HOT TOPIC | SEPTEMBER 2026 - Non-compliance risks – a guide for employers
Introduction
The Employment Rights Act 2025 (ERA) represents the most monumental shift in UK employment legislation in decades. With key enforcement dates dropping throughout 2026 and culminating in major shifts on 1 January 2027, employers face severely heightened legal and financial risks.
This month, we examine the shifting regulatory landscape: fragmented state enforcement has been replaced by a single, heavily empowered super-regulator - the Fair Work Agency. As risk exposure windows widen for employers, flawed processes now carry severe consequences, threatening the solvency of small businesses and taking a heavy toll on corporate bottom lines.
Enforcement of workers employment rights
The ERA is aimed at growing the economy, boosting wages and reducing insecure work, and a key priority is to improve the enforcement of employment rights. The Act will do this by:
Creating a new enforcement body, the ‘Fair Work Agency’
Extending the timeframe a worker can bring an employment tribunal claim
Changing the rules on who can claim unfair dismissal
The Fair Work Agency (FWA)
The FWA is a new enforcement body that is an amalgamation of several existing bodies. It brings together HMRC’s National Minimum Wage unit, the Employment Agency Standards Inspectorate and the Gangmasters and Labour Abuse Authority. By combining these under one department, the government is creating a unified strategy in the enforcement of workers’ rights.
The agency was established in law back in April, but it will be implemented gradually (you can read how they plan to deliver in 2026 – 2027 here).
Once fully operational, the agency will be able to enforce:
the National Minimum Wage and National Living Wage
review statutory holiday pay calculations for irregular hours and part-year workers, including arrangements for rolled-up holiday pay.
ensure SSP is correctly calculated and paid
regulate employment agencies and businesses in England, Scotland and Wales
license labour suppliers to the agriculture and food sectors
work to eradicate modern slavery by taking action against those employers who commit serious labour exploitation or abuse.
Ensure any sums ordered by an Employment Tribunal or in a COT3 settlement via Acas settlement are paid promptly to avoid FWA imposed financial penalties.
The enforcement powers it will have to do this will include:
Inspect and investigate workplaces and require you to produce any relevant documents or evidence.
Issue notices of underpayment when they find an error, which will require you to pay back workers for up to six years of underpayments.
issue a financial penalty of 200% of the underpayment (capped at £20,000 per worker), reduced to 100% of the underpayment if paid within 14 days - but that still means you are paying double what you originally owed.
the power to charge you for the cost of their investigation if you are found to be non-compliant.
Prosecute the business for serious offences
Require employers to put things right
Bring Employment Tribunal proceedings on behalf of a worker even if the worker has not yet done so themselves.
Extension of timeframe for bringing a tribunal claim
The time frame for claimants to bring an employment tribunal claim are extending from 3 months to 6 months, with effect from 1 October 2026.
For employers, this change will mean the window of exposure to claims will be extended impacting HR practices, risk management and record keeping and document retention periods.
Longer risk window: Previously, employers could generally breathe a sigh of relief three months after a dismissal, resignation, or workplace dispute. The new rules mean a former or existing employee has half a year to reflect, seek legal advice, or decide to take action.
Compounded by Acas conciliation: When factoring in mandatory Acas early conciliation, which pauses the timer, claims could easily surface 8 to 9 months after the actual event.
Increased claim volume: Employees who previously missed the tight 3-month window due to stress, delay in seeking legal advice, or attempting internal grievances will now have time that is needed to file. More time allows claimants to build stronger, better-documented cases, which raises the bar for the defence.
Fading memories: Witness credibility reduces over time. Line managers and colleagues may struggle to recall specific details, dates, or verbal conversations that occurred 6 to 9 months previously.
Staff turnover: Key witnesses, such as HR representatives or direct managers who handled a disciplinary, might leave the business before a claim is even notified, making an employer’s defence preparation harder.
Potential for longer internal grievances: This is actually positive because the extra time allows internal grievance procedures and informal mediations to run their full course without the employee feeling forced to lodge a tribunal claim
Changing the rules on who can claim unfair dismissal
Currently, an employee must have 2 years continuous service to bring a claim for ordinary unfair dismissal. Under the ERA this is being significantly reduced to just 6 months.
The reduction in the service requirement for unfair dismissal claims is one of the most significant changes under the reforms because it fundamentally alters how employers manage new hires.
Shortening the qualifying period from 24 months to just 6 months shifts the burden of proof, assessment, and risk management much earlier into an employee’s employment.
It will also mean ensuring you are thorough in documenting performance from day one, so you have clear evidence to support any decision to dismiss. Implementing a system for regular performance reviews and feedback, even during the initial period of employment will become essential.
The end of low-risk early dismissals
Under the 2-year qualifying rule, employers had up to two years to exit an underperforming or poorly fitting employee with minimal risk of an ordinary unfair dismissal claim (provided there were no discrimination or whistleblowing elements). Under the new rules, once an employee reaches the 6-month mark, an employer must prove a fair reason for dismissal (capability, conduct, redundancy, statutory restriction, or Some Other Substantial Reason) and show they followed a fair and reasonable procedure.
So even for new starters, you must have a fair and documented process for dismissals, and you can no longer simply terminate a new employee's contract without a valid reason and a fair procedure.
One common practice that will be impacted, is the use of a ‘short service dismissal’ approach where an abridged disciplinary process is used (but only in situations where there are no potential discrimination). This will no longer be safe.
Probationary periods become critical
Probationary periods can no longer be a passive HR formality, or even something that is optional to have.
Adopting a robust probation process that allows the employer to review and monitor performance and conduct and actively engage with an employee to address shortfalls timely and promptly is going to be critical.
Especially since the statutory minimum notice of one week after one month service, adds to an employee's service length. In other words, employers must effectively decide whether to keep or let go of a staff member by about month 5 at the latest, to implement a notice/dismissal before the 6-month deadline.
The probation period will become key for actively managing performance. If issues arise, formal warnings and a chance for improvement are likely to be vital. This documented process will be essential evidence if a dismissal occurs during or at the end of the probation period.
Shift in management mindset
A manager’s ‘wait and see’ approach in assessing a person’s capability/conduct, will carry high legal risk. Line managers will need to identify issues in attendance, performance, or conduct immediately during onboarding, document them, and address them promptly. Leaving performance issues unaddressed until an annual appraisal or late-stage probation review will expose the company to full tribunal proceedings.
Compounded impact with extended tribunal timeframes
Combined with the increase in tribunal timeframes to 6 months, and the removal of the compensatory cap in successful unfair dismissal awards, the financial and legal exposure on early-tenure terminations rises significantly, particularly for those in highly paid jobs and senior management.
It also means managers and supervisors will need mandatory training on the new unfair dismissal rules so that they understand the importance of following proper procedures and documenting performance issues to avoid claims.
Financial and non-financial risks of non-compliance
Non-compliance with employment law carries escalating direct and indirect financial risks, particularly the key provisions of the ERA explored in this guide. Failing to adapt processes, miss handling early-tenure dismissals or missing the expanded claim timeline exposes employers to severe monetary exposure.
Financial:
Statutory caps on ordinary unfair dismissal compensatory awards are removed from January 2027. Previously capped at £123,543 (or one year's gross salary), tribunals can award unlimited compensation based on actual loss of earnings. Higher earners and specialised roles pose unprecedented financial liability if dismissed unfairly.
Fighting a complex employment tribunal claim is costly, with typically costs ranging from £15,000 to £50,000+ in legal fees alone, regardless of whether the employer wins or loses. Because employment tribunals rarely award legal costs to the winning party, defending poorly documented or procedural non-compliant dismissals is a net loss.
The Fair Work Agency acts as a unified state enforcement body. It holds broad powers to inspect records, investigate breaches, and issue direct administrative fines or penalties for non-compliance such as penalties up to 200% of the arrears owed in the non-payment of NMW, as well as failure to pay Statutory Sick Pay (SSP) from day one or the inaccurate holiday pay and annual leave record-keeping
With employees having 6 months to claim and protection from unfair dismissal kicking in at 6 months of service, claimants hold significantly stronger leverage in exit negotiations meaning settlements will increasingly demand higher exit packages to avoid costly proceedings.
Non-financial indirect costs
Beyond direct legal payouts, non-compliance generates hidden operational costs:
Defending a single tribunal claim absorbs 100+ hours of internal HR and senior leadership time in document discovery, witness statements, and hearings.
Tribunal judgments are public record and searchable, which damages employer branding and recruitment efforts. With social media now the norm, news can spread quickly and far.
Heightened claims volume drives up Employment Practices Liability Insurance (EPLI) premiums and deductibles.
Compliance is critical
Identifying potential risks to your business must be central to your business operations. And compliance audits are an essential tool for this. We offer several:
ERA 2025 Readiness Check – access here.
HR Risk Audit – access here.
Preventing Sexual Harassment – access here
Preventing harassment risk assessment (this addresses sexual harassment but is extended to include general harassment on the grounds of a protected characteristic, as well as harassment by third parties – coming into force 30 October 2026) – access here.
Our tailored questionnaires are designed to pinpoint vulnerabilities in your business, enabling the business to prioritise and plan strategic risk mitigation strategies.
Meticulous record keeping
With greater exposure to scrutiny, employers should focus on improving their record keeping for all employment activity, and HR practices.
A failure to keep certain records adequately, can amount to a criminal offence. For example, records relating to holiday entitlement and pay, NMW, statutory payments and the right to work in the UK.
Meticulous record keeping is not only a legal requirement in certain areas, but records of all employee-related issues, including disciplinary actions, grievances, performance reviews, and termination documents, will be crucial for building a robust defence at tribunal and evidencing compliance with the FWA. For example:
Implement a system to keep records demonstrating compliance with statutory holiday entitlement (amount of leave and pay and pay in lieu of outstanding holiday on termination) for a minimum of six years.
Ensure records (NMW, holiday, SSP) are easily accessible for inspection. Remember that enforcement officers can enter premises and check computers or storage equipment.
Note that knowingly producing false documents or information is a criminal offence punishable by fines or imprisonment.
If you are unsure how long for, then read our Knowledge Base article ‘Document retention’ and download the accompanying retention period guide.
Handbooks and policies
The ERA 2025 overhaul directly impacts how employers draft, manage, and enforce workplace policies and employee handbooks. Relying on legacy documentation exposes businesses to immediate compliance risks and potential tribunal claims.
Because these legislative changes are being introduced in phases across 2026, 2027, and beyond, employers must commit to a continuous review of all employment documentation, including contracts. Updating non-contractual handbooks and policies is relatively straightforward. However, changing contractual terms is far more challenging: it requires formal employee consultation to vary the contract, even though aligning with statutory UK law ultimately makes this a clear, necessary communication process.
Management capability
The ERA transforms the role of line management. Historically, line managers could rely on a two-year grace period where informal, delayed, or passive management of underperforming new hires carried limited legal risk. Because statutory protections attach earlier (such as 6 months for unfair dismissal) and enforcement tightens, line manager capability becomes an employer's primary risk mitigation tool.
Managers can no longer wait until an annual review or late-stage probation to address concerns. Performance, conduct, and cultural fit must be assessed starting in Week 1.
Because statutory notice can extend an employee's effective service length, managers must make firm "keep or terminate" decisions by Month 4 or 5 at the latest. Letting an underperforming staff member "drift" past 6 months now grants them full unfair dismissal rights and access to uncapped tribunal awards.
Managers must be trained to document every performance conversation, action plan, and warning clearly and objectively.
Tribunals closely scrutinise manager notes. Vague statements like "not a good culture fit" or "isn't working out" will not hold up as a fair reason for dismissal; managers need to state concrete facts, dates, and metrics.
Flexible working requests next year, will be scrutinised under an objective "reasonableness" standard. Managers will no longer be able to issue blanket rejections based on personal preference; they must demonstrate evidence-based operational reasons.
With Statutory Sick Pay payable from day 1, managers need strong absence-management skills, conducting prompt return-to-work interviews and spotting health or burnout patterns early.
Managers are on the front lines of enforcing anti-harassment standards, including managing risks posed by third parties (clients, customers, suppliers).
Managers must be capable of spotting microaggressions, handling informal complaints seriously before they escalate, and documenting safety measures taken to protect team members.
Further Information
Register for our webinar: Non-compliance risks – a guide for employers
Our webinar is taking place Thursday 10 September, 10am-11am and we will discuss:
How state enforcement is no longer fragmented.
The impact of the extended window of exposure on employers
How a poorly handled dismissal could bankrupt a small business or severely damage a corporate bottom line.
Why legacy HR handbooks and casual management styles are an immediate liability.
You can register here.
Future Webinars
Don’t forget to join us each month in our free webinars. These monthly discussions explore a HR topic to understand the practical application for SMEs. Our upcoming events are:
Planning redundancies? What the new law means for your business – register here
Grievances are changing, is your organisation ready? - register here
2027 starts now. How to prepare your organisation for the year ahead – register here.