The Employment Rights Act 2025: What It Means for Your Business and Payroll
Most of what has been written about the Employment Rights Act 2025 is aimed at large employers with HR teams to manage it. If you run a limited company or you are a sole trader with a handful of staff, that coverage is not much use to you. You have a business to run, and now you also have to work out what a piece of legislation that received Royal Assent in December 2025 actually requires of you, and when.
A note from Carolyn Burchell, the owner of Composure,
“One of the best decisions I made as an owner-manager was to engage an independent HR adviser. They do offer ad hoc support, but we have opted for a retained contract which allows us to access their expertise whenever we need it. Our adviser covers changes like those coming in right now as part of our quarterly updates.”
The plain answer is that the Employment Rights Act 2025 means quite a lot, spread across several dates, and some of those dates have already moved once since the government first set them out. If you employ anyone, you are affected.
This is where things stand as of August 2026: what has already changed, what is coming this autumn, and what is now scheduled for January 2027.
What already changed on 6 April 2026
Three things landed on the same day, and if you employ anyone, all three apply to you regardless of your size.
Statutory Sick Pay became a day one right
The three waiting days have gone. SSP is now payable from the first day of sickness absence rather than the fourth. The lower earnings limit has also been removed, so employees who earn too little to have previously qualified are now entitled to SSP at the lower of the flat weekly rate (£123.25 from 6 April 2026), and 80 per cent of their average weekly earnings. If you employ part time or lower paid staff, this is the change most likely to affect your payroll costs.
We hear from a lot of business owners who still think that they can recover SSP against their PAYE bill, but it has been more than 10 years since this was the case. This is very definitely a direct cost to their business.
Paternity leave and unpaid parental leave became day one rights
Employees previously needed 26 weeks of service to take paternity leave and a year of service for unpaid parental leave. Both are now available from the first day of employment. Paternity pay still requires 26 weeks of service, so there is now a gap between the right to take the leave and the right to be paid for it, which is worth explaining clearly to new staff, so nobody is caught out expecting pay that has not yet been earned.
Employers must now keep annual leave records
There is a new statutory duty to keep adequate records of each employee’s holiday entitlement and the leave they have actually taken, including how holiday pay was calculated. Records must be kept for six years, and failing to keep them is a criminal offence. If your holiday tracking currently lives in someone’s head or a whiteboard in the staff kitchen, this is the change that needs sorting first.
Alongside these, the Fair Work Agency opened its doors on 7 April 2026. It brings enforcement of the minimum wage, holiday pay and statutory payments under one roof, and it has real teeth. This is the body most likely to come knocking if any of the above is not in order.
We have seen letters from the Fair Work Agency coming to employees, particularly in the hospitality sector, so there is at least one part of the government doing what it says on the tin!
What is changing in October 2026
Two dates in October 2026 matter for small employers and, just to be helpful, they are at opposite ends of the month.
From 1 October 2026, the time limit for bringing most employment tribunal claims doubles from three months to six. In practice this means a dismissal, a grievance or a resignation can come back to you as a claim far later than employers have been used to. Records that would previously have been safe to archive after three months now need to be kept accessible for twice as long.
From 30 October 2026, employers face a strengthened duty to take all reasonable steps to prevent sexual harassment, not merely reasonable steps as before, and a new form of liability for harassment of staff by customers, clients or other third parties. For a small business this is most relevant if your staff deal with the public: a shop, a hospitality venue, a trade counter. A written policy, a way for staff to report incidents, and evidence that you have acted on complaints will matter far more than they did before.
What is now scheduled for January 2027
Fire and Re-hire
This is the point where the timeline has shifted since it was first announced. The restriction on fire and rehire i.e. dismissing someone and re-engaging them on worse terms, was originally expected in October 2026. The government’s revised timetable, published earlier this year, has pushed it back to January 2027 alongside two other significant changes.
From 1 January 2027, dismissing and re-engaging an employee to impose a restricted contractual change will generally be automatically unfair, with narrow exceptions where a business is in genuine financial difficulty and has no other reasonable option.
Unfair Dismissal Claims
From the same date, the qualifying period for unfair dismissal claims drops from two years of service to six months. This applies to dismissals taking effect from 1 January 2027 onwards, not to when someone started work, so anyone hired from around the end of June 2026 will already have built up the necessary service by the time the change lands. If you have hired anyone since the summer, this is not a distant issue.
The statutory cap on unfair dismissal compensation is also being removed from January 2027. Compensation is currently capped at the lower of a year’s pay and a set statutory figure. From next January, that ceiling disappears.
What else?
A handful of other changes, including guaranteed hours for zero and low hours workers, statutory bereavement leave, and stronger protection for pregnant employees and new mothers, are also due in 2027, though the government has not yet confirmed exact dates.
The payroll and admin implications
Every change above eventually lands on the same desk: whoever runs your payroll and your HR paperwork. In practical terms that means:
- Sickness absence policies and payroll software need to reflect day one SSP and the new rate calculation for lower earners.
- Family leave policies and contracts need updating so they no longer refer to qualifying periods that no longer apply.
- A proper system for recording annual leave needs to exist, not just a rough tally at year end.
- Disciplinary and dismissal processes need to be robust enough to survive scrutiny at six months of service rather than two years, since a badly handled dismissal will be challengeable far sooner than employers have previously had to plan for.
None of this is optional, and none of it fixes itself. It needs someone to go through your contracts, your policies and your payroll setup and update them against each date as it arrives.
What small employers should be doing now
If you employ even one person, four things are worth doing before the autumn changes land.
- Check your payroll software is correctly calculating day one SSP at the right rate for every employee, including anyone previously excluded by the lower earnings limit.
- Put an actual system in place for recording annual leave, even a simple spreadsheet, so you are not caught out by the record keeping duty.
- Review your employment contracts and staff handbook so paternity and parental leave references reflect day one entitlement.
- If your staff face the public, put a written harassment policy in place, or update the one you have, ahead of 30 October.
Then, before the end of the year, look at how you handle dismissals. With the qualifying period dropping to six months in January, any process that has relied on the two-year buffer needs to be fixed now, not in December.
Where Composure fits into this
We are accountants, not employment lawyers, and for the detail of a specific dismissal, a harassment complaint or a contract dispute, you should always take proper employment law advice.
Where we can help is the part that touches your numbers and your compliance: making sure your payroll is calculating SSP correctly from day one, making sure the cost of these changes is built into your budgeting rather than arriving as a surprise, and flagging where your record keeping falls short of what the law now requires.
On top of the standard pay calculations, our payroll services give employers the option of including expense payments, salary sacrifice arrangements, tracking holiday, and even setting up payment files to make it easier to pay employees.
One of the biggest mistakes we see is in holiday calculations is the rate of pay being paid to workers whose pay is variable. Examples of variable pay might include performance bonuses, sales commissions, and overtime as well as actual variable hours. Most software is poor at calculating this so it’s frequently a manual exercise to ensure holiday pay is calculated correctly. We solve this headache for a number of our clients.
If you are not sure whether your payroll practices are up to date against any of the dates above, book a discovery call: https://composureaccounting.co.uk/contact/
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IMPORTANT NOTICE — NOT TAX OR PROFESSIONAL ADVICE
This article is published by Composure Accounting & Taxation Limited for general informational purposes only. It does not constitute tax advice, legal advice, financial advice, or any other form of professional advice, and should not be relied upon as such. The information contained in this article reflects the law and government guidance as understood at the date of publication and is subject to change.
Every business’s position is different and depends on its specific circumstances. Nothing in this article should be treated as a recommendation to take or refrain from taking any particular course of action. You should always seek independent professional advice, including specialist employment law advice where appropriate, tailored to your own situation before making any decisions.
Composure Accounting & Taxation Limited accepts no liability for any loss or damage arising from reliance on the contents of this article. The publication of this article does not create a client relationship between the reader and Composure Accounting & Taxation Limited.
Composure Accounting & Taxation Limited is registered in England and Wales. Registered office: Wildens, Coneyhurst Road, Billingshurst, West Sussex, RH14 9DE
