The Price You'll Pay for Dismissing an Employee the Wrong Way

Recent changes in the law mean you can no longer let someone go and simply assume everything will be fine. It is now easier, and therefore far more likely, that an employee will claim they were dismissed unfairly. And from January 2027, the amount they can claim becomes uncapped.

Here is what is changing, how it affects you and what you need to do to keep your business protected

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What is changing

Right now there is a limit on what a tribunal can award in most unfair dismissal cases. From January 2027, that compensation cap disappears entirely.

At the same time, the qualifying period for unfair dismissal is dropping to six months. If you hired someone on or after 1 July 2026, they will be able to bring an unfair dismissal claim once the rules change in January.

This directly affects how you hire, how you run probation and how you handle any performance or conduct issues in the first six months of employment.

On top of that, the Fair Work Agency launched in April this year. It gives employees another route to raise a complaint and seek protection. Crucially, the agency can also audit your records and processes without waiting for a worker to complain.

How the changes affect you

For small business owners, these changes mean that dismissal can no longer be treated as a quick operational decision.

Previously, the two year qualifying period gave businesses a long runway. It made it relatively easy to let someone go informally in the early stages of employment.

With employees now gaining unfair dismissal protection after just six months, even relatively new starters may be able to challenge how and why they were dismissed. And because compensation will no longer be capped, the financial risk of getting it wrong becomes considerably higher.

This does not mean you can never dismiss someone. But it does mean you will need to show that you acted reasonably and followed a fair process.

Tribunals do not just look at the decision you made. They look very closely at how you made it.

Common mistakes that create risk include:

• No clear probation process in place
• Poor or inconsistent performance documentation
• Vague feedback instead of direct, honest conversations
• Dismissing someone suddenly after issues were never formally raised
• Different employees being treated differently for similar behaviour
• Managers making emotional or rushed decisions
• No written records of meetings or warnings

The real cost of an unfair dismissal

When people think about the cost of a dismissal going wrong, they usually think about the legal payout. But a poorly handled dismissal can cost you in many other ways too.

Legal fees and HR consultancy costs. Significant management time spent gathering evidence and attending hearings. Stress and disruption for managers and teams. Lower morale among the employees who remain. Damage to your reputation as an employer. And real difficulty attracting and retaining good staff afterwards.

In some cases, employers end up settling claims simply because they do not have the documentation needed to defend themselves properly, even when they genuinely believe the dismissal was reasonable.

That is one of the most frustrating positions a business can find itself in. Being right, but unable to prove it.

What you need to do now

The businesses most exposed to these changes are usually the ones with informal processes that have grown quickly alongside the business.

Now is the time to tighten up the basics. At a minimum, you should review:

• Employment contracts and probation clauses
• Your disciplinary and grievance procedures
• How managers document performance concerns
• Whether probation reviews are actually happening in practice
• How warnings and feedback are recorded
• Whether your managers understand what a fair dismissal process actually looks like

You should also think carefully about how you handle the first six months of employment. That period now matters far more than it used to, particularly for anyone you hire from 1 July 2026 onwards.

A final thought

A good HR consultant reviews your dismissal process before you need it, not after. That means examining your documentation, your investigation steps and your decision-making to identify where things would fail under scrutiny.

And if you are already in a difficult situation, the right support helps you handle it without making it worse.

If you have dismissed someone recently, or are planning to, get in touch. We will tell you quickly whether your process is defensible and what to do if it is not.

Get in touch for a confidential chat today.

📞 0161 757 7576
📧 info@hrtoolbox.co.uk
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