Sack staff and risk six figures as new laws hit small firms

              

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Small and micro‑business employers need to prepare for the new unfair dismissal landscape once the Employment Rights Act 2025 reforms come into force.

In Summary

From 1 January 2027, major reforms to UK employment law will significantly increase the risk and cost exposure for small and micro‑business employers. The most important change is the removal of the cap on unfair dismissal compensation, meaning tribunal awards will reflect actual financial loss with no upper limit. Combined with earlier eligibility for unfair dismissal rights, this creates a materially higher risk for small and micro business owners. However it will take time for it to become obvious from decisions made by tribunal panels, whether or not higher awards will become the reality.

Key Legal Changes

1. Uncapped Unfair Dismissal Awards

• The previous cap (the lower of £118,223 or 52 weeks’ pay) will be abolished.
• Compensation will be based on actual loss, similar to discrimination and whistleblowing claims.
• Higher‑paid employees or those who remain unemployed for long periods could claim and be awarded six‑figure sums.

2. Six‑Month Qualifying Period

• Employees will have the right to claim unfair dismissal protection after six months’ service, not two years.
• This applies to existing staff who have already passed six months by January 2027.

3. Longer Time Limits

• Employees will have six months (rather than three as currently) to bring most tribunal claims.

For Small & Micro‑Businesses this means:

• Higher likelihood of claims due to earlier eligibility.
• Greater financial exposure due to uncapped awards.
• More scrutiny of process, even for short‑service employees.
• Increased need for documentation, record‑keeping, and HR consistency.
• A single claim could have a disproportionate impact on cashflow and business continuity.

Next steps

1. Strengthen Probation & Performance Management

• Use structured probation periods with clear objectives.
• Document concerns early and hold regular review meetings.
• Extend probation formally where needed.

2. Follow a Fair Process Every Time

• Even for short‑service employees, follow a basic procedure:

• Investigate
• Meet
• Allow representation
• Decide
• Confirm in writing

3. Update Contracts & Handbooks

• Review probation clauses, disciplinary processes, and dismissal procedures.
• Ensure managers understand the new six‑month threshold.

4. Improve Record‑Keeping

• Keep notes of meetings, warnings, and decisions.
• Retain dismissal‑related documents for at least 12 months.

5. Train Managers

• Make sure managers understand the reforms and the new six‑month threshold.
• Train them on fair dismissal procedures.

Insurance: Consider Insurance Options to Manage the Risk

Employment Practices Liability Insurance (EPLI)

EPLI protects businesses against claims such as:

• Unfair dismissal
• Wrongful termination
• Discrimination & harassment
• Whistleblowing
• Legal defence costs
• Settlement or tribunal awards (depending on policy wording)

This type of cover becomes significantly more valuable once awards are uncapped.

UK Providers Offering EPLI

Your existing business insurer or broker

Many mainstream insurers (e.g., Aviva, AXA, Hiscox) offer EPLI as an add‑on to commercial combined policies, though availability varies. Brokers such as Romero Insurance have also highlighted the importance of EPLI given the impending reforms.

At the time of writing, the following insurers and brokers offer EPLI suitable for small businesses:

• Hiscox – EPLI available as part of business insurance packages.
• Aviva – Employment practices cover via brokers.
• AXA – EPLI add‑ons for SME policies.
• Zurich – Management liability policies including EPLI.
• Markel – Specialist SME cover including employment disputes.
• Brokers such as Romero, IC Insurance, and Livingstones – source EPLI from multiple underwriters.

Availability varies depending on your business needs and many policies require employers to take legal advice before taking action, for the cover to apply.

Make sure any policy you buy fits the needs of your business, that you don’t take out less cover than you really need to save money, otherwise any payout may fall short of the amount you claim. Remember to review you policies/cover regularly to make sure it still covers the needs of your business as it grows or changes.

The Employment Rights reforms shift the balance significantly toward employees. Small employers could feel the impact most. With uncapped awards and earlier eligibility, prevention, documentation, and insurance will be essential pillars of risk management.

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