What changes does the Employment Rights Act introduce?

On 18 December 2025, the Employment Rights Bill successfully received Royal Assent. Accordingly, the provisions of the new Employment Rights Act (“ERA”) will be brought into force on a phased basis, with most changes occurring in 2026 and 2027.

This represents one of the most substantial reforms to UK employment rights in over a decade, with over 15 million working people across the country expected to benefit from its modernised protections.

Importantly, Labour’s manifesto promise of “basic rights from day one” — to include paternity leave, sick pay, and protection from unfair dismissal — has been only partially realised.

It has been agreed that, as opposed to a day-one right, the ERA will amend the qualifying period for unfair dismissal claims from the current two years to six-months’ service.

In response the Government will remove the cap on compensation awards for unfair dismissal claims. This was introduced just a few weeks prior to the passing of the bill and will make unfair dismissal claims more expensive for respondent employers.

Change to the unfair dismissal qualifying period

The Government initially aimed to establish a day-one right to unfair dismissal claims. This was highly contested between the House of Commons and the House of Lords with the latter reiterating its position that a six-month qualifying period was necessary.

Ultimately, the view was taken that a qualifying period of six-months is a ‘workable package’ when viewed alongside the existing day-one rights to discrimination and automatic unfair dismissal. It is considered that this change will benefit millions of working people whilst also offering employers clarity around the role of probation periods and the need to conduct due diligence when hiring.

In support, the Trades Union Congress has stated that it was prepared to accept this concession as its priority is to ensure that workers can benefit from the aforementioned rights (such as day-one sick pay and paternity leave rights) from April 2026.

Interestingly, the Government intends for this amendment to be implemented through primary legislation. Consequently, future governments will face greater obstacles in reversing or modifying this change.

The new qualifying period is expected to apply from 1 January 2027. So, a new employee starting on 2 January 2026 will obtain unfair dismissal protection after just 12 months’ service.

Implications for employers

We expect that the forthcoming reduction in the unfair dismissal qualifying period will lead to employers changing hiring practices. Employers will no longer have a two-year safety net, meaning performance monitoring from day one will be crucial.

Employers will have just six months to decide if a new recruit is the right person for the job. After six months of employment, any dismissal, whether for poor performance, misconduct or redundancy, could result in an unfair dismissal claim.

A vigorous recruitment process will be important in order to ensure employees are a good fit for the company before they are taken on.

To mitigate risk, employers are encouraged to take the appropriate steps, which may include:

• Tightening up probationary performance management practices and documentation.
• Strengthening probationary procedures and ensuring accurate record-keeping.
• Reviewing contractual clauses regarding probation as well as disciplinary and capability procedures.
• Carrying out training for managers and senior employers to equip them to quickly tackle any concerns about performance or conduct of a new recruit.

Employers are also reminded of the current delays in the employment tribunal system. This follows the recent report by His Majesty’s Court and Tribunal System confirming that there are currently over 515,000 pending claims as of September 2025. As such, employers are reminded of the importance of accurate record-keeping. Good contemporaneous records help to mitigate the issues that may follow delays in hearing tribunal claims, such as faded memories or the departure of managers involved in the dismissal before a final hearing takes place.

Changes to the compensation cap

The ERA removes the cap on compensatory awards in successful unfair dismissal claims. Currently, for dismissals occurring from 6 April 2025, the compensatory award is limited to the lower of one year’s gross pay or £118,223. This is a significant change, meaning that unfair dismissal claims could potentially become much more expensive for employers who lose such claims, and settling these claims will likely cost more.

The removal of the cap will also significantly complicate senior employee exits. Under the previous system, employers had a clear understanding of their maximum exposure, particularly for high-value roles. In exit negotiations, offers close to or exceeding the cap often made accepting a settlement the most attractive option, even in cases of unfair dismissal. Many employees would accept a settlement for far less than their projected loss, due to the time required to secure a comparable role, as well as the impact of restrictive covenants, especially in niche industries. The capped award meant that pursuing a claim would likely not yield much more, and the costs, stress, and time involved in bringing an Employment Tribunal claim would outweigh the potential gain.

With the removal of the cap, employers now face the risk of higher, uncapped compensation awards, which could reflect an employee’s full remuneration package, including bonuses, commissions, and long-term incentives. This uncertainty will likely affect settlement negotiations, as employees may increase their expectations, and employers will no longer have a clear upper limit to guide discussions. On the other hand, this change could reduce the number of weak or complex claims, such as those involving whistleblowing or discrimination, brought solely to circumvent the unfair dismissal cap. As a result, employers may see a reduction in the overall number of claims, along with associated costs, time, and evidential burdens.

The Government has committed to conducting an impact assessment before the commencement of this change. However, it remains unclear when the removal of the cap will take effect. While the outcome of the assessment may or may not influence the Government’s intention to remove the cap, the new qualifying period is expected to apply to dismissals from 1 January 2027 (subject to confirmation), and it is reasonable to assume that the removal of the cap will coincide with this change. By contrast, the unfair dismissal basic award will remain unaffected.

Employers will need to review their disciplinary and performance management procedures in preparation for this change and ensure that managers are properly trained to handle such issues while following a fair procedure to mitigate the risk of a successful claim.

With the potential for higher compensation awards, employers may be more inclined to try to avoid dismissing senior employees altogether by carrying out performance management procedures or by following a more robust process, to strengthen the grounds for any potential dismissal before making a settlement offer. This approach would help ensure that, when the employee seeks legal advice on the settlement, there are potentially fair grounds for dismissal and a lack of merit in an unfair dismissal claim, helping to manage expectations during negotiations. Employers should ensure that the responsibilities and performance objectives for senior employees are clearly documented and that any performance concerns are addressed early on, rather than rushing into a settlement offer without a strong justification for dismissal.

Additional key changes

The ERA will introduce an extensive list of additional measures. Although the below is not an exhaustive list, employers should familiarise themselves with key changes which include:

• Significant restriction on employers’ ability to change terms of employment through “fire and re-hire”
• Extension of the time limit for the majority of Employment Tribunal claims from three months to six months
• Enhanced duty on employers to take all reasonable steps to prevent sexual harassment in the workplace
• Sexual harassment to become a protected disclosure under whistleblowing laws.
• Requirement for employers to provide a reasonable justification for the refusal of a flexible working request
• Strengthened protections against dismissal for pregnant workers and workers returning from maternity leave
• Paternity leave rights and entitlement to statutory sick pay to become day one rights, with statutory sick pay being paid from the first day of illness and available to all workers regardless of their earnings
• Creation of the “Fair Work Agency” to support employees and carry out enforcement.
• Extensive changes to trade union activity and rules
• Changes to rules surrounding zero-hours and casual workers.

We will soon explore some of these changes in more detail and provide updates on any supporting regulations as they are published, to help you stay aware of, and compliant with, the new requirements.

If you have any questions about how the Employment Rights Bill may affect your workplace, please do contact a member of our Employment Team.

This article originally appeared in Insider Media.