At the end of last year, the UK government passed an Act that – from 1 January 2027 – will dramatically increase the cost of employment, and of terminating employment unfairly. Introduced as part of its mission to “make work pay”, the Employment Rights Act 2025 brings together a broad package of reforms affecting millions of workers, from changing flexible working processes to guaranteed hours for zero-hours staff, alongside significant changes to how unfair dismissal rights will operate. Parliament finally approved the Act in December 2025, and implementation of the Act’s various – and huge – changes are expected from 2026 onwards; however, its impact and trajectory is already shaping conversations in boardrooms and HR teams across the country.
As leading employment lawyer, Dan Begbie-Clench at Doyle Clayton explained to me: “Part of the Act’s significance is that it up-ends established risk management strategies. For over a decade, the two-year qualifying period has been a long buffer for employers to assess whether someone is the right fit even though, in reality, many people leave their roles well before reaching it. So, it is little surprise that the Government’s attempt to remove that buffer, so that unfair dismissal would be a ‘day one’ right, triggered a ‘ping-pong’ match between the Commons and the Lords as the proposed law was debated.” However, eventually, the Government relented and compromised on a six-month qualifying period, saying doing so was necessary for the Bill to pass through Parliament.
“For employers, it is less about the principle of fair treatment, and more about managing risk,” – Dan Begbie-Clench, Employment Lawyer, Doyle Clayton
Although better news for employers, this joy was quickly tempered by the Government’s unanticipated and late-stage decision to abolish the limit on unfair dismissal compensation. That cap, currently set at either £118,223 or one full year’s gross pay (whichever is lower) has long helped employers to manage risk and control termination costs. However, removing it means that everyone – even senior roles on much higher salaries than the cap – will be able to pursue claims for potentially unlimited losses to salary, bonuses and other incentive payments. The possibility of higher pay outs is also likely to prompt more employees to bring claims, especially where the prospect of compensation feels more significant than the cost of defending weak or speculative cases.
The wider impact of the Employment Rights Act will be felt especially sharply in retail, healthcare and hospitality. These sectors collectively employ around ten million people in the UK, often on short-term, flexible or seasonal contracts, with employee turnover – despite having dropped by 10% this year – remaining stubbornly high. This means that most of the workforce sits inside the very window the law is trying to address.
Government analysis suggests that around six million workers nationwide will benefit from the shorter service requirement; in retail and hospitality, this is significantly higher than in other sectors.
In retail, healthcare and hospitality sectors where service is short, hours fluctuate, and staff turnover is a fact of life, removing the two-year threshold changes far more than the law – it will change the way the whole employment relationship functions.
It’s no surprise, then, that the question of how early unfair dismissal rights should apply became the central point of tension in the passage of the Act. While the original proposal for day one rights set the tone of the debate, the Government’s agreement to a six-month initial period and to uncapped compensation has moved the focus from when to what. As Dan explains: “For employees, it is straightforward – unfair dismissal protections will now come in at six months, rather than needing to have been in continuous employment with the company for two years to qualify. For higher-paid employees there will be the added benefit of uncapped compensation, which will materially improve their lot, especially in exit negotiations. For employers, it is less about the principle of fair treatment, and more about managing risk”.
Although it isn’t the day one right initially proposed, six months is still a short window. This means that hiring incorrectly will still be costly – and that employers will need to make decisions on long-term employment of employees in a shorter timeframe, pushing the spotlight onto issues such as probation periods and processes.
“Recruitment processes are being tightened so that hiring decisions are based on clearer criteria, and probation policies are being updated, with more structured check-ins for new starters.”
For workers who find themselves dismissed unfairly, however, the change could be significant. Under the current system, someone dismissed in month seven often has no recourse at all unless the reason falls into a narrow list of automatically unfair grounds. But under the Act, as Dan explains: “Employees could request written reasons for dismissal earlier, access tribunals sooner and, where appropriate, negotiate settlements from a position of greater security. We also expect more unfair dismissal claims and higher value settlements with senior employees following the removal of the compensation cap.”
Although many retail, healthcare and hospitality workers still won’t meet the six-month employment period, employers are likely to have invested significant expense overhauling processes to ensure that they don’t unwittingly incur extra costs associated with the coming changes.
Dan concludes: “Naturally, this puts pressure on employers to look again at their hiring and onboarding practices. Without the two-year buffer, the emphasis switches to getting the basics right – providing tighter job descriptions, building more structure into onboarding, and ensuring probation is monitored, decisions evidenced and processes are carefully and promptly carried out.”
“In retail, healthcare and hospitality – where teams are busy and management layers are often thin – there will be a growing need to give managers the tools and confidence to handle early-stage issues well.”
In the new world, probation can no longer be treated as an informal settling-in period. Employers have less than six months to decide whether to continue the relationship, so documentation, clarity and structured feedback matter more than ever. Fixed-term contracts won’t provide the workaround some may have hoped for as the new rights follow the employment relationship, not whether the contract is described as “permanent”, “temporary” or “fixed-term”. Instead, the quality of performance management will take on new importance. Dan explains: “Employers will need to ensure that managers know how to handle performance issues at all stages of the employment to reduce risk during probation and in unfair dismissal claims – how to set expectations, record concerns and take decisions that stand up to scrutiny”.
Some organisations have already begun making adjustments. Recruitment processes are being tightened so that hiring decisions are based on clearer criteria, and probation policies are being updated, with more structured check-ins for new starters and a greater emphasis on documenting early conversations.
In retail, healthcare and hospitality – where teams are busy and management layers are often thin – there will be a growing need to give managers the tools and confidence to handle early-stage issues well. The likelihood of increased tribunal activity – in tandem with the Government extending the time limit for employees to start legal claims, from 3 to 6 months as of October 2026 – is also prompting some employers to strengthen their record-keeping and provide more training around early performance management.
In a time of increased cost pressures, and complexity, for the retail, healthcare and hospitality sectors, compliance with this new raft of legislation will add further cost and stress to already stretched teams. How will these changes impact on your business – and what measures are you already taking to prepare?
