Employment Rights Act 2025: SME prep without panic

Unemployment hit 5.1% in December 2025 (up from 4.3% a year earlier), and plenty of small firms already feel that hiring has become slower, pricier, and riskier. Now add a major new piece of employment legislation into the mix: the Employment Rights Bill received Royal Assent on 18 December 2025 and is now the Employment Rights Act 2025, with guidance expected to roll out through 2026 and some measures staged into 2026–2027.

Most companies get this wrong: they treat employment law changes as a once-a-year policy rewrite. The reality? The Act creates ongoing operational change—contracts, onboarding, absence, scheduling, and internal communications all need tighter control. That matters even more in the Immigration, Skills & Workforce context, where labour shortages and retention pressures make your employee experience (and your compliance) a competitive advantage.

This post explains what’s actually in the legislation (as of Royal Assent), what it means in day-to-day SME terms, and how to keep up with 2026’s guidance cycle using simple automation workflows—not because you want more software, but because you want fewer dropped balls.

What the Employment Rights Act 2025 changes (the practical version)

Answer first: The Act shortens the unfair dismissal qualifying period, introduces day-one sick and parental pay, tightens rules around “fire and rehire/replace,” and increases obligations around predictable hours and shift notice.

A lot of the detail will arrive via secondary legislation and codes of practice. So your 2026 plan should assume: (1) change is phased, (2) specifics will be clarified, and (3) you’ll need a repeatable way to communicate and evidence updates.

Unfair dismissal: not day-one, but still much earlier

The headline change is that day-one unfair dismissal rights were dropped in favour of a six-month qualifying period. That’s still a dramatic reduction from the long-standing 24 months.

SME impact:

• Your probation period process becomes more than a formality. If you’re not documenting performance conversations early, you’re leaving yourself exposed.
• Hiring managers need a clearer “what good looks like” plan for the first six months: objectives, feedback cadence, and training.

Compensation cap lifted (from January 2027)

The Act includes lifting the compensation cap, which is causing concern among employers. This rule is due to come into force from January 2027.

SME impact: disputes become a bigger financial risk, so prevention is cheaper than cure. Clear processes, timely records, and consistent communication matter more.

Day-one sick pay and parental pay

Workers will receive sick pay and parental pay from day one. Pregnant women and new mothers also receive enhanced protections.

SME impact:

• Onboarding and payroll setup must be accurate from day one—no “we’ll sort it next month.”
• You’ll want consistent absence reporting and return-to-work workflows.
• In tight labour markets (especially where immigration rules restrict supply), these rights can support retention—if you communicate them properly.

Fire-and-rehire: softened, but still risky

Answer first: Fire and rehire isn’t fully banned, but it becomes unfair if an employer changes certain core terms. Fire and replace (swapping employees for contractors/agency workers doing the same work) is set to be banned, with an exception for severe financial distress.

Under the new approach, fire and rehire will be deemed unfair if the employer changes core terms, including:

• Required number of working hours
• Pay
• Pension
• Rights regarding time off
• Shift times and length

Fire and replace practices are expected to be banned if the employee is replaced by contractors, agency workers, or individuals doing largely the same work—unless the company is under severe financial distress.

Timing: these measures are expected around October 2026.

What to do now (before the codes land)

You don’t need to stop making changes to roles and schedules. You do need to stop doing it informally.

Put this in place during 2026:

1. A “core terms” checklist for any contract change (hours, pay, pension, time off, shift pattern).
2. A consultation template (even for small teams): what’s changing, why, options considered, timeline.
3. A decision log: who approved, what evidence, what alternatives were rejected.

That third point sounds bureaucratic, but it’s the difference between “we acted reasonably” and “we can’t prove anything.”

Zero-hours and predictable hours: the shift notice era

Answer first: Employers will be expected to offer guaranteed hours to qualifying workers when regular working hours exceed contracted hours, and many workers will gain rights to reasonable shift notice (including changes/cancellations), extended to agency workers.

The Act doesn’t ban zero-hours contracts outright, but it pushes employers toward predictability.

Guaranteed hours offers

Employers will be expected to give qualifying workers an offer of guaranteed hours if the hours worked regularly exceed contracted hours. The definition of “qualifying” will be set later.

SME impact: if you rely on flexible staffing (hospitality, care, retail, seasonal logistics), you’ll need better tracking of actual hours vs contracted hours and a process for issuing offers.

Reasonable notice of shifts (and changes)

Many workers will have the right to reasonable notice of shifts and shift changes/cancellations. These rights are set to extend to agency workers.

SME impact: spreadsheets and WhatsApp rotas are going to hurt here. Not because they’re “bad,” but because they’re hard to audit and easy to miscommunicate.

The real risk for SMEs in 2026: communication debt

Answer first: The Act creates a rolling series of updates through 2026; the biggest SME failure mode will be inconsistent internal communications—different managers saying different things, with no evidence trail.

The Federation of Small Businesses has warned that 65% of small employers are worried about the volume of changes and want a staggered rollout with clear guidance. I agree with the worry, but not the default response. Waiting for perfect clarity usually means you’re late.

Here’s the stance I’ve found works: prepare your system, not your guesses. Build a repeatable way to:

• capture guidance updates,
• translate them into a policy change,
• brief managers,
• notify employees,
• store acknowledgements.

That’s operational discipline—and it’s also where automation earns its keep.

A simple automation blueprint to stay compliant (and sane)

Answer first: Use lightweight automation to standardise HR communications: one source of truth for policy updates, automated staff notifications, tracked acknowledgements, and manager prompts at the right moments.

This is the bridge many SMEs miss: the tools you use to market to customers are often the same class of tools that can run internal comms and workflows. Think “automated journeys,” not “marketing emails.”

Workflow 1: Legislation update → policy change → staff acknowledgement

Goal: Every policy update is communicated once, consistently, and logged.

• Trigger: a policy is updated (e.g., sick pay day-one rules, shift notice rules)
• Actions:
  1. Create an internal announcement email + a short manager version
  2. Send to relevant employee segments (e.g., hourly workers, managers, new starters)
  3. Require a click-to-acknowledge form
  4. Store acknowledgement records by employee

Why it matters: if a dispute arises in 2027 around compensation caps, the first question will be “what did you tell people, and when?”

Workflow 2: Probation “six-month” cadence

Goal: Turn the six-month unfair dismissal qualifying period into a structured onboarding and performance habit.

• Day 7: role clarity check-in prompt to manager
• Day 30: training completed? objectives agreed?
• Day 60/90: performance review template auto-sent
• Day 150: “decision point” reminder (confirm, extend, or performance plan)

Why it matters: it reduces risk and improves retention—crucial when skills are scarce and immigration constraints limit the hiring pool.

Workflow 3: Variable hours monitoring and predictable-hours offers

Goal: Spot patterns early, not after an employee complains.

• Monthly trigger: import hours worked (or push from scheduling/payroll reports)
• Rule: flag staff whose average hours exceed contracted hours for a defined period
• Action: create a task for HR/manager to review and issue an offer where required

Why it matters: you’ll be ready when “qualifying” criteria are finalised, because your tracking is already consistent.

Workflow 4: Shift notice and change notifications (with audit trail)

Goal: Reduce rota chaos and prove notice was given.

• Scheduled shifts sent automatically via email/SMS
• Any change triggers:
  • immediate notification,
  • a timestamped record,
  • optional confirmation request (“reply YES”) for critical roles

Why it matters: reasonable notice is easy to argue about and hard to evidence unless you design evidence in.

Snippet-worthy truth: Compliance isn’t a document. It’s a trail of decisions, messages, and receipts.

People also ask: quick answers for busy owners

Do I need to rewrite all contracts now?

No. Update templates and build a process for issuing variations. Use 2026 to standardise how changes are proposed, approved, and communicated.

Should I stop using zero-hours contracts?

Not automatically. But you should assume more obligations around predictability and offers of guaranteed hours once criteria are clarified.

What’s the fastest win?

Fix onboarding and probation. The six-month change makes early documentation and training the cheapest risk reducer you’ve got.

What to do this quarter (a realistic SME checklist)

Answer first: Focus on repeatable systems that will still work when secondary legislation fills in the blanks.

1. Map your risk hotspots: variable hours, high turnover roles, heavy use of agency staff, informal rota changes.
2. Create a single policy hub (even if it’s just one shared folder with version control and naming rules).
3. Standardise three templates: contract variation letter, consultation summary, manager briefing note.
4. Implement two automated journeys: (a) policy update + acknowledgement, (b) probation cadence.
5. Set a monthly “guidance review” slot: 30 minutes, same people, same output—a short internal update.

If you’re running a business in 2026’s labour market, this is part of workforce strategy, not admin. When the best candidate has two offers, your ability to offer clarity, fairness, and predictable processes counts.

The Employment Rights Act 2025 is pushing the UK toward stronger job security and more predictable working practices. SMEs that treat this as a systems project—supported by automation—will spend less time firefighting and more time hiring, training, and keeping good people.

What’s the one HR process in your business that currently depends on someone “remembering to do it”? That’s the first one to automate before the next wave of 2026 guidance lands.