Governance & Compliance 13: Employment Rights Act reshapes risk and governance

Will Chalk:
Hello and welcome to Ashurst Legal Outlook, the latest in our series of governance and compliance focused podcasts. My name's Will Chalk and I'm a partner in Ashurst's Corporate Transactions practice focusing on governance.

You're listening to a special series tackling our view of the top risk related priorities for Boards in 2026. In each episode, we explore a major risk, trend, or opportunity commanding attention when setting board agendas this year.

And in this episode, we're diving into some of the details on the most transformative shift in employment law in a generation. The Employment Rights Act 2025 will shape workforce risk and governance for years to come. There's a lot to get to grips with. For boards with UK-based employees, there's work to do and to do now.

To help me unpack the details, I'm joined by two of my employment partners, Crowley Woodford and Ruth Buchanan.

Thanks both very much for joining me.

Crowley Woodford:
Thanks, Will.

Will Chalk:
So Crowley, probably an unfair question given the breadth of the At, but is there one standout aspect of it that really shifts the employment dial?

Crowley Woodford:
Yeah, thanks, Will. I mean, I think it's true to say with no exaggeration that the Employment Rights Act is probably the most fundamental change in employment rights since the Thatcher era. And amongst those changes, probably the most significant one is the changes to unfair dismissal.

Those changes come into effect from January next year and there's two key changes I wanted to flag to you all.

The first is there's going to be a significantly reduced qualifying period for unfair dismissal from the current two years to the new sixth month qualifying period.

The second, and in many ways perhaps more fundamental, is the abolition of the compensation cap, which by way of reminder is currently at the lower of a year's gross pay or approximately £120K.
And that change is likely to result in a significant shift in the termination dynamics that employers have come to know and love, especially so for senior employees and inevitably it's going to make those settlement discussions a lot tougher going forward.

Will Chalk:
So let's just unpick that. So going forwards, are you saying it'll be worth the while of highly remunerated employees to bring unfair dismissal claims carrying uncapped liability exposure, whereas in the past they just may not have bothered?

Crowley Woodford:
Exactly. I think at the moment, employees often argue discrimination and whistleblowing to get round the unfair dismissal cap and to strengthen their arguments for higher settlement sums. But these types of claims are complicated for employees to bring and they don't always fit with the surrounding circumstances.

And so in the new world, there's going to be a greater emphasis on an employer's reason for terminating. Is that a fair reason? And in particular, there's going to be real challenge on the process that an employer follows prior to termination. If an employer fails on either one of those, the employee has an unfair dismissal claim.

Will Chalk:
So in practise, boards need to prepare themselves for greater litigation risks within their organisations when terminating highly paid employees. Is that what we're saying?

Crowley Woodford:
Politicians answer 'yes' and 'no', Will. Potentially yes, where the organisation has not put in place good governance strategies, for example, to performance manage highly paid employees, which certainly in my experience is not that common.

Going forward, however, I think there are a number of strategies that boards should be considering to mitigate the litigation risks. For example, they could ensure that their organisation tightens up on the performance management of those type of individuals, make sure that all important paper trail is left so that when things come to a crunch, there's a story, a backstory to be told. It might include, for example, employers introducing some sort of special expedited performance management plan so that poor performance can be established as a fair reason when they come to terminate.

Will Chalk:
Thanks, Crowley. So Ruth, another topic that seems to regularly dominate the press is allegations of sexual harassment, rightly, which of course are extremely damaging to an organisation's reputation. Now, I think I'm right in saying that boards need to be particularly concerned about the Act's new corporate obligations in relation to sexual harassment. Am I right?

Ruth Buchanan:
Yeah, well, I think that's right. The Act is going to significantly strengthen the legal framework around workplace harassment and it's going to impose some higher standards on employers and also expand the scope of liability for organisations. So, for example, there's going to be a heightened GC on employers to prevent sexual harassment. Employers had already done quite a lot of work for the preventative duty that got introduced back in October 2024, which required employers to take reasonable steps to prevent sexual harassment. But from October this year, the Act's actually going to raise that threshold again to require employers to take all reasonable steps to prevent sexual harassment.

Will Chalk:
So what governance issues does this throw up for boards?

Ruth Buchanan:
I think it just leads to a heightening of the compliance bar for organisations. So employers are going to have to take the steps that are going to be specified in the regulations, but also take all other preventative steps that are reasonable in the circumstances and the types of steps that we're thinking about or are going to be expected include conducting risk assessments, making sure that you're publishing relevant policies and plans, establishing reporting mechanisms, making sure that you've got proper complaints handling procedures, et cetera.

Will Chalk:
And other issues the Act throws up for boards to be aware of, Ruth?

Ruth Buchanan:
So one of the other key things is that from October 2026, the Act reintroduces employer liability for third party harassment. That's a provision that we'd had some time ago, but it had been repealed and that definition of third party is very broad. And so anyone who is not the employer, but it could capture a broad range of individuals, customers, clients, contractors, guests, delegates at a conference, members of the public. And I think the key thing about this change is that that new liability applies to all forms of harassment, not just sexual harassment. And it creates a direct, independent right of action against employers and an employer will be liable where harassment occurs during the course of the individual's employment and the employer fails to take all reasonable steps to prevent it.

Will Chalk:
So presumably the breadth of this obligation is important for boards to understand as what I think you're saying ... Well, I think I understand you're telling me is that an organisation will need robust procedures in place to address a sensitive issue like this, should it arise between an employee and for example, an important client. Have I got that right?

Ruth Buchanan:
Yeah, that's exactly right. Employers are really going to have to give thought to what interactions their employees are having with third parties and made sure that they have taken all the appropriate steps to do whatever they can, which is difficult because you don't have control of that situation in the same way that you do with your own staff, but potential claims could arise in a plethora of situations and organisations are going to need to be ready to respond.

I also just wanted to mention one other change to the Act that needs to be on the radar of boards and which is expected to come into force next year. And that relates to any clause in an agreement between an employer and a worker that seeks to stop that worker from making allegations or disclosures about harassment or the employers who are handling of those matters.

That type of clause is going to be void and that's not limited also to clauses and employment contracts. The government has said that excepted agreements will be allowed and they've started a consultation about what that might look like. We don't have time to go into all of the details of the consultation, but potentially the requirements for excepted agreements might shift the goalposts when organisations are looking to negotiate settlement agreements with exiting employees.

Will Chalk:
So that's the NDA issue, the non-disclosure agreement issue that we hear that go hand in glove with all of the publicity about sexual harassment claims.

Ruth Buchanan:
Yeah, that's right.

Will Chalk:
Thanks, Ruth. Okay. Moving on to a topic that I've been following closely from a governance perspective and that being the requirement for employees to create equality action plans. Crowley, what do boards need to know here?

Crowley Woodford:
Thanks, Will. Well, the good news, I suppose, depending on how many people you employ is that only employers with 250 employees will need to publish those equality action plans. This is going to be a mandatory requirement from April next year and alongside existing gender pay reporting, employers will need to develop and publish an equality action plan on an annual basis. And that plan will need to cover the actions that will be taken to address both the gender pay gap and supporting employees going through the menopause in their organisations. And the government's published detailed guidance on what needs to be included in those plans and I recommend clients reference that on that government advice portal when preparing their plans.

And employers in the private or voluntary sector, if that's relevant, will need to include the name of a responsible person when submitting the action plan. And this will usually be a director or partner or senior officer as that named person will be responsible for confirming that the information submitted is accurate.

And as a result of that, it's going to be important that organisations make sure that they have appropriate systems in place for the collecting, storing, and reviewing data for those new equality action plans.

Will Chalk:
And relatedly, the government's also confirmed that these large employers will need to report on ethnicity and disability pay gaps. What detail do we have on this at the moment, Crowley?

Crowley Woodford:
Yeah, thanks. Well, not much as the answer, but you're right, the government ran a public consultation last year and has confirmed that it intends to make ethnicity and disability pay gap reporting mandatory. And likewise, that's going to apply to employers with 250 or more employees. So there's consistency with the threshold there. So for example, employers will be required to report the same six measures for ethnicity and disability pay gap reporting as they already do for gender pay reporting and will have the same reporting dates and use the same online service as the gender pay reporting.
Unfortunately, where it gets a bit trickier is around the data collection and calculations. Similar to the equality action plan, organisations may need to review their systems to ensure that they're in compliance. For example, with ethnicity pay gap reporting, employers are going to be required to report a binary comparison as a minimum between white and other ethnic groups combined and so aggregate to five ethnic groups where possible.

There's going to be a threshold for employees for each group being reported on to obviously protect anonymity of that group. We don't know yet what the appropriate threshold might be as the government's still working on that.

Will Chalk:
And I think we're expecting to draft the Equality Bill to be, well, it's a disability reporting requirements to be announced in the King's speech today. I think it's worth pointing out that we're recording this a couple of hours before the King's speech. And with everything that's going on in Westminster at the moment, we'll probably come off this recording and find out that the King's been told to turn his carriage round halfway down the Mall.

But anyway, Ruth, thinking about the main focus of the department that I sit in, corporate, which is of course M&A, does the Act present any issues when it comes to harmonising terms and conditions post-acquisition? [Listeners should note that the Bill referred to above did not appear in the King's Speech so it may well be that this aspect of legislative change does not come forward in this Parliamentary session.]

Ruth Buchanan:
I think it potentially does and that's because of some of the changes that are being made in the unfair dismissal space.

So currently, where employers can't get the consent of employees to harmonise terms and conditions, they have a root of potentially being able to dismiss the employees and re-engage the staff on the new terms that's known as 'fire and re-hire'. It is always used very much as a last resort by employers and that's because any dismissal through that route already gives rise to a potential unfair dismissal claim.
But under the Employment Rights Act changes, it's going to become very difficult to really ever follow that route because where an employer seeks to dismiss and re-engage staff to alter key terms like pay working hours or time off, then that dismissal is going to be treated now as automatically unfair, unless the employer can show that the business was facing serious financial trouble and that the contractual change was genuinely unavoidable to keep the organisation running.

But really when we talk about serious financial difficulties, it's got to be something that is getting very close to insolvency type situations, hopefully highly unlikely to arise in practise. And that same protection is also going to apply to what's called 'fire and replace' situations, which stops employers from avoiding restriction basically by bringing in contractors and non-employees like agency workers, to carry out the same work on new terms.

And what I think probably hasn't been focused on by many organisations is that these changes will make harmonising terms and conditions following, say for example, a TUPE transfer of staff even more challenging because unless changes to key terms are beneficial for the staff population, there's going to be actually very little an employer will be able to actually do without consent unless the business is in serious financial trouble.

Will Chalk:
And is there anything boards can do now to insulate the business from the repercussions of these changes?

Ruth Buchanan:
So these changes are expected to come into effect next January. So I think before then what we're starting to see some employers do is doing a bit of an audit, a bit of a review of any historic benefits or terms that they don't really want in the business moving forward and making sure that terms are appropriate for their organisation for new hires and existing staff so that you can tackle that change before these changes come into effect in January.

Will Chalk:
Thanks, Ruth.
Crowley, a final highlight, if that's the right word, from you?

Crowley Woodford:
Highlight; low light. I think for me it's definitely the powers that have been given to the trade unions. These new powers that they've got can potentially impact not just those employers who currently have unionised workforces, but also those employers who don't currently recognise unions but perhaps are in the zone or in the crosshairs of trade unions for future recognition. And it's no great surprise, I suppose, that a Labour government is pro- trade union, but the breadth of the new trade union rights will inevitably embolden the unions.

And to give you one example of that, unions are going to have the right to access workplaces and communicate with workers for the purposes of meeting, supporting, representing, recruiting, or organising workers and facilitating collective bargaining. That's going to apply to all employers irrespective of whether employees are members of a trade union or whether that trade union is recognised at the moment.

So really quite extensive access rights to the workplace and really, from my perspective, the only limitation on this is the unions themselves in getting organised and targeting where they want to expand.

Will Chalk:
And a final highlight, thought from you, Ruth?

Ruth Buchanan:
I think for me, one of the really interesting areas is the creation of the Fair Work Agency. So this new agency, which has now been established, it's got very wide ranging enforcement powers so they can investigate and sanction non-compliance with employment law like holiday pay, minimum wage. And we've not really had a regulator like that in the employment space. And I think it's also really important for boards to be aware that there are potential civil and criminal sanctions which can extend beyond the corporate entity, but also to individuals such as directors for non-compliance with certain obligations. So that agency is going to be well worth watching, I think, over the next few months to see how it decides to show its teeth.

Will Chalk:
Thanks, Ruth. And thank you, Crowley. That's been really helpful. We're going to have the book you both in later on in the year for an update on where we are on all of those topics, I'm sure.
And thank you for listening to this episode of Ashurst Legal Outlook. To listen to more episodes in this board priorities mini series, just search for Ashurst Legal Outlook on Apple Podcasts, Spotify, or through your favourite podcast player, or visit our Board Priorities homepage to read more about our top priorities for boards in 2026. You can find our relevant contact details on that page too and you should of course feel free to get in touch.

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Until then, this is me, Will Chalk, saying thank you very much for listening and goodbye for now.