How will the Employment Rights Act 2025 changes to unfair dismissal affect the use of fixed-term contracts?

by Darren Newman, Employment Lawyer, Employment Law Ltd

If an employee is engaged on a six-month contract and that is allowed to expire without being renewed, the employee will have been dismissed on the day the contract expires. If at that stage the employee has been continuously employed for six calendar months an unfair dismissal claim could be brought.

The reduction in the qualifying period for protection from unfair dismissal from two years to six months under the Employment Rights Act 2025 is due to take effect in January 2027 and there is no reason why the appointment of a new Prime Minister should lead to any change in that timetable. Anyone dismissed from 1 January onwards will therefore be able to bring an unfair dismissal claim if they have been employed for at least six months as at the date of their dismissal.

If an employee is engaged on a six-month contract and that is allowed to expire without being renewed, the employee will have been dismissed on the day the contract expires. If at that stage the employee has been continuously employed for six calendar months an unfair dismissal claim could be brought.

This dramatic reduction in the qualifying period raises questions around the use of what are often still called fixed-term contracts (although the Employment Rights Act 1996 refers to them as “limited-term” contracts). These are contracts that come to an end automatically on the occurrence of a “limiting event”. This may be the end of a fixed period of time, the completion of a project or the occurrence of some event – such as the return of an employee from maternity, adoption or shared parental leave.

The first key point to understand is that the non-renewal of a limited-term contract amounts in law to a dismissal (s.95(1)(b) of the Employment Rights Act 1996). If, therefore, an employee is engaged on a six-month contract and that is allowed to expire without being renewed, the employee will have been dismissed on the day the contract expires. If at that stage the employee has been continuously employed for six calendar months an unfair dismissal claim could be brought.

Measuring the qualifying period

Qualifying service is measured to the day. It begins on the first day of employment and ends on the day the contract terminates. So an employee who is employed on a contract that begins on Monday 14 September 2026 and expires on Friday 13 March 2027 will be able to claim unfair dismissal if that contract is not renewed. If the contract expires on Thursday 12 March, on the other hand, no claim will be possible because the employee will not quite have six months’ service at the time of dismissal.

Such an obvious ploy for avoiding liability would not be very admirable perhaps, but it would be legally effective provided the employer was very clear about the dates on which the contract both began and ended.

Reason for dismissal: Redundancy or some other substantial reason?

If the contract does end after the employee has gained at least six months’ service, the normal rules of fairness will apply in relation to the dismissal. Where an employer has allowed the contract to expire because they are unimpressed with the employee’s performance or behaviour, they should adopt a fair procedure appropriate to that reason. A limited-term contract cannot be used as a substitute for a probation period.

Where there has been a downturn in business and the employer decides to allow a contract to expire that would otherwise have been renewed, the reason for dismissal is likely to be redundancy. To what extent should the employer treat an employee on a limited-term contract as part of the overall pool for selection? It could certainly be argued that the mere fact that the contract has an expiry date should not in itself exclude the employee from consultation, a fair selection process and consideration for alternative work.

There is, however, case law suggesting that the non-renewal of a fixed-term contract may fall within the category of some other substantial reason. In North Yorkshire County Council v Fay (EAT, 1985) it was held that where it was clear that the contract was always intended to be temporary and that the purpose for which it was entered into was “no longer applicable” then those facts were capable of amounting to “some other substantial reason” for dismissal.

This suggests that where an employee has been hired to work on a specific project that has come to an end and the temporary nature of the work was clearly communicated from the outset there would be no need for the employer to put other employees at risk as part of a wider selection exercise.

Maternity, adoption or shared parental leave cover

One issue that employers will certainly have to contend with is in relation to those covering for maternity, adoption or shared parental leave. Hitherto an employer could engage an employee to cover another employee’s period of leave and there would be no risk of an unfair dismissal claim when the employee returned to work after being absent for a year or more. That changes from January.

S.106 ERA 1996 provides that a dismissal that occurs when an employee who has been absent on maternity, adoption or shared parental leave returns to work will be a dismissal for “some other substantial reason” provided that, on recruitment, the dismissed employee was informed in writing that this would happen. The dismissal is not automatically fair, however. An employment tribunal would still have to consider the question of reasonableness. So what does a fair dismissal look like in such circumstances? Might the employer have to put the “replacement” employee in a pool for selection that includes other employees doing the same or similar work?

The key issue must surely be communication. Was it made entirely clear to the employee that the contract was solely for the purpose of providing absence cover? If that has been the expectation throughout it is highly unlikely that a tribunal would expect an employer to place other employees at risk of dismissal. That could be highly disruptive to the business and would make any employee taking leave anxious that their return would cause one of their colleagues to be made redundant.

A reasonable employer must surely be entitled to avoid that problem by dismissing the replacement when the time comes – though perhaps it would be appropriate to consider offering alternative work when suitable vacancies are available.

Be open and manage expectations

It is important not to fall into the trap of thinking that because an employee qualifies for the right not to be unfairly dismissed their dismissal is a practical impossibility. The question is simply whether the employer has acted reasonably. While allowing a limited-term contract to end may be technically unfair, an employer should have little to fear if it has been open, transparent and honest with the employee about the reason for the limited term and managed their expectations accordingly.