Unfair dismissal is changing – why family businesses should be paying attention

From 1 January 2027, two important changes to the unfair dismissal regime will come into force. Taken together, they significantly alter the risk and financial liability for employers.

The changes are straightforward to describe, but their implications are far reaching:

• An employee will only need six months’ service to claim ordinary unfair dismissal (reduced from two years)

• The statutory cap on unfair dismissal compensation will be removed

These reforms bring unfair dismissal risk sharply into focus much earlier in the employment relationship and, for some dismissals, the cost to the employers will be at a much higher financial level than they have historically managed.

For family businesses, where decisions are often influenced by trust and close personal relationships, these changes warrant close attention and a tightening up of processes.

A much shorter runway for protection

At present, most employees must have two years’ continuous service before they can bring an ordinary unfair dismissal claim. From 1 January 2027, that threshold will fall to just six months, meaning that employees with six months of service as at that date will acquire enhanced rights overnight.

Employers will need to demonstrate a fair reason for dismissal and follow a fair and proportionate process, much earlier in the employment relationship, meaning they have far less time to assess a new recruit’s suitability for the role. This places greater emphasis on the importance of recruiting the right people, operating well-managed probation periods, and having clearly defined performance standards and capability management processes, even in the early phases of the working relationship.

For many family businesses, where new hires are often given time to settle in and learn the ropes, this represents a significant shift in approach.

Probation periods: no longer a safety net

It is currently common for employers to have a probation period of 3 -6 months, often extended where concerns arise, and to adopt a relatively light touch approach to dismissals during or at the end of probation.

Under the new regime, once an employee reaches six months’ service, they will have the right to claim unfair dismissal, regardless of whether they are still “on probation”. The existence of a probationary clause will not, of itself, enable the employer to justify the dismissal or excuse deficiencies in process. Employers will no longer be able to assume that an end of probation dismissal can be handled informally or without explanation.

For many businesses, where probation reviews are often currently undocumented or folded into informal conversations, this represents a material increase in their legal and financial exposure.

Best practice going forward is likely to include:

• Shorter probation periods of 3 months

• Extension only where genuinely necessary, and ideally by no more than one month

• Structured and documented probation reviews with clear expectations and feedback

Concerns about performance, conduct or cultural fit should be raised, evidenced and addressed properly during probation. If an employee later acquires unfair dismissal protection, employers will need a clear and defensible record to support any later decision to dismiss.

The removal of the compensation cap – a game changer for high earners

Alongside the reduction in the qualifying period, the removal of the statutory cap on unfair dismissal compensation is arguably even more significant.

Unlike discrimination claims, where compensation has long been uncapped, ordinary unfair dismissal compensation is currently limited to the lower of 52 weeks’ gross pay or £118,223.

Once the cap is removed, unfair dismissal – traditionally viewed as a relatively contained risk – may become a high value claim in its own right. This is particularly so for higher earning executives, whose potential losses will reflect not only salary but also the value of enhanced benefits such as bonuses and pension accrual, or possibly defined benefit pension entitlement. In claims for high earners, , claim values will escalate well beyond historic expectations.

Case study: when probation ends and risk begins

A third generation family owned business appoints a senior operations manager to modernise internal processes. The role carries a significant salary and enhanced pension benefits. A six month probation period is agreed.

Within the first few months, concerns emerge. Family directors feel the manager’s style is too corporate and insufficiently sensitive to existing relationships. These issues are discussed informally, but no written feedback, objectives or formal probation reviews are put in place.

At the end of month six, the business decides the “fit isn’t right” and dismisses the manager following a brief meeting, relying on the fact that they are still on probation.

From January 2027, this dismissal would fall squarely within the unfair dismissal regime. The employee has sufficient service to claim, the process is vulnerable to challenge and the compensation claimable is no longer capped. What might once have been viewed as a low risk probationary decision becomes a potentially substantial claim. Using a Settlement Agreement is likely to become more expensive too as informed employees are likely to have inflated their expectations.

Renewed focus on due process

These changes should drive a renewed emphasis on performance management, structure and consistency. Businesses will need to ensure that employment decisions are not overly reliant on personal dynamics or informal conversations. Tribunals will continue to expect evidence of fair reasons and process, even where relationships are close knit and decision making is owner led.