The Unfair Dismissal Time Bomb: Why Small Businesses Must Act Now Before January 2027

There is a change coming to UK employment law that most small business owners don't yet know about — and the window to prepare is closing faster than you might think.

From 1 January 2027, the qualifying period for unfair dismissal protection will reduce from two years to just six months. This is one of the most significant shifts in employment law in a generation, and if you employ or plan to hire people this year, it will affect you sooner than you expect.

What Is Changing — and When?

Currently, an employee needs to have worked for you for two years before they can bring an unfair dismissal claim at an employment tribunal. From 1 January 2027, that drops to six months.

But here is the part that catches many employers off guard: the change applies immediately to anyone who already has six months' service by that date. That means any employee you hire from 1 July 2026 onwards will qualify for unfair dismissal protection on 1 January 2027 — even if they have only been with you for six months.

In practice, the clock starts ticking from this summer.

What Does This Mean for Your Business?

Under the current rules, if you hire someone who turns out not to be the right fit, you have up to two years to make that decision with relative ease. From 2027, you will have six months — and if you miss that window, dismissing an underperforming employee will require a formal process: documented concerns, a performance improvement plan, a disciplinary hearing, and a clearly evidenced fair reason for dismissal.

Getting that process wrong could result in a tribunal claim. And to make matters more significant, at the same time as the six-month qualifying period comes in, the cap on unfair dismissal compensation will be removed entirely. Currently capped at around £118,000, awards will become uncapped — meaning the financial risk of a poorly handled dismissal increases substantially.

What Should You Be Doing Right Now?

1. Review your probationary periods

If your contracts include a six-month probationary period, that will no longer give you adequate time to act before an employee gains protection. Employment law specialists are now recommending a maximum probationary period of three to four months, giving you time to make a decision and act on it before the six-month threshold is reached.

2. Strengthen your onboarding and early performance management

The most effective way to manage this change is to get recruitment right and act quickly if concerns arise. That means clear expectations from day one, regular documented one-to-ones during the probationary period, and written records of any performance or conduct concerns as they arise — not retrospectively.

3. Update your employment contracts and policies

Your contracts, capability policies, and disciplinary procedures need to reflect this new reality. If your probationary period clause, notice periods, and performance management process are not aligned with the new rules, you could find yourself in a difficult position.

4. Train your managers

Many small business managers are not equipped to handle performance issues formally. A dismissal that feels straightforward to a business owner can still be successfully challenged at tribunal if the process was not followed correctly. Investing in manager training now is far cheaper than defending a claim later.

The Good News

You have time — but not a lot of it. If you hire from July 2026, those employees are already within scope. The businesses that prepare now, by tightening their recruitment, probationary processes, and early performance management, will be in a far stronger position than those who wait until the law changes to think about it.

This is precisely the kind of change where having experienced HR support in your corner makes a real difference — not because the process is impossible to manage, but because the stakes of getting it wrong have never been higher.

People & Compliance helps small businesses prepare for employment law changes with practical, straightforward HR support — no jargon, no unnecessary complexity. Book a free 30-minute consultation and find out what you need to do before January 2027