The UK’s approach to unfair dismissal is about to change in a way that could catch small businesses off guard. From January 1, 2027, employees with six months of service will gain unfair dismissal protection, down from the current two-year threshold. For many small and medium-sized enterprises (SMEs), this shift will disrupt long-standing practices around probation periods, performance reviews, and early terminations, while increasing legal exposure.
Most small business owners handle human resources informally, often relying on experience rather than structured processes. The changes, introduced under the Employment Rights Act, mean a reassessment of how dismissals are managed may be needed. The qualifying period for unfair dismissal claims is now six months, meaning any employee who reaches that milestone on or after January 1, 2027, will qualify for protection-regardless of their hire date. Many SMEs wrongly assume they have breathing room because the new rules do not formally take effect until early next year, but employees with six months’ service on January 1 2027 will automatically gain unfair dismissal protection.
New rules expand employer liability risks
The changes extend beyond the shortened qualifying period. Two additional modifications increase risks for employers:
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- The deadline for filing a tribunal claim will double from three months to six months.
- The compensation cap for unfair dismissal claims will be eliminated, allowing for potentially larger awards.
These adjustments create greater legal vulnerability for businesses that frequently rely on short-service dismissals. Government estimates suggest the reforms could result in 9,000 more early conciliation cases and 3,000 additional employment tribunal claims annually. For SMEs already operating with limited resources, even one claim can disrupt operations, deplete finances, and create operational stress.
Probation periods have traditionally been a safety net, but from January 2027, they will need to be managed with far greater care. Without documented performance concerns, structured feedback, or evidence of support, dismissing an employee with six months of service could expose businesses to legal challenges.
SMEs face higher stakes without HR support
Small businesses face higher stakes than larger organizations, which typically have dedicated HR teams and legal support. SMEs often lack formalized dismissal procedures, making them more susceptible to claims. The new rules mean routine decisions, such as ending probation or addressing performance issues, will soon carry full unfair dismissal liability.
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However, targeted adjustments to HR practices can mitigate risks. Recommended steps include:
- Shortening probation periods to five months to complete reviews before the six-month threshold.
- Implementing structured check-ins, documented feedback, and clear expectations during probation.
- Strengthening recruitment processes to reduce early dismissals, including improved job descriptions and clear person specifications, probing interview questions, and other pre-employment checks completed before employment commences.
- Enhancing onboarding with clear role expectations, training, and regular touchpoints in the first 12 weeks.
- Documenting performance concerns from day one, even in brief notes, to create a paper trail if dismissal becomes contested.
- Training managers on early-stage performance management.
- Updating employment contracts to align with the new legal requirements, including probation terms and review points.
- Seeking early HR advice to identify and address potential risks before they escalate.
Fixed-term contracts now require stricter scrutiny
A critical but often overlooked risk involves fixed-term contracts. While these roles are time-bound, they remain subject to dismissal protections. Employers should explicitly state in the contract that the role is for the fixed term only (start and end dates) as well as stipulating why it has been created, (such as maternity cover or a specific project), and why it will end on a specific date with no alternative position envisaged. Without these details, a tribunal could rule the termination unfair, even if the contract was intended to be temporary. This applies to contracts signed before or after January 1, 2027, meaning businesses should review both existing and future agreements.
The expanded claim window adds further complications. Previously, employees had three months to file a tribunal claim, limiting business risk. Now, with six months to bring a case, former employees have more time to gather evidence, seek legal advice, and pursue claims—even if the initial decision appeared justified. This longer window means businesses must assume every dismissal could be challenged months later. For SMEs, this is particularly problematic because disputes may arise after key documents or witnesses are no longer accessible. The solution is to maintain thorough records from the hiring stage, including performance reviews, feedback notes, and disciplinary actions, even if they seem minor at the time.