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Employment Rights Act 2025: Key steps to ensure compliance and readiness

The Employment Rights Act marks a definitive turning point in UK employment law.
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By Becky Beasley , 

Client Executive (Management Liability) and Product Development Specialist, FINPRO

21/04/2026 · 5 minute read

The Employment Rights Act (the Act) received Royal Assent on 18 December 2025. This legislation marks a definitive turning point in UK employment law, significantly rebalancing the power dynamic in favour of employees while imposing substantial new obligations on employers. The Act will come into force in stages over the next two years, with many provisions yet to be finalised.

This article looks at some of the Act’s most expansive reforms and how companies can adapt to an increasingly litigious and regulated environment — particularly through the adoption of robust risk management strategies and employment practices liability (EPL) and directors and officers (D&O) insurance. 

Unfair dismissal qualifying period reduced to six months and compensation cap removed

This is one of the most impactful changes brought about by the Act. The qualifying period for unfair dismissal claims will be reduced from two years to six months, and the current compensation cap (the lower of 12 months’ pay or £118,223) is also being removed. This change is expected to take effect in January 2027.

The change is expected to increase the volume of unfair dismissal claims brought by employees as more become eligible to claim, and removing the compensation cap will make such claims more attractive, especially for high earners. The value of claims is also likely to increase as the cap is removed.

Employers should review and update induction, probation, and performance management procedures to bring them in line with the legal changes and to try and prevent unfair dismissal claims. EPL insurance policy limits should also be reviewed in light of the unlimited compensation becoming available for these claims and to prevent erosion of aggregate limits, if the number of claims increases. 

Increased parental rights and protections

Dismissals because of pregnancy or maternity are already automatically unfair, but the Equality and Human Rights Commission report from 2016 found that one in nine mothers are still being forced out of jobs each year because of pregnancy and maternity-related discrimination. The Act will make it unlawful to dismiss pregnant workers during pregnancy or maternity leave or within six months of their return to work. This new proposal will create a “protected period” during which dismissal would be prohibited, except for clearly defined statutory exceptions. This change is expected to take effect in 2027.

In addition, from 6 April 2026, paternity leave became a “day one right”, allowing employees to give notice of leave from the first day of employment. Before, fathers must have worked for their employer for 26 weeks before claiming paid paternity leave (for one to two weeks) or for one year for unpaid parental leave (typically for up to 18 weeks per child).

Day one rights mean more employees will be eligible for these types of leave, and there will likely be more employees taking leave at any given time. Policies should be updated to reflect the new legislation. 

Introduction of the Fair Work Agency (FWA)

A streamlined single regulator — the Fair Work Agency (FWA) — is being established to enforce workers’ rights, including the national minimum wage, holiday pay, and statutory sick pay. Some existing bodies’ functions will be transferred to the FWA, and it will also be given new powers and responsibilities. The FWA will have the power to inspect workplaces to check compliance with employment law, issue binding orders, impose penalties, and bring tribunal proceedings on behalf of workers. It will be able to require payment of underpayments within 28 days of a notice and impose financial penalties of up to 200% of the underpaid sum (capped at £20,000 per individual).  

Employers should make sure they have reviewed the accuracy of holiday pay calculations and maintained records dating back six years. The Government has said it will use the new powers to ensure the estimated 900,000 people who have holiday pay withheld each year will finally receive it.

The FWA was established on 7 April 2026, with a phased implementation throughout 2027.  

Employment tribunal time limits increased from three to six months

Under the ERA, the time limit for bringing an employment claim will increase from three to six months. This is a significant change expected to increase employment claims and put additional strain on an already strained tribunal system.

This change is expected to take effect in October 2026.

“Fire and rehire” will be automatically unfair

“Fire and rehire” — dismissing and re-engaging employees on worse terms — will be automatically unfair except in narrow cases.

Employers should make sure they understand the new rules in relation to fire and rehire and note the narrow exception where it will be allowed if the employer can show a real threat to their ability to carry on business and that, in all circumstances, the variation could not have been avoided.

This change is expected to take effect in October 2026. 

Employers must take “all” reasonable steps to prevent sexual harassment of employees

An employer already has a duty to take reasonable steps to prevent sexual harassment, not only from other employees but from third parties such as customers and suppliers. However, the Act will require employers to take all reasonable steps to prevent sexual harassment. What constitutes “all reasonable steps” will depend on an employer’s size, risk, and resources, but they will have to undertake tailored risk assessments, set up targeted training, and implement robust policies and reporting procedures.

This new, higher bar of “all” reasonable steps is expected to take effect in October 2026. 

Trade union reforms

The Act significantly strengthens trade union powers by simplifying industrial action, enhancing workplace access, and increasing worker protection. Key changes effective from February 2026 include reducing strike notice from 14 to 10 days, removing the requirement for picket supervisors, extending industrial action mandates from six to 12 months, and increasing dismissal protection for industrial action.

Employers should take time to review the extensive trade union reforms and update contracts and handbooks accordingly. 

Collective redundancy maximum protective award doubled from 90 to 180 days' pay

The Act increased the maximum award for failing to properly inform and consult on collective redundancies involving 20 or more employees from 6 April 2027.

Before, an employment tribunal could award up to a maximum of 90 days' gross pay. This has increased to a maximum of 180 days' gross pay. This new measure will deter employers from avoiding their consultation obligations.

Employers are advised to review and update their redundancy processes and train HR teams on these new rules. 

Statutory sick pay (SSP): Removal of lower earnings limit and waiting period

From 6 April 2026, the Act abolished the current three-day waiting period before SSP can be paid. This means SSP will need to be paid from the first day of illness. The lower earnings limit is also being removed (currently, workers must earn £125 per week to be eligible for statutory sick pay).

This reform will increase SSP costs for employers. Policies will need to be updated to reflect the new legislation, and budgeting will need to be considered for the increased costs.

We’ve summarised only a few of the changes the Act is bringing in. Our colleagues at Mercer have set out a more detailed review here, as well as ways they can support businesses as they adapt to the changing legal and regulatory landscape. 

EPL insurance

Given the significant employment law changes being introduced under the Act, many companies are considering either purchasing EPL insurance for the first time to protect their business, increasing current limits, or checking their coverage provides them with the protection they need.

EPL insurance protects individuals as well as the company itself against losses arising from employment claims. Cover is likely to include the following:

  • Defence costs incurred by the company or its employees in defending an employment claim before the Employment Tribunal or in civil court.
  • Damages awards arising out of an employment claim that is found against the insured.
  • Civil fines and penalties for individuals (where insurable at law).
  • Settlements paid in connection with employment claims, for example, as a result of an Advisory, Conciliation and Arbitration Service (ACAS)-mediated resolution to a claim.
  • An individual’s legal fees incurred in responding to an internal investigation related to actual or alleged employment violations.
  • The costs of responding to a regulatory investigation into actual or alleged employment violations.
  • The cost of hiring public relations consultants to mitigate reputational damage.

Common exclusions include:

  • Criminal misconduct established by final adjudication.
  • Claims for personal injury or property damage (although defence costs and investigation costs may be covered).
  • Prior litigation or claims or circumstances notified and accepted under a prior EPL policy.
  • Claims relating to contractual liabilities.
  • Claims in relation to an insured’s capacity as trustee (although defence costs and investigation costs may be covered).
  • Claims in relation to an insured’s duty to consult on the possibility of redundancy (although defence costs and investigation costs may be covered).

D&O insurance

There is some overlap between an EPL policy and a D&O policy. D&O insurance provides protection for directors and officers who are named personally in an employment claim, but does not cover the company itself.

Companies should be alive to the risk of not having an EPL policy, as they are exposed in the event of employment claims brought against the company. D&O limits also may be eroded by a covered employment claim that names an insured person under the D&O policy, when a company or other insured persons might well prefer that the D&O limit is protected for other, more traditional D&O matters, including securities claims against the company. This becomes a particularly acute concern in light of the increased risk of employment practices violation claims arising out of the Act, and the increased value of such claims in light of the changes being enacted.

Preparing for change: Strategic adaptation and EPL insurance to safeguard your business

The Act introduces a significant shake-up of employment law in the UK. Preparation is key for companies. A strategic blend of policy revision, continuous training, and enhanced record-keeping is required. Proactive adaptation in these areas is essential not only for mitigating financial and reputational risks but also for fostering a fair and resilient workplace. Mercer is available to support companies in identifying and implementing any necessary changes, offering practical advice and actionable solutions.

Companies should also consider purchasing EPL insurance if they don’t have this already, as it provides valuable cover for defence and settlement costs in the event of an employment claim. Having the appropriate level of EPL insurance in place protects balance sheets from unexpected legal costs, regulatory investigation costs from the new FWA, and potentially unlimited tribunal compensation awards with the associated reputational impact.

Speak to your Marsh advisor today to find out more.

Our people

Becky Beasley

Becky Beasley

Client Executive (Management Liability) and Product Development Specialist, FINPRO

  • United Kingdom

Zelda Pitman

Zelda Pitman

Senior Client Executive, Management Liability

  • United Kingdom

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