Fixed-term contracts and unfair dismissal reform under the Employment Rights Act – your questions answered
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In our recent webinar on unfair dismissal reform under the Employment Rights Act 2025 (ERA), we received a number of questions on the effective management of probationary periods and fixed term contracts.
This is the second article in our series answering your questions (and a few of our own). In this article we focus on the impact of the unfair dismissal changes on fixed-term contracts and share our tips for using them under the new regime.
You can read our previous article, in which we addressed questions about probationary periods here.
Unfair dismissal: a brief recap
At present, employees need two years’ qualifying service to bring a claim for ordinary unfair dismissal. Compensation for unfair dismissal is capped at the lower of one year's salary or £123,543.
What is changing and when?
From 1 January 2027, the qualifying period for unfair dismissal will be reduced to six months and the cap on compensation will be removed.
Why are these changes relevant to fixed-term contracts?
The expiry and non-renewal of a fixed-term contract is a dismissal in law. Simply reaching the contractual end date is not, on its own, a fair reason for dismissal. Currently, many fixed-term contracts run for less than two years, which means ordinary unfair dismissal rights have not been engaged when those contracts come to an end.
However, from January 2027, any fixed-term contract lasting six months or more will acquire unfair dismissal protection. Therefore, the key implication is that, for the expiry of a fixed-term contract to be fair, employers will need both a fair reason for dismissal and a fair process.
How will employers be able to terminate fixed-term contracts under the new regime?
Once a fixed-term employee has six months’ service, the employer will need to be able to point to a potentially fair reason for not renewing the contract and follow a fair process. In practice, absent any issues relating to the employee's performance or conduct, the potentially fair reason will usually be either redundancy or some other substantial reason (SOSR). Which of those applies matters because it will drive the process that needs to be followed.
SOSR
SOSR is most likely to apply where a contract was entered into for a clear, genuine and time-limited purpose which has come to an end, for example family-leave cover or a specific project. In these cases, it is essential that the purpose of the role and the circumstances for termination are communicated clearly to the employee at the outset, and that the employer can show that the purpose has genuinely concluded at the end of the fixed term.
A fair process will still be required, but in practice this is likely to involve communicating with the employee in advance about the proposed end date and considering whether there are any suitable alternative roles.
Redundancy
Redundancy will apply where the requirement for the work the employee is carrying out has genuinely reduced or disappeared. In those cases, you will need to follow the usual redundancy principles, including thinking carefully about the appropriate pool. In some cases, that may be a pool of one with just the fixed-term employee, though care would be needed in that situation. Consultation and consideration of suitable alternative roles will also be required. However, the right to statutory redundancy pay will still require two years’ service.
The practical impact of this is that managers will need to act much earlier than the end of a fixed-term contract; it will no longer be possible to let a contract of six months or more expire without unfair dismissal risk.
What if there are issues with a fixed-term employee's performance?
Once the changes take effect, issues with fixed-term employees' performance will need to be managed from the outset of employment, in the same way as other employees. This includes communicating clearly what is expected of employees, proactively assessing performance, providing clear feedback and support and giving the employee a reasonable opportunity to improve.
If performance issues arise, they should be managed during the first six months of employment wherever possible, before ordinary unfair dismissal rights apply. During this period, employers may take a more pragmatic 'light touch' approach, rather than running a full performance process.
For more detail on effective performance management under the new unfair dismissal regime, see our Q&A on probationary periods. If dismissal is contemplated, our comments in that article around dismissing sufficiently in advance of the expiry of six months apply equally to fixed-term contracts, to avoid inadvertently straying into unfair dismissal. Remember also that day one protections (eg automatic unfair dismissal protection, discrimination, and whistleblowing) continue to apply throughout the first six months of employment.
If performance issues are not effectively addressed in the first six months of employment – or if issues do not arise until after the employee has six months' service – the employee will have unfair dismissal protection. Dismissal for performance reasons will then require a fair performance process and a reasonable belief that the performance issues justify dismissal (the 'range of reasonable responses test').
What does this mean for how fixed-term contracts are drafted?
Given that terminating fixed-term contracts will be harder under the new regime, employers should ensure that their contracts support the intended ground for termination.
To support a potential SOSR dismissal, contracts will need to clearly set out the genuine and time-limited purpose of the role and the circumstances when it is expected to end.
To support any future redundancy rationale, ensure the employee's contract and job description reflect the reality of the role on the ground.
Will this be the end of fixed-term contracts?
Probably not, but they will no longer be a low-risk or automatic exit route. They are likely to still be useful, especially where there is a specific purpose for the role, and they can be helpful in setting expectations and creating natural review points. However, from January 2027 they will need the same forward planning and active management as permanent roles.
How will these changes impact employers that use fixed-term contracts for roles which they replace each year?
Currently, some employers use fixed-term contracts for roles which are replaced on a rolling basis every year, for example to hire different gap year students each year. Under the current regime, this is fairly low risk because the employee will not have ordinary unfair dismissal rights when the contract ends.
From January 2027, this practice will carry increased risk because an employee on a one-year contract will have unfair dismissal rights after six months' service. In circumstances where work is ongoing and there is no clear time-limited purpose for the role, it is unlikely that the expiry of the contract will amount to a redundancy or SOSR dismissal (as explained above). Unless there are performance or conduct concerns, this may make it hard to identify a potentially fair reason to dismiss. In the absence of such a reason, allowing the contract to expire is likely to amount to an unfair dismissal. Employers will therefore need to think carefully about their approach to such contracts and may need to extend the contract if they wish to mitigate that risk.
In some cases, the risk may be lower, for example where it is in both parties' interests for the contract to end on expiry of the fixed term (such as where an employee is moving onto something else, such as further study). In such circumstances, employers may feel more comfortable allowing the contract to expire, although care will still be needed in assessing the position in each case.
It remains to be seen whether changes in practice will emerge once the reforms take effect. For example, some employers may explore whether settlement agreements can be used at the outset of employment to manage unfair dismissal risk. However, this approach is:
- untested in this context;
- would require the employee to take independent legal advice on entering the contract; and
- may not be commercially attractive.
Employers should therefore keep their approach under review as the practical implications of the reforms begin to emerge.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, June 2026
