Changes to unfair dismissal rights

Current position

Employees who have at least two years’ continuous service have the right not to be unfairly dismissed: an employer wishing to dismiss them must have a fair reason, follow a fair process, and the dismissal must be fair in all the circumstances. Employees in their first two years can be dismissed without giving a reason and without following any procedure and this cannot be challenged by the employee provided that the decision is not made on discriminatory or other unlawful grounds (eg. health and safety or whistleblowing).

The changes

The latest Government proposal, which has been pulled through to the final Act, is to reduce the two-year service qualifying period for unfair dismissal to six months. This is not the day one right originally proposed but retains a six month period during which an employee does not have any unfair dismissal rights. The Government will lift the cap on unfair dismissal compensation (currently set at the lower of one year’s salary or £118,223). These changes are not sure to come into effect until 2027, and the Government has committed to publishing an impact assessment on this point.

Therefore, it will still be possible for employers to dismiss employees during the first six months of employment without the risk of the employee claiming unfair dismissal. This means that during the first six months an employer retains the current flexibility to easily terminate an employee’s employment as the employer does not need to have a potentially fair reason to dismiss and does not need to follow a reasonable procedure before dismissing.

Further details are awaited as to precisely how the current cap on unfair dismissal compensation will be “lifted”.

Impact

The latest proposal waters down the original plan of making unfair dismissal a day-one right which would have impacted businesses to a much greater extent.

The change means that employers have a six-month window after employment starts where it will be very simple and low risk to terminate employment, providing that it is not a discriminatory or otherwise unlawful decision. After this initial six months, any dismissal will need to be for a permitted fair reason (misconduct, performance, redundancy, statutory illegality or some other substantial reason) and the decision – including the process followed – will need to be fair.

Timeline

It is currently proposed that this will not come in until 2027 (most likely 1 January 2027).

Employer actions now

• Employers should be reviewing current staff to determine whether any with under two years service at present are the right fit for the organisation and if not, dismissing them now may be a lower risk and cheaper option. Care should still be taken when terminating employees with less than two years service now as while unfair dismissal protection will not apply there are other potential claims that need to be avoided. Our team of specialist employment lawyers can help guide you through this.
• Employers should also review and start to tighten up their recruitment processes as once the qualifying period for unfair dismissal reduces to six months, an employer only has a six month window where there is no unfair dismissal risk to determine if the employee will be a good fit for the role. Employers should put in place robust probation reviews and consider that the rules around statutory minimum notice period means that dismissals processes should be in place by around the five month mark. HCR Law can provide practical advice and support on improving recruitment processes including manager training on recruitment.
• Once the unfair dismissal qualifying period reduces to six months, the risks of getting it wrong at the recruitment stage will be greater and so employers should also focus on improving existing staff retention. Better the devil you know and all that. HCR Law and Eagle HR can support organisations in reviewing their staff retention levels and implementing strategies and measures for improving retention rates.