UK Employment Rights Act Changes: What M&A Buyers Need to Know

The Employment Rights Act 2025 introduces two major changes to unfair dismissal rules from 1 January 2027:Note: these reforms are anticipated in England, Scotland, and Wales, but not Northern Ireland, although in this article we refer to the UK throughout.

• Uncapped compensation awards. Awards for unfair dismissal claims will become uncapped (currently capped at the lower of 52 weeks’ gross salary or £123,543).
• Reduced qualifying period. Claims may be brought after six months’ service, instead of two years.

Other key reforms include:

• Increased collective redundancy exposure. The maximum compensation payment that employees are entitled to for failure to comply with collective consultation obligations for redundancies has increased from 90 days’ uncapped pay per affected employee to 180 days.
• Restrictions to “fire and rehire”. Employer fire and rehire practices (where an employee is dismissed and re-engaged on new, usually less favourable terms) are expected to become automatically unfair in most cases, with uncapped compensation, unless the employer can demonstrate severe financial necessity, i.e., critical to the survival of the business.
• Trade union rights are expanding. These enhanced rights include a simplified statutory recognition process and a lower membership threshold, making formal union recognition easier to achieve.
• Changes to employment claims and enforcement of rights. The time limit for bringing most employment tribunal claims in the UK is expected to double from three months to six months. In April 2026, a new Fair Work Agency was established, consolidating the enforcement of key employment rights such as holiday pay, sick pay, and national minimum wage obligations.

In this edition of M&A Views, we discuss the impact of the changes and how buyers in M&A deals can prepare for increased employment risk profiles of target companies.

Unfair Dismissal: The Scale of the Risks

The changes to unfair dismissal will impact all employers. Discrimination and whistleblowing claims have always been uncapped and carry no minimum qualifying period, so contentious departures of senior management already attract significant financial exposure, with executives often able to negotiate settlements that exceed the unfair dismissal cap.

A claimant’s schedule of loss that was once capped at just under £125,000 could now run into the millions of pounds on the same facts surrounding their termination of employment

However, the removal of the cap for unfair dismissal claims means that executives will no longer need to establish an element of discrimination or whistleblowing in order to seek higher compensation awards and settlement sums, which could now include uncapped losses under management incentive plans, carried interest schemes or discretionary bonus arrangements. A claimant’s schedule of loss that was once capped at just under £125,000 could now run into the millions of pounds on the same facts surrounding their termination of employment.

The reforms fundamentally change the position for shorter-service employees who previously had limited recourse, giving them earlier access to unfair dismissal protection. This materially broadens claims risk across the UK workforce for employers.

The reforms fundamentally change the position for shorter-service employees who previously had limited recourse, giving them earlier access to unfair dismissal protection

International Comparisons

These changes to UK employee rights should be put in the context of other countries.

• France: The 2017 “Macron caps” introduced a statutory scale for unfair dismissal damages (ranging from one to 20 months’ salary depending on length of service) to create predictability. However, well-advised executives often pursue uncapped parallel claims for harassment, discrimination, or loss of equity incentives rights (as is currently the case in the UK).
• Germany: There is no statutory cap. Reinstatement is the primary remedy, and senior executive dismissals typically settle for negotiated sums reflecting uncapped exposure, with equity losses factored into the quantum.
• Spain: Statutory severance is capped at two years’ total remuneration, and recent Supreme Court authority definitively closed the door on awards beyond the statutory formula.
• US: European jurisdictions, which continue to be “employee friendly”, contrast sharply with the US, where employment is predominantly “at-will” with no statutory severance entitlement, but with contractual severance entitlements typically agreed under the employment contract or offer letter for senior executives.

We do not expect that UK employers will move towards the US position — with severance packages agreed at the outset of the employment relationship — as parties cannot contract out of the statutory unfair dismissal regime. Our expectation is that settlement will become much more expensive for employers who want to avoid the time and cost of defending an uncapped claim.

Our expectation is that settlement will become much more expensive for employers who want to avoid the time and cost of defending an uncapped claim

How M&A Buyers Can Prepare for the Reforms

Pre-acquisition planning will be key.

• Pre-acquisition management assessment. Both the removal of the cap and the shortening of the qualifying period for unfair dismissal claims will impact plans for post-acquisition management changes.

  Greater emphasis should be placed on whether the target has the right management team in place pre-acquisition, with an expectation of higher costs if executives are replaced on or shortly after completion. Where new management is brought in, a compressed probationary window for assessment and removal before unfair dismissal exposure arises will need to be factored in, as well as ensuring clear processes are in place for managing probationary periods. Where possible, resignation or settlement arrangements should be agreed within the M&A process to ensure visibility of liability exposure from management claim risk.

  Restrictions on the use of fire and rehire practices will mean less flexibility to amend employment terms, and employers may wish to consider how to build greater flexibility into employment agreements going forward.

• Review of restructuring plans. Broader workforce restructurings will generate a greater risk of employee claims, as a greater proportion of the UK workforce will hold unfair dismissal rights at the point any restructuring is implemented. Collective consultation obligations will also need to be managed more carefully on collective redundancies, given the higher potential penalties.
• Employment documentation. Employment terms should be reviewed and tightened where possible, particularly around loss of share rights provisions, to reduce the prospect of successful claims for losses that can be attributed to an unfair dismissal.
• Constructive dismissal exposure. Post-acquisition plans that involve restructuring — such as changes to management structures, reporting lines or incentive arrangements — create a risk that a senior executive will treat the changes as fundamental breaches and resign, leaving them in a position to bring an uncapped constructive unfair dismissal claim. Any such changes will need to be supported by clear business rationale, genuine consultation and a realistic assessment of litigation risk prior to implementation.

It is clear that pre-acquisition assessment and due diligence, and post-completion planning will be key in order to manage increased costs and complexities in restructuring and management changes.