At a glance:
- The Act will increase costs, especially through day-one statutory sick pay access.
- New rules make it harder to change employee contracts, reducing business flexibility.
- Earlier unfair dismissal rights may make firms more cautious when hiring new staff.
- A new agency will increase enforcement, requiring better record-keeping from employers.
Passed late last year, the Employment Rights Act 2025 introduces sweeping changes to employment law across England, Scotland, and Wales. Two of those changes are likely to be higher costs and lower flexibility for small businesses.
“The biggest impact for small businesses will come from higher baseline employment costs and reduced flexibility when change is needed,” says Sarah Ropek, founding HR partner at The Fractional HR Department.
A good example of the impact comes from the new set of rules around statutory sick pay, she says. As of April 2026, employees will be able to access statutory sick pay from day one of their employment.
“More people will qualify, and sooner. That increases direct cost and makes proactive absence management important, requiring more management time.”
Btu costs are far from the only problem.
The hit to flexibility
Some of the most contentious proposals were moderated during the bill’s passage, including plans for day-one unfair dismissal rights. But the Act’s final version still has broad practical implications for small employers.
The Act also introduces changes across dismissal, contractual flexibility, and enforcement – areas that often present substantial operational challenges for smaller employers.
So how can small firms ensure they are prepared?
Many of the measures introduced by the Act are designed to create a more consistent baseline of protection for workers, particularly those in lower-paid or less secure roles.
But a number of the reforms seem set to limit small firms’ flexibility, particularly when it comes to talent management.
For example, employers will soon have less leeway to alter the terms of a contract. Under the new rules, dismissals linked to an employee’s refusal to accept changes to core contractual terms will be automatically unfair, except in limited circumstances (such as severe financial distress).
This change aims to tackle controversial “fire and rehire” and “fire and replace” practices. And the new laws do increase protections for employees. But they could also make it harder for employers to respond quickly to market, regulatory, or client-driven change, and increase the time and process required to make contractual changes.
“Changing terms and conditions for existing staff will become harder, even where the business case is sound,” says Ropek. “Change will still be possible, but it will take more structure, more time and better planning.”
Changes to unfair dismissal rules could also prompt more cautious approaches to recruitment.
Starting in 2027, the start of unfair dismissal protection reduces from two years’ employment to six months’ employment. The original bill proposed that protection against unfair dismissal should start from day one. That was watered down following concerns from business groups about the impact on hiring risk and flexibility.
The current cap on compensatory awards (previously the lower of a year’s salary or £118,223) will also be removed.
“The Act will no doubt make small business owners more cautious about taking on employees to support growth,” says Ropek.
“Unfair dismissal protection reducing to six months shrinks the margin for error when things aren’t working out with an employee.”
This means employers may be less likely to take a chance on a “higher-risk” candidate, she says.
“That can include people with less traditional experience, career gaps or those who need more support to get up to speed. So while the Act is intended to bring about more protections for staff, it may also make the job market harder.”
All of these changes increase the importance of good hiring decisions, clear expectations, and early performance conversations, she says.
Preparing for new administrative hurdles
Another significant change is the establishment of the Fair Work Agency, due to launch in April 2026. The agency will bring together enforcement of domestic agency rules, the National Minimum Wage, holiday pay, licensing of labour providers, and action against labour exploitation, with expanded powers to investigate non-compliance and issue penalties.
The creation of this agency is expected to increase proactive enforcement in areas that have historically been more reactive, says Ropek.
“If asked, employers will need to evidence compliance when it comes to holiday entitlement, holiday pay and working time records. These records will need to include accurate, auditable information and show how calculations and decisions were made.”
Changes to zero-hour contracts have yet to be finalised. But based on what has been published so far, Ropek notes that clear record-keeping around shifts worked, hours offered, and cancellations is also likely to become increasingly important.
“If businesses don’t have an electronic system to manage and hold these records, they should be looking to introduce one as soon as possible.”
This increased scrutiny may be daunting for time-poor business leaders. But the Act’s staged rollout is designed to give employers time to audit and update their processes. Measures will be introduced gradually between 2026 and 2027, with common commencement dates in April and October (a full implementation timeline is available here).
“There is still time to get ahead of [the changes] without panicking about every headline,” says Ropek.
As a starting point, she recommends small business leaders take the following four actions:
- Build statutory sick pay changes into forecasts so costs are understood early.
- Prompt a review of contracts and core people policies.
- Review roles alongside any planned business changes.
- Encourage investment in simple, reliable systems for holiday hours and pay records.
These steps can help firms reduce disruption, manage risk, and protect leaders’ time as the reforms come into effect, Ropek says. “The real cost is rarely the legal change itself. It is the firefighting when the basics are not in place.”
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