Employment Update January 2026

The Employment Rights Act 2025 received Royal Assent in December 2025 and now paves the way for significant reforms to UK employment law. The Act has been described as the "biggest upgrade to workers' rights in a generation". The changes are being introduced in phases, with key reforms coming in from April 2026 onwards. However, despite the Act becoming law, some of the detail on the new rules will be set out in future regulations, to be consulted on, with some 26 Government consultations expected in 2026. Employers will need to assess which reforms will have the most impact on their business and prepare for implementation. We have summarised the key changes, implementation dates and action points for employers on our Employment Rights Act Hub page Employment Rights Act - what does it mean for employers?

As widely reported, under the Employment Rights Act, the qualifying period for unfair dismissal claims will reduce to six months and the cap on compensation will be removed. Currently, employees need at least two years' service in most cases to claim unfair dismissal. The Government had planned to remove the qualifying period altogether but has now settled on a six-month qualifying service requirement. This is a significant change, meaning many more employees will have unfair dismissal rights. The change is scheduled to take effect from 1 January 2027, so that anyone employed from now until 1 July 2026 would immediately have unfair dismissal protection from 1 January 2027.

The removal of the compensation cap is also a major change. Currently compensation for unfair dismissal is capped at the lower of a year's pay and £118,223 (a figure which is revised each year). Under the Act, there will be no limit on the amount that can be claimed, as is the case for whistleblowing and discrimination claims. It is anticipated that the removal of the compensation cap will also take effect on 1 January 2027.

These changes will almost certainly result in an increase in Employment Tribunal claims, both from employees who would not previously have had enough service and also from high earners for whom an unfair dismissal claim may not have been worthwhile under the current capped compensation regime. The changes are also likely to make settling unfair dismissal claims and negotiating senior exits more difficult. Employers can prepare for the changes by ensuring they have robust probationary periods, which are operated effectively, and that managers are trained in managing probation, underperformance following probation, disciplinaries and dismissals more generally.

From 1 September 2026, the FCA is introducing a new rule on non-financial misconduct, together with guidance on how firms should treat such misconduct in relation to the FCA conduct rules and fitness and propriety assessments. The FCA has now published the final version of its new guidance. Although the guidance has been reworked and clarified in a number of places, in substance it is largely the same as the draft version published in July 2025 for consultation. In the light of the new guidance, firms will need to consider their policies and processes for assessing conduct rule breaches and fitness and propriety, as well their training for staff, ahead of the new rule coming into force in September 2026. For more details about the new guidance, please see our briefing New FCA guidance on non-financial misconduct. We will be hosting a webinar on the new rule and practical implications in February: watch this space!

Employers have a duty to consult employee representatives where they are proposing 20 or more redundancies within a 90-day period at a single site or establishment. Employers who fail to do so currently face a protective award of up to 90 days' pay per affected employee. Under the Employment Rights Act, the maximum protective award will be doubled to 180 days' pay per affected employee, meaning the costs of failing to consult on multiple redundancies will increase significantly. The change is expected to come into force on 6 April 2026 and will likely apply to redundancies taking effect on or after 6 April 2026 (although this is to be confirmed in commencement regulations). Other changes to the collective consultation regime, detailed in our briefing, are planned to come into effect in 2027

On 6 April 2026, new rules on tax avoidance for umbrella companies will come into effect. Umbrella companies are sometimes used by employers or employment agencies to employ temporary workers and handle their payroll, including accounting for PAYE income tax and national insurance contributions. Under the new rules, where the umbrella company fails to pay the correct amount of income tax or national insurance, HMRC will be able to seek recovery from either the employment agency or, in some cases, the client that uses their services. Ahead of the changes, employers should assess whether they, or any employment agencies they use, engage workers through umbrella companies, and ensure there are appropriate protections in place.

The rates of the National Living Wage and the National Minimum Wage increase in April each year. The Government has announced that the rates applicable from 1 April 2026 will be:

• £12.71 per hour for workers aged 21 and over (increasing from £12.21 per hour);

• £10.85 per hour for workers aged 18-20 (increasing from £10 per hour); and

• £8.00 per hour workers aged 16-17 and apprentices under 19 or in the first year of apprenticeship (increasing from £7.55 per hour).

The rates of statutory pay for family leave also increase in April each year. The Government has announced that from 6 April 2026, the weekly rate of statutory maternity pay will increase from £187.18 to £194.32 per week. This new rate will also apply to statutory adoption, paternity, shared parental, parental bereavement and neonatal care pay. The increase needs to be formalised in an Order which must be laid before Parliament.

Under the Employment Rights Act, the current qualifying periods for paternity leave (26 weeks) and unpaid parental leave (one year) will be removed, so that employees will be able to take such leave from day one. Employees will also be able to take paternity leave following shared parental leave (currently an employee who takes shared parental leave loses the right to any untaken paternity leave). These changes will come into force on 6 April 2026.

On 6 April 2026, a number of changes will be made to statutory sick pay. The current three-day waiting period will be removed, so that statutory sick pay is available from day one of absence. The earnings threshold will also be removed, so that it is available to all workers regardless of their earnings. The rate of statutory sick pay will also change so that it is the lower of the statutory rate and 80% of the employee's normal weekly earnings, with the statutory rate increasing from £118.75 to £123.25 per week with effect from 6 April 2026.

The Government is currently consulting on proposals to double the standard qualifying period from five years to ten years for indefinite leave to remain or settlement in the UK. However, as part of the consultation, the Government is proposing to introduce a new concept of 'earned settlement' with time reductions from the 10-year baseline qualifying period, depending on specific requirements being met. For example, under the proposals, the qualifying period for settlement would reduce to three years for employees earning above £125,140 (the threshold for payment of income tax at the additional rate). This will represent a significant change, but it is not yet clear whether transitional provisions will apply for individuals already in the UK who are currently on a five-year pathway to settlement. The consultation closes on 12 February 2026.

Most applicants for UK work visas need to prove their knowledge of the English language. On 8 January 2026, the level of English language required increased to level B2 on the Common European Framework of Reference for Languages (CEFR) scale, which is intermediate to upper-intermediate level.

As reported in the press, a hedge fund has been ordered to pay USD$5.385m (plus interest) in compensation to a former employee after it failed to award him a bonus. Despite the bonus being described as discretionary, the High Court ruled that no reasonable employer would have refused to pay a bonus in circumstances where the employee had generated USD$60m in profit and 97% of the fund's revenue.

The employee in this case, a female engineer, worked for a global security company. The employer had a policy that employees could use toilet facilities based on their asserted gender rather than biological sex. The employee brought claims arguing that the toilet access policy amounted to sex discrimination and harassment on the grounds of sex, as well as a breach of her right to privacy. She said that biological women are entitled to safety, privacy and dignity when using facilities, and that permitting trans women to use female toilets violated this.

An Employment Tribunal dismissed her claims. The Tribunal ruled that the toilet access policy did not constitute harassment as it did not violate the employee's dignity; she had continued to use the female toilets alongside trans colleagues, despite having access to separate single occupancy toilets. Nor did the toilet access policy amount to discrimination, as it applied equally to male and female toilets, and there was no basis for saying that the policy had a greater impact on privacy for women than for men. It was also relevant that no concerns about the policy had been raised by any other members of staff.

The Government has published a consultation on options for reforming non-compete clauses in employment contracts. The Government is considering a range of options, including:

• banning non-competes, either altogether or for employees earning below a certain salary;

• limiting the length of non-competes to three months across the board; or

• applying different statutory limits on length for employers of different sizes (e.g. three months for large employers, six months for small and medium employers).

The consultation also asks whether any reforms should be limited to non-competes in employment contracts or should capture other restrictions (e.g. non-poaching of employees or clients) and/or apply to wider workplace contracts (although this is not defined). In May 2023, the previous Conservative government said it would introduce a three-month limit on non-competes but this was never introduced. Non-competes in employment contracts are common and if they were banned or limited, employers would need to ensure they have appropriate contractual provisions in place, such as confidentiality, garden leave and other post termination restrictions. Employers and other interested parties have until 18 February 2026 to comment on the proposals.

Currently statutory trade union ballots must be conducted by post (e.g. for industrial action, union elections and union mergers). From April 2026, the Employment Rights Act will introduce electronic and in person workplace balloting as additional methods for such ballots. Alongside this, the Government plans to introduce a new statutory code of practice on electronic and workplace balloting to provide guidance and set out best practice. A draft of the statutory code of practice has now been published for consultation. The draft code and associated consultation are open for comment until 28 January 2026.

In April 2024, a new right to carer's leave was introduced, giving employees up to one week of unpaid leave each year to care for dependents with long-term care needs. The Government is reviewing the right and has now published terms of reference for its review. The review aims to consider how the right is working, whether there are barriers to take-up and what options there might be for introducing paid carer's leave or other changes to the right. The review is due to conclude by autumn 2026, with a roadmap for any reforms expected over winter 2026/27.

• In December 2025, we purchased over 240 gifts for the Single Homeless Project Christmas Appeal.

• In recent weeks, our team has been involved in a variety of pro bono work for organisations such as Refugees at Home, Just Like Us, Change Agents and Impact Investing Institute.

Since the last edition of Employment Update, our work has included:

• advising a global reinsurance business on a complex whistleblowing investigation into allegations of bullying, harassment and regulatory breaches

• advising an asset manager on a cross-border team move and associated litigation

• advising a listed company on the removal of a senior executive

• supporting a bank to resolve multiple sickness absence cases

• carrying out a global review of remuneration and covenants for an asset management client

• advising a private equity portfolio company on an anonymous whistleblowing complaint containing serious allegations of health and safety breaches, financial misconduct and potential theft

• supporting a technology-based client in defending a tribunal claim from a job applicant who withdrew from the process due to being unable to satisfy an essential job requirement.