The Employment Rights Act 2025 represents one of the most significant shifts in UK employment law for employers in years. Several reforms are being phased in across 2026 and 2027.

We sat down with Michelle Last, Partner at Keystone Law and thought leader on UK employment law to discuss some of the most significant changes which are due to come into effect from 1st January 2027:

• the qualifying period for ordinary unfair dismissal protection will reduce from two years to six months
• the compensatory award cap for unfair dismissal will also be removed.

Michelle argues that these changes, coupled with the relative ease of filing a claim for disgruntled ex-employees, due to the use of AI, means that some businesses are potentially facing huge financial risk and disruption over the coming year unless they take action now.

For employers, the practical message is: hiring, onboarding and early-stage performance management are becoming higher-risk commercial decisions. Businesses will have less time to assess whether a new hire is right, less room for informal management and potentially greater financial exposure if a dismissal is mishandled.

What this means for businesses

As discussed in our podcast, employment law reform cannot be regarded as solely an HR issue – it now needs to be treated as a hiring, leadership and business risk issue.

For years, many employers have operated with a two-year window before most employees could bring an ordinary unfair dismissal claim. That created a degree of flexibility, particularly where a hire was not working out, performance concerns were emerging or cultural fit was unclear.

That window is narrowing dramatically. From January 2027, employers will need to make better decisions much earlier. Probation, onboarding and management conversations will carry far more weight.

Michelle Last’s warning is that employers who wait until the reforms come into force will be in a weaker position. Her advice is to review the current workforce now, especially employees with shorter service, and decide who the business genuinely wants to take forward into 2027.

The new six-month risk window

The biggest operational change is the move from a two-year qualifying period to six months.

That means the first six months of employment will become the critical assessment period. Employers will need to know, much earlier, whether someone is performing well, behaving appropriately and meeting the standard required.

This changes the role of probation. Probation can no longer be a loose or passive process. It needs structure, evidence and clear decision-making.

In practical terms, employers should be asking:

• Is the person meeting the standard expected?
• Have objectives been clearly set?
• Have concerns been raised early enough?
• Has feedback been documented?
• Are managers confident enough to have difficult conversations?
• Is there enough evidence to support any decision to extend, confirm or terminate employment?

Six months is not long. If concerns only surface formally at month five, the employer has very little time left to act.

Compensation risk is increasing

The removal of the compensation cap is another major issue. At present, unfair dismissal compensation is capped, but from January 2027 that cap will be removed.

This is especially relevant for senior hires, highly paid employees and commercially critical roles. A bad hiring decision at leadership level has always been expensive, but the legal exposure may now become materially higher too.

That makes the quality of hiring decisions more important. Employers cannot rely on post-hire flexibility to fix poor selection, weak assessment or unclear expectations.

AI may increase employee confidence to bring claims

One of the strongest insights from the podcast is the role of AI.

Michelle Last argues that employees are already using AI tools to understand their rights, draft documents, submit subject access requests and start ACAS or tribunal processes. Her view is that this is contributing to a rise in claims and may accelerate once unfair dismissal rights become easier to access.

Official tribunal data shows the system is already under pressure. In Q3 2025/26, employment tribunals received 23,000 claims, with 523,000 open claims at the end of the quarter.

The employer takeaway is not that every claim will have merit. It is that employees have more access to information, more tools to escalate disputes and more confidence to challenge process failures.

Process failure will become more expensive

A recurring theme in the podcast is that many employers are still managing people informally and that creates risk.

The issue is not always malicious behaviour or obviously unfair treatment. Often, risk comes from everyday management gaps:

• Poor onboarding
• No reference checks
• Vague objectives
• No written probation reviews
• Managers avoiding difficult conversations
• Probation extensions without clear evidence
• Performance concerns raised too late
• No written record of feedback

In the new environment, these gaps will matter more. Line managers are now central to risk management and these reforms will push more responsibility onto them.

Managers will need to know how to:

• Set clear expectations
• Review performance regularly
• Identify conduct concerns early
• Give honest feedback
• Document conversations
• Escalate issues quickly
• Treat employees consistently
• Avoid letting concerns drift

This is particularly important in high-growth businesses where managers may be inexperienced, stretched or promoted quickly without formal management training.

The danger of extended probation

One of the clearest practical warnings from the podcast is around repeated probation extensions.

If an employer is repeatedly extending probation, that usually indicates the person has not met the required standard. Under the current regime, some employers may have allowed that situation to continue. Under the new regime, that becomes much riskier.

The key message: employers need to make cleaner decisions earlier.

Why onboarding and reference checking matter more

The report should strongly connect the law changes to hiring discipline.

Michelle highlights that many employers still fail to complete proper reference checks before someone starts. In the new environment, that becomes a bigger problem.

For employers, this means recruitment needs to be more rigorous before offer stage.

That includes:

• Clear role definition
• Structured interview criteria
• Proper assessment of capability
• Stakeholder alignment
• Formal referencing
• Informal market insight where appropriate
• Realistic discussion of expectations
• Clear onboarding plan before start date

Interim and temp-to-perm hiring may become more attractive

We also touched on a likely shift towards interim, temporary and temp-to-perm hiring models to mitigate risk.

Employers may want to see how someone performs in practice before committing to a permanent hire. This is especially relevant for senior finance, technology and leadership roles where chemistry, delivery style and stakeholder management matter.

However, commercially, interim hiring can still help employers manage uncertainty, bridge gaps and test the shape of a role before making a long-term appointment.

What employers should do now

• Review the current workforce
• Tighten contracts and policies
• Train line managers
• Make probation structured
• Improve documentation culture
• Strengthen hiring processes
• Consider interim hiring where appropriate

The Employment Rights Act 2025 will not stop employers from hiring. But it will make poor hiring, weak onboarding and informal management much harder to defend.

The businesses that adapt early will not only reduce legal risk. They are also likely to make better hiring decisions, manage performance more effectively and build stronger teams.

For employers, the message is simple: the first six months now matter more than ever.