The Big Employment Law Shake-Up: 1 January 2027 Could Cost Employers a Fortune

Issue No. 1 | October 2026 | Free Newsletter

New dismissal rights. Bigger compensation claims. More paperwork. Is your business ready?

If you employ people, put 1 January 2027 in your diary. Preferably in red ink.

Because some of the biggest changes to employment law in years are heading your way — and employers who fail to prepare could find themselves facing expensive tribunal claims.

The Government's Employment Rights Act 2025 is changing the rules of the workplace.

And while much of the publicity has concentrated on giving employees greater protection, there is another side to the story.

What happens to the small business owner who makes an honest mistake?

What happens when a new employee turns out to be unsuitable? Or when an employer has to dismiss somebody because the business simply cannot afford to keep them?

Let's look at what's changing — without the legal jargon.

1. The two-year rule is going. Six months is the new deadline

For years, most employers have worked on a familiar principle.

An employee generally needed two years' continuous service before being entitled to claim ordinary unfair dismissal.

From 1 January 2027, that period falls to just six months.

That is a major change.

Imagine you run a small business employing eight people.

You recruit a new office manager. Four months later, you're becoming concerned about their performance.

You give them more time. You try to help. But after seven months, you decide the arrangement isn't working.

Under the old rules, an ordinary unfair dismissal claim would generally have been unavailable because the employee hadn't completed two years' service.

Under the new rules, the employee may be entitled to bring a claim.

And that means you need to be able to demonstrate a fair reason for dismissal and a fair procedure.

Our advice: Don't wait until the end of a six-month probation period to assess performance. Keep records, address problems early and make sure your employment contracts and procedures are up to date.

Remember, certain claims — including discrimination and some automatically unfair dismissals — already carry protection from day one.

2. The compensation ceiling comes off

This could be the biggest financial shock of all.

At present, ordinary unfair dismissal compensation is subject to a statutory compensatory award limit.

From 1 January 2027, that statutory cap disappears.

Consider a senior employee earning £90,000 a year.

They are unfairly dismissed and struggle to find another comparable job.

Under the new arrangements, the compensatory award will no longer be restricted by the existing statutory ceiling.

That does not mean an employee can simply demand any figure they like.

They must still establish their losses, and the tribunal will consider matters such as efforts to find alternative employment, contributory conduct and other applicable reductions.

The separate basic award rules also remain relevant.

But the potential financial exposure for employers could be considerably greater.

Our advice: Before dismissing a valuable or highly paid employee, obtain proper advice. The cost of getting the procedure right could be tiny compared with the cost of getting it wrong.

3. Your employees must be told about trade unions

Here's another change that some employers may have overlooked.

From 1 January 2027, employers will be required to provide workers with a written statement explaining their right to join a trade union.

Yes, even businesses that have never had anything to do with a union will need to consider the new duty.

The Government is preparing a standard statement, with detailed requirements to be set out in regulations.

Our advice: Don't improvise. Use the prescribed statement once the final requirements are confirmed, and keep a record of when it was supplied.

4. Restaurants, hotels and cafés — watch your tips

If your business handles tips, gratuities or service charges, another change is coming.

From January, employers will have to consult workers or their representatives when creating or reviewing a tipping policy.

They will also need to share an anonymised summary of the feedback and review their written policy at least every three years.

This is in addition to existing requirements concerning the fair allocation of qualifying tips.

Our advice: Make sure your tipping arrangements are transparent, properly documented and understood by your staff.

A disagreement about tips should never be allowed to turn into an avoidable legal dispute.

5. And don't forget — the rules have already started changing

Not everything waits until January.

Since April 2026, statutory sick pay has been payable from the first qualifying day of sickness, and the previous lower earnings threshold has been removed.

From 1 October 2026, the normal time limit for many Employment Tribunal claims increased from three months to six months, subject to the applicable rules and exceptions.

And from 30 October, employers face strengthened duties concerning workplace sexual harassment, including harassment by third parties.

That means the customer, visitor or contractor who behaves inappropriately may create a serious problem for your business.

These changes matter now, not next year.

So what should an employer do before Christmas?

Here are five sensible precautions.

1. Review your employment contracts, particularly probation and notice provisions.
2. Make sure managers understand how to deal with poor performance and misconduct.
3. Keep proper written records of warnings, meetings and performance concerns.
4. Review your dismissal and grievance procedures before the six-month qualifying period arrives.
5. Get advice before taking decisions that could expose your business to an expensive claim.

None of this means employers cannot dismiss people.

Of course they can.

Businesses must be able to operate efficiently, manage poor performance and make difficult commercial decisions.

But they need to do so lawfully.

The Talk Legal view

Employment law should not be a minefield for ordinary businesses.

Most employers want to treat their staff fairly. They also want to run successful businesses without spending their lives worrying about employment tribunals.

The problem is that a perfectly understandable business decision can become an expensive legal dispute if the correct procedures are ignored.

At Talk Legal, we believe in talking to people.

Not bots. Not automated answers.

Real conversations about real problems.

We listen, ask questions and examine the relevant papers before giving our initial view, often in writing and completely free.

And if you need ongoing employment support, we can discuss the options available.

Serious about your case. Determined to win.

Have an employment problem? Let's talk.

Request your free initial assessment. No obligation to instruct us. No fee unless you agree in writing.

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The Legal Brief is published by Talk Legal. This article concerns employment law in England, Wales and Scotland and reflects the announced changes as at 30 October 2026. Future commencement dates and detailed requirements may change. It provides general information rather than advice on individual circumstances. Talk Legal is not regulated by the Solicitors Regulation Authority.