- According to new research from IRIS Software Group, 71% of SME employers plan to bring forward redundancy decisions due to concerns about increased exposure to claims under new unfair dismissal rules.
- With claims becoming possible after six months – and the compensation cap set to be removed entirely – employers face increasing exposure, with cases already costing £22,200 on average.
London, United Kingdom, April 1, 2026:UK SMEs are bracing for redundancy decisions when new hires don’t work out, as changes to unfair dismissal rules increase businesses’ potential exposure to claims and financial risks, new research from IRIS Software Group reveals.
The study of 500 SME HR managers* found that 71% are likely to make termination decisions before six months if problems arise, effectively shortening the window in which new hires have a chance to succeed. The results raise an important question for employers: rather than accelerating layoff decisions, is this a better opportunity to benefit from the first six months from the start?
Under the Employment Rights Act 2025, from 1st In January 2027, the waiting period for ordinary appeals for unfair dismissal will increase from two years to six months. At the same time, the salary cap will be removed entirely, increasing the potential financial risk for employers**.
It’s important to note that some termination claims – including discrimination and whistleblowing – already have no waiting period or compensation cap, meaning employees can bring a claim from day one of employment.
A common practice, now under surveillance
Early layoffs are already a reality for many SMEs. On average, HR managers say they have laid off two employees with between six and 24 months of seniority over the last three years.
The most commonly cited reasons were performance or ability issues (50%), followed by misconduct (43%), attendance or illness issues (33%), failure to meet targets (31%) and breakdowns in working relationships (17%).
A separate IRIS survey of 500 SME employees* found that almost one in five employees (19%) had been laid off or made redundant between six months and two years in the job. Of these, 73% felt the decision was unfair or unjustified – but only 20% filed a grievance, with 17% saying they were unable to do so because they had not yet reached two years of service.
Risk is increasing – and employees are ready to act
Of employees surveyed by IRIS, 63% said they were more likely to challenge dismissal under the new six-month rules – underscoring a potential increase in claims as access to rights increases.
The IRIS investigation revealed significant existing financial exposure. Two in five SMEs (42%) said they had defended an unfair dismissal claim in the last three years, costing an average of £22,200 in settlements, compensation, legal costs and lost time. Almost a quarter (23%) said cases had cost between £25,000 and £49,999, and 8% faced costs of up to £99,999.
Stephanie Coward, Managing Director of HCM at IRIS Software Group, said: “What is striking is that many of these situations already exist: employees feel that decisions are unfair, but do not have the opportunity to challenge them.
“These changes don’t necessarily create new risks, but they make existing issues much more visible and concrete for employees. The first six months of employment have never been more important, not just in terms of risk, but also as an opportunity to build a working relationship from the start.”
Reshaping Employer Behavior
While reforms aim to improve equity, they also reshape employer behavior. Nearly half (47%) of HR leaders said the changes would improve fairness but increase business risks, while 30% believed they would improve fairness without major disruption.
More than half (51%) of HR managers said the changes would make employers more reluctant to take risks when recruiting – with many planning to act sooner if problems arise and introduce more rigorous candidate screening. Three-quarters (76%) said they would become more cautious about candidates with limited references or patchy work histories, and the same proportion are considering introducing more thorough candidate screening processes.
At the same time, employers are seeking to strengthen the way probation is managed. More than a third (36%) said the changes would lead to improvements in management standards, with a clear focus on better documentation, earlier performance checkpoints and more structured processes in the first six months.
When documenting probation performance and termination decisions, 38% of SMEs still rely on email trails, 32% on paper records and 29% on spreadsheets, rather than dedicated HR software. A third (34%) of SMEs said they were considering investing in dedicated performance management tools, such as HR software, and a further 39% already have systems in place or plan to invest anyway.
Stephanie Coward added:“There is a clear tension in the data. Employers recognize the intent behind these changes – to improve equity – but many plan to respond by speeding up layoff decisions and becoming more cautious about who they hire.
“The risk is that probation becomes more about early risk management. The organizations that succeed will be those that treat the first six months as a structured, evidence-based program, not an afterthought.
“This is where having the right systems in place is critical. It’s no longer enough to rely on casual conversations or fragmented records: employers need a clear, consistent view of performance, decisions and supporting evidence from day one.
“Successful organizations won’t just manage risk, they’ll treat the first six months as a real opportunity to set people up for success. That means being intentional from day one: clear expectations, structured controls, and the right systems to provide managers with the support and evidence they need to make good decisions.”
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* The research was conducted by Censuswide, on behalf of IRIS Software Group, with a sample of:
- 500 HR managers in SMEs. The data was collected between 03/13/2026 and 03/19/2026.
- 500 employees in SMEs. The data was collected between 03/13/2026 and 03/17/2026.
An SME is defined as having fewer than 250 employees. Censuswide is a member of the Market Research Society (MRS) and the British Polling Council (BPC), and a signatory to the Global Data Quality Pledge. It adheres to the MRS Code of Conduct and the ESOMAR principles
**Gov.uk – Factsheet: Unfair dismissal
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About IRIS Software Group
IRIS Software Group is a global provider of mission-critical software and one of the UK’s largest privately owned software companies. IRIS provides software solutions and services to finance, HR and payroll teams, educational institutions and accounting firms that simplify processes and allow professionals to focus on the work they love. By simplifying, automating and providing insight into critical daily tasks for organizations of all shapes and sizes, IRIS ensures its customers can look to the future with certainty and confidence.
IRIS is the largest third-party online filer to the UK government. Ninety-three of the UK’s 100 largest accountancy firms use IRIS software. One in six employees in the UK are paid through IRIS payroll offerings, and globally, six million employees receive their payslips through IRIS software each month. More than 850,000 employees in the UK are managed by IRIS HR solutions. More than 12,000 UK schools and academies use IRIS, and four million parents and carers use IRIS apps to connect with their child’s school; 300 million messages are sent between schools and parents each year, and over £15 million in transactional payments are processed each month. IRIS is a Great Place to Work® certified and recognized as one of the Times 50 Best Employers for Gender Equality in 2023. IRIS is also recognized as a Best Workplace for Wellbeing, a Best Workplace in Technology, and a Best Workplace for Women.
To see how IRIS helps organizations succeed first time, every time, visit www.iris.co.uk or follow IRIS Software Group on LinkedIn, Twitter and Instagram.
Media contact:
Jennifer Peters | News@irisglobal.com
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