Small businesses face ‘real compliance burden’ when employment law changes next year – how could YOU be affected?

Small businesses could be burdened even further by an employment law change set to come into effect on January 1 next year. 

The Employment Rights Act will mean that, from next year, employees will be able to claim ordinary unfair dismissal after six months rather than two years, which is the current law. 

In practical terms, this means small business owners will have less time to decide whether new workers are suitable before they are entitled to a lot more rights. 

Although the law has been praised as it will offer employees greater protection, it will also make it harder for small business owners to change staff and put them under pressure to make a decision about whether an employee is to be permanent.  

With small businesses under pressure already from policies introduced under Rachel Reeves‘ chancellorship, and unemployment rates at 4.9 per cent, experts worry that the sweeping changes set to be introduced will put the labour market under further pressure. 

Under the new law, the existing cap on the maximum amount of compensation that a fired worker can receive for successful unfair dismissal claims will also be removed. 

This could have a costly effect on small businesses, who have suffered already under changes enacted under Sir Keir Starmer’s leadership. 

Then-Chancellor Rachel Reeves introduced an increase in Employer National Insurance contribution rates from 13.8 to 15 per cent, while the earnings threshold at which employers start paying dropped sharply from £9,100 to £5,000. 

Rachel Reeves’ policies, including increasing employer contributions to national insurance, already put many businesses under strain 

This policy – alongside an increase in the national living wage for teenagers and young people – made small businesses less driven to employ young people or more staff due to higher labour costs. 

Small businesses also faced higher business rates, with high street and larger commercial properties valued over £500,000 facing higher costs, de-incentivising small business growth. 

And the one request from the small business and hospitality sector – a reduction in VAT – was refused, denying companies some relief. 

This latest law change by Labour will put an extra burden on compliance for already hard-hit small businesses. 

Employers will now also have to provide a written reason for dismissal if requested by the employee.  

Katie Nightingale, Director of People Consulting at Grant Thornton UK, said: ‘Businesses are already squeezed in a slow economy so will naturally have concerns about investing in training for managers to be set up for the new bill. 

‘This is where the government needs to step up and support. It should provide SMEs with straightforward, accessible templates for compliant recruitment, probation and performance-management procedures. 

‘It should also use the Growth and Skills Levy to fund short, practical courses that build line-manager capability without imposing a prohibitive cost or time commitment.

‘Poor recruitment and performance management are expensive long before a case reaches a tribunal. Mis-hires, employees ‘checking out’, and avoidable staff turnover all damage productivity.

‘Grant Thornton UK helps businesses build hiring and performance practices that work in the real world, not just on paper. This isn’t about ticking a box.

‘Clear expectations, capable managers and honest conversations will help businesses ensure they have the right people working for them and achieve successful outcomes for employees.

‘For SMEs, it’s time to act before it’s too late.’