UK Employment Rights Act 2025: the Unfair Dismissal Cap Is Gone, What Employers Must Do Now

The UK Employment Rights Act 2025 has fundamentally changed the landscape of unfair dismissal litigation. The first tranche of the Act began to be brought into force on 6 April 2026, introducing a series of day-one employment rights and other measures, with the statutory cap on compensatory awards scheduled to be removed from 1 January 2027. Certain reforms, including the zero-hours guaranteed-hours obligation and the extension of tribunal time limits, are being commenced separately (the tribunal time-limit extension is expected from October 2026 and the guaranteed-hours obligation is expected to take effect in 2027). This article sets out the key changes, explains the legal and financial implications, and provides a priority-ordered employer audit checklist designed for immediate use by in-house counsel and HR teams.

Quick Summary: What the Employment Rights Act 2025 Changed on 6 April 2026

The Employment Rights Act 2025 (c.36) received Royal Assent in 2025. Its provisions are being brought into force in stages through commencement orders. The first tranche, effective 6 April 2026, delivered the following headline changes, as confirmed in the GOV.UK overview factsheet:

• Removal of the unfair dismissal compensation cap. The current cap on compensatory awards — the lower of 52 weeks’ gross pay or £123,543 (as of 6 April 2026) — will be removed from 1 January 2027. Tribunals will then be able to award compensation reflecting the employee’s actual financial loss. The basic award will remain unchanged.
• Day-one rights for specific leave. Employees are now entitled to paternity leave, parental leave, and Bereaved Partner’s Paternity Leave from the first day of employment, without any qualifying service period. The right to request flexible working became a day-one right under separate legislation effective from 6 April 2024.
• Zero-hours guaranteed-hours trigger. Workers on zero-hours or low-hours contracts who work regular hours over a reference period (currently anticipated to be 12 weeks, with final detail to be set by regulations) are expected to be entitled to an offer of a guaranteed-hours contract reflecting those hours, with this obligation expected to take effect in 2027.
• Tribunal time limits extended to six months. The limitation period for presenting most employment tribunal claims will be extended from three months to six months. This change is expected to take effect from October 2026.

These changes apply to all employers in England, Wales, and Scotland (employment law is largely reserved at Westminster). Northern Ireland has a separate employment law regime and employers there should take separate advice. As ACAS guidance confirms, every UK employer, regardless of size or sector, must review existing contracts, policies, and settlement practices in light of these reforms.

What the Removal of the Unfair Dismissal Compensation Cap Means

For decades, the compensatory award for unfair dismissal was subject to a statutory ceiling. That cap functioned as a de facto upper limit on employer exposure in tribunal proceedings and heavily influenced settlement strategy. With the unfair dismissal compensation cap due to be removed under the Employment Rights Act 2025 from 1 January 2027, the calculus will change significantly.

How Tribunals Will Assess Uncapped Compensation

Under the amended framework, tribunals will assess compensation on the principle of restitution, awarding a sum that, so far as possible, puts the claimant in the position they would have been in had the dismissal not occurred. The key heads of loss that tribunals are likely to consider include:

• Immediate loss of earnings. Salary, contractual bonuses, commission, and benefits (such as private healthcare, car allowance, and share-based incentives) from the date of dismissal to the date of the tribunal hearing.
• Future loss of earnings. Projected salary and benefits for the period the tribunal considers it will take the claimant to find comparable employment, or, in the case of older or specialised employees, potentially to retirement.
• Pension loss. The loss of employer pension contributions and, where applicable, the loss of final-salary or defined-benefit pension entitlements, which can represent very large sums for long-serving senior employees.
• Loss of statutory rights. A conventional sum reflecting the loss of accrued statutory employment rights.
• Employers assessing compensation exposure should note that, under existing case law, the burden of proving a claimant has failed to mitigate their loss rests with the employer — this principle will continue to apply in uncapped awards.

Industry observers expect that uncapped unfair dismissal remedies will, in practice, increase average compensatory awards significantly, particularly for high-earning employees with long service or niche skill sets where re-employment prospects are limited.

Practical Risk Scenarios Employers Must Prepare For

The removal of the cap does not affect every dismissal equally. The cases presenting the highest financial exposure include:

• Senior executive dismissals. A C-suite executive earning £250,000 per year, with deferred bonuses and a defined-benefit pension, could generate a compensatory award running into seven figures if the tribunal finds the dismissal was unfair and future loss extends several years.
• Redundancies with a discrimination element. Where an unfair dismissal claim is combined with a discrimination claim (which was already uncapped), the removal of the unfair dismissal cap eliminates the practical advantage employers previously had in isolating the unfair dismissal head of claim.
• Long-service employees in declining industries. Workers aged 55+ with 20 years’ service in a shrinking sector face a demonstrably limited labour market. Tribunals could award future loss to retirement.

The likely practical effect is that employers will need to factor materially higher potential awards into their litigation risk assessments, settlement budgets, and insurance arrangements.

All Employment Rights Act 2025 Changes Already in Force from 6 April 2026

The removal of the compensation cap is the headline change, but that removal is scheduled for 1 January 2027. The first commencement tranche delivered several other significant reforms on 6 April 2026 that require immediate employer action. The GOV.UK factsheet confirms the scope of the first tranche and commencement timings.

Day-One Rights: Paternity, Parental, and Bereaved Partner’s Paternity Leave

Previously, employees needed to satisfy a qualifying period of continuous service, typically 26 weeks, to access paternity leave and ordinary parental leave. Bereavement leave (introduced in 2020 as parental bereavement leave) also carried a qualifying period. The ERA 2025 removes these qualifying periods entirely. From 6 April 2026:

• Paternity leave is available from day one of employment.
• Parental leave (up to 18 weeks per child) is available from day one.
• Bereaved Partner’s Paternity Leave — a new right providing eligible partners with up to 52 weeks of unpaid leave following the death of the child’s mother or primary adopter — is available from day one.
• The right to request flexible working became a day-one right under separate legislation effective from 6 April 2024.

Employers must update their employee handbooks, leave policies, and onboarding documentation to reflect these day-one rights. Managers must be trained to process requests from new starters without defaulting to previous qualifying-period restrictions.

Zero-Hours Reform: Guaranteed Hours After a Reference Period

The Employment Rights Act 2025 introduces a right for workers on zero-hours or low-hours contracts to receive an offer of guaranteed hours if they work regular hours over a reference period (currently anticipated to be 12 weeks, with final detail to be set by regulations). The guaranteed-hours offer must reflect the hours actually worked during that period. Workers are not obliged to accept the offer, but employers are obliged to make it. This obligation is expected to take effect in 2027.

This provision requires employers to maintain accurate records of hours worked by zero-hours staff and to implement a monitoring system that flags when the anticipated 12-week threshold is reached. Failure to make the required offer will be enforceable through employment tribunal proceedings.

Tribunal Time Limits Extended to Six Months

The standard limitation period for presenting most employment tribunal claims will be extended from three months to six months. This extension is expected to take effect from October 2026. This means employees will have twice as long to lodge claims for unfair dismissal, unlawful deduction of wages, and most other statutory employment rights. Breach of contract claims remain excluded from this extension.

The extension is expected to apply to claims arising from acts or omissions occurring on or after the commencement date set by the relevant commencement order.

Which Employees Get Protection from Ordinary Unfair Dismissal Now, and What Is Coming in 2027

Protection from ‘ordinary’ unfair dismissal will become available after six months of service (reduced from two years), effective 1 January 2027. The government had originally considered day-one protection but adopted the six-month compromise before the Act received Royal Assent.

Immediate Employer Unfair Dismissal Risk Audit: Step-by-Step Checklist

Given the scale of the Employment Rights Act 2025 changes, employers should conduct a structured risk audit without delay. The following checklist is ordered by priority, highest-impact actions first.

1. Review Employment Contracts

• Examine termination clauses, notice provisions, and redundancy terms in all current contracts.
• Ensure that contractual references to benefits, pension contributions, bonuses, commission, and share-based incentives are precise and current, these will form the basis of tribunal loss calculations if claims are brought.
• Flag any “entire agreement” or “sole remedy” clauses that may be unenforceable against statutory rights.
• Update restrictive covenant clauses where necessary, a well-drafted covenant can limit the period of future loss a tribunal will award.

2. Audit Settlement Agreements and Compromise Terms

• Review standard settlement agreement templates to ensure release language is comprehensive but does not attempt to contract out of statutory rights that cannot lawfully be waived.
• Reassess the adequacy of financial consideration, with uncapped awards now possible, settlement offers that were previously considered generous relative to the cap may be inadequate.
• Confirm that all settlement agreements comply with the requirements set out in ACAS guidance, including the requirement for independent legal advice.
• Review confidentiality and non-disparagement clauses for enforceability and proportionality.

3. Strengthen Disciplinary and Redundancy Procedures

• Confirm that disciplinary procedures comply with the ACAS Code of Practice on Disciplinary and Grievance Procedures, a failure to follow the Code can result in an uplift of up to 25% on any tribunal award.
• Ensure every dismissal is supported by contemporaneous, documented evidence of the fair reason for dismissal and the process followed.
• Conduct a mock audit of recent dismissals to identify process gaps.
• Implement a mandatory sign-off protocol requiring HR and legal review before any dismissal of an employee earning above a defined threshold.

4. Review Insurance Coverage

• Notify your employment practices liability (EPL) insurer and your directors’ and officers’ (D&O) insurer of the change in law.
• Check whether policy limits, excess levels, and exclusions remain adequate in light of uncapped awards.
• Request confirmation from brokers that claims arising after 1 January 2027 are covered under current policy wording.

5. Deliver HR and Management Training

• Run refresher training for all line managers and HR business partners on fair dismissal processes, investigations, capability procedures, and contemporaneous record-keeping.
• Emphasise the heightened financial consequences of procedural failures under the new uncapped regime.
• Include scenario-based training that reflects the practical risk scenarios outlined above.

6. Reassess Settlement Strategy

• Update the organisation’s settlement authority framework, the financial thresholds at which legal counsel must be instructed and at which board or senior leadership approval is required.
• Factor the removal of the cap into cost-benefit analyses for defending claims versus settling early.
• Consider alternative dispute resolution (ADR), including ACAS early conciliation and mediation, as a cost-effective alternative to tribunal proceedings where risk exposure is high.

7. Audit Zero-Hours Roster Records

• Identify all workers currently on zero-hours or low-hours contracts.
• Review the previous 12 weeks of roster data to determine whether any workers have been working regular hours that would trigger the guaranteed-hours offer obligation.
• Implement an automated monitoring system that flags the anticipated 12-week threshold going forward.

8. Update Flexible Working and Day-One Leave Policies

• Amend the employee handbook to reflect day-one entitlements to paternity leave, parental leave, and Bereaved Partner’s Paternity Leave.
• Ensure the onboarding process informs new employees of their rights from the first day.
• Note that the right to request flexible working became a day-one right under separate legislation effective from 6 April 2024; update internal guidance accordingly.

9. Create a High-Risk Dismissal Playbook

• Define trigger thresholds, for example, any proposed dismissal of an employee earning above £80,000, any employee with more than ten years’ service, or any case involving a potential discrimination element, that require mandatory legal involvement before a decision is made.
• Document the playbook and distribute it to all HR business partners and senior managers.
• Schedule quarterly reviews of the playbook in light of emerging tribunal case law.

Practical Drafting and Settlement Considerations Under the UK Employment Rights Act 2025

The removal of the unfair dismissal compensation cap demands that employers revisit the standard contractual and settlement language they have relied on. The following redline suggestions should be treated as starting points for review with employment law counsel.

Settlement Agreement Release Clauses

Settlement agreements should include a release clause that is comprehensive yet narrowly framed. Avoid blanket waivers that purport to cover claims the employee could not reasonably have been aware of at the date of signing. Ensure the agreement expressly lists the claims being settled, including unfair dismissal, wrongful dismissal, and any discrimination or whistleblowing claims, and recites that independent legal advice has been received. Include a carve-out for accrued pension rights and personal injury claims that have not yet manifested, as required by law.

Termination Clauses in Employment Contracts

Termination clauses should clearly specify the treatment of deferred bonuses, unvested share awards, pension contributions during any notice period, and payment in lieu of notice (PILON) arrangements. Ambiguity in these provisions gives tribunals wider scope for loss calculation. A well-drafted PILON clause that expressly addresses whether PILON is taxable or tax-free can reduce dispute risk.

When to Involve External Counsel

• Any proposed dismissal where total potential exposure (salary, bonuses, pension, benefits) exceeds two years’ gross remuneration.
• Any dismissal involving a protected characteristic, whistleblowing allegation, or trade union activity.
• Any settlement negotiation where the employee is represented or has initiated ACAS early conciliation.
• Any case where the employee has indicated an intention to claim in multiple jurisdictions or under multiple statutory headings.

What Is Next: The Reduced Qualifying Period and Next Steps

Protection from ordinary unfair dismissal will be available after six months’ service (reduced from two years), effective 1 January 2027. Employers should monitor secondary legislation and commencement orders for precise implementation details and prepare to apply the reduced qualifying period once in force.

Employers should begin preparing now. The recommended readiness timeline is:

• Now (Q2 2026): Complete the audit checklist above. Ensure all existing employees are on compliant contracts and that current dismissal processes are robust.
• Within three months (by Q3 2026): Redesign onboarding processes and probation policies to anticipate the reduced six-month qualifying period. Introduce structured performance reviews within the first six months of employment.
• Within six to twelve months (by Q2 2027): Implement the high-risk dismissal playbook. Train all managers on the new initial-period dismissal process once secondary legislation is published. Conduct a full policy review and update the employee handbook.

Timeline of Key Employment Rights Act 2025 Legislative Dates

Date
Change Enacted
Employer Impact

6 April 2026
First tranche in force: day-one rights for paternity leave, parental leave, and Bereaved Partner’s Paternity Leave; other related measures commenced on this date. Certain measures, including the removal of the statutory compensation cap, are scheduled to commence at later dates.
Immediate need to audit contracts, settlement agreements, procedures, insurance, and leave policies.

1 January 2027 (referenced by commentators)
The removal of the unfair dismissal compensation cap and the reduction of the qualifying period for ordinary unfair dismissal to six months are scheduled to take effect on this date. Employers should verify the precise commencement dates via legislation.gov.uk as commencement orders are published.
Continue monitoring secondary legislation. Notify insurers and update litigation risk registers.

Mid-2027 (expected)
Further secondary legislation and commencement orders may be published; employers should continue to monitor developments and be prepared to update policies and procedures accordingly.
Employers must treat dismissals of short-service employees with appropriate procedural rigour once the reduced qualifying period and related measures are commenced.

Note: Employers should consult legislation.gov.uk and the GOV.UK factsheet for authoritative commencement dates. Dates marked as “expected” are based on government policy statements and may be subject to change.

Conclusion: Acting Decisively Under the UK Employment Rights Act 2025

The UK Employment Rights Act 2025 represents the most significant shift in unfair dismissal law in a generation. With the compensation cap due to be removed from 1 January 2027, new day-one leave rights in force, the zero-hours guaranteed-hours obligation expected in 2027, and tribunal time limits lengthened, every employer in the United Kingdom must act now. A structured audit of contracts, settlement templates, disciplinary procedures, and insurance coverage is not optional, it is an urgent risk-management priority. Employers who need guidance navigating these reforms should consult a qualified employment law specialist without delay.

This article is provided for general information only and does not constitute legal advice. Employers should seek independent legal counsel tailored to their specific circumstances.

Need Legal Advice?
This article was produced by Global Law Experts. For specialist advice on this topic, contact John Hayes at Constantine Law, a member of the Global Law Experts network.

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