A recently published report has sparked debate over proposed reforms packed into the Employment Rights Bill, described by some as a potential “£5 billion stealth tax” on workers. While the reforms were introduced by Angela Rayner in her role as Deputy Prime Minister, her resignation is not expected to derail the proposals; it may, however, slow their progress.

A business owner reviews new employment reforms potentially reshaping SMEs

What’s on the table and when

The reforms are set to receive Royal Assent this Autumn and will be rolled out in phases. Some measures could be implemented as early as April 2026, with others following in 2027. As the Bill stands, and subject to significant House of Lords amendments, the Government is urging Parliament to maintain its current direction.

Key reform ideas proposed by the Government include:

• Unfair dismissal: A right from the first day of employment.
• Sick pay: Statutory sick pay to begin on day one (removing the lower earnings limit).
• Parental leave: A day-one right to paternity and unpaid parental leave.
• Whistleblower protections: Stronger protections in relation to sexual harassment cases.
• Collective redundancy: Protective awards for failures to comply with formal redundancy consultation procedures.
• Fire and rehire: Automatic unfair dismissal and re-engagement when terms are varied.
• Time limits: Increase the window to bring a claim to the employment tribunal to six months.

The “stealth tax” concern

Proponents and critics alike point to hidden costs associated with these reforms. Described as a “stealth payroll tax” on workers, some estimates suggest the changes could total around £5 billion in new costs. For employers, this could translate into:

• Slower wage growth and smaller or fewer bonuses
• Hiring constraints
• Passing costs to customers
• Lower starting salaries

Small and medium-sized enterprises (SMEs) are expected to feel the impact most acutely due to tighter budgets and fewer resources to absorb or administrate new requirements. By contrast, global corporations may be better positioned to weather the changes.

Implications for SMEs

• Administrative burden: SMEs often lack the in-house legal teams and HR infrastructure to navigate new requirements efficiently. This can lead to higher per-employee costs or a heavier compliance workload.
• Hiring and retention: Enhanced employee rights may influence eligibility criteria, compensation strategies, or hiring practices, particularly for roles with broader staff turnover.
• Operational agility: Larger firms can reallocate resources to mitigate financial risk, for example by adjusting compensation structures. SMEs may not have the same flexibility.
• Foreign investment considerations: International companies expanding into the UK may hesitate to hire if unfair dismissal rights begin on day one, potentially impacting inbound investment.

A pragmatic approach for SMEs

While expanding employee rights is a positive aim in many respects, the potential knock-on effects require careful planning. SMEs should consider:

• Process readiness: Develop robust, scalable HR processes for handling potential redundancies, disciplinary actions, and terminations. This can help reduce the need for frequent legal consultations.
• Individualised support: Move away from a one-size-fits-all approach. Consider tailored support for staff with diverse needs (e.g., neurodiversity) to maintain fair and compliant practices.
• Risk assessment: Map out where new reforms will affect your business most, and budget for potential costs in payroll, HR software, and training.
• External resources: Build relationships with trusted legal and HR advisors who can provide timely guidance as the final Bill takes shape.

Final thoughts

These proposed reforms aim to strengthen employee rights, but they also carry significant implications for how SMEs operate. As the final form of the Employment Rights Bill takes shape, businesses especially smaller ones should stay informed, assess their exposure, and begin building resilient processes now to navigate the transition smoothly.

If you would like to discuss this any further please call our team on 01522 448 181