Employment Law - Looking Ahead

To help you navigate employment law reforms during the next quarter and beyond, we have updated our Employer Guide to the Employment Rights Act 2025.

Our updated Employer Guide can be viewed online here or downloaded here.

From 1 January 2027, two significant changes take effect:

• The qualifying period for unfair dismissal reduces from two years to six months; and
• The cap on the compensatory award is removed, meaning successful claimants can receive unlimited compensation.

Any employee who starts employment on (or before) 2 July 2026 will have accumulated six months' service by 1 January 2027 and will therefore have unfair dismissal rights (with no cap on compensation) from that date.

Beware: the impact of the “notional” effective date of termination

Under section 97 of the Employment Rights Act 1996, where an employee is dismissed without notice (other than for gross misconduct), the statutory minimum notice period is added to the actual termination date to produce a "notional" effective date of termination (EDT). If that notional EDT falls on or after 1 January 2027, and the employee would have 6 months’ service as at that notional EDT, then they will benefit from unfair dismissal rights.

Example: An employee starts on 2 July 2026 and is dismissed on 25 December 2026 with a payment in lieu of notice (PILON). Their one-week statutory notice period is added, giving a notional EDT of 1 January 2027. They therefore qualify for unfair dismissal protection.

Unlimited compensation - different rules may apply

Whilst the qualifying period is tied to the notional EDT, unlimited compensation appears to be tied to the actual date of termination. An employee dismissed before 1 January 2027 may therefore remain subject to the existing compensatory award cap, even if their notional EDT falls on or after that date. The Government has not yet clarified this point, so employers should monitor this during the next quarter for further guidance.

Open consultations:

• Improving access to flexible working – closes 30 April 2026
• Modernising the Agency Work Regulatory Framework – closes 1 May 2026
• Draft Code of practice on trade union right of access – closes 20 May 2026
• Threshold for triggering collective redundancy obligations – closes 21 May 2026
• Misuse of non-disclosure agreements (NDAs) – closes 8 July 2026

Open calls for evidence:

• Transfer of Undertakings (Protection of Employment) (TUPE) Regulations – closes 1 July 2026. This is intended simply to inform potential reform of the TUPE Regulations. No specific proposals have been put forward at this stage, and it remains unclear whether any changes will follow.

Expected:

• The Government's road map indicates that consultations on zero hours contracts and protection against blacklisting may be published this quarter.
• Two further consultations (on the Revised Statutory Code of Practice on Dismissal and Re-engagement, and regulations specifying reasonable steps to prevent sexual harassment) are awaited but may not arrive until later in 2026.

Outcomes from concluded consultations may also be published this quarter. These will be available via the Government's Make Work Pay page.

In May 2026, the government is intending to lay before Parliament an updated draft Code of Practice on Services, Public Functions & Associations. Whilst this Code does not apply specifically to employers, the EHRC noted that it “will update its guidance for employers in due course to reflect developments in the law.” (see Update on Code of Practice for services, public functions and associations | EHRC).

Pay periods for sponsored workers

Sponsored workers whose Certificate of Sponsorship was assigned on or after 8 April 2026 must be paid the required salary in each pay period (as stated on their Certfiicate of Sponsorship) rather than on an annualised basis. This means that temporary reductions in pay such as unpaid leave, salary sacrifice arrangements or payroll errors could cause non-compliance even where total annual salary remains in line with what is confirmed on the Certificate of Sponsorship.

The purpose of this change is to enable the Home Office to investigate potential underpayments at an earlier stage, without needing to wait until a full year of salary data has been accrued. We have seen an increase in data sharing between HMRC and the Home Office and as a result an increase in enforcement action being taken because of pay falling below the threshold required for sponsored workers.

Sponsors should ensure they keep on top of their reporting and record keeping requirements when it comes to pay to ensure compliance with their duties. A failure to do so may have wide-reaching implications, especially now as the Home Office guidance has lowered the enforcement threshold as sanctions can be taken where the Home Office "reasonably suspects" non-compliance with sponsor duties, a proven breach is not required.

Expanded right to work checks

As referenced in our previous edition, the Border Security, Asylum and Immigration Act 2025 received royal assent in December 2025. This Act will significantly expand the illegal working regime beyond direct employees to workers, subcontractors, gig economy workers and those engaged through online matching platforms, extending civil penalty liability to businesses engaging workers even where there is no direct contractual relationship.

Despite the new Act receiving royal assent and consultation closing in December 2025, we await the legislative changes. In the meantime, we have seen the introduction of an express duty on sponsor licence holders to conduct right to work checks on any worker the business wishes to employ or directly engage. This seems to give a bit of an indication of what is to come following the consultation.

Temporary Shortage List

The Migration Advisory Committee is continuing to conduct its comprehensive review of the Temporary Shortage List, which in its current form is set to expire on 31 December 2026.

Following Stage 1, which identified 82 occupations as potentially crucial, the Stage 2 report, due in July 2026, will determine which of those occupations make the final list. Employers in sectors reliant on roles below RQF Level 6 should monitor the outcome of the Stage 2 report closely.

Earned Settlement

The proposed earned settlement model remains one of the most closely watched developments in UK immigration law. The Government's proposals would mark a fundamental shift away from the current model, with the standard qualifying period for settlement potentially increasing from 5 to 10 years for most applicants.

The Government’s consultation on this closed on 12 February 2026, and we are awaiting the response. Whilst it was anticipated that these changes would be introduced in April 2026, we expect this to be delayed later in 2026.

Given the significant implications for recruitment, retention, workforce planning and sponsorship costs, this remains a critical issue for large employers to monitor closely.

‍