UK Restructuring Risk: New Unfair Dismissal Rule
A UK Employment Rights Act provision effective January 2027 will make it automatically unfair to dismiss an employee and replace them with a non-employee, creating significant new risks for any business restructure.
A new provision in the UK's Employment Rights Act, effective January 2027, will introduce significant risk for employers undertaking workforce restructures. The incoming section 104K will create a new category of automatically unfair dismissal if the main reason for termination is to have the employee's work done by a non-employee, such as a contractor, consultant, or agency worker. Sophisticated counsel and clients should care because this type of claim requires no qualifying service period from the employee and compensation for a finding of unfair dismissal is uncapped. This creates a hidden trap where a dismissal for what an employer considers a genuine redundancy could be re-characterized as a prohibited 'workforce replacement,' even if the restructure has a strong commercial rationale. Ambiguities remain regarding the provision's interaction with existing TUPE regulations and its application to complex group structures. Employers planning any restructure that involves replacing permanent roles with flexible resources must now carefully document that the need for employees has genuinely diminished, keeping dismissal decisions clearly separate from any subsequent engagement of contractors to avoid costly legal challenges.