For start-ups and scale-ups in the tech sector, having the right team in place is critical. Product development, market penetration and securing investment all depend on having the right people, and so businesses in this sector generally act swiftly when the fit isn’t right or performance isn’t hitting the mark.
Up until now, the legal risks of this approach were, broadly, manageable, because of the need for employees to have two years’ service before being eligible to bring an unfair dismissal claim. Provided there was no discrimination, whistleblowing retaliation or other automatically unfair reason in play, employers had some flexibility to move on underperforming staff without needing a lengthy performance management process. Even after two years’ service, the risks were quantifiable, with compensation for unfair dismissal capped at the lower of 1 year’s pay or a fixed amount (currently £123,543), and this has shaped risk appetite and set parameters for exit negotiations.
The Employment Rights Act 2025 throws that framework up in the air. From 1 January 2027, the qualifying period for ordinary unfair dismissal claims will reduce from two years to six months. At the same time, the statutory cap on compensatory awards for unfair dismissal will be removed.
For business owners and senior staff, particularly those operating in high-growth, venture-backed or rapidly evolving businesses, these changes are likely to have a significant impact.
The degree of risk attached to recruitment decisions will increase. Tech companies often recruit against uncertain future demand or anticipated investment rounds. Where a new hire doesn’t make the required impact, or the company’s finances falter, employers will no longer have the luxury of time to assess whether to exit them – and if they have already passed the 6 month mark, an exit will carry more legal risk and will have to be handed much more carefully. Employers will need to demonstrate not only a potentially fair reason for dismissal but also that they have followed a fair process
Probation periods will assume far greater importance. Many tech employers currently operate six-month probation periods almost by default, often extending them where concerns arise. That timeframe no longer works. A business that has not properly assessed performance, documented concerns and reached a decision before the end of probation may find itself dealing with an employee who has already acquired unfair dismissal protection.
As a result, employers are likely to move towards much more structured probation management. Managers will need clear objectives, regular review meetings and documented performance assessments. An informal approach will become significantly harder to defend before a tribunal, and this will have a real impact on businesses without in-house HR or legal expertise.
There may also be consequences for hiring appetite. Many tech businesses have benefited from a willingness to take chances on candidates with unconventional backgrounds. If the cost and complexity associated with terminating employment increases, recruitment decisions may become more cautious.
The removal of the compensatory award cap will be just as big a sea-change as the new 6 month service rule. Although most unfair dismissal awards fall well below the statutory maximum, the cap provides some certainty when assessing litigation exposure, and means that the value of share options, bonuses and other non-salary elements is often less significant in exit negotiations. The removal of the cap will bring those issues back into play and considerably increase the complexity of both settlement negotiations and employment litigation.
Claimants are likely to place much greater emphasis on the value of lost incentive opportunities, particularly where a dismissal causes them to miss a liquidity event, funding round, exit transaction or vesting milestone. Staff often join start-ups or scale-ups on the understanding that the real financial reward will arise on an acquisition, IPO or secondary sale. If an employee is dismissed shortly before a significant corporate event and successfully establishes unfair dismissal, the financial consequences could be eye-watering.
The timing of dismissals will therefore attract greater scrutiny. Decisions which occur close to funding rounds, exits, transformational contracts or vesting dates may create fertile ground for claims. Businesses will either need to adjust their approach to settlement negotiations or get comfortable with a greater degree of litigation risk – but recognising that this risk exposure is also likely to assume greater prominence in pre-transaction due diligence.
You might think that a solution is to use self-employed consultants rather than employees – but Employment Tribunals carefully scrutinise these arrangements to assess whether the individual is genuinely self-employed or deemed to be an employee. The fact that the individual agreed to be self-employed at the outset won’t prevent them later bringing a claim based on employee status, so this isn’t a panacea.
The effect of these changes won’t be limited to processes for handling probation or performance-management. Instead, it’s likely to create a broader shift in the risk profile of executive employment disputes. Any businesses which don’t already have this on their radar need to start preparing – and fast.
