if things don’t work out.
To reduce the risk of unfair dismissal claims, it is advisable to:
1. Set the probation period in advance
While there is no legal obligation to use probation periods (and probationary periods do not have any legal status, beyond that set out in the contract), best practice is to:
- Use a probation period for new recruits (this is usually set at 3 months, or 6 months for more senior roles, or roles with a specialist skill set).
- Clearly state the probation period in the contract of employment.
- Make clear in the employment contract that:
- Confirmation of passing probation is not automatic.
- The probation period can be extended if needed.
2. Be clear about expectations from day one
Many probation failures happen because expectations were never made clear. Sometimes this is simply because it was the wrong hire.
Best practice is to:
- Set simple, measurable objectives for the probation period
- Explain:
- What “good performance” looks like; and
- key behaviours and standards expected (attendance, communication, conduct and standards of work/objectives)
3. Hold regular check-in meetings
These are usually one-to-one meetings between the employee and their line manager. You do not need formal meetings, unless you are considering issuing a formal performance or disciplinary warning, or dismissal, but failing to address issues as they arise is risky.
If problems arise, you need to show the employee was told about concerns and given a chance to improve. The temptation to delay difficult conversations increases risk.
Best practice is to:
- Hold at least:
- One check-in soon after the recruit has started in their role.
- A mid-probation review.
- A final probation review.
- Keep notes brief:
- What’s going well.
- Any concerns.
- What support or improvement is needed.
- Be specific about:
- What the issue is.
- Why it’s a problem.
- What improvement is required.
- Set a short review period (e.g. 2 weeks).
Avoid:
- Vague feedback (“you’re not quite the right fit”).
- Surprises at the end of probation.
5. Offer reasonable support and adjustments
While employers are entitled to assume the employee is competent for the role, the focus of the probation period is on assessment, not perfection, bearing in mind that the employee is new to the role and business.
Where the employee is unable to meet the required standards, both a fair dismissal process and performance review process is likely to require:
- Providing reasonable support, such as:
- Additional on-the-job training (within reason).
- Clarifying instructions.
- Adjusting workloads initially.
- If health or personal issues are mentioned:
- Take legal advice.
- Consider whether reasonable adjustments are needed (employers have an obligation to make these where an employee requires these due to a disability that affects their ability to do the job).
6. Use probation extensions if these may lead to improvement
If performance is mixed but improving, an extension can be helpful.
Best practice:
- Confirm the extension in writing.
- Explain:
- Why the probation is being extended.
- What must improve.
- How long the extension will last.
- Keep probation extensions proportionate (usually 1–3 months).
Avoid:
- Repeated or open-ended extensions.
- Letting probation drift without decisions.
7. If Probation is not passed, follow a fair process
A fair dismissal process is likely to involve:
Best practice
- Inviting the employee in writing to a meeting.
- Explaining the concerns clearly in the invitation letter.
- Allowing them to respond at a face-to-face meeting.
- Considering any explanations or mitigating factors.
- Confirming the decision in writing.
Why this matters
A basic fair process reduces the risk of:
- Unfair dismissal claims.
- Discrimination allegations.
8. Train managers (even briefly)
- Ensure managers understand:
- The importance of documenting concerns.
- How to give constructive feedback.
- When to escalate issues.
9. Keep Simple Records
You don’t need lengthy notes, just evidence of fairness (for example, bullet points confirming main points discussed and/or agreed).
Keep records of:
- Probation reviews.
- Key feedback given.
- Support offered.
- Outcome decision.
These can be short bullet-point notes.
FSB members can find template letters and documents on the FSB Legal and Business Hub for managing probation and other stages of employment and should contact the FSB Legal advice line prior to dismissing any employee.