Unfair Dismissal Compensation to Become Uncapped from January 2027 – What Employers Need to Know

What’s Changing?

Currently, when an employee successfully brings an ordinary unfair dismissal claim, the compensatory award is generally limited to the lower of:

· 52 weeks’ gross pay; or

· £123,543 (the statutory maximum from 6 April 2026).

However, from 1 January 2027, this financial cap will be removed altogether.

This means that an Employment Tribunal will no longer be restricted by these limits when calculating a compensatory award.

It’s important to understand that this doesn’t mean every successful claim will result in a huge payout. Compensation will still be based on the employee’s actual and reasonably foreseeable financial losses, taking into account the circumstances of their dismissal and other relevant factors.

Nevertheless, the removal of the cap creates the potential for substantially higher awards, particularly where an employee experiences significant or prolonged financial loss.

Employees Will Also Gain Protection Much Sooner

Another major change arriving on 1 January 2027 is the reduction in the qualifying service period for ordinary unfair dismissal claims.

Currently, most employees need two years’ continuous service before they can bring an ordinary unfair dismissal claim.

From January 2027, this will reduce to just six months.

This is particularly important for employers operating in industries with high staff turnover, such as hospitality, retail and leisure.

Employers will need to be much more mindful of how they manage probation periods, performance concerns and decisions to dismiss employees during their first year of employment.

It’s also worth remembering that certain dismissals, including those involving discrimination or automatically unfair reasons, can already result in claims without the employee needing two years’ service.

What Does This Mean for Employers?

For businesses, particularly smaller employers who don’t have a dedicated HR department, these changes reinforce just how important it is to have appropriate procedures in place.

Dismissing an employee shouldn’t simply be a case of deciding someone isn’t suitable for the role and telling them not to return.

Employers need to consider whether there is a fair reason for dismissal, whether the decision is reasonable and whether an appropriate process has been followed.

This could include addressing performance concerns, investigating allegations of misconduct, holding meetings, allowing employees the opportunity to respond and maintaining proper records.

Even where there is a genuine reason to dismiss someone, failing to follow a fair process can leave a business exposed to an Employment Tribunal claim.

What Should Employers Be Doing Now?

With these changes approaching, now is a good opportunity for employers to review their existing HR procedures.

Here are five areas worth looking at:

1. Review probation periods: Make sure probationary employees receive feedback, performance concerns are addressed promptly and decisions are properly documented.

2. Check disciplinary procedures: Ensure managers understand how to investigate misconduct, conduct meetings and follow a fair process before making dismissal decisions.

3. Keep accurate records: Written records of conversations, warnings, performance concerns and decisions can provide valuable evidence if an employee later challenges their dismissal.

4. Train managers: Those responsible for supervising staff should understand when an issue can be handled informally and when a more formal procedure may be necessary.

5. Seek advice before dismissing: Taking HR advice before making a dismissal decision can help identify potential risks and prevent costly mistakes.

A Particular Consideration for Hospitality Employers

In the pub and hospitality industry, staffing issues often need to be dealt with quickly.

Whether it’s an employee repeatedly failing to turn up for shifts, poor performance, misconduct or difficulties during probation, it’s understandable that publicans and managers want matters resolved as efficiently as possible.

However, with unfair dismissal protection becoming available after just six months, employers will have less time to address issues before employees gain the right to bring an ordinary unfair dismissal claim.

The key is to deal with problems early, communicate expectations clearly and maintain suitable records.

Having a fair process doesn’t necessarily mean making everything complicated or turning every minor issue into a formal HR matter. It’s about taking sensible, proportionate steps to protect both the business and its employees.

The Bottom Line

From 1 January 2027, employers will face two significant changes: employees gaining ordinary unfair dismissal protection after six months and the removal of the cap on compensatory awards.

These changes don’t mean employers can no longer dismiss under performing employees or deal with misconduct.

They do, however, make it more important than ever to ensure dismissals are fair, reasonable and properly documented.

For smaller businesses, the cost of getting a dismissal wrong could be considerably greater than the cost of getting the right advice in the first place.

Need HR Support?

At That HR Girl, we understand that running a business is demanding enough without having to navigate constantly changing employment legislation.

We provide straightforward, practical HR advice to help businesses manage employee issues confidently, remain compliant and avoid unnecessary employment disputes.

Whether you need guidance on a disciplinary matter, managing poor performance or handling a potential dismissal, we’re here to help.

Get in touch with That HR Girl for friendly, practical HR support before a small staffing problem becomes a much bigger one.

Disclaimer: This article reflects employment law developments announced as at October 2026 and relates to Great Britain. It provides general guidance and should not be treated as legal advice for individual circumstances.