Phased employment rights reforms leave SMEs with no time to lose

One of the biggest misconceptions about the Employment Rights Act 2025 is that it is a future problem for employers. It isn't. The first wave of reforms is already in force, including day one rights to paternity and parental leave and statutory sick pay, with the lower earnings threshold removed. For many businesses, these changes have been relatively straightforward.

What is changing

However, the changes coming into effect on 1 October 2026 and 1 January 2027 will require significantly more preparation and process changes and are likely to hit smaller businesses hardest. Large employers have HR teams to track a rolling set of implementation dates. Most SMEs only have one person doing that job alongside several others, and it is easy for a date to be missed.

From 1 October this year, employers must take all reasonable steps’ to prevent harassment, including sexual harassment, a higher bar than the current requirement to take ‘reasonable steps’. This is compounded by a new duty for employers not to permit harassment of staff by third parties: customers, contractors or anyone your staff deal with at work or at work-related events.

One of the challenges with this is that there is no fixed checklist for what ‘all reasonable steps’ means yet. In due course, case law will test and refine what this means, sector by sector. What’s reasonable in hospitality won’t match what’s reasonable in financial services or on a construction site, so it is anticipated there will be different expectations.

The starting point for small businesses

The best place to start for an SME would be a risk assessment. This could include situations where, for example, property valuers are visiting a client’s home, staff are onsite at someone else’s venue or anyone is dealing with the public alone, with no colleague nearby if something goes wrong. These are all situations to be considered depending on the nature of your business and the roles fulfilled by your employees.

Any contracts with suppliers and venues should include a standard clause making clear that harassment of your staff won’t be tolerated.

The employment tribunal time limit for most claims will double from three months to six, which will give both sides more room to settle before a legal claim is lodged.

Plus, by the end of 2026 (date tbc), any employer receiving tips, service charges or gratuities will need a tipping policy, developed in consultation with staff and reviewed at least every three years. This will be a major change for the hospitality sector and for businesses such as hairdressers and salons.

Another critical change will come into force on 1 January 2027, when the qualifying period for unfair dismissal protection falls from two years to six months. Employers that have relied on a long run-in to decide whether someone is right for a role will have far less flexibility.

Even going up to the end of the six-month period can be risky. Where an employer makes a payment in lieu of notice so that employment ends immediately, within the six-month period, the statutory notice period adds a notional week onto someone’s length of service. That can be overlooked, with the risk that a dismissal may fall within the protected period.

Linked to this, the cap on unfair dismissal compensation is being removed. It currently sits at roughly £120,000 or a year’s salary, whichever is lower. This means that an employee has less reason to settle for a known sum when there’s no ceiling on what a tribunal might award them instead.

Many employers treat a contract ending on its stated date as a clean exit. It isn’t. The end of a fixed-term contract is legally a dismissal, and once someone has six months’ service, that dismissal needs a fair reason and a fair process, the same as any other. A fixed-term role tied to a grant or a piece of funding coming to an end can be a fair reason. However, a funding gap on its own does not justify dismissing the specific person doing that work. From a legal perspective, where several people doing the same job are funded from different sources, a proper redundancy process is needed to decide who is made redundant.

The two most important things

For SMEs, two things matter most if you haven’t started preparations for these changes yet. The first is proactive harassment prevention: a written policy, a risk assessment and a clear process for handling a complaint, so managers aren’t left to work it out on the day. The second is a properly managed probationary period, with defined check-ins and a documented reason if someone doesn’t make it through, rather than a probation period in name only that lets six months slip past unnoticed.

Neither has to be built from scratch. Fixed-price HR and legal support packages exist that cover a handbook, contract review and access to advice as issues arise, at a cost most SMEs can absorb.

The alternative is one tribunal claim landing on a desk with no process in place to defend it. Preparing now and seeking the advice and guidance you need before the new requirements come into effect will make all the difference and help protect your business.