The KLG Employment Law Update: Employment Rights Act & Autumn Budget 2025 December 2025 Newsletter

In this month’s update, we review some of the most consequential developments for UK employers in recent years. With the Employment Rights Bill completing its parliamentary journey and the Autumn Budget 2025 now confirmed, this edition explains where the final reforms have landed, what has changed from earlier proposals, and how employers should prepare for implementation during 2026 and 2027.

Employment Rights Bill Becomes the Employment Rights Act – Where We’ve Landed

After almost a year of parliamentary scrutiny, extensive amendments, and late-stage concessions, the Employment Rights Bill is now awaiting Royal Assent and will shortly become the Employment Rights Act. While the government has held firm on its overarching policy objectives, the final Act looks materially different from the Bill originally introduced.

Key changes emerged during debates in both the House of Commons and House of Lords. These included notable retreats on day-one unfair dismissal rights, recalibration of collective redundancy thresholds, a softening of fire-and-rehire restrictions, and most significantly a last-minute decision to remove the statutory cap on unfair dismissal compensation.

At the same time, the scope of certain rights has expanded, particularly in relation to guaranteed hours, trade union access, and enforcement powers. Entirely new provisions have also been added, including miscarriage leave and wide-ranging restrictions on non-disclosure agreements.
What follows is our summary of where the most important provisions have ultimately settled and what they mean for employers.

Unfair Dismissal: Six-Month Qualifying Period Confirmed

One of the most striking reversals in the legislative process was the government’s abandonment of its plan to introduce day-one unfair dismissal protection. Following sustained resistance in the House of Lords, the government accepted a compromise position: unfair dismissal rights will now arise after six months’ service, rather than immediately.

Proposals for an “initial period” of employment with a reduced procedural burden were also dropped entirely. Regulations are expected in early 2026, with the new qualifying period anticipated to apply to employees who reach six months’ service on or after 1 January 2027.

Importantly, the Act removes the long-standing power to amend the qualifying period by secondary legislation. Any future change will therefore require fresh primary legislation, making this six-month threshold more politically entrenched than previous reforms.

Other day-one rights remain unaffected, including protection against discrimination and automatically unfair dismissal, as well as day-one entitlement to Statutory Sick Pay, paternity leave, and unpaid parental leave.

Removal of the Cap on Unfair Dismissal Compensation

In a surprise move late in the legislative process, the government introduced amendments to abolish the statutory cap on compensatory awards for unfair dismissal. Under the current framework, compensation is limited to the lower of 52 weeks’ pay or the statutory maximum (currently £118,223). This ceiling will be removed entirely.

This reform represents a fundamental shift in the UK’s dismissal risk landscape and will place the UK outside the norm for comparable economies. For employers with highly paid workforces, the financial exposure associated with unfair dismissal claims could increase significantly.

While the government has committed to publishing an impact assessment, the measure was introduced without prior consultation. Although the commencement date is not yet confirmed, it is widely expected to align with the new six-month qualifying period in January 2027.

In practice, this change is likely to alter how organisations assess litigation risk, approach settlement negotiations for senior employees, and structure termination processes. Once in force, unfair dismissal claims will no longer be materially less risky than discrimination claims, challenging long-standing assumptions embedded in many HR policies.

Collective Redundancy: Thresholds Reworked, Penalties Increased

The Act ultimately retains the familiar “at one establishment” test for triggering collective consultation, reversing earlier proposals to remove it entirely. However, this has been supplemented by a new, alternative threshold—likely to apply across the employing entity as a whole. The precise details of this additional test will be set out in future regulations and may involve either percentage-based or numerical triggers.

At the same time, the maximum protective award for failure to comply with collective consultation obligations has been doubled from 90 to 180 days’ pay. This substantially raises the stakes for employers who fail to follow correct procedures and will make it far more difficult to mitigate risk through compensation alone.

Although the enhanced penalty is expected to apply from April 2026, further clarity is awaited on how and when tribunals will begin applying it in practice.

Fire and Rehire: Narrower Ban, Clearer Boundaries

The government has significantly moderated its original fire-and-rehire proposals. Automatic unfair dismissal will now apply only where dismissal is used to impose changes to defined “core” terms, including pay, working hours, pensions, shift patterns, and statutory time off rights. Additional restricted terms may be specified in regulations.

The ban has also been extended to cover “fire and replace” scenarios, preventing employers from dismissing employees and substituting them with agency workers, contractors, or other non-employees to perform substantially the same work.

A limited exemption applies where an employer is facing extreme financial distress, provided the updated Code of Practice on dismissal and re-engagement is followed.

Other contractual changes remain subject to the usual unfair dismissal tests, though tribunals will be required to consider the employer’s rationale, consultation process, and any compensation or benefits offered in return.

These provisions are due to take effect from October 2026.

Guaranteed Hours, Shift Notice and Agency Workers

The guaranteed hours regime remains one of the most technically complex elements of the Act. Employers will be required to offer guaranteed hours to qualifying workers at the end of each reference period where actual working hours exceed contractual minima. The detail including who qualifies and how reference periods operate will be set out in regulations.

Rights to reasonable notice of shifts and compensation for cancelled or amended shifts have also been expanded. Notably, the scope of these provisions has been extended to agency workers, closing off potential avoidance strategies but introducing considerable practical complexity for both agencies and end users.

While late amendments allow for limited exceptions where guaranteed hours would cause significant adverse effects in exceptional circumstances, the regime remains mandatory rather than a right to request.

The government has committed to publishing detailed sector-specific guidance. Most of these provisions are expected to come into force during 2027.

Family Leave, Flexible Working and Miscarriage Leave

Family leave reforms remain largely unchanged and are scheduled for April 2026. Length-of-service requirements for paternity and parental leave will be removed.

More significantly, new protections will restrict dismissals during pregnancy, family leave, and following return to work. The government is consulting on whether to introduce a higher dismissal threshold or limit the availability of certain fair reasons. Final details will be confirmed in regulations ahead of implementation in 2027.

A new right to unpaid bereavement leave following pregnancy loss before 24 weeks has also been introduced, extending protections to both employees and their partners.
Flexible working reforms were untouched. From 2027, refusals must not only fall within one of the statutory grounds but must also be objectively reasonable and properly explained in writing.

Harassment Duties Strengthened

Employers will be required to take all reasonable steps to prevent workplace sexual harassment. Liability for third-party harassment has also been expanded to cover all forms of harassment, subject to a reasonableness threshold. While concerns were raised about employer control over third parties, the government has indicated expectations will be proportionate. Further guidance is awaited.

Fair Work Agency: Expanded Powers and Enforcement Role

The new Fair Work Agency (FWA) will consolidate enforcement of minimum wage, statutory sick pay, holiday pay, labour exploitation, and modern slavery, with scope to expand further. The agency will have broad investigatory and enforcement powers, including the ability to enter premises, require information, impose penalties, and recover enforcement costs.

Crucially, the FWA will also be able to bring employment tribunal claims on behalf of individuals and provide legal assistance. With tribunal backlogs persisting, the FWA is expected to play a central role in future enforcement. The agency is scheduled to be established in April 2026, with enforcement commencing thereafter.

Trade Union Rights Expanded

The Act introduces wide-ranging reforms to collective rights, including new workplace access rights for trade unions (including digital access), a duty to inform workers of their right to join a union, reduced thresholds for statutory recognition, and reforms making industrial action easier to organise.
Consultations are already underway on several of these changes, including electronic balloting and workplace access, with key deadlines falling in December 2025.

Non-Disclosure Agreements Restricted
Late-stage amendments introduce sweeping restrictions on NDAs. Any agreement preventing disclosures relating to harassment, discrimination, or failure to make reasonable adjustments will be void. While the provisions appear aimed at settlement agreements, regulations are expected to clarify limited exceptions, potentially where agreements are entered at the employee’s request with independent legal advice.
No commencement date has yet been confirmed.

Employment Tribunal Time Limits Extended
Time limits for most employment tribunal claims will double from three to six months, with effect from October 2026. While this may support early resolution, it is also likely to prolong uncertainty and increase claim volumes.

Autumn Budget 2025 – Key Employer Impacts
Alongside these legislative reforms, the Autumn Budget 2025 confirms:

• Increases to Statutory Sick Pay and statutory parental payments from April 2026
• National Minimum and Living Wage increases effective 1 April 2026
• Continued freeze to income tax thresholds, increasing fiscal drag
• Changes to salary-sacrifice pension NIC advantages from April 2029
• Expanded funding for apprenticeships, particularly for SMEs
• Significant relaxation of Enterprise Management Incentive (EMI) eligibility from April 2026

Very few provisions will take effect immediately upon Royal Assent. Most changes will be phased in through 2026 and 2027, subject to further regulations and consultation. Despite strong business pressure, the government has confirmed its intention to implement the reforms in line with its published roadmap.

Closing Remarks
As we welcome 2026, the legislative and fiscal measures outlined in this edition will have significant implications for workplace policy and practice. Staying informed and responsive will be key to managing risk and enhancing workforce engagement.

At Kalra Legal Group, we remain committed to guiding employers through the evolving employment law landscape with clarity and practical support. If you require assistance in reviewing these developments, understanding their implications, or implementing any necessary changes within your organisation, our specialist Employment Law team is here to help.