Dismissing an employee is one of the most legally exposed decisions a small business owner can make. Get the process wrong and you face an employment tribunal claim, even if the underlying reason for dismissal was entirely justified.
This guide explains unfair dismissal from the employer's perspective - what the law actually requires, what the two-year qualifying period does and does not protect you from, and the procedural steps you must follow before making any dismissal decision.
The Two-Year Qualifying Period: What It Means and What It Does Not Protect You From
Under the Employment Rights Act 1996, an employee must currently have at least two years of continuous service before they can bring an ordinary unfair dismissal claim against you - though this threshold is set to reduce to six months from 1 January 2027 under the Employment Rights Act 2025. This is the qualifying period most employers are aware of.
What many small business owners misunderstand is what this protection actually means. The two-year threshold applies to ordinary unfair dismissal only. It does not mean you can dismiss a new employee for any reason without consequence. A significant category of dismissals - automatically unfair dismissal - carries no qualifying period at all.
Employees in their first two years also retain full rights in relation to discrimination law, unlawful deduction of wages, and whistleblowing protection. Those claims are separate from unfair dismissal and can be brought from day one.
Automatically Unfair Dismissal: The Categories That Apply From Day One
Certain reasons for dismissal are automatically unfair regardless of how long the employee has worked for you. There is no qualifying period, no minimum service threshold, and no procedural defence. If you dismiss someone for one of these reasons, the employee can go straight to an employment tribunal.
The categories most relevant to small employers include:
Pregnancy or maternity leave - dismissing an employee because they are pregnant or have taken, or intend to take, maternity leave
Whistleblowing - dismissing an employee for making a protected disclosure.
Asserting a statutory right - dismissing an employee for claiming rights they are legally entitled to, such as the national minimum wage or statutory sick pay
Trade union membership or activities - dismissing an employee for joining or participating in a trade union
Health and safety grounds - dismissing an employee for raising a genuine health and safety concern or refusing unsafe work
Part-time or fixed-term status - dismissing an employee for asserting rights related to their working pattern
* A disclosure of information which, in the worker's reasonable belief, is in the public interest and tends to show a criminal offence, breach of a legal obligation, miscarriage of justice, health and safety danger, environmental damage, or concealment of any of these. From 6 April 2026, sexual harassment (as defined in s.26(2) Equality Act 2010) is also expressly included as a qualifying category under s.43B ERA 1996, amended by the Employment Rights Act 2025.
The timing risk
If you dismiss a new employee shortly after they tell you they are pregnant, or shortly after they raise a health and safety concern, an employment tribunal will examine the reason closely.
The burden of proof in automatically unfair dismissal cases is less forgiving than in ordinary claims. Take advice before acting in any situation where the timing of a dismissal could be questioned.
What Makes a Dismissal Fair: The Five Potentially Fair Reasons
For a dismissal to be fair once the qualifying period has been met, you must be able to show both a potentially fair reason for dismissal and that you acted reasonably in treating that reason as sufficient. Having a valid reason is not enough on its own - how you handled the process matters equally.
The five potentially fair reasons under UK employment law are:
Conduct - the employee's behaviour, ranging from a single act of gross misconduct to a pattern of repeated lesser misconduct
Capability - the employee's ability to do the job, including performance issues and long-term ill health
Redundancy - the role is no longer required due to a change in business needs
Statutory illegality - continuing to employ the person would break the law (for example, they have lost the right to work in the UK)
Some other substantial reason (SOSR) - a catch-all category covering genuine business reasons that do not fit the above, such as irreconcilable breakdown of trust and confidence
Most small employer dismissals fall under conduct, capability, or redundancy. The process requirements differ depending on which reason applies.
The Disciplinary Process: What You Must Do Before Dismissing for Conduct or Performance
The ACAS Code of Practice on Disciplinary and Grievance Procedures sets out the minimum standards you should follow - while not following the Code is not in itself unlawful, employment tribunals must take it into account and may increase or reduce any award by up to 25% where it has been unreasonably ignored before dismissing an employee for conduct or performance. Following this Code is not optional - it is the benchmark a tribunal will use to assess whether you acted reasonably.
The 25% uplift rule
If you fail to follow the ACAS Code without good reason and an employee wins a tribunal claim against you, the tribunal can increase the compensatory award by up to 25 percent if you have unreasonably failed to follow the ACAS Code of Practice (the uplift does not apply to the basic award).
Note that the compensatory award is currently capped at the lower of 52 weeks' gross pay or £123,543, though this cap will be removed from 1 January 2027 under the Employment Rights Act 2025. This applies even if the underlying reason for dismissal was fair. The process matters as much as the reason.
The ACAS Code requires you to follow a clear sequence before making a dismissal decision:
The ACAS Disciplinary Process
Investigate
Carry out a reasonable investigation before taking any formal action. This means gathering relevant evidence, speaking to witnesses, and reviewing documentation. The depth of investigation should reflect the seriousness of the allegation.
Inform in writing
Write to the employee setting out the issue, why it is a concern, and that a formal hearing has been arranged. Give them enough detail to prepare a response.
Hold a hearing
Give the employee the opportunity to put their case at a formal disciplinary hearing. They have the legal right to be accompanied by a colleague or trade union representative. Listen before you decide.
Decide and confirm in writing
Make your decision after the hearing, not before. Confirm the outcome in writing, including your reasoning. If the outcome is dismissal, state the reason, the notice period, and the final date of employment.
Offer the right of appeal
The employee must be given the right to appeal the decision. The appeal should be heard by a different manager where possible. Confirm the appeal outcome in writing.
For performance issues specifically, dismissal should normally be the final step after a period of managed improvement - documented targets, support offered, review meetings held. Dismissing for poor performance without a formal improvement process is a common reason employers lose tribunal claims they felt confident about.
Redundancy as a Fair Reason for Dismissal: The Process You Must Follow
Redundancy is a genuine fair reason for dismissal - but only when the redundancy is real. You cannot use redundancy as a way to remove an employee you want rid of for a different reason. If the role continues to exist after the person leaves, it is not a genuine redundancy.
When redundancy is genuine, the process you follow determines whether the dismissal is fair. The key requirements for small employers are:
Identify the pool for selection fairly - which roles or employees are at risk, and why
Apply objective selection criteria - do not select based on personal preference, seniority alone, or factors that could be discriminatory
Consult meaningfully - speak to the affected employee before the decision is made, not after. Explain the situation, invite suggestions, and consider alternatives to redundancy
Consider suitable alternative roles - if you have any other vacancy that could be offered, you are legally required to consider it before making the person redundant
Pay statutory redundancy pay - employees with two or more years of continuous service are entitled to statutory redundancy pay, calculated by age and length of service using a capped weekly pay figure - from 6 April 2026 this cap is £751 per week, giving a maximum payment of £22,530
Collective consultation rules
If you are making 20 or more employees redundant at a single establishment within 90 days, collective consultation rules apply. From 6 April 2026, the maximum protective award for failing to consult doubled to 180 days' pay per employee. From 2027, the Employment Rights Act 2025 will also introduce an additional organisation-wide trigger - the exact threshold is subject to ongoing government consultation.
You must notify the Redundancy Payments Service (RPS) using form HR1 before the first dismissal takes effect - at least 30 days in advance where 20–99 redundancies are proposed, or at least 45 days in advance where 100 or more redundancies are proposed. For small employers making fewer than 20 redundancies, individual consultation is required but the formal collective process does not apply.
What Happens If an Employee Claims Unfair Dismissal
An employee who believes they have been unfairly dismissed an employee who believes they have been unfairly dismissed currently has three months less one day from the date of dismissal to notify ACAS and bring a claim to an employment tribunal - this limit is set to increase to six months from October 2026 under the Employment Rights Act 2025. Before they can submit a claim, they must contact ACAS first under the Early Conciliation process.
The Early Conciliation period lasts up to 12 weeks (doubled from 6 weeks as of 1 December 2025) and pauses ('stops the clock' on) the tribunal limitation period for its duration. After conciliation ends, the claimant has at least one month to file a tribunal claim - a step designed to give both parties the chance to resolve the dispute without going to tribunal.
If the claim proceeds to tribunal, you will be asked to submit a formal response setting out why the dismissal was fair. The tribunal will consider the reason for dismissal, whether you followed a fair process, and whether dismissal was within the range of reasonable responses available to an employer in your position.
Remedies available to a successful claimant include reinstatement (rare in practice), re-engagement, or compensation. Compensation is made up of a basic award (calculated similarly to statutory redundancy pay, up to a current maximum of £22,530) and a compensatory award reflecting actual financial loss. The compensatory award is currently capped at the lower of £123,543 or 52 weeks' gross pay - though this cap will be removed from 1 January 2027 under the Employment Rights Act 2025, after which awards will be uncapped. Both can be adjusted up or down depending on whether the ACAS Code was followed and whether the employee contributed to their own dismissal.
How to Reduce Your Risk: The Documentation That Protects You
Most small employers who lose tribunal claims do not lose because they had the wrong reason for dismissal. They lose because they cannot demonstrate they followed a fair process. Documentation is your primary defence.
The records that matter most in a contested dismissal are straightforward to maintain - but only if you create them at the time, not after the fact.
Documentation to maintain throughout a disciplinary or redundancy process
Written records of informal conversations about performance or conduct, including date, attendees, and what was agreed
Formal written warnings at each stage, signed and acknowledged
Improvement plans with clear targets, timescales, and support offered
Invitation letters to disciplinary or redundancy consultation meetings, confirming the right to be accompanied
Notes from all formal hearings, ideally taken by a second person
Written decision letters with clear reasoning and appeal rights explained
Records of any appeal hearing and outcome
For redundancy: evidence of the selection pool, criteria applied, consultation meetings, and any alternatives considered
When to take legal advice
If the employee has raised a grievance, made a whistleblowing disclosure, is pregnant, or has recently returned from a protected leave, take employment law advice before you take any disciplinary action. These are the situations where automatically unfair dismissal risk is highest and where getting the process wrong can be most costly.
Unfair dismissal law is genuinely complex. The framework above gives you a working understanding of the obligations that apply - but contested dismissals, situations involving protected characteristics, and cases involving senior employees benefit from specialist employment law advice before you act. The cost of getting it right upfront is substantially lower than the cost of a tribunal claim.
Get Practical Guidance You Can Use This Week
Get Practical Guidance You Can Use This Week
Ready to cut through the noise? Join the BGE newsletter for practical guidance, tool recommendations, and real-world insights for UK founders and business owners - delivered weekly to your inbox. No fluff, no spam, unsubscribe any time.
BGE newsletter
