What Is the Employment Rights Act 2025?
The Employment Rights Act UK is designed to modernise UK employment law, ensuring fairer working conditions and greater transparency. It introduces new rights for employees and obligations for employers, with a particular focus on flexibility, job security, and pay equity.
The legislation received Royal Assent on 18 December 2025, making it one of the most substantial overhauls of employment law in a generation. Its provisions are being introduced in phases, starting from April 2026. These affect all employers, but SMEs may feel the impact more acutely due to limited resources and smaller HR teams. Understanding these changes will help you stay compliant and avoid costly mistakes.
“The Employment Rights Act 2025 represents a significant shift for UK businesses, and for SMEs, it’s an opportunity as much as a challenge. These changes aim to create fairer, more transparent workplaces, but adapting can feel daunting when resources are tight. Leveraging modern HR technology helps simplify compliance, reduce admin, and keep teams focused on growth and engagement.” — Matt Crook, General Manager at Access People SMB
Key Changes
Several major updates are coming into force. Here’s what you need to know:
Stronger Flexible Working Rights
Employees have had the right to request flexible working from day one since April 2024. The Employment Rights Act 2025 strengthens this by introducing a reasonableness test for refusals, expected in 2027. Employers will need to explain in writing why any refusal is reasonable. For SMEs, this makes documented, evidence-based processes for handling requests more important than ever.
Zero-Hours and Casual Worker Protections
The Act introduces new protections for zero‑hours and casual workers from 2026 onwards. From around October 2026, workers are expected to gain rights to reasonable notice of shifts and compensation for short‑notice cancellations. From 2027, employers will also be required to offer guaranteed hours to workers whose regular hours consistently exceed their contracted minimum, after a 12-week reference period.
Enhanced Family Leave and Redundancy Protections
The Act strengthens redundancy protections for those on maternity, paternity, or adoption leave, and adds stronger dismissal protections for pregnant workers and those returning from maternity leave. These changes are expected in 2027. SMEs should begin reviewing relevant policies ahead of implementation.
Day One Paternity Leave and Unpaid Parental Leave
From 6 April 2026, paternity leave and unpaid parental leave become day-one rights, removing the current service requirement. Pay entitlement remains unchanged, but SMEs will need to update policies and ensure scheduling can accommodate requests from new starters.
Changes to Statutory Sick Pay
From April 2026, the Lower Earnings Limit for SSP eligibility is removed and replaced with a rate of 80% of normal weekly earnings. The three-day waiting period is also scrapped, meaning SSP is payable from day one of illness.
Unfair Dismissal Qualifying Period Reduced
From January 2027, employees will gain unfair dismissal protection after just six months - down from two years. Anyone hired from around July 2026 could have full protection from day one of 2027.
Removal of the Unfair Dismissal Compensation Cap
Also from January 2027, the cap on unfair dismissal compensation (currently the lower of 52 weeks' gross pay or £118,223) will be removed entirely. Employment tribunals will be able to make uncapped awards, significantly increasing the financial risk of a misjudged dismissal, particularly for higher earners.
Fire and Rehire Restrictions
From 1 January 2027, new statutory restrictions will significantly limit the use of “fire and rehire” practices. Dismissal will be automatically unfair in most cases where fire and rehire is used to change core contractual terms, except in cases of severe financial difficulty. SMEs planning contractual changes should take legal advice early and ensure that any consultation process is thorough, fair, and well‑documented.
Pay Equity and Transparency
The government is consulting on proposals including a potential future requirement for salary ranges in job adverts, though this is not yet law. The Act also introduces Equality Action Plans on gender pay gaps and menopause support for employers with 250 or more employees - voluntary from April 2026, mandatory from 2027.
Stronger Enforcement and Penalties
The Act introduces tougher enforcement measures and significantly higher penalties for non-compliance, giving regulators increased powers to act against breaches. A new Fair Work Agency, launching in April 2026, will consolidate enforcement of minimum wage, SSP, and holiday pay into a single body with broad powers to enter premises and impose penalties. The time limit for bringing tribunal claims also doubles from three to six months, from October 2026. For SMEs, the stakes are high: financial penalties can be substantial and hit smaller businesses hardest, while reputational damage from failing to meet legal obligations can erode employee trust and harm your brand.
New Duty to Keep Holiday Records
From 6 April 2026, employers are required to keep records of annual leave and holiday pay for all workers. This is a new legal obligation and one that SMEs should act on straight away — ensure your HR or payroll system is set up to log leave accurately and that records are retained in line with your wider data obligations.
Timeline and Implementation Roadmap
The Employment Rights Act 2025 is already in force, with changes being introduced in phases. Here’s what you need to know:
December 2025: Already in Force
Two changes came into force straight away. Rules requiring workers in certain sectors to maintain minimum staffing levels during strikes were scrapped. And from 18 February 2026, dismissing an employee for taking part in lawful industrial action became automatically unfair, with no time limit. Previously, this protection only covered the first 12 weeks of a strike.
Action points for SMEs:
- Review your industrial action policies: Ensure any existing procedures around strike action reflect the new legal position.
- Brief your managers: Make sure line managers understand that dismissing someone for taking part in lawful industrial action is now automatically unfair.
April 2026: Day-One Rights and New Enforcement Body
From 6 April 2026, paternity leave and unpaid parental leave become day-one rights, SSP is payable from the first day of absence, and the Lower Earnings Limit is removed. Employers who fail to meet collective redundancy consultation obligations now face doubled protective awards of up to 180 days' pay, and the new Fair Work Agency launches with powers to inspect records and impose penalties.
Action points for SMEs:
- Pay equity review: Conduct an internal audit to identify and address any pay gaps, and consider including salary information in job adverts ahead of likely future requirements.
- Redundancy planning: Update redundancy procedures and train managers on obligations for employees on family leave.
- Update your parental leave policies: Remove any length-of-service requirements and communicate the changes to your workforce.
- Review your payroll setup: Ensure your payroll system is configured to apply SSP from day one of illness, at 80% of normal weekly earnings, without a waiting period.
- Set up holiday record-keeping: Ensure your HR or payroll system is configured to log leave and holiday pay accurately from 6 April 2026.
October 2026: Shift Notice Rights and Extended Tribunal Limit
From around October 2026, zero-hours workers gain the right to reasonable notice of shifts and compensation for short-notice cancellations. The window for bringing most employment tribunal claims also doubles from three to six months.
Action points for SMEs:
- Audit your casual and zero-hours workforce: Begin mapping working patterns to prepare for the guaranteed hours obligation arriving in 2027, and model the potential cost and scheduling impact.
- Update your record-keeping: With the tribunal window doubling to six months, ensure HR records, correspondence, and documentation are thorough and retained for longer.
- Review shift notice processes: Put clear procedures in place for issuing, changing, and cancelling shifts - and ensure managers are trained on the new obligations.
January 2027: Unfair Dismissal Reforms and Fire and Rehire Updates
The most far-reaching changes for SMEs arrive in January 2027: the unfair dismissal qualifying period drops from two years to six months, the compensation cap is removed entirely, and new statutory restrictions on fire and rehire come into force, significantly limiting its use.
Action points for SMEs:
- Revisit your probationary period processes: With protection kicking in at six months, robust and well-documented performance management from the start of employment is essential.
- Train your managers: Line managers need to understand the shorter window and the importance of following fair process when managing performance or conduct issues.
- Review your dismissal procedures: Ensure any dismissal process (at any stage of employment) is legally sound and thoroughly documented, given the removal of the compensation cap.
Impact on SMEs: Why This Matters More for Smaller Businesses
While the Employment Rights Act applies to all employers, its impact on SMEs is particularly significant. Unlike large organisations with dedicated legal and HR teams, smaller businesses often operate with lean resources and limited budgets. This makes adapting to new legislation more challenging, and the consequences of getting it wrong more severe.
Why SMEs Face Greater Challenges
- Limited HR capacity: Many SMEs rely on a single HR manager or even an office administrator to handle compliance, leaving little room for error.
- Budget constraints: Implementing policy changes, updating systems, and training managers can feel like a financial burden when margins are tight.
- Operational disruption: Smaller teams mean that even minor changes to scheduling or leave policies can have a big impact on productivity.
- Increased dismissal risk: With the unfair dismissal qualifying period dropping to six months and compensation becoming uncapped, the cost of a misjudged dismissal has never been higher for smaller employers.
The Risks of Non-Compliance
Failing to comply with the Employment Rights Act can have serious repercussions for SMEs, including:
Financial penalties: With increased enforcement powers granted to regulatory bodies (including the new Fair Work Agency), the financial consequences of non-compliance are becoming more severe. Fines for breaches are not only higher but also more frequent, especially as scrutiny intensifies across industries. For small businesses, these penalties can be particularly damaging, potentially diverting funds away from growth initiatives, staffing, or operational improvements. Even a single violation can have a disproportionate impact on cash flow, making proactive compliance a critical financial safeguard.
Reputational damage: Non-compliance doesn’t just carry financial risk; it can also erode trust in your brand. In today’s transparency-driven market, employees, customers, and partners are increasingly attuned to how businesses treat their workforce and uphold legal standards. A damaged reputation can make it significantly harder to attract top talent, retain existing staff, and build meaningful client relationships. For small businesses, where word-of-mouth and community trust often play a key role in success, reputational harm can be long-lasting and difficult to repair.
Employee turnover: Workers who feel their rights are ignored are significantly more likely to leave, leading to increased recruitment costs, loss of institutional knowledge, and operational strain. For small businesses, the impact is especially acute. With fewer employees overall, the departure of even one team member can mean the complete loss of a critical skill set or function. For example, if a one-person marketing team resigns, the business doesn't just lose a worker, it loses its entire marketing capability until a replacement is found and onboarded. This disruption can stall projects, reduce productivity, and place additional pressure on remaining staff, making retention and employee satisfaction even more vital for long-term stability.
Why Proactive Planning Is Essential
The good news is that SMEs can turn compliance into a strategic advantage. By acting early, you can:
- Spread the cost of changes over time rather than facing a last-minute scramble.
- Position your business as a fair and transparent employer, which can boost recruitment and retention.
- Reduce the risk of legal disputes and the associated costs.
Don’t wait until the deadlines hit. SMEs should start preparing now by:
- Updating policies and contracts
- Training managers on new rights and obligations
- Reviewing HR and payroll systems for compliance readiness
- Auditing probationary and performance management processes ahead of the January 2027 unfair dismissal changes
- Preparing payroll systems for SSP changes landing in April 2026
Looking Ahead: Building a Future-Proof HR Strategy
Compliance isn’t just about avoiding penalties; it’s about creating a workplace that attracts and retains talent. The Employment Rights Act 2025 is already in force, and its changes will continue to roll out through 2026 and 2027. For SMEs, embracing these changes early can position your business as an employer of choice in a competitive market. A proactive approach to compliance offers several advantages, such as improved employee engagement, reduced risk of costly fines and operational efficiency.
Technology plays a critical role in future-proofing your HR strategy. Modern HR and payroll systems can automate compliance checks, streamline policy updates, and provide real-time visibility into workforce data. This reduces administrative burden and frees up time for strategic initiatives like talent development and employee wellbeing.
Ultimately, compliance should be viewed as a competitive advantage, not a box-ticking exercise. Businesses that invest in robust HR processes today will be better equipped to adapt to future legislative changes and evolving employee expectations.
To find out more about how PeopleHR can support your workforce, watch our 4 minute demo or speak to our expert team.
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