What small businesses need to know about the Employment Rights Act 2026 updates

Published Friday 21 August 2026

Table of contents

• What is the Employment Rights Act?
• What changed in April 2026?
• What is the Fair Work Agency?
• What's changing in October 2026?
• The fire and rehire ban (January 2027)
• Unfair dismissal reforms (January 2027)
• Zero-hours contract reforms (2027)
• How to prepare your business: a compliance checklist
• Stay on top of employment law changes with Xero
• FAQs on the Employment Rights Act 2026

Key takeaways

• The Employment Rights Act 2025 is being rolled out in phases across 2026 and 2027, with several major changes already in effect since April 2026, including day-one sick pay and paternity leave.
• A new Fair Work Agency launched in April 2026 to enforce employment rights, giving small businesses a single point of contact for compliance support and guidance.
• From January 2027, the fire and rehire practice becomes automatically unfair dismissal, and the unfair dismissal qualifying period drops from two years to six months.
• Review and update your employment contracts, payroll processes, and workplace policies now to stay ahead of these changes.

What is the Employment Rights Act?

The Employment Rights Act 2025 is a major overhaul of UK employment law. Formally passed in 2025, it forms the backbone of the government's Plan to Make Work Pay, and its provisions are being rolled out across 2026 and 2027.

For small businesses, this matters because it applies to every employer regardless of size. Whether you have one employee or 20, these changes affect how you handle sick pay, contracts, dismissals, and workplace policies.

The reforms are arriving in phases rather than all at once. Some are already in effect as of April 2026, while others take effect in October 2026 and January 2027. Understanding the timeline helps you plan and budget for each change rather than scrambling to catch up.

Why it matters for small businesses

Compliance is not optional. The new Fair Work Agency has the power to enforce these rights and issue penalties for non-compliance. But the changes are also designed to be manageable, and most require straightforward updates to your contracts, payroll, and policies.

The phased approach gives you time to prepare. If you start now, you can spread the work across the coming months rather than making all your changes at once.

What changed in April 2026?

Several significant changes took effect on 6 April 2026. If you haven't already updated your processes, these are your immediate priorities.

Day-one statutory sick pay

Statutory sick pay (SSP) is now payable from the first day an employee is off sick. Previously, employees had to wait three days before qualifying, and they needed to earn above the Lower Earnings Limit.

Both of those barriers are gone. From 6 April 2026, there is no waiting period and no earnings threshold. This means more of your employees qualify for SSP, and they qualify sooner.

For your payroll, this means updating your systems to calculate SSP from day one of absence. If you use payroll software, check that it reflects the new rules. You should also update your sickness absence policy to remove any references to the old three-day waiting period.

Day-one paternity and parental leave

Paternity leave and unpaid parental leave are now available from an employee's first day of employment. Previously, employees needed to have worked for you for a set period before qualifying.

From 6 April 2026, eligible employees can take paternity leave straight away, without meeting a minimum service requirement. Unpaid parental leave, which previously required one year of service, is also now a day-one right.

A new entitlement to bereaved partners' paternity leave also came into effect. This allows bereaved partners to take up to 52 weeks of leave following the death of a child's mother or primary adopter.

Strengthened whistleblowing protections

Whistleblowing protections have been strengthened, particularly for workers who report sexual harassment. If an employee raises a concern about harassment in your workplace, they now have stronger legal protection against being dismissed or treated unfairly as a result.

Collective redundancy changes

If you ever need to make redundancies, the protective award for failing to follow proper collective redundancy consultation procedures has doubled. This makes it more important than ever to follow the correct process if you're restructuring.

What is the Fair Work Agency?

The Fair Work Agency was established on 7 April 2026 as a new government body responsible for enforcing employment rights across England, Scotland, and Wales. It brings together several existing enforcement bodies into a single organisation.

The agency enforces holiday pay rules, SSP entitlements, and other employment rights. It also has the power to investigate employers and issue penalties for non-compliance.

How it affects small businesses

For small businesses, the Fair Work Agency creates a single point of enforcement. Rather than dealing with multiple bodies, you now have one agency that oversees compliance.

The agency isn't just about penalties. It also offers compliance support and guidance for employers. If you're unsure about how a particular change affects your business, the Fair Work Agency is a resource you can turn to.

That said, it's worth taking compliance seriously. The agency has enforcement powers, and penalties for getting things wrong can be significant. Keeping your records up to date and your contracts in order is the simplest way to stay on the right side of the rules.

What's changing in October 2026?

The next wave of changes arrives in October 2026. These focus on harassment prevention, trade union rights, and tribunal procedures.

Sexual harassment prevention

From October 2026, employers have a strengthened duty to take "all reasonable steps" to prevent sexual harassment in the workplace. This replaces the previous, less specific requirement.

The duty also extends to third-party harassment, meaning you could be held responsible if a customer, client, or contractor harasses one of your employees, and you haven't taken reasonable steps to prevent it.

For a small business, practical steps include putting a clear anti-harassment policy in place, training your staff, and making sure everyone knows how to report concerns. You don't need a large HR department to do this. A straightforward written policy and a short training session can go a long way.

Trade union rights

From October 2026, you'll have a duty to inform all new employees of their right to join a trade union. Trade union representatives will also have enhanced access to workplaces.

If you don't currently have trade union involvement in your business, this doesn't mean you'll suddenly need to negotiate with a union. It simply means your employees must be told about their right to join one, and union representatives have clearer rules about when they can access your workplace.

Other October 2026 changes

Employment tribunal time limits are also being reformed, giving employees more time to bring certain claims. If you're involved in a dispute, be aware that the window for claims may be longer than you're used to.

The fire and rehire ban (January 2027)

The fire and rehire ban takes effect on 1 January 2027. From that date, dismissing an employee and then re-engaging them on worse terms will be treated as automatically unfair dismissal.

This is a significant change. Previously, some employers used fire and rehire as a way to push through contract changes that employees hadn't agreed to. Under the new rules, this approach is effectively banned, with only a very limited exception for employers who can demonstrate genuine financial difficulty that threatens the survival of the business.

What this means in practice

If you want to change an employee's contract terms, you need to negotiate and consult with them. If they don't agree, you can't simply dismiss them and offer them a new contract on different terms.

The very limited exception for financial difficulty is exactly that: very limited. It isn't a loophole for routine cost-cutting. If you're genuinely struggling financially and need to restructure, seek professional advice before taking any action.

If you're considering any changes to employment terms, start the conversation with your employees now. Genuine negotiation and consultation is the right approach, and it's what the law expects.

Unfair dismissal reforms (January 2027)

From January 2027, the qualifying period for unfair dismissal claims drops from two years to six months. At the same time, the cap on compensatory awards for unfair dismissal is being removed.

What the shorter qualifying period means

Currently, employees need two years of continuous service before they can bring an unfair dismissal claim. From January 2027, that drops to just six months.

This means you need to be confident in your hiring and dismissal decisions much sooner. If you rely on a lengthy probation period as a safety net, you'll need to rethink your approach. Your probation processes should be thorough, well-documented, and completed within the first six months.

Consider whether your onboarding process gives you enough information to make a fair decision about an employee's suitability within that timeframe. If it doesn't, now is the time to strengthen it.

Compensation cap removed

With the cap on compensatory awards being removed, the potential financial risk of getting a dismissal wrong increases.

This doesn't mean you can't dismiss employees. It means you need to follow a fair process every time. Document your reasons, follow your disciplinary procedures, and make sure the decision is reasonable. If you do things properly, the removal of the cap shouldn't be a concern.

Zero-hours contract reforms (2027)

Reforms to zero-hours contracts are expected to take effect during 2027. If your business uses zero-hours contracts, these changes will require your attention.

Right to guaranteed hours

Under the new rules, employers will need to offer guaranteed hours that reflect a worker's regular working pattern. If someone regularly works 20 hours a week, you'll need to offer them a contract that reflects that.

Workers aren't forced to accept. They can choose to stay on a zero-hours contract if they prefer the flexibility. But the offer of guaranteed hours must be made.

Shift notice requirements

New rules on shift notice are also coming. You'll need to give workers reasonable notice of their shifts, and if you cancel a shift at short notice, you may need to make a cancellation payment.

For small businesses that rely on flexible scheduling, this means planning your rotas further in advance. It also means budgeting for potential cancellation payments if you need to change plans at the last minute.

How to prepare your business: a compliance checklist

The phased rollout gives you time to prepare, but only if you use it wisely. Here's what to focus on, broken down by priority:

Immediate actions (already required)

These changes are already in effect. If you haven't made these updates, do so as soon as possible.

• Update your payroll system to calculate SSP from day one, with no earnings threshold.
• Revise employment contracts to reflect day-one rights for paternity leave and parental leave.
• Review your holiday pay record-keeping to make sure you're retaining records for six years, as required by the Fair Work Agency.
• Remove any references to old SSP waiting periods or qualifying periods from your sickness absence policy.

Prepare now for October 2026

You have a few months to get ready for the next wave of changes.

• Put a written sexual harassment prevention policy in place, or review your existing one to make sure it meets the "all reasonable steps" standard.
• Consider running a short training session for your team on workplace harassment, including third-party harassment.
• Inform new employees of their right to join a trade union as part of your onboarding process.

Plan ahead for January 2027 and beyond

Start preparing now for the changes that take effect in January 2027.

• Review your probation and dismissal procedures. Make sure you can make fair, documented decisions about an employee's suitability within six months.
• Prepare to end any fire and rehire practices ahead of the January 2027 ban. If you need to change contract terms, use negotiation and consultation instead.
• Audit your zero-hours contract arrangements and identify any workers whose regular hours should be reflected in a guaranteed-hours offer.
• Keep your payroll and compliance processes up to date as each phase of reforms takes effect.

Stay on top of employment law changes with Xero

Keeping up with employment law changes is easier when your payroll and accounting are in order. Xero Accounting Software helps you manage payroll, track expenses, and stay organised, so you can focus on running your business rather than worrying about compliance.With automated payroll features and integrations with HR tools, Xero makes it simpler to adapt to changes like day-one SSP and updated contract requirements.

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FAQs on the Employment Rights Act 2026

Here are answers to some common questions about the Employment Rights Act 2026 updates.

Is fire and rehire now illegal?

From 1 January 2027, dismissing an employee and re-engaging them on worse terms will be treated as automatically unfair dismissal, with only a very narrow exception for genuine financial difficulty.

Do day-one rights apply to all employees?

Day-one rights for SSP, paternity leave, and parental leave apply to all eligible employees from 6 April 2026. Eligibility criteria still apply to some entitlements (for example, SSP requires the employee to be classified as an employee, not a contractor), but there is no minimum service requirement.

What happens if you don't comply with the new employment laws?

The Fair Work Agency has enforcement powers, including the ability to investigate employers, issue compliance notices, and impose financial penalties. Keeping your contracts and payroll up to date is the most effective way to avoid problems.

Can workers choose to stay on zero-hours contracts?

Yes. Workers aren't obliged to accept guaranteed hours. The government has confirmed that zero-hours contracts won't be banned outright; the reform gives workers the right to request a contract reflecting their regular hours, while preserving the option to stay on a flexible arrangement if that suits them better.