Employment Rights Act: New unfair dismissal rules will increase unemployment
As the latest ONS figures show UK unemployment rose by 5% in the first quarter of 2026, RSM UK warns changes to unfair dismissal rules in the Employment Rights Act could push this figure higher in the coming months.
RSM UK’s Workforce Surveyshowed 44% of employers will be more cautious with recruitment due to new unfair dismissal rules, which from January will allow employees to claim unfair dismissal after just six months service instead of the current two years. Around a third of businesses (34%) said they would use more off-payroll workers and contractors because of the new rules, and almost a fifth (19%) are putting a temporary freeze on recruitment.
Charlie Barnes, Head of Employment Legal Services at RSM UK said: “The changes to unfair dismissal rules coming in January are designed to protect workers’ rights, however our research suggests there may be unintended consequences that could lead to increased unemployment. It seems many employers will recruit fewer permanent employees, or use more off-payroll workers, as a result of this change. In an economic climate where the unemployment rate is already showing a worrying rise - partly due to increasing tax and labour costs for employers - the results are concerning.”
The new rules are also likely to put further pressure on the employment tribunal service, which is already facing a 5-year backlog. RSM’s research found quarter of employers felt an increase in tribunal claims was ‘very likely’ while 40% think it is ‘somewhat likely’. Recent data from the Courts and Tribunals Judiciary highlighted there are now 58,000 outstanding tribunal claims, up from 33,000 in Q4 2023/24, representing a 76% rise.
Charlie Barnes concludes: “The employment tribunal service is already struggling under a heavy caseload, and the change in unfair dismissal rules, together with a rise in AI-generated claims, is pushing it to breaking point. With cases taking up to five years to be heard, it’s impossible to see how the current system can provide swift access to justice, for either employee or employer, without additional resource or a complete overhaul.”