Major shake-up of employment law raises challenges for UK businesses

The Employment Rights Act 2025 was a piece of landmark legislation for the Labour government, reflecting many of its priorities and manifesto commitments to strengthen rights for workers and trade unions.

The act means that significant changes to UK employment law will come into force over the next two years. UK businesses will need to deal with trade unions having the right to physical and digital access. They will also have to implement new steps to prevent sexual harassment, as well as facing potential liability for the harassment of employees by third parties.

Meanwhile, large employers will be expected to produce gender equality action plans in 2027, even though there may be a roll-back on diversity, equity and inclusion across the Atlantic in the United States.

All these changes are significant and, when coupled with the doubling of employment tribunal time limits from three months to six months, mean the exposure to claims for insurers also increases.

Andrew Marvin, client service director for UK and Ireland retail at Gallagher, said: “The act has major implications for both employers and employees, touching upon everything from the qualifying period for unfair dismissal to the ability to request flexible working from day one. As such, there are insurance implications for firms with Employment Practices Liability insurance (EPL) – the main policy that firms may need to access if they fall foul of the new laws.”

“Because the legislation broadens employee rights this will inevitably lead to an increase in claims, which firms need to be prepared for. Even if unsuccessful, they are time consuming and costly to deal with and businesses need to make sure they operate with best practices to avoid these issues, while also ensuring they have insurance and risk management measures in place.”

Claims on the up

Insurers and brokers expect to see an increase in unfair dismissal disputes. In addition, many businesses, particularly hospitality firms, may need to change long standing practices around wages, tipping and, given the small size of some of these firms, many may not be aware of the changes.

Similarly, many SME businesses will not have the ability or knowledge to support flexible working rights from day one.

According to insurer Zurich, both EPL and directors and officers (D&O) policies will remain at the forefront in helping protect businesses and individuals. It explained that the first three quarters of 2025 saw its claim numbers rise over 40% compared to the same period in 2024, with the majority of issues arising in the wake of restructuring or redundancy processes.

Will Anderson, head of specialty lines claims at Zurich UK, noted: “Reducing the qualifying period for unfair dismissal claims from 24 months to six months would mean millions more employees having the opportunity to present claims and, given that it’s rare for costs to be awarded against a claimant, there is often little risk to those who want to pursue a case.

“The tribunal system is already stretched and some regions aren’t able to list claims for many months, with London, the south east and other major urban centres the worst affected. These changes would create more pressure on the system and delays to the process inevitably lead to higher costs being incurred.”

D&O and PI impacts

Will Naylor, partner at DAC Beachcroft, explained that there will also be an impact on D&O lines from the Employment Rights Act, as the changes will lead to rising management scrutiny and increased exposure for directors. Consequently, brokers and policyholders will need to be familiar with the reforms and the impact they may have on the businesses they manage.

He added: “A lack of awareness of the changes could lead to potential claims and regulatory scrutiny. D&O policies must be reviewed and potentially expanded to cover EPL, including tribunal representation and investigation costs.

”Often EPL cover is considered as a ‘bolt on’ to existing insurance arrangements, such as D&O cover. However, consideration should be given to whether a standalone policy is required – or whether additional limits are needed.”

Beyond EPL and D&O, professional indemnity could see claims if HR consultants or legal advisors fail to guide employers correctly through the new requirements, said Louise Bloomfield, an employment partner at DAC Beachcroft.

She explained: “We see a number of businesses relying on off-the-shelf HR support or even AI-led services and such support may not have picked up on all of the wealth of change the act brings, or the nuances of the changes and how they impact the employment relationships of particular employers.

“Health and safety exposures may rise due to obligations to prevent harassment and ensure safe working conditions. In sectors reliant on flexible workforces, changes to zero hours arrangements could also affect contingent workforce liability and contractual risk cover.”

DAC Beachcroft added that the insurance industry can help UK employers prepare for the impact of the act in a number of ways. These include risk audits and compliance reviews to identify gaps in employment practices.

Carriers could also provide training and guidance on fair dismissal procedures, harassment prevention and managing flexible work arrangements.

In addition, insurers could also provide enhanced policy solutions, including broadened EPL and D&O coverage for tribunal costs and reputational risk. These could be supported by practical tools, such as checklists, template policies and helplines to help employers implement compliant processes, as well as educational initiatives.

Anderson concluded: “Ahead of the changes taking effect, we’d encourage employers to make sure they’re getting the basics right, particularly the use of clear and compliant employment contracts and consistent processes for all employees. Any business about to embark on a major change, such as a restructure, would be wise to get external advice beforehand to help reduce the likelihood of issues arising.”