Employment Rights Act 2025: what small businesses and family enterprises need to know

The Employment Rights Bill received royal assent on 18 December 2025, becoming the Employment Rights Act (ERA) 2025. While many of the changes will be phased in over the next few years, small businesses and family-run enterprises should start preparing early, as several reforms will significantly affect staffing costs, contracts, and people management.

This article highlights the changes most likely to matter for smaller employers.

Unfair dismissal rights

It has been confirmed that the qualifying period for workers to bring an unfair dismissal claim will reduce from two years to six months. This means that more employees will be able to make claims sooner, only needing 6 months service to be eligible. It is expected that this change will come into effect from 1 January 2027.

For small and family businesses, this means:

• Less time to assess whether a new hire is the right fit;
• Greater importance of probationary periods, early performance management, and good documentation; and
• Increased risk exposure if dismissals are not handled carefully, even for relatively new employees.

Currently, the compensatory award for unfair dismissal is capped at the lower of (i) a year’s salary or (ii) £118,223. This cap is to be removed entirely, so that the compensatory award will be unlimited. This change is also expected to come into effect from 1 January 2027. The basic award remains capped at £21,570.

This significantly raises the financial risk of getting dismissals wrong, particularly where long-term employees or senior staff are involved.

Zero-hours and low-hours contracts

Qualifying workers and agency workers will have the right to be offered guaranteed hours at the end of every reference period (which is still to be defined but is likely to be 12 weeks), if the worker regularly works more hours than the minimum number set out in their contract. Qualifying workers will include those on a zero-hours contracts and those on a ‘low hours’ contract.

Employers will also need to give workers on a zero-hours contract and agency workers reasonable notice of shifts. Reasonable notice will also need to be given if shifts are cancelled or changed at short notice. When shifts are cancelled or changed at short notice, workers will be entitled to receive a ‘short notice payment’. Regulations are to be introduced to set out the minimum notice period and the cancellation payment amount, but it is expected that these changes will come into effect from 2027.

Key points for small businesses to consider include:

• This is not just a “right to request” guaranteed hours. Employers will be required to make an offer;
• Government consultation will take place before the final regulations are introduced, but businesses relying heavily on flexible staffing models should start reviewing their approach now and assessing which of their workers will be entitled to a regular hours contract; and
• Reliance on casual labour may require a shift towards a more stable workforce.

Fire and rehire

The ERA will also introduce restrictions on the use of fire and rehire, with it becoming automatically unfair to dismiss an employee for refusing to agree to certain variations to their employment contract. These variations will include changes to pay, hours, holidays and pensions. Similarly, it will be automatically unfair to dismiss an employee in order to replace them with someone else or re-engage then on different terms. There will be a limited exception to this is the change is in response to financial difficulties. It is expected that this change will take effect from October 2026.

Small businesses often rely on informal flexibility to change working hours, adjust pay or benefits and respond quickly to changing market conditions. These changes will mean less flexibility for employers wishing to change their terms and conditions and they may wish to consider whether any changes are required in the meantime. If changes are unavoidable, clear evidence of financial pressure should be kept.

Family-friendly rights

Paternity leave and unpaid parental leave are set to become day one rights from April 2026, meaning that no minimum service will be required. These changes are expected to be in force from April 2026. Currently employees require 26 weeks service to be eligible for paternity leave and 1 years’ service to qualify for parental leave. Employees will also be able to take paid paternity leave following a period of shared parental leave. This change will enable many more employees to take leave for potentially longer periods of time. The change to parental leave may be less noticeable for employers since it is rarely taken given it is unpaid. However, smaller business may particularly notice the changes to paternity leave as key members of staff may be absent. For family-run businesses, where individuals often hold multiple roles, this may require more careful workforce planning and contingency arrangements.

From 2027 it will become unlawful to dismiss employees during pregnancy, maternity leave, adoption leave or shared parental leave, or within 6 months of them returning to work, save for in limited circumstances (e.g., gross misconduct). It is important that employers have appropriate processes in place to avoid the risk of dismissing employees unlawfully.

How can small businesses prepare for these changes?

Whilst many changes will be phased in into 2027, allowing time for businesses to plan for these. You may wish to consider:

• reviewing current contracts, policies and practices;
• whether training is necessary;
• identifying flexible workers and those working on zero-hours contracts; and
• budgeting for higher employment costs.

How we can help

If you need assistance or have any questions on how these changes will impact your business, please contact our employment team.