Dismissing Someone Is the Hardest Decision a Small Employer Makes
Dismissing an employee is the decision most small business owners dread: in a team of five there is no HR department and no spare manager to hear the appeal.
Fair dismissal is a process, not a talent: show a lawful reason, follow a fair procedure, and a tribunal will back you even if the employee disagrees. This guide covers the two tests, the five lawful reasons, the process, the costs, and the major changes arriving on 1 January 2027.
The Two Tests Every Dismissal Must Pass
Under the Employment Rights Act 1996, a dismissal is fair only if two things are true: you can show a reason the law recognises, and you acted reasonably in treating it as sufficient to dismiss, judged on the size and resources of your business.
Fail either test and the dismissal is unfair. Tribunals look at what you knew, what you investigated, and whether dismissal was within the range of responses a reasonable employer would choose.
The Five Fair Reasons for Dismissal
Section 98 of the Employment Rights Act 1996 sets out five potentially fair reasons. If your reason is not one of them, the dismissal is automatically unfair.
1. Capability
The employee cannot do the job, through poor performance or ill health: the salesperson who misses achievable targets after training and warnings, or the employee whose illness means they cannot return within a reasonable time. You need evidence — targets, appraisals, warnings, medical evidence — and genuine consideration of alternatives such as a different role. Our guide to managing long-term sickness absence and return to work explains the ill-health process.
2. Conduct
The employee has behaved badly: persistent lateness, refusal to follow reasonable instructions, or gross misconduct such as theft or fraud. Conduct is the most common reason for dismissal and the one where procedure matters most: even gross misconduct needs an investigation and a hearing first. Our disciplinary procedure guide sets out the steps in full.
3. Redundancy
The job itself has gone or is shrinking: the business has closed, moved, or needs fewer people. Redundancy has its own rules — genuine business reason, fair selection, consultation and alternative work — and the Acas Code does not apply. An employee with two or more years’ service is entitled to statutory redundancy pay; see our statutory redundancy pay guide.
4. Statutory restriction (illegality)
Continuing the employment would break the law — for example, a delivery driver who loses their licence, or a worker whose right to work expires. Check first whether the restriction is temporary and whether another role is available.
5. Some other substantial reason (SOSR)
A genuine business reason that fits none of the other four: a client refuses to work with the employee, or a restructure changes the job fundamentally. SOSR is the most flexible reason and the most closely scrutinised, so document the business case carefully.
Reasons That Are Always Unfair — From Day One
Some dismissals need no qualifying period: an employee can claim from day one if the main reason was pregnancy or maternity, whistleblowing, asserting a statutory right, trade union activity, or health and safety activities. Dismissal because of a protected characteristic under the Equality Act 2010 is also unlawful from day one, and discrimination compensation is uncapped.
Who Can Claim — and What Changes on 1 January 2027
Today, an employee needs two years’ continuous service to bring an ordinary unfair dismissal claim. From 1 January 2027, section 25 of the Employment Rights Act 2025 cuts that to six months, for any dismissal whose effective date of termination falls on or after that date — even if notice was given in 2026. Anyone hired on or before 1 July 2026 is protected immediately.
| What changes | Until 31 December 2026 | From 1 January 2027 |
|---|---|---|
| Qualifying period for ordinary unfair dismissal | 2 years | 6 months |
| Cap on the compensatory award | Lower of £123,543 or 52 weeks’ gross pay | No cap |
| Right to written reasons for dismissal | After 2 years’ service | After 6 months’ service |
| Dismissal for a spent conviction | Needs 2 years to claim | Automatically unfair, no qualifying period |
| Tribunal time limit | 6 months (for acts on or after 1 October 2026) | 6 months |
From January 2027, treat every dismissal as if the employee could already claim — because anyone hired before July 2026 will be able to.
The Fair Process, Step by Step
For conduct and capability dismissals, the Acas Code of Practice sets the standard tribunals judge you against; unreasonable failure to follow it can increase an award by up to 25%. The 2015 Code still applies.
Step 1: Investigate before you decide. Gather the facts without delay: interview witnesses, review documents, check records. Do not prejudge the outcome.
Step 2: Tell the employee in writing. Set out the allegations, the evidence and the possible consequences, including dismissal. Give enough detail and time to prepare — at least 48 hours is the usual minimum.
Step 3: Hold a formal hearing. The employee has a statutory right to be accompanied by a colleague or trade union representative. Listen, consider their evidence, and adjourn if new information emerges. Keep notes and share them.
Step 4: Decide and put it in writing. Explain the reasons, state the notice period and last day, and set out the right of appeal.
Step 5: Offer a right of appeal. The appeal should be heard by someone not involved in the original decision — in a very small business, consider an external HR adviser. Confirm the outcome in writing.
For redundancy and ill-health cases, consultation replaces the disciplinary hearing, but the principle is the same.
Notice Periods: What You Must Give
Unless the employment contract says more, the statutory minimum notice under the Employment Rights Act 1996 is:
| Length of service | Statutory minimum notice |
|---|---|
| Less than 1 month | None |
| 1 month to 2 years | 1 week |
| 2 to 12 years | 1 week per complete year of service |
| 12 years or more | 12 weeks (the maximum) |
Check the contract first: many give longer notice, and the contract governs if it is more generous. You can pay in lieu of notice if the contract allows it. The only situation where no notice is due is summary dismissal for gross misconduct — and even then, get advice first. Pay any untaken statutory holiday on the final payslip.
What an Unfair Dismissal Claim Can Cost
A successful claim has two parts. The basic award follows a formula based on age, service and a week’s pay, capped at £751 from 6 April 2026; the maximum is £22,530. The compensatory award covers financial loss — lost earnings, pension and benefits, and job-search costs. Until 31 December 2026 it is capped at the lower of £123,543 or 52 weeks’ gross pay; from 1 January 2027 there is no cap. Add up to 25% for Acas Code failures; discrimination claims are uncapped already.
Worked example: an employee aged 40 with six years’ service earning £35,000 a year gets a basic award of 6 x £673 (one week’s pay per year of service at ages 22–40) = £4,038. The compensatory award depends on time out of work, but with no cap from 2027 it can run to five figures.
Settlement Agreements: A Quieter Way Out
Where the relationship has broken down, a settlement agreement can end the employment cleanly: the employee agrees not to bring tribunal claims in return for an agreed payment, and the agreement is only valid if the employee has received independent legal advice, which you usually pay for. Termination payments benefit from a £30,000 tax-free threshold.
Common Mistakes That Lead to Tribunal Claims
Deciding first, investigating later. A dismissal announced before the hearing is procedurally unfair almost by definition.
No paper trail. Verbal warnings never written down do not exist at a tribunal.
Skipping the hearing. The Acas Code requires a hearing before dismissal for conduct or capability. Skipping it makes the dismissal procedurally unfair and increases compensation.
Forgetting the appeal. No appeal, or an appeal heard by the same person who dismissed, is a classic procedural failing.
A Practical Checklist Before You Dismiss
Identify the reason and check it fits one of the five fair reasons.
Gather the evidence and keep a dated file of warnings, appraisals and meeting notes.
Check the employee’s length of service and whether any day-one protection could apply.
Investigate, invite in writing, hold the hearing, decide, confirm in writing and offer an appeal.
Check the contract for notice, and pay accrued holiday.
From 2027, assume every employee with six months’ service can claim — because they can.
Frequently Asked Questions
Can I dismiss an employee with less than two years’ service?
Yes, but not freely: day-one protections apply whatever the length of service, and from 1 January 2027 employees with six months’ service can also bring ordinary unfair dismissal claims.
Do I have to give a reason for dismissal?
Employees with two years’ service can ask for written reasons, which you must provide within 14 days; from 1 January 2027 that right starts after six months. Give written reasons in the dismissal letter regardless.
The Bottom Line
Fair dismissal comes down to two things: a reason the law recognises and a process a tribunal would call fair. From 1 January 2027 the qualifying period falls to six months and the compensation cap disappears, so the margin for cutting corners is about to vanish. Investigate, listen, decide in writing, and offer an appeal — every time.
Related reading
Disciplinary procedure for small businesses
