Understanding the Employment Rights Act: Essential Insights for Employers

The Government’s flagship proposal of unfair dismissal rights from ‘day 1’ of employment has been dropped in the face of significant resistance from the House of Lords.  

Instead the new Employment Rights Act provides that employees will be able to claim unfair dismissal after 6 months of employment. In return for this concession, the Government has also completely removed the cap on compensation for unfair dismissal claims, which was previously set at the lower of either 52 weeks’ pay or a ‘compensation cap’ or maximum, set by Government each year (currently £118,233). Indications are that the Government will undertake a review and impact assessment of this change.

This major change, which we believe will come into force from 2027, will make the right to claim unfair dismissal significantly more accessible and is likely to lead to a rise in Employment Tribunal claims.

How can employers prepare?

• Ensure your recruitment, pre-employment screening and on-boarding processes are robust – the key will be recruiting the right candidate for the role
• Introduce clear and robust processes for managing capability and performance during the first 6 months of employment. We suggest mandatory line manager check ins on at least a monthly basis with written documentation to support and evidence the process
• Arrange training for your recruiters and HR advisory staff on the changes and training for your line managers on performance management / capability procedures during the first 6 months of employment

‘Fire and rehire’ refers to the practice of changing employment terms and conditions by way of dismissal and re-engagement, typically in situations where it has not been possible to obtain employee or trade union consent. The Act introduces significant reforms aimed at curbing the practice of fire and rehire. 

Under the new proposals, employers will be prohibited from dismissing employees in order to impose changes to key contractual terms such as pay, working hours, holiday entitlement, pensions and anything else the Secretary of State sets out in Regulations (which could include benefits). These changes, referred to as “restricted variations” will be protected by law, and any dismissal because the employee did not agree to the employer’s attempt to vary these terms or because the employer intends to employ another person or re-engage the employee on varied terms to carry out substantially the same role, will be automatically unfair.

The Act also prevents employers from using fire and rehire to introduce a variation clause that would allow them to unilaterally change employment terms. However, existing flexibility clauses will remain valid. 

An employee’s dismissal will not be automatically unfair if an employer can show both that:

• The reason for the restricted variation was to eliminate, prevent or significantly reduce or significantly mitigate any financial difficulties which at the time of the dismissal, were affecting, or were likely in the immediate future to affect:
  • The employer’s ability to carry on business as a going concern; or
  • If the employer is in the public sector, the financial sustainability of carrying out the employer’s statutory functions.
• In all the circumstances, the employer could not have reasonably avoided the need to make a variation.

Even if the employer can show these requirements are met, the employer will still need to show that dismissal was fair in all the circumstances, which will include the consultation carried out and anything offered to the employee in return.

This is a very high bar for employers to meet. Employers will not be able to make changes to key terms to improve operational or financial efficiency or harmonise terms.

The Act also contains restrictions on dismissing an employee to replace them with someone who is not an employee (for example, an agency worker or independent contractor) to do substantially the same work.

Where an employer dismisses an employee for refusing to accept a contractual variation that is not a 'restricted variation', the dismissal will not be automatically unfair. Employment Tribunals will be required to decide whether the dismissal is fair according to the usual tests, including assessing the employer’s rationale, the extent of consultation carried out, and anything affected employees were offered in return for the changes. 

The reforms are expected to come into force in October 2026.

How should employers prepare?

Build flexibility into employment contracts for new starters, for example well-drafted contractual flexibility and variation clauses. This may give you some opportunity to change terms of employment without needing to obtain the consent of employees. Keep in mind that there are restrictions on an employer’s ability to rely on these types of clauses to make changes and take legal advice where needed. 

Organisations that are considering making significant changes to terms and conditions may wish to make those changes before the new law takes effect. Keep in mind the need to allow sufficient time for consultation.

As it stands, employers proposing to dismiss as redundant 20 or more employees “at one establishment” (or site as we’ll call it) within a 90-day period must collectively consult with appropriate representatives of those employees before making any redundancies. If they don’t, employees can claim a protective award of up to 90 days’ pay.

Under the Act, two key changes are proposed:

• Where employees are being made redundant at more than one site, separate regulations will set out the threshold for deciding whether the obligation to collectively consult is triggered. The new threshold could be a number higher than 20 or based on a percentage.
  
  The Act says that when carrying out collective consultation, the employer does not need to consult all employee representatives together or try to reach the same agreement with all representatives. This is presumably to address concerns that the Act would require representatives to be brought together to be consulted with over separate batches of unconnected redundancies at different sites. 
• The Act will double the penalty (known as the ‘protective award’) that can be awarded by Tribunals where employers fail to meet their obligations to collectively consult with employees about redundancies - from 90 days to 180 days’ gross pay per employee.

The government says it will consult on collective redundancy measures in winter 2025 / early 2026. The planned doubling of the collective redundancy protective award is planned to come into effect in April 2026. The new collective consultation threshold for redundancies across more than one site will be introduced in 2027.

How should employers prepare?

Although we don’t yet know what the threshold number or percentage will be to trigger the obligation to collectively consult, employers with multiple sites should start thinking about how they can better track and record redundancies across their business on a rolling basis. Without this, employers will run the risk of inadvertent and potentially costly breaches of collective redundancy requirements.

Since 26 October 2024, employers have had a duty to “take reasonable steps” to prevent sexual harassment of their staff in the workplace. The Act will extend employer responsibilities from October 2026 by: 

• Requiring employers to take “all reasonable steps” to prevent sexual harassment (rather than just “reasonable steps”). What will constitute “reasonable” steps is likely to include risk assessments, action plans and complaint handling procedures, amongst other measures
• Introducing a new liability on employers for harassment on any ground (not just sexual harassment) of their employees during the course of their employment by third parties such as customers, clients or suppliers unless the employer took all reasonable steps to prevent this

From April 2026, disclosures about sexual harassment will be added to the list of what counts as a qualifying disclosure under whistleblowing law. Sexual harassment disclosures will be protected provided they meet the requirements for a protected disclosure. This makes it clearer that complaints or disclosures about sexual harassment can amount to whistleblowing, rather than adding anything new.

How should employers prepare?

• Review and update policies to include bullying and harassment by third parties
• Implement a robust procedure for reporting and responding to complaints
• Undertake a risk assessment and put together an action plan to manage that risk
• Provide updated and relevant workplace behaviour and DEI training for all staff

For more information, you can read our detailed update.

There has been longstanding concern about the misuse of non-disclosure agreements to prevent disclosures about sexual harassment. The Act includes a proposal that would make Non-Disclosure Agreements (NDA) covering harassment and discrimination between an employer and worker void. The government had indicated it may allow some NDAs in an ‘excepted agreement’. The government’s Impact Assessment on the proposed change indicates that it’s likely that any regulations introduced would allow NDAs to be included in a settlement agreement if the NDA is requested by the worker.  

What should employers do?

Look at how you’re currently using NDAs and make sure you follow the new rules when they come into effect. Consider enhancing harassment and discrimination training for employees to help minimise risk.

Currently, Statutory Sick Pay (SSP) is payable from day 4 of sickness absence and employees need to earn at least £123 a week to qualify for it. 

The Act will change this so that SSP will be payable from the first day of absence. In addition, the lower earnings limit will be removed so sick pay will become accessible for lower earners. An estimated 1.3 million low-paid workers will gain access to SSP for the first time.  

Under the new plans, lower earners will be eligible to receive 80% of their average weekly earnings where this is lower than the flat weekly rate of SSP, currently £116.75 and rising to £118.75 in April 2025. 

This means that all employees will be entitled to the lower of the SSP weekly flat rate or 80% of average earnings as soon as they are off sick from work.

How should employers prepare?

• Review and prepare to implement an updated sickness absence policy
• Review your absence management procedures

Currently employees have a day 1 right to make flexible working requests and can do so twice a year. Employers must deal with requests in a reasonable manner.

Under the Act, employers will only be able to refuse requests if it is reasonable to do so based on one or more of the eight specified grounds on which employers may refuse a request. A key change is that employers will be required to explain why they believe their refusal is reasonable. The eight grounds on which employers may refuse a request are to remain unchanged.

Employers will still have some discretion to assess requests based on business needs and operational feasibility. 

There is no change to the penalty for breach of the flexible working rules (a maximum of 8 weeks’ pay capped at £5,600). The real risk for employers will remain the potential for discrimination claims where requests are turned down, rather than from claims for breaches of the technical rules around dealing with requests. 

These measures are set to take effect in 2027. 

How should employers prepare?

• Consider gathering data on recent requests to assess scope of potential issues
• Review flexible working policies and establish clear decision-making processes 
• Train managers on the new rules
• Update flexible working outcome letters to explain why the employer considers it is reasonable to refuse the application on the ground(s) relied on

The Act proposes to introduce ‘day one’ rights for workers to:

• Paternity leave 
• Unpaid parental leave (which gives parents up to 18 weeks’ unpaid leave, at the rate of up to four weeks a year for each child over their childhood) 
• Unpaid bereavement leave 

In addition, it is proposed that unpaid bereavement leave, which currently is a right available only to bereaved parents, will be extended so that all bereaved workers are entitled to unpaid leave at the rate of “at least one week” for each bereavement.

‘Day 1’ rights to paternity leave and unpaid parental leave are expected to come into effect in April 2026 and unpaid bereavement leave in 2027.

The Act also includes measures to protect from dismissal women who are pregnant, on maternity or other family leave and during six months after their return to work (with some specific exceptions).

How should employers prepare?

Once the proposals have been clarified:

• Update your family leave policies for these changes
• Ensure managers are aware of the new rules and are equipped to manage workloads around people taking time off for family or bereavement leave

Some significant changes are planned in relation to trade unions and industrial action: 

• Employers will be required to inform workers of their right to join a trade union. Employers will have to give workers a written statement advising them of their right to join a trade union at the same time as providing the worker's section 1 statement
• Greater rights of access to workplaces for unions – the Act will facilitate physical access to the workplace for unions but also digital access (with details to be set out in regulations), as well as enhancing rights to time off for union officials
• Simplifying the statutory trade union recognition process and changes to the statutory provisions around organising industrial action, including reducing the thresholds for support (for example, including a measure no longer requiring a 40% support threshold at the recognition ballot stage but instead just a simple a simple majority in favour to have recognition approved)
• Removing the minimum service level requirements for certain sectors, and the information and turnout requirements for ballots.

How should employers prepare?

Look at how well your existing employee information and consultation facilities such as councils and forums are already working and whether they could be enhanced to effectively address the need for union involvement in the workplace “in-house”.

For more information, you can read our detailed update.

New changes under the Act will mean that: 

• Employers will be obliged to offer eligible workers (zero hours workers and agency staff) a contract for guaranteed hours, reflecting the hours they regularly work over a reference period likely to be 12-weeks. The obligation to offer a guaranteed hours contract will rest with the end hirer
• Eligible workers (zero hours workers and agency staff) will also be entitled to reasonable notice of any changes in shifts - with proportionate compensation for shifts that are cancelled or curtailed at short notice 
• The hirer and the agency will share responsibility for providing reasonable notice of shifts and agency workers will be eligible for compensation for shifts cancelled or changed at short notice. Responsibility for making these payments will fall to the agency, although the government has confirmed agencies will have the ability to recoup such payments in certain circumstances
• Collective agreements to contract out of the rights to guaranteed hours and reasonable notice of shifts for workers and agency workers will be allowed. This will enable an employer and an independent trade union to reach an agreement that excludes the new rights and agree something else, as long as these new terms are incorporated into the contract. In the case of agency workers, the collective agreement can be with the person who has the contract with the agency worker. 

How should employers prepare?

Audit your workforce to identify individuals who may be caught by these changes. Then consider the best model for flexing staff numbers and plan how you will give more certainty about hours. Review any contracts and agency agreements and set expectations of clear communications
 

Employers with 250 or more employees are currently required to publish specific Gender Pay Gap data annually and publishing gender equality action plans is encouraged but optional. The Act would compel the same large employers to detail the evidence-based actions they are taking to both improve gender equality, and support employees during the menopause. This is being introduced on a voluntary basis in April 2026, and on a compulsory basis in 2027.

Further, these large organisations will be required to inform the government (through the existing reporting service) which companies they outsource from. The reporting service website would then show that these organisations are linked, with the intention that linking the companies will result in increased pressure on contracted suppliers of outsourced services to reduce their gender pay gaps.

How should employers prepare?

• Start preparing for gender equality action plans being compulsory and consider the steps your organisation can take to address any gender pay gaps
• Introduce a menopause policy outlining your organisation's commitment to inclusivity
• Train staff on menopause awareness to create a supportive working environment

Most Employment Tribunal claims need to be brought within three months of the act complained of, for example dismissal, discrimination, harassment or deduction from wages.

The Act will extend time limits for bringing tribunal claims from three to six months. This will apply to all types of claims, including discrimination and unfair dismissal (although it does not currently apply to breach of contract claims). 

This change is expected to take effect in October 2026.

How should employers prepare?

• Continue to keep accurate, contemporaneous notes of decisions impacting employees
• Ensure your organisation’s data retention policy allows you to keep disciplinary, grievance and performance management documents / emails etc for long enough to allow you to respond to claims brought six months after the employee’s termination date

Umbrella companies will be regulated to bring them within scope of the Employment Agency Standards Inspectorate’s (and Fair Work Agency’s) remit. The aim is for workers to have similar rights and protections when employed through an umbrella company as they would if hired directly by a recruitment agency.

How should employers prepare?

• Audit your organisation’s use of umbrella companies and consider whether to employ the individuals directly or continue to engage them through a recruitment agency
• In any event, ensure that your organisation has a clear record of any contracts with umbrella companies and that you understand the rationale around PAYE practices.