Unfair dismissal and the Employment Rights Act: How to manage performance from January 2027

Performance management is the main priority for HR and business leaders for the coming year according to the Freeths Employment Survey 2026.

With the rules around unfair dismissal introduced in the Employment Rights Act coming into force in January 2027, employers are right to focus on getting performance management right.

Our Employment law experts Fergus Currie, Matt McBride and Melanie Stancliffe outline what the changes mean for managing performance.

Expect more tribunals seeking more money

From 1 January 2027, protection from unfair dismissal will become a right after six months of being in a job, and the limit on compensation for unfair dismissal of £123,543 will be removed. Government calculations suggest that the reforms will result in a 6% increase in the number of claims, but these numbers may be on the low side. The cap on compensation being removed will have a very significant impact: claims are less likely to settle because of increased expectations of compensation; very high earners may now be motivated to make claims; losses for employees who benefit from final salary or defined benefit pension schemes may well go beyond the current cap, as could compensation for career-long loss.

Think 25 weeks

The Employment Rights Act 1996 says that an employee is entitled to add their statutory minimum one week's notice period to their dismissal date if they haven't received notice. Instead of six months, think 25 weeks and adjust your probationary periods accordingly.

Get the balance right

Effectively managing employees within their first 25 weeks of employment and creating a welcoming culture is a delicate balancing act. You want people to enjoy working with you and to stay, so beware managing employees so oppressively that you end up destroying the culture within your business. Train managers to achieve that balance.

Comply with the ACAS code and follow your procedures

You need a fair reason to dismiss and to follow a fair process. It’s really important to know what the employment contract and any relevant internal policies say about the process you should follow; tribunals will often look at these to see what the expectation was. The ACAS code of practice is the minimum threshold for a fair process. Failure to follow the code can lead to a finding of unfair dismissal and result in an uplift of compensation of up to 25%.

Understand the situation

Know what you're trying to achieve before undertaking any process. Is there is a real performance issue? Is there an alternative to performance management: could you get the employee back on track in a less formal way? Is this process a means to an end: are you trying to manage them out or make sure that any performance concerns would be taken into account in a redundancy process? Never forget that there could be underlying reasons for poor performance. Investigate these before actively managing performance.

Set clear targets

Clarity is key in performance improvement plans. Targets should be specific, measurable, achievable, relevant and timebound (SMART). Be aware that tribunals and employees are most likely to criticise employers over how achievable targets are and the timescales set. Tribunals will focus on what is reasonable in the circumstances, so link timescales to a natural part of the business cycle or the duration of a particular phase of a project.

Manage grievances

It's not uncommon for employees to raise grievances when faced with being performance managed. You should pause the process when there's an alleged conflict of interest, bias, selective evidence, or possible discrimination. Pausing doesn't mean that the performance issue disappears, but it allows you to protect the integrity of the process so the outcome is defensible.

Make reasonable adjustments for disability

Take care about treating disability-linked underperformance as pure capability. The legal risk can escalate quickly, so get medical and occupational health advice early to identify the issue and any adjustments.

Handle absence

Performance management should be a collaborative process, but sometimes an employee is absent. An employee can be dismissed in their absence and it can be fair, but each case needs careful consideration: if the absence is for a disability, a reasonable adjustment might be needed.

Be aware of age

Age is a possible risk under the Equality Act. Avoid assumptions, for instance that someone is slowing down or not tech-savvy because of their age, and focus on performance outputs. If you use age-linked criteria such as experience thresholds, document the legitimate aim and why less discriminatory alternatives won't work.

Manage senior management

Historically, performance management at a senior level has been resolved in the majority of cases by a settlement agreement. Unlimited compensation may well change the landscape and employers might have to follow more formal processes. Get as much clarity as possible into contracts where possible.