Employment Rights Act 2025: SME HR Compliance, Automated

Unemployment hit 5.1% in December 2025 (up from 4.3% a year earlier), and it’s happening in the same breath as a major shift in UK employment law. When hiring already feels risky, the Employment Rights Act 2025 (formerly the Employment Rights Bill) adds new obligations, tighter timelines, and more admin.

Most companies get this wrong: they treat employment law changes as a “read it once, update the handbook” job. For SMEs, that approach fails because compliance isn’t a document—it’s a system. It’s how you issue contracts, track hours, run probation reviews, handle sick pay, communicate shifts, and keep records when something goes sideways.

This post sits within our Immigration, Skills & Workforce series because workforce stability isn’t just about filling roles—it’s about keeping them filled. When rules change around dismissal, sick pay, parental rights, and predictable hours, your ability to hire and retain people (including migrant workers and scarce-skill talent) depends on operational discipline. The practical answer for most SMEs is straightforward: standardise the process and automate the repeatable parts.

What changed: the Employment Rights Act 2025 in plain English

The headline is a faster, stricter employment environment for SMEs, with several rights moving closer to “day one” and protections tightening. Even where the government softened earlier proposals, the direction of travel is clear: less informality, more documentation, more predictability for workers.

Here’s what we know (as of Royal Assent on 18 December 2025), with guidance expected through 2026 and certain measures phased later.

Unfair dismissal: six months, not day one (but still a big shift)

The government stepped back from unfair dismissal rights from day one and landed on a six-month period instead. That’s still a major reduction from the long-standing 24-month qualifying period, and it changes the risk profile of hiring.

Practical implication for SMEs: probation management can’t be casual anymore. If you’re not documenting performance and fit during those first months, you’re storing up problems.

Compensation cap: lifting planned for January 2027

The Act includes lifting the compensation cap, due to come into force January 2027. Even if you rarely see claims, the financial exposure changes how you think about:

• manager training
• performance review notes
• consistent processes across teams

It also changes how insurers and advisers may view your risk.

Day-one sick pay and parental pay

Workers will receive sick pay and parental pay from day one. The policy intention is clear: reduce insecurity at work. The operational reality is also clear: more payroll edge cases, more HR queries, more “what do we do here?” moments.

Fire-and-rehire: softened, but still constrained

Fire-and-rehire isn’t banned outright, but it becomes unfair when changing certain “core terms”, including:

• required number of working hours
• pay
• pension
• rights regarding time off n- shift times and length

There’s also movement toward banning “fire and replace” where employees are replaced by contractors/agency workers doing largely the same work, with an exception for severe financial distress. These measures are expected around October 2026.

Zero-hours: more pressure for predictable hours

The Act doesn’t ban zero-hours contracts, but it pushes employers toward offering guaranteed hours when a worker’s regular worked hours exceed contracted hours (details of “qualifying” to come via secondary legislation).

It also introduces rights around reasonable notice of shifts and cancellations, and these are expected to extend to agency workers.

If your workforce relies on variable scheduling—hospitality, care, warehousing, field services—this is where the admin load ramps quickly.

Why this matters for the “Immigration, Skills & Workforce” agenda

When compliance is messy, retention suffers—and vacancies become harder to fill. In a tight labour market for specific skills, the best operators win by being reliable employers: clear contracts, predictable scheduling, well-run onboarding, and managers who don’t improvise.

This matters even more when you’re recruiting internationally or from under-supplied talent pools. Candidate experience spreads fast. So do complaints. If workers feel shifts change without notice or pay policies are unclear, you’ll see churn, sickness absence disputes, and damaged employer brand—none of which helps when you’re already facing skills gaps.

A useful stance to take: treat HR compliance as part of your workforce strategy, not “HR admin”.

The real SME challenge: compliance is a workflow, not a policy

Most SME compliance failures aren’t about bad intentions—they’re about inconsistent execution. Someone forgets to send a document. A manager cancels a shift by text with no audit trail. Probation reviews happen late. Hours creep above contract without anyone noticing until someone asks for guaranteed hours.

The Employment Rights Act 2025 increases the cost of that informality.

Here’s the practical lens I use: if a task is repeatable and has a compliance consequence, it should be systemised.

Where SMEs will feel the pinch first

From January through spring (when many SMEs set budgets, hiring plans, and headcount), you’ll likely see pressure in these areas:

1. Onboarding: issuing compliant contracts and day-one information consistently.
2. Absence and pay queries: sick pay eligibility and “what happens if…” scenarios.
3. Scheduling and hours: proving notice, documenting cancellations, tracking actual vs contracted hours.
4. Probation: managing the six-month window with evidence.
5. Change management: avoiding “core term” changes that drift into fire-and-rehire risk.

If you’re relying on spreadsheets, inbox searches, and memory, you’re going to feel it.

What to automate (and what not to) for Employment Rights Act compliance

Automation doesn’t replace HR judgement; it removes the repetitive admin that causes mistakes. The best setups give you a clean paper trail and timely prompts so managers do the right thing by default.

Automate these first (high value, low regret)

1. Contract and policy delivery + acknowledgement

   • Automatically send offer packs, contracts, and key policies.
   • Capture e-signature or acknowledgement.
   • Store a timestamped record.

2. Probation timeline and review prompts

   • Schedule check-ins at week 2, month 1, month 3, month 5.
   • Trigger manager reminders and a simple review form.
   • Log outcomes and action plans.

3. Sick pay and parental pay workflow

   • Standardise the “reporting sick” steps.
   • Auto-send the employee instructions (what you need, when you need it).
   • Notify payroll with structured data, not free-text emails.

4. Shift notice and change communications

   • Use one channel (portal/app/email) as the system of record.
   • Template messages for shift changes/cancellations.
   • Track notice windows and acknowledgements.

5. Hours tracking vs contract

   • Flag when regular worked hours exceed contracted hours.
   • Produce a report for roles potentially needing guaranteed-hours offers.

Be careful automating these (they need human oversight)

• Performance management decisions: automate reminders and forms, not the judgement.
• Contract changes to core terms: use workflows for approvals and documentation, but keep a human review step.
• Sensitive employee relations: keep automation supportive (documentation, scheduling meetings) rather than “robotic”.

A simple rule: automate process, not consequences.

A practical 30-day plan for SMEs (January-friendly)

You don’t need a big HR project to get safer quickly. You need a short sprint that fixes the highest-risk workflows.

Days 1–7: map the risk points

• List every place you currently use informal comms: WhatsApp shifts, text message cancellations, verbal probation chats.
• Identify your “single points of failure” (one admin who knows the process).
• Pull three recent employee files and check: contract issued, policies acknowledged, probation notes present.

Days 8–20: standardise and template

Create templates you can reuse (and automate later):

• onboarding email sequence (day 0, day 1, week 1)
• probation review form (short, factual, consistent)
• absence reporting steps (one-page employee guide)
• shift change/cancellation messages

Write them like a human. Clear, respectful, direct.

Days 21–30: automate reminders, logging, and reporting

Choose a small set of automations that reduce errors:

• automated reminders for probation milestones
• centralised storage of signed documents
• weekly hours vs contract report
• a standard “manager action list” email every Monday

By the end of the month you should be able to answer, quickly:

• “Who is inside their first six months and when are reviews due?”
• “Where’s the audit trail for shift cancellations?”
• “Which workers are regularly exceeding contracted hours?”

If you can answer those, you’re already ahead of most SMEs.

People also ask: quick answers SME owners need

When do Employment Rights Act 2025 changes take effect?

The Act received Royal Assent on 18 December 2025, but many measures will be phased through secondary legislation and guidance during 2026. Specific elements (like the compensation cap change) are slated for January 2027, while other measures are expected October 2026.

Does this ban zero-hours contracts?

No, but it increases the expectation of predictable hours. Employers will need to offer guaranteed hours in certain cases where regular hours exceed contracted hours, with details to follow.

Is fire-and-rehire now illegal?

Not outright, but it becomes much riskier around “core terms” like pay, hours, pension and shift patterns. Documented process and legal advice matter more here.

The smart move: treat compliance as operational hygiene

The Employment Rights Act 2025 doesn’t just change what’s legal; it changes what’s sensible. SMEs that keep hiring through 2026 will be the ones who make HR processes boring, consistent, and well-documented.

My strongest opinion on this: if your HR admin relies on heroic memory, you’re running a risk business—not just a people business. Automating the basics (documents, reminders, scheduling comms, hours reporting) is how you protect time, reduce disputes, and keep managers focused on performance and development.

As guidance rolls out during 2026, the question worth asking isn’t “what does the law require?” It’s: what would we want our HR process to look like if we were hiring 10 more people this year, across scarce skills and hard-to-fill roles?

If you’re planning to recruit, retain, and upskill in 2026, operational HR discipline is part of your workforce strategy—whether you call it that or not.