The Employment Rights Act 2025 marks one of the most significant shifts in UK employment law in recent years. While much of the focus has been centred on headline reforms, the January 2027 changes to unfair dismissal presents practical, immediate consequences for how organisations engage talent.
For many employers, this is not simply a legal change. It represents a structural shift in risk, accountability, and workforce flexibility.
What are the changes?
From 1 January 2027, employees will gain the right to claim unfair dismissal after just six months of employment, rather than two years. At the same time, the government has signalled the removal of the compensation cap, increasing potential financial exposure.
The legal process itself remains unchanged for employers; however, risk is increased. More employees now fall within scope, and decisions made in the first year — including during probation periods — will face significantly closer scrutiny.
Where risk sits
In a traditional employment model, the employer is directly responsible for dismissal decisions, process compliance, and any resulting claims. In contract models where intermediaries are engaged — such as umbrella companies — the picture is more complex. The umbrella company typically acts as the legal employer and carries primary responsibility for dismissal decisions and associated risk.
However, this distinction is often more nuanced. In practice, end clients retain significant influence over how work is delivered and often play a key role in decisions to conclude engagements. As a result, while formal liability may rest with the umbrella employer, the underlying risk is effectively distributed across the supply chain. As regulatory oversight continues to strengthen, there will be increasing focus on ensuring that day‑to‑day operational control is aligned with legal accountability.
The emerging challenge: flexibility vs compliance
Areas that have traditionally provided flexibility — such as probation periods, and short-term engagements — now require greater structure and discipline. Performance management needs to be embedded earlier, with consistent documentation in place from the outset, reducing the risk of reactive or ad hoc decision-making.
For organisations with a strong reliance on contingent labour, this creates a structural tension. The cost and complexity associated with direct employment continue to increase, while the demand for flexible, responsive workforce capacity remains unchanged.
Rethinking engagement models
As the reforms narrow the gap between early-stage and established employment, organisations are being pushed to reconsider not just how they manage employees —but how they engage talent altogether.
Direct employment models now carry earlier and potentially greater dismissal risk, prompting many organisations to look more closely at intermediated arrangements, such as umbrella companies, where formal employer obligations sit elsewhere. While this can help centralise compliance and reduce direct exposure, it does not remove the need for careful governance.
Alongside this, there is an increasing need to define the nature of each engagement with greater precision. The distinction between a clearly scoped, time‑bound role and an open‑ended working arrangement is not simply contractual, but central to how organisations manage legal risk. The clearer the rationale for how and why an engagement ends, the easier it is to demonstrate fairness.
At the same time, organisations are recognising the relationship between pay structure and overall risk profile. Engagement models that imply longer-term employment —bringing a full suite of statutory rights and procedural obligations — naturally increase both cost and operational complexity. In contrast, more clearly structured day‑rate or assignment-based models can offer a more balanced approach: aligning cost with delivery, providing clearer endpoints, and reducing ongoing administrative and legal burden.
What organisations should be doing
To align with this shift, organisations need to move from reactive compliance towards a more proactive approach to workforce design.
Organisations need to develop a clear view of how the workforce is structured in practice, and where risk is concentrated. As the six‑month threshold brings more individuals into scope more quickly, it becomes increasingly important to understand how different engagement types operate, and where individuals may transition into higher-risk categories over relatively short periods.
Greater rigour also needs to be embedded at the outset of any engagement. Processes such as performance management, structured review points, and consistent documentation create frameworks that ensures decisions taken are supported by a clear and defensible record.
At the same time, responsibilities across the labour supply chain should be clearly defined and aligned. Where agencies and umbrella providers are involved, clarity around decision-making — particularly at the point of assignment end — is critical to avoiding disconnect between operational control and legal accountability.
More broadly, this represents an opportunity to reassess whether existing engagement models remain fit for purpose. Organisations that take a more deliberate approach will be better positioned to navigate the increased demands of the regulatory environment while maintaining access to the skills and capacity required.
The bottom line
The 2027 unfair dismissal reforms reflect more than just a legislative update — they signal a broader shift toward stronger worker protections and reduced reliance on informal flexibility.
For organisations, the response goes beyond compliance. It requires a more intentional approach to workforce design, recognising how risk, cost, and flexibility interact.
Those that adapt early will be better placed not only to manage exposure, but to build a workforce strategy that is both resilient and scalable in a more regulated environment.