Latest / Howes Percival Podcast / Six months to claim: How employers can prepare for the new era of unfair dismissal
Transcript
- Nick Benton: Hello and welcome to the Howes Percival Podcast Employment Law episode. I'm Nick Benton, I'm an employment partner and today we're going to be discussing one of the most significant employment law changes we've seen in recent years and that's the reforms to unfair dismissal rights introduced by the Employment Rights Act 2025 which will be taking effect from the 1st of January 2027. Joining me today is my colleague, fellow partner Hannah Ball. Hannah welcome. Hannah: Hi Nick! Nick Benton: Hi. So Hannah, before we get into the specifics of the reforms, I think it might be helpful for listeners to understand in broad terms what the law or the current position on the law in respect of unfair dismissal. Hannah: Yeah, absolutely. think it's worthwhile just checking in with where we are today. So it's been the case for a long time that employees need two years qualifying service in order to claim unfair dismissal and that's two years continuous service. And also at present in terms of compensation for unfair dismissal, there's also a cap on what can be claimed if an employee brings an unfair dismissal claim. and that is capped at 52 weeks pay or there's also a statutory cap that changes every April that's in the region of £123,000 and both of those things have been in place for quite a significant period of time. Obviously it doesn't mean that at present employers have got carte blanche to do whatever they want over those first two years. As we well know, there's obviously still certain claims that employees can bring from day one of their employment, things like discrimination, automatic unfair dismissal, for example. But certainly at present, there is that two-year qualifying period, which means that for that period of time, there's almost a settling in period in which if an employee is dismissed, they can't pursue an ordinary unfair dismissal claim. Nick Benton: So effectively, employers have had a relatively, assuming there is no risk of assertion of discrimination or automatic unfair dismissal, whistle blowing health and safety concerns, employers have had a sort relatively low risk period to assess an employee's suitability and if appropriate, dismiss employees within that two year period. Hannah: Absolutely, I think it has been seen as a bit of a comfort blanket hasn't it for employers in which they can get to know someone, assess their suitability for the role and allow them to bed in before they obtain that unfair dismissal protection, particularly for example senior employees where it might take them a certain period of time to bed into the role and understand whether they're the right individual for that particular role. Nick Benton: So things are about to change though. So looking at the reforms, what are the key changes that employers need to be aware of? Hannah: Yeah absolutely there is certainly going to be a sea change from the 1st of January 2027 and there's been much discussion about this hasn't there. So where we landed on with this is that there's four changes. I'll talk about the kind of two most significant ones first. The first is obviously going to be the reduction in the qualifying period that employees will need in order to obtain unfair dismissal protection. As I just mentioned at the moment, we've got that two year period, haven't we? And that is going to reduce significantly to just six months from the 1st of January, 2027. So employees will only need six months continuous service to be able to claim unfair dismissal. The second very significant change is the removal of that compensation cap that I just talked about. Obviously at the moment, we've got those statutory limits as to what an individual can claim. but from January 2027, those limits will disappear and a tribunal is instead going to focus on the actual losses and if those actual losses exceed what the current caps are, then an individual will be able to obtain that full amount. There is going to be no cap. There's a couple of less significant changes. One of them is that the reduction in the qualifying period for requesting written reasons will go down from two years to six months. that's entirely sensible, I guess it then brings it in line with the reduction in the unfair dismissal service. And also there was previously a bit of a loophole in the law in relation to spent convictions, whereby if you dismiss someone because they had a spent conviction, you previously had to have two years service in order to make that claim. which obviously is a nonsense if someone's doing it right at the beginning of someone's employment. So that is going to become a day one protection and that's also being brought into force. Nick Benton: Okay, so is it in terms of gaining unfair dismissal protection, will it be all employees from the 1st of January 2027 with six months continuous service? Or is that sort of six months from the 1st of January? Hannah: Yeah, was a lot of discussion about this wasn't there, what was going to happen. It is going to affect a large section of an employer's workforce overnight essentially because from the 1st of January 2027 it will be anybody that has got six months service including those within your existing workforce. So if you've got people that were taken on from the 1st of July 2026 or before they're going to have unfair dismissal protection. when we get to the 1st of January, 2027, which is why I think it's an important topic to discuss now because certainly there are things that employers can be doing to prepare for those changes now given that as you say, it's going to affect lots of people from the 1st of January, 2027. Nick Benton: So let's look at that in a bit more detail, in particular what it means for employees in practice. It seems almost obvious to say it, but it's clearly going to have an effect on recruitment and employers' practices for recruitment. Hannah: Absolutely, I think there's no doubt that it's going to do that. Unfortunately, it's going to be the case, it, that hiring mistakes could be much more costly for businesses given that they're going to have such a short period of time in which to assess if an employee is the right fit and also given that there'll be no cap on the compensation. I think historically perhaps some businesses were more prepared to take a chance on people because of the fact that you had that. period in which they couldn't claim unfair dismissal. And obviously that buffer period is, you know, being much reduced, isn't it? So I undoubtedly think that employers are going to be more cautious when making recruitment decisions. And it might also frustratingly mean that recruitment processes perhaps take longer than employers would like because of the fact that they're going to want to build extra protection into their recruitment processes, I would have thought, because Certainly, if I was an employer, I'd be wanting to make sure I've got robust selection and interviewing processes in place because clearly here what we're going to want to try and do is focus on getting recruitment right at the beginning rather than having to sort out the mistake later down the line. So yes, certainly I'd be looking at what are your selection processes? What is your process for checking references for those that you're employing, make sure you've got a thorough process in place, and also looking at whether, particularly for senior hires, there are additional assessment exercises or other practices that you might want to introduce, given you are going to have such a short period of time in which to assess their performance once they're in post. Nick Benton: I think that has to be right. think speaking to a number of clients as well, it seems as though probationary periods is an area of focus. And it's right, isn't it, that by and large employers currently are operating six-month probationary periods. mean, surely that won't continue. Hannah: Yeah, absolutely right. Certainly our experience has been that in the main, we're used to seeing six months probationary periods with often the ability to extend for a further three months or even longer and perhaps even longer than that for extremely senior hires. And that has tended to be common practice across the board, really. And I think you're absolutely right. I don't think that that should continue going forward in most cases because there's a number of risks, I think, once the law changes that will be associated with that practice. I think the biggest one is going to be the fact that if you're dismissing them right at the end of their six month probationary period, in most cases, it's going to be too late and they're going to have already obtained that unfair dismissal protection. That's particularly important if you're dismissing someone. without notice. So employers might get to the day before the end of the probationary period, realise they're about to get six months service and think, good, we'll just perhaps have that conversation we've been avoiding and dismiss them with immediate effect now and then they don't get unfair dismissal protection. And actually that's just incorrect unfortunately because there is a provision in which you have to add on an individual statutory minimum notice when you're calculating their effective date of termination which is what's critical for working out whether they've got that unfair dismissal protection and so if you are wanting to dismiss someone with immediate effect you have to add on their statutory minimum notice which is going to be a week so you will need to do that dismissal a good clear week before they reach six months service to avoid them getting those unfair dismissal rights. I think that's just something really important for employers to be aware of and even Without that risk, there's just the fact that employees may drag their heels, delay things, et cetera, et cetera. And also I think for managers, if they think they've got six months, there can be a tendency to put difficult conversations off, can't there? What if someone's off sick that last week and then we can't have a discussion with them? It's gonna make things really difficult, isn't it? So I think certainly that that is the right advice to have looking. within your organisation at those periods to look at a shorter period of time. Probably in most cases I would have thought three to four months would have been a sensible position to be in, perhaps with a short extension being offered within that, to really encourage people to look at whether that individual is the right individual for the role at an early stage. Nick Benton: It's really tricky, isn't it? It's the balance between having a long enough period to afford a proper period of time to assess performance, but not too long so that you risk falling into a period of or going beyond six months and therefore the employee obtaining the unfair dismissal rights. Another issue which is often overlooked by employers is the treatment of those employees on fixed term contracts. And it's right isn't it that actually the termination of a fixed term contract still amounts to a dismissal and therefore those on fixed term contracts beyond six months will have a situation where they have unfair dismissal rights. Hannah: Absolutely, this is another area that's being hotly debated at the moment because perhaps it wasn't something that was properly considered necessarily by employers when these changes were first talked about. You might have a fixed term contract that as you say expires after let's say seven, eight, nine, ten months and think well that's okay because that's a fixed term contract and that's just expiring so I don't need to worry about doing anything in respect of that employee. if the law has already changed and that person has over six months service, then they will have unfair dismissal protection. And therefore what you need to do before you terminate that fixed term contract is work out, okay, well, what is our fair reason for dismissing this individual and ensure that you follow a fair process before you terminate that contract. Now, I would say most commonly what you're going to see is that those contracts are going to be terminated for one of two reasons. Either redundancy, because there's no longer a need for that work, if it was work for a fixed term and that's now been completed, or SOSR. And often that might come up, for example, again, things like if there's been a maternity cover or some other form of cover and that's coming to an end, there may be a potential SOSR dismissal. But you certainly will still need to think about what the reason is for the dismissal and ensure that some kind of process is followed. And it will also be equally important to ensure that at the outset of the relationship, you're very clear with the employee about the nature of their fixed term and what the reason is for it. Because I think that'll stand you in good stead for when you then have to go through that process towards the end of the contract. I think where businesses will probably come a cropper is if They have a practice of recurring fixed term contracts that they use for things like students, because in that case, if there's an ongoing need, then it's not going to be a redundancy or an SOSR necessarily. So I think it is going to be important for employers to look now at their use of fixed term contracts and whether they remain appropriate for their business. Nick Benton: Yeah, that's absolutely right. this is all brought into sharper focus, isn't it? Because as you say, along with the changes to qualifying rights for unfair dismissal, we have the removal of the cap on compensation. So looking at that in a bit more detail, what do you say that sort of the impact of that is going to have on employers? What do they need to considering connection with that. Hannah: Yeah, absolutely. think this wasn't one of the original reforms, was it? And there was so much chatter around, it's going to be a day one right, and then we ended up on the six month period for unfair dismissal. This seemed to have of entered into the reforms by the back door, if you like, and suddenly appeared. And it is a radical change, I think, in some cases. I mean, if we have a look at what that means, certainly when someone claims unfair dismissal, the losses are still going to be assessed in the same way, aren't they? So someone will still have to show that they have got financial losses that flow from that dismissal and they will still be under a duty to mitigate those losses, won't they? So in a lot of cases, it might mean that the average awards aren't going to change significantly and lots of employees may well not be able to show that they've suffered substantial losses and they've got a new job in a relatively short period of time. But There are going to be certain categories of employee where the change is going to be really, really significant, I would have thought. And that's going to be people such as senior executives, high earners, those people that have complex remuneration structures. So they might have shares, other forms of remuneration that provide them with significant income, for example, for those individuals. their losses certainly could exceed what we used to have over the cap very, very quickly, couldn't they? And the other thing is people that have final salary pension schemes or things like that appreciate they're much less likely than when we first started out, but they still are in place. And those types of individuals could have very, very significant losses. Nick Benton: Right. Hannah: I guess the other group of people that we probably want to make sure we're looking out for is perhaps people that have got very long service and are approaching retirement and therefore will argue that they won't be able to get another job or at least another job on anywhere near the same remuneration that they were on if they're in a senior position particularly, or people that are suffering from ill health which is affecting their ability to regain new employment. those type of people I think we're going to see potentially request for much much higher awards. A lot of people are talking about football as well aren't they? We might see some very significant unfair dismissal claims from footballers but yeah let's wait and see what happens with that. Nick Benton: Certainly, I think common amongst all of this is that actually there will be increased risk for employers when they are considering a dismissal of employees, particularly those with seenior executives. And indeed, Hannah, you and I are often involved in negotiating senior exits. And presumably this new landscape is going to change how employers have to approach those negotiated exits. Hannah: Yeah, no doubt about it. think sometimes for certain organisations there was a great deal of pragmatism and perhaps a commercial approach taken with senior individuals where their only real claim was unfair dismissal. It could be quantified very easily, couldn't it? And if they were a very senior individual and there was no desire to go through any kind of... process with that individual, sometimes the decision is taken at a senior level when the cap's in place to just quantify that risk and negotiate an exit very quickly where everybody is clear about what the cap for that claim is. That's going to go out the window, isn't it now? And so I think it is inevitably going to be much more challenging when you're looking at these senior exits and you're going to have to start thinking at a much earlier stage about what your exit strategy is and what the reason is and it's going to be you know much more important to scope out what are our performance management processes in place for senior individuals. Are we clear with them about what we're expecting and are we documenting that in in case we get into a dispute and you know do we need a separate procedure even for those senior individuals that may be appropriate depending on your organization and you know have we got senior people within the organization that are providing that honest feedback to people at an appropriate time so we don't get into a situation three years down the line where we then are trying to scrabble around with nothing looking at an exit that's potentially very expensive. And I think you'll also have to properly value that potential claim in advance of starting any type of exit negotiation so you know what you're getting yourself in for. I think what we'll also see probably is further exploration of possible SOSR dismissals in those contexts, I think, where there isn't really anything concrete in terms of performance that's been documented. It might be that we see more arguments being run about breakdown in relationships, et cetera, I think. I mean, still, you've got the issue that there's no cap, but I employers are going to have to think tactically and carefully, aren't they, about how they negotiate those exits. And also, probably having more of an eye on what's happening in the market and what other roles are available. Because I think I'd want to go into any negotiation saying, well, yes, but it's clear that we can see there's X, Y, and Z roles available that you are qualified for. And therefore we think you would be able to get employment within a short period of time. Because certainly if I was acting for the employee, that's what they're going to throw at it, aren't they? The fact that they're not going to be able to get any kind of role. So I think... I definitely would not be going into a senior exit negotiation lightly going forward and there's going to have to be clear involvement of senior management in HR at an early stage of the process. Nick Benton: I think that's right and that's certainly advice that we give to employers when actually facing unfair dismissal claims and seeking to understand the value of those claims. And the risks which we have discussed with an increased amount of employees getting unfair dismissal rights and and the increase in the cap or the removal of the cap in compensation, it has doubled down in some respects, isn't it? Because we will see more claims now or there's a longer period of risk in connection with that because the limitation period for claims has also changed, hasn't it? Hannah: That's right, we've now seen an increase in that from October, that it's now six months rather than three months for the vast majority of claims. So absolutely the background is that we're going to see here. an increase in claims, would have thought. Yeah, certainly commentary is that we're widely expecting an increase in claims following these changes, which is something employers are going to have to navigate and all the more reason to look at having robust procedures in place and training for managers now, because what we don't want to be doing always is firefighting. We want to make sure that we've got good, robust practices in place. so that hopefully we're not having to get to the point of negotiated exits as often as perhaps is going to be anticipated. Nick Benton: Prevention better than cure, So Hannah: Absolutely. Nick Benton: look, let's give a neat summary to employers in terms of what steps they can take in preparing for these changes coming into effect. Hannah: Yeah, I think I would probably focus on five things in particular. So first, what we've already covered, which is review your recruitment practices and ensure they are as robust as they can possibly be. I think that's an easy win. We need to be doing that immediately. And the second thing is if you haven't already, review those probationary periods in your contracts and make sure that you've got a shorter probationary period in place. I think that alone though isn't enough, it? Just having that shorter probationary period in but then it's not utilised and we're not doing anything with it isn't necessarily going to put us in the best possible position. So I think we need to also be as employers reviewing that probationary review process as well. So we need to make sure the managers have got regular reviews in place. I wouldn't be leaving it till month three and four. I'd be wanting something in there every month. And if you haven't already, I would be exploring, can your HR systems help managers with that? So for example, can we have reminders that are issued? Can we make sure that they have those in the diary with employees? Are we chasing them up on whether they've been done? Those types of things so that we can do everything in our power to make sure that that process is being utilized as well as it can be. And I think as part of that process, what I'd also want to be encouraging employers to do is be very clear about what that role is and what's required of that role from the outset, ideally before we're even recruiting for that role, so that we're very clear on what the objectives are and they can then be agreed and communicated with the employee. Because ultimately if you're trying to assess with the employee whether they're suitable for that role, we all need to be clear about what that role is and assess them against those objectives. So I think that would be critical. Thirdly, we just need to make sure that we're training those line managers, don't we, on all those things we've just discussed and making sure that they can be as confident as they can be in having those difficult conversations and discussions and involving HR where they need to because they are ultimately the people on the ground that are having those conversations. And they also need to fully understand the consequences of leaving it too late, don't they? and get them up skilled. think that's going to be key. Also, fourthly, look at your policies and procedures more broadly in case there is anything within your disciplinary procedures or your performance management processes or if you've got a written probationary policy. They may need updating in accordance with these changes. So I'd encourage employers to have a look at that as well. And then finally, we ultimately need to look at the workforce as it is. And if particularly we've got senior people that we are planning to exit, I would suggest we need to be looking at that sooner rather than later and seeing whether any dismissals do need to take place before the law changes, particularly with Christmas. mean, a week before the 31st of December is Christmas Eve, isn't it? So if you're scrapling around trying to get a Settlement Agreement signed at Christmas, that's not really a position that people want to be in, is it? So I think, yeah, again, the more that people can deal with it head on and look at it now, I think that's going to stand you in really good stead. Nick Benton: I think that's a very important point. Your employment lawyer will not thank you for having to work up until Christmas Eve. Thanks Hannah, that's a really helpful and I think an important list for employers. I think in summary, in terms of those preparations, those preparatory steps, act now, don't wait until later on. Hannah: Absolutely. Thank you. Nick Benton: Thank you. Well, thank everybody for listening to this episode of the Howes Percival podcast, Employment Law episode. We hope that this is useful. Do get in touch if you would like any further information on this topic or any other topics. There will be a link in the show notes to the episode. But for now and until next time, it's thank you and goodbye from me.