More Employment Law Changes Ahead: Why SMEs Should Review Their Processes Now
Employment law reform is continuing at pace, with several important changes already in force and more to come over the next few months. The next significant milestone arrives on 1 January 2027, when the qualifying period for unfair dismissal protection reduces from two years to six months.
For many SMEs, this is one of the most significant changes to recruitment and employee management in recent years.
A shorter window to make decisions
Many employers have traditionally used the first two years of employment to assess whether someone is the right fit for the business. From January 2027, that period will be much shorter. This means it’s more important than ever to have effective recruitment processes, regular probation reviews and clear performance conversations from the outset. Waiting until the end of a probationary period to address concerns may leave little time to act appropriately.
It’s also important to remember that notice periods can affect an employee’s length of service. Where employment ends immediately through a payment in lieu of notice, statutory notice may still count towards their service. This can result in an employee reaching the six-month qualifying period without the employer realising, increasing the risk of an unfair dismissal claim.
Changes to compensation
Another proposed reform is the removal of the current cap on unfair dismissal compensation.
If implemented, employment tribunals would have greater flexibility when making awards, which could make claims more financially significant for employers. While the exact detail is still subject to legislation, it highlights the importance of following fair procedures and keeping clear records when managing employment decisions.
Don’t overlook fixed-term contracts
Another area that often catches employers by surprise is the end of a fixed-term contract. Legally, allowing a fixed-term contract to expire is still a dismissal. Once an employee has six months’ service, employers will need both a fair reason and a fair process before employment ends.
For example, if a role genuinely comes to an end because a specific project or grant funding has finished, this may provide a fair reason for dismissal. However, where several employees carry out the same role but are funded from different sources, the end of one funding stream does not automatically determine who should leave. In these situations, employers may need to follow a fair redundancy process rather than simply ending one individual’s contract.
What employers should be doing now
Although some changes are still several months away, now is a good time to review your existing employment practices and consider whether you have:
- Clear recruitment and probation processes.
- Regular performance reviews during the first six months of employment.
- Managers who understand the new timescales and legal obligations.
- Up-to-date contracts, policies and employee handbooks.
- Appropriate processes for managing fixed-term contracts and redundancies.
For SMEs in particular, early preparation can make these changes much easier to manage. Reviewing your processes now can help reduce risk, improve consistency and ensure your business is ready when the new legislation takes effect.
Finally, a reminder that our next ‘Employment Law Update’ will take place on 19th November and we will be sharing more details shortly.
For more guidance or advice please contact one of our HR business partners at [email protected] or call 01484 680098
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