For many SMEs the ERA 2025 fundamentally challenges their lean management structures, flexible staffing arrangements, and ad hoc people-management decisions.
Reforms will be phased in between April 2026 and December 2027, so small businesses need to prepare now for a legal landscape that places greater emphasis on early employment decisions, documentation, and risk management.
Here’s what matters most:
Day-One Rights (April 2026):
Statutory sick pay will become payable from the first day of absence, and the current lower earnings limit will be removed. This expands eligibility to part time and lower paid workers resulting in immediate payroll costs due to short term absences.
Paternity leave and unpaid parental leave become day one rights increasing the operational impact of employee absence during early stages of employment.
The impact will be felt in smaller teams (particularly in manufacturing, logistics, retail, hospitality and care) when unplanned absence is disruptive and difficult to cover and specialist or business critical roles, will require earlier contingency planning and in some cases, more cautious recruitment decisions.
Unfair Dismissal (Jan 2027):
One of the most significant changes is the reduction of the qualifying period for unfair dismissal claims, from two years to six months, expected to take effect from January 2027.
This gives employers a shorter window to determine whether a new hire is the right fit for the business. Decisions previously viewed as relatively low risk during the first year or two of employment will now need to be carefully managed, clearly documented, and properly justified at an earlier stage.
In addition, the statutory cap on unfair dismissal compensation is due to be removed, significantly increasing financial exposure in any tribunal claims, particularly senior or higher paid employees. For SMEs, with constrained legal budgets getting these early decisions right, especially during probationary periods, is increasingly important.
Flexible Working:
The Employment Rights Act 2025 places new obligations on employers that rely on flexible working arrangements, including casual contracts, variable hours and shift based work.
Workers on zero or low hours contracts will gain new rights to:
These changes are not designed to remove flexibility altogether, but they do require businesses to plan staffing more carefully and track working patterns more closely.
The Act also places strong restrictions on “fire and rehire” practices. Changing key contractual terms will require genuine consultation and a clear, defensible business rationale. Smaller employers, will need to get contracts and job descriptions right from the beginning.
Greater Enforcement and Accountability (April 2026)
April 2026 sees the creation of the Fair Work Agency, expected to launch in April 2026. They will be responsible for proactively enforcing key employment rights, including holiday pay and minimum wage compliance.
SMEs should expect closer monitoring, so keeping thorough records and being transparent will be critical. Coupled with tribunal time limits being extended to six months, unresolved issues now could come back later with bigger legal and financial risks.
Long Term Impact: A Cultural Shift
These reforms will not eliminate flexibility, but they will demand greater transparency, structure and justification.
Longer term, the ERA 2025 represents a shift from informal people management. Many small businesses have historically relied on trust, flexibility and “doing the right thing”. While those values remain important, they will now need to sit alongside clear processes, policies and evidence-based decision-making.
Tighter restrictions on “fire and rehire” practices mean employers will face substantial legal risk. Changing contracts without clear consultation and financial justification is risky. Dismissals for refusing changes will generally be classed as unfair, unless the business is in serious financial trouble.
Similarly, new rights for zero hours and low hours workers will require many SMEs (particularly in hospitality, retail and care) to reassess workforce planning models.
Firms that adapt early are likely to see benefits: fewer disputes, better staff retention, and clearer expectations on both sides. Those that do not may find themselves reacting to problems under increased legal and financial pressure.
Looking Ahead: Risk, Opportunity, and Adaptation
Short term impacts of the ERA 2025 may feel burdensome for small businesses, but there is a longer term opportunity for those who adapt early.
Organisations with clear contracts, well managed probationary processes, trained managers, and fair, transparent decision making are likely to experience:
What Should Small Businesses Do Now?
Preparation should begin now:
Final Thoughts
The Employment Rights Act 2025 undoubtedly presents challenges for small businesses, but it also offers an opportunity. Employers who invest in good management practices now will be better placed to navigate the changes, protect their businesses, and build sustainable teams for the future.
Want to understand how these changes affect your business? Contact Lisa Aitken for a free 20-minute discussion.
Tel: 03450305300
Email: Lisa.Aitken@freeths.co.uk
