Small businesses are anticipating a substantial compliance burden with the upcoming implementation of the Employment Rights Act on January 1. This legislation will reduce the qualifying period for employees to claim ordinary unfair dismissal from two years to six months. The change means business owners will have a more limited timeframe to assess the suitability of new hires before those employees gain enhanced rights.
While the law aims to provide greater protection for employees, it is expected to make staff adjustments more challenging for small businesses. This comes at a time when many businesses are already facing economic pressures, exacerbated by previous policy changes. Unemployment rates currently stand at 4.9 percent, and experts suggest these new legal changes could further strain the labor market.
Impact on Compensation and Previous Policies
The new legislation will also remove the cap on compensation for successful unfair dismissal claims, potentially leading to significant financial costs for small businesses. This follows a series of policy shifts enacted under previous leadership that have already impacted business finances. For instance, increases in Employer National Insurance contribution rates from 13.8 percent to 15 percent, coupled with a sharp drop in the earnings threshold for employer contributions from £9,100 to £5,000, have raised labor costs.
These measures, along with an increased national living wage for younger workers, have reportedly made businesses less inclined to hire new staff or expand their workforce. Furthermore, higher business rates for commercial properties valued over £500,000 have been cited as a disincentive to small business growth. A request from the small business and hospitality sector for a value-added tax (VAT) reduction was also reportedly denied, offering no relief.
New Requirements and Expert Advice
Under the revised Employment Rights Act, employers will be obligated to provide a written reason for dismissal if requested by an employee. Katie Nightingale, Director of People Consulting at Grant Thornton UK, highlighted the potential strain on businesses, stating that "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." Nightingale suggested that the government should provide Small and Medium-sized Enterprises (SMEs) with accessible templates for recruitment, probation, and performance management procedures, and utilize the Growth and Skills Levy to fund practical training for line managers.
Grant Thornton UK advises businesses to prepare by reviewing recruitment processes to ensure they are robust and standardized, with clear objectives set from an employee's first day. They also emphasize that assuming managers understand the new policies is insufficient; proper training on conducting performance conversations is crucial. The firm recommends against delaying performance discussions until an employee is nearing the six-month mark, stressing the need for regular, documented development conversations to establish clear expectations and provide support.