Monthly Highlights – UK Employment Law – January 2026

In this month’s highlights, our team summarises the latest developments in UK employment law and their implications for employers. Catch up on December’s highlights here.

Unfair Dismissal: Cap to Be Removed and Qualifying Period Cut from 1 January 2027

What Changed

Compensation for unfair dismissal

The Government has now confirmed—via its newly published Unfair Dismissal Factsheet—that the statutory cap on compensation for ordinary unfair dismissal will be abolished from 1 January 2027. At present, compensation is limited to the lower of £118,233 (this figure is revised annually) or 52 weeks’ gross pay. Starting 1 January 2027 there will be no financial ceiling, bringing unfair dismissal awards into line with discrimination and automatically unfair dismissal cases.

In a significant development, the Government has also confirmed that it will not consult with unions or employers before removing the cap.

Qualifying period reduced to six months

The factsheet also confirms that the qualifying period for ordinary unfair dismissal will be reduced from two years to six months, with effect from 1 January 2027. The Government has also clarified that employees who have already completed six months’ service by 1 January 2027 will immediately benefit from unfair dismissal protection, while those with shorter service on that date will acquire protection once they reach six months’ continuous employment.

Why these changes matter—and why the announcement is surprising

When the Employment Rights Bill was progressing through Parliament in late 2025, Ministers suggested that the Government would consult on how the removal of the unfair dismissal cap would operate, including any safeguards or transitional measures. This created an expectation among employers and advisers that further engagement might refine the reforms or introduce concessions to mitigate the increased potential liabilities for businesses.

However, the newly published factsheet confirms that no consultation will take place, and that the Government intends to proceed exactly as drafted, removing the cap entirely from 1 January 2027. This is a notable departure from earlier ministerial indications and aligns with more recent, informal signals from within Government that Ministers had become increasingly confident about implementing the changes without further engagement.

What this means for employers

These changes together amount to one of the most significant shifts in the unfair dismissal regime for decades. Removing the compensatory cap greatly increases potential financial exposure, creating far greater uncertainty in settlements and litigation. The existing cap has long acted as a stabilising mechanism in negotiations—without it, settlement values may become more unpredictable and may rise significantly.

At the same time, reducing the qualifying period from two years to six months means a much larger proportion of employees will acquire the right to claim unfair dismissal far earlier in the employment relationship. Employers will have far less time to identify and address concerns before dismissal rights attach. This raises the importance of timely, well‑documented performance conversations, robust probation processes and clear procedural fairness.

The overall effect is a material shift in dismissal risk. Employers will need stronger internal processes, earlier intervention points and more consistent management practices to manage the increased exposure.

What employers can do now

Employers should review and strengthen their probation processes. Because unfair dismissal protection will apply much earlier, decisions will need to be made sooner, with concerns identified and addressed well before an employee reaches the six‑month threshold. Diarised review points, meaningful feedback and appropriate use of probation extensions will become essential. We also strongly recommend that new‑hire contracts include at least a three‑month probationary period, supported by regular check‑ins and clear written feedback throughout that period to ensure any issues are managed promptly and effectively.

Additionally, we recommend that employers strengthen the people‑management skills of those with supervisory responsibilities. Many tribunal claims frequently arise not because the underlying reason for dismissal was weak, but because the employer failed to follow a fair, reasonable and lawful dismissal procedure. Ensuring managers are trained now in early performance management, effective communication and probation reviews is essential.

Employers who take these steps now will be in a much stronger position when the new regime takes effect. Those who delay may find themselves navigating a far more unpredictable, higher‑risk dismissal landscape with limited room for error once employees gain protection at six months’ service.

EAT Narrows the Scope of Collective Redundancy Consultation

The Employment Appeal Tribunal (EAT) clarified how employers should assess the threshold for collective redundancy consultation under section 188 of TULRCA. In Micro Focus v Mildenhall, the EAT held that employers do not have to take into account past dismissals when assessing whether the threshold for collective redundancy consultation is met, rather, the statutory test is forward‑looking and considers only what the employer is proposing at the material time.

What led to the disputes, and why are the outcomes significant for employers?

• In Micro Focus v Mildenhall, the claimant, Mr. Mildenhall, was made redundant by Micro Focus as part of a wider restructuring. He brought claims for unfair dismissal and a protective award on the basis that Micro Focus had failed to comply with its collective consultation obligations under section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA).
• Micro Focus accepted that more than 20 redundancies occurred within a 90‑day period, but these dismissals were implemented in several tranches and involved employees working for different companies within the wider Micro Focus group, rather than a single legal entity. The proposals also arose at different points in time across the restructuring.
• The Employment Tribunal held that Micro Focus had breached its duty to collectively consult. In reaching this decision, it applied the reasoning in UQ v Marclean Technologies, finding that employers must look both backwards and forwards across a 90‑day period to determine whether 20 or more dismissals occurred. It also treated employees across the group companies as potentially falling within “one establishment”, which effectively allowed aggregation across the group.
• On appeal, the EAT overturned this decision, holding that:
  
  • There is no requirement to look backwards and forwards across the relevant period to artificially construct a threshold. Instead, the focus is on what the employer was proposing for the future at the 'material time'.
  • Redundancy numbers cannot be aggregated across separate legal entities within a corporate group for the purpose of section 188 TULRCA. Instead, the duty to consult is employer‑specific and group‑wide integration does not create a single employer for these purposes.

Takeaways

This decision provides valuable clarification on the meaning of “proposed redundancies” and “one establishment” under section 188 of TULRCA. The EAT’s narrow reading of both concepts will be welcomed by employers, as it restricts when collective consultation is triggered.

However, this reassurance may be temporary. Section 29 of the Employment Rights Act 2025 creates a new collective consultation threshold that mirrors the language of section 188 but removes the “one establishment” requirement. Subject to consultation, this change is likely to require employers to count dismissals across their entire corporate group. Section 29 is expected to take effect in 2027, and we will provide updates in due course.

COT3 Settlements: When “Full and Final” Really Means Final

In Turner v Western Mortgage Services, the EAT held that COT3 settlements must be construed objectively according to contractual interpretation principles.

What led to the disputes, and why are the outcomes significant for employers?

• The claimant, Mr. Turner, had been on long-term sick leave, receiving Permanent Health Insurance (PHI) scheme payments, and had claimed employer pension contributions. He was notified that these payments would end in May 2021, but he believed that he was entitled to a further six months of PHI payments and corresponding pension contributions.
• He first issued Employment Tribunal proceedings in 2021 and then again in 2022 (second claim number: 1302182/22) after his first claim was withdrawn and then dismissed. His claim was in respect of the PHI scheme payments and pension contributions; it also referenced disability discrimination. The PHI scheme claim was struck out on res judicata grounds – i.e., the matter had already been the subject of prior proceedings and could not be re-litigated. Mr. Turner appealed this decision to the EAT.
• Both parties subsequently entered into a COT3 agreement, in which Western Mortgage Services agreed to pay Mr. Turner a settlement sum in consideration of him withdrawing his “claim number 1302182/22” and "in full and final settlement of any and all claims which [he] has or may have" against it. The EAT was not notified about the COT3 and proceeded with Mr. Turner's appeal.
• Western Mortgage Services argued that the appeal should no longer proceed due to the COT3 whereas Mr. Turner argued that it should continue because the PHI scheme claim had been struck out by the Employment Tribunal, and as such, it no longer formed part of the “claim number 1302182/22” which the COT3 required withdrawal of. The COT3 also did not expressly reference EAT proceedings.
• The EAT dismissed Mr. Turner’s appeal, holding that the COT3 was a binding contract and therefore should be interpreted objectively. The language of “full and final settlement” together with the existence of express carve-outs, indicated the parties intended a clean break.

Takeaways

This case underlines the importance of clear settlement drafting and objective interpretation. Employers seeking finality of claims should ensure that any settlement language reflects a clear intention to conclude all related proceedings.

When “Volunteers” Are Really Workers

In Maritime & Coastal Agency v Groom, the Court of Appeal held that where ‘volunteers’ attended to remunerated activities, they are considered ‘workers’ and must be paid accordingly.

What led to the disputes, and why are the outcomes significant for employers?

• The claimant, Mr. Groom, was a volunteer serving as Coastguard Rescue Officer (CRO) for the Coastguard Rescue Service until his role was terminated. Following his dismissal, Mr. Groom sought to rely on section 10 of the Employment Relations Act 1999, which grants employees and certain workers the right to be accompanied by a trade union representative at disciplinary hearings to challenge their termination.
• The Coastal Agency refused, alleging that Mr. Groom was a volunteer and not a worker. Mr. Groom argued that he was a worker under section 230(3)(b) of the Employment Rights Act 1996.
• The Court of Appeal upheld the EAT’s decision that Mr. Groom was a worker (see our update for further information on the EAT’s decision in this case). In doing so, it found that:
  • The relationship between Mr. Groom and the Coastal Agency was governed by a handbook and code of conduct which described CROs as “volunteers” and stated there was no “mutuality of obligation”. CROs were able to claim hourly remuneration when performing “authorised activities” and the Coastal Agency also issued payslips on termination.
  • These features characterised a wage/work bargain, despite the “volunteer” label.

Takeaways

This decision reinforces that describing someone as a “volunteer” is not decisive. Courts and tribunals will look at the circumstances of the arrangement and whether it involves a wage/work bargain—a personal service performed in return for remuneration.

New Paternity Leave Rights Related to Bereavement

The Paternity Leave (Bereavement) Act 2024 came into effect on 29 December 2025, reforming paternity leave rights in scenarios where a child’s mother or adopter passes away during childbirth or within the first year of birth or adoption.

What does the Act do?

• The Act amends the Employment Rights Act 1996 to allow fathers or partners to take paternity leave immediately, without any qualifying service, when the mother or adopter of a child dies. Before this change, employees needed 26 weeks continuous service to qualify for paternity leave.
• The Act also removes the restriction preventing paternity leave if shared parental leave (SPL) has already been taken. This means a bereaved partner may take paternity leave even if they have already taken SPL, reflecting the need for flexibility when the original care arrangements can no longer continue.

Takeaways

The impact of these changes is expected to be relatively limited, given the limited situations in which bereavement‑related paternity leave applies. Nonetheless, employers should review and update relevant family‑friendly policies and ensure HR teams and line managers are aware of these new requirements.

It is also worth noting that these changes will soon be overtaken by broader reforms under the Employment Rights Act 2025, which from April 2026 will make paternity leave and unpaid parental leave day‑one rights for all fathers and partners and remove the SPL restriction across the board.