UK Employment Law Changes 2026: What SMEs Need To Know
By Jeremy Parkinson, Partner and Head of Employment Team
In December 2025, the Employment Rights Bill received Royal Assent, becoming the Employment Rights Act 2025. This landmark legislation represents the most substantial reform of UK employment law in decades and will fundamentally reshape the relationship between employers and employees throughout 2026 and 2027. For small and medium-sized enterprises (SMEs), these changes demand immediate attention, comprehensive policy reviews, and strategic adaptation to avoid costly compliance failures and tribunal exposure.
With the next phase of changes coming into effect from October 2026, now is a good time for SMEs to review their employment contracts, policies and procedures. This article looks at what has already changed, what is coming next and what employers should prepare for in 2027.
Important context: The Employment Rights Act 2025 is being implemented on a phased basis throughout 2026 and 2027. Some provisions are already in force, while further changes are due to take effect in October 2026 and January 2027, with additional reforms expected later in 2027. Several measures remain subject to consultation and secondary legislation, so employers should continue to monitor developments and ensure their employment practices are kept under review.
The New Employment Rights Landscape
The Employment Rights Act 2025 delivers on the Labour government's manifesto commitment to "Make Work Pay" and introduces sweeping changes across multiple areas of employment law. The government estimates that over 15 million workers will benefit from these reforms, including through new day one rights to paternity and parental leave and changes to Statutory Sick Pay.
However, for SMEs already grappling with rising operational costs, increased employer National Insurance contributions and National Living Wage increases, the Employment Rights Act represents a significant additional compliance burden. Understanding what has already changed, what is coming next and what further reforms are expected will be essential to managing risk and cost.
Changes Already In Effect In 2026
1. Day One Statutory Sick Pay
From 6 April 2026, the three-day waiting period for Statutory Sick Pay (SSP) was abolished and the lower earnings limit was removed. Workers now qualify for SSP from the first day of absence, regardless of their earnings level.
What this means: Employers face increased SSP costs and additional payroll administration. Systems should be updated to calculate and pay SSP from day one, and budgets should reflect the higher frequency of SSP claims. For SMEs with limited margins, this represents a material cost increase that must be factored into financial planning.
2. Day One Paternity and Parental Leave
Paternity leave and ordinary parental leave also became day one rights on 6 April 2026. Previously, employees had to work for 26 weeks before qualifying for paternity leave and one year for parental leave. These qualifying periods have been removed.
What this means: Workforce planning and cover arrangements must account for the possibility of new employees taking immediate leave. While the right is unpaid for parental leave, the administrative burden and operational disruption remain. SMEs should review their approach to temporary cover and consider how new starters' leave rights affect recruitment and onboarding.
3. Collective Redundancy Protections
From 6 April 2026, the maximum protective award for failure to comply with collective redundancy consultation requirements increased from 90 days' pay to 180 days' pay per affected employee.
What this means: Employers considering redundancies should ensure they understand their collective consultation obligations and allow sufficient time to comply with the relevant requirements. The increased potential financial consequences make it particularly important that businesses seek appropriate advice before starting a redundancy process where collective consultation may apply.
4. Trade Union Recognition Changes
Changes to trade union recognition processes were introduced from April 2026, including changes to recognition ballots and the requirements for achieving recognition.
Further trade union reforms are being introduced in stages, wither more changes due to take effect from October 2026.
What this means: SMEs should prepare for increased union engagement. Review your policies on union access, ensure managers understand the new requirements and develop a constructive approach to union relations.
5. Flexible Working from Day One
Flexible working became a day one right on 6 April 2024 under the Employment Relations (Flexible Working) Act 2023. Employees can request flexible working from their first day of employment, and employers must respond within two months.
What this means: If your business has not already adapted to the day one flexible working right, now is an opportunity to conduct a comprehensive review. Ensure your policies clearly explain how requests will be assessed, what business reasons may justify refusal and how decisions will be communicated. Train managers to handle requests fairly and consistently.
Changes Taking Effect In October 2026
1. Employment Tribunal Time Limits
From 1 October 2026, the time limit for bringing most Employment Tribunal claims will increase from three months to six months. This gives claimants more time to pursue claims and increases the period during which employers must retain relevant documentation.
What this means: SMEs should review their record-keeping and data retention policies to ensure relevant employment records are retained for an appropriate period. Good records will be essential in responding to and defending potential claims.
2. Enhanced Sexual Harassment Duties
From 30 October 2026, employers will be required to take "all reasonable steps" to prevent workplace sexual harassment. Employers will also have obligations in relation to harassment by third parties such as customers or suppliers.
This goes further than the current obligation to take "reasonable steps". Sexual harassment will also become a protected ground for whistleblowing.
What this means: Employers should implement comprehensive anti-harassment policies, conduct regular training, establish clear reporting mechanisms and take proactive measures to address third-party harassment risks. The shift from "reasonable" to "all reasonable" steps raises the bar for employers and increases the importance of being able to demonstrate the preventative measures that have been taken.
3. Further Trade Union Reforms
From 30 October 2026, further changes to trade union rights will take effect, including a new legal right for independent trade unions to access workplaces and engage with workers, either in person or virtually. Employers will also be required to inform workers of their right to join a trade union.
What this means: SMEs should review their existing policies and procedures around trade union engagement and ensure managers understand the changes. Businesses should also consider how they will respond to requests for workplace access and ensure they are prepared for increased union activity.
4. Tipping Regulations
New tipping laws will require employers to consult workers or their representatives before creating or updating a tipping policy, which must be reviewed at least every three years. Transparency around tip allocation and distribution will be mandatory.
What this means: Hospitality and service sector businesses must review how tips, gratuities, and service charges are handled. Implement a fair, transparent policy, consult with staff, and ensure all workers understand how tips are distributed. Non-compliance could lead to tribunal claims and reputational damage.
Changes Taking Effect In January 2027
1. Six-Month Unfair Dismissal Qualification Period
From 1 January 2027, the qualifying period for ordinary unfair dismissal protection will reduce from two years to six months. This represents a compromise from the government's original proposal for day one unfair dismissal rights.
What this means: SMEs will have significantly less time to assess new employees before unfair dismissal protection applies. Structured probation processes, clear performance management, regular reviews and comprehensive documentation will become increasingly important. Managers should be trained to identify and address performance or conduct issues early, as the six-month window leaves little room for error.
Businesses should also review their recruitment processes to improve candidate selection and reduce the risk of poor hires.
2. Removal of Unfair Dismissal Compensation Cap
From 1 January 2027, the current statutory cap on unfair dismissal compensation will be removed. There will be no upper limit on the compensatory award that a tribunal can make for unfair dismissal, although compensation will continue to be based on the claimant's actual and projected losses.
What this means: The potential financial risk of defending unfair dismissal claims will increase, particularly for higher-earning employees. SMEs must treat every potential dismissal with care, ensuring robust procedures, comprehensive documentation and genuine procedural fairness.Employers should consider employment practices liability insurance to help manage this increased exposure.
3. Fire and Rehire Protections
From 1 January 2027, dismissing employees and then rehiring them on worse terms and conditions will become automatically unfair in most cases, subject to limited exceptions. A statutory code will regulate how employers can change terms by dismissal and re-engagement, and tribunals will be empowered to increase compensation by up to 25% if the code is breached.
What this means: Employers facing financial difficulties should explore alternative approaches to restructuring employment terms, including genuine consultation, voluntary agreement and demonstrable business need. SMEs should seek legal advice early if contractual changes are necessary.
Further Changes Expected in 2027
Several additional reforms are expected during 2027, although specific implementation dates have not yet been confirmed:
1. Zero-hours contract reforms
Employers will be required to offer guaranteed hours contracts that reflect workers' average work patterns, provide reasonable notice of shifts and pay compensation for short-notice cancellations. Workers with irregular hours will also gain the right to request more predictable working patterns.
What this means: SMEs that rely on flexible, seasonal or zero-hours staff should review how they schedule and manage their workforce. Businesses should prepare to implement systems to track average hours, provide advance notice and calculate compensation. The shift toward guaranteed hours may increase costs and reduce operational flexibility, particularly in sectors like hospitality, retail and events management.
2. Enhanced protections for pregnant women and new mothers
It will become unlawful to dismiss pregnant women, mothers on maternity leave and mothers within six months of returning to work, except in specific, limited circumstances such as redundancy or gross misconduct. The government is consulting on the precise scope and exceptions.
What this means: Employers must take exceptional care when managing performance, conduct or capability issues involving pregnant employees or new mothers. SMEs should seek legal advice before taking any action that could result in dismissal during these protected periods.
3. Mandatory action plans
Menopause and gender pay gap action plans are expected to become mandatory in 2027. Employers with 250 or more employees are currently encouraged to publish the steps they are taking to reduce their gender pay gap and support employees experiencing menopause.
4. Collective redundancy changes
Further changes to collective redundancy consultation requirements are expected, including changes to the threshold for when collective redundancy rules apply. Employers will also need to consider the total number of redundancies across their whole organisation, not just individual workplaces.
5. Clarification on harassment prevention
The government is expected to provide further guidance on what "all reasonable steps" means in the context of preventing sexual harassment, providing more detailed guidance for employers.
6. Other reforms
Further changes are expected during 2027, including reforms relating to industrial relations, umbrella companies, flexible working, bereavement leave and blacklisting protections.
What this means: SMEs should continue preparing for these reforms, even where precise implementation dates are pending. Reviewing data retention policies, developing appropriate workplace strategies and understanding future employment obligations will all require time and resources.
The Fair Work Agency and Enforcement
The Employment Rights Act has established the Fair Work Agency, a new enforcement body that will oversee compliance with employment law and have powers to investigate labour abuse, issue penalties and bring cases to Employment Tribunals on behalf of workers. The Fair Work Agency was established in April 2026, representing a significant shift towards more proactive state enforcement of employment rights.
What this means: SMEs can no longer rely on the assumption that non-compliance will only be challenged by individual employees. The Fair Work Agency will have broad investigative powers and the ability to pursue systemic breaches. Maintaining robust employment practices and comprehensive documentation will be essential to withstanding regulatory scrutiny.
Essential Actions For SMEs
The scale of these reforms demands a structured, comprehensive response. SMEs should prioritise the following actions:
• Conduct an employment contract audit: Review all employment contracts, particularly probation clauses, notice periods, restrictive covenants and sick pay provisions. Update contracts to reflect the new legal requirements and ensure consistency across the workforce.
• Update HR policies and handbooks: Revise policies on statutory sick pay, paternity and parental leave, flexible working, zero-hours contracts, trade union engagement, harassment prevention, whistleblowing, disciplinary and grievance procedures and redundancy. Ensure policies are clear, compliant and accessible to all staff.
• Train managers and HR professionals: Ensure that all managers understand the new rights and their responsibilities. Provide training on performance management, disciplinary procedures, harassment prevention and fair dismissal practices. The reduced unfair dismissal qualification period means mistakes will be costly.
• Review payroll systems: Ensure payroll systems can calculate SSP from day one and support any changes affecting statutory payments.
• Strengthen probation processes: With the unfair dismissal qualifying period reducing to six months from January 2027, probation should be structured, documented and actively managed. Set clear objectives, conduct regular reviews, address issues promptly and document all feedback and decisions.
• Improve recruitment practices: Invest in better candidate assessment and selection processes to reduce the risk of hiring mistakes. Consider skills testing, extended interview processes and thorough reference checks.
• Review data retention policies: With tribunal time limits extending to six months from 1 October 2026, ensure that documentation is retained for an appropriate period and preferably longer. Good records will be essential in defending claims.
• Consider insurance coverage: Review employment practices liability insurance to ensure adequate coverage for the increased risk arising from changes to unfair dismissal compensation.
• Monitor implementation guidance: Many reforms remain subject to consultation and secondary legislation. Stay informed about implementation details and be prepared to adapt as guidance is published.
The Employment Rights Act 2025 represents a fundamental change to the employment relationship in the UK. For SMEs, the reforms create significant compliance challenges, increased costs and heightened legal risk. However, businesses that approach these changes proactively, updating contracts, policies and practices, training staff and embedding good employment practices, will be well-positioned to navigate the transition successfully.
With further changes taking effect from October 2026 and January 2027, and additional reforms expected throughout 2027, now is the time for SMEs to review their employment practices and prepare for what is ahead.
If you would like expert legal advice on reviewing your employment contracts, updating your HR policies or ensuring compliance with the Employment Rights Act 2025, our employment law team can help. We work with SMEs across all sectors to develop practical, cost-effective compliance strategies. Call Owen White Catlin on 0208 890 2836 or contact us via the OWC office closest to you.