A new ‘ERA’: The key changes for Private Equity firms and their portfolio companies

It won't have escaped PE firms' notice that the Employment Rights Act 2025 (ERA 2025) is continuing to bring significant change to the employment law landscape in the UK. In this article we explore the key changes and their relevance to each stage of the investment lifecycle.

Stage 1: Acquisition

ERA 2025 will have a significant impact on the employment risk profile of a target business and therefore it is important that the Buyer's due diligence and the transaction documents address these new risks. In particular:  

• Unfair dismissal protection: from 1 January 2027, the qualifying period for unfair dismissal claims will reduce from two years to six months. This will likely increase the number of employees within the target business who have ordinary unfair dismissal rights. Additionally, the cap on unfair dismissal compensation is being abolished, so any potential claims for unfair dismissal may be much more valuable.  

• Extended tribunal time limits: time limits for most employment tribunal claims doubled from three to six months from 1 October 2026. Given the extension of the Acas early conciliation period to 12 weeks and the ongoing tribunal delays, there is increased uncertainty about employment liabilities. It is therefore important that dismissals, disciplinaries and grievances are reviewed as part of the Buyer's due diligence exercise. Further, Buyers may wish to push for specific indemnities with increased time periods or financial retentions to cover the worst-case indemnity payments.

• Harassment: from October 2026, employers must take "all reasonable steps" to prevent harassment by third parties and additional financial compensation may be awarded to employees who have been subject to sexual harassment in the workplace where this standard has not been met. Buyers should assess policies, training records, incident logs and risk assessments to identify potential exposure and should pay particular attention to any disciplinary or grievance processes which involve allegations of harassment.

• Holiday: since April 2026, employers must maintain records demonstrating compliance with holiday entitlement and pay. Records must be retained for six years, and non-compliance can result in criminal penalties and unlimited fines. Additionally, penalties can be imposed by the Fair Work Agency if the records show that there has been an underpayment of holiday pay. Buyers should therefore ensure that the target business has the correct records in place and that holiday pay is being paid correctly, particularly where bonus, commission, overtime or other allowances form part of an employee's normal remuneration and should be included.

• Redundancies: on 6 April 2026, the maximum protective award for a failure to collectively consult doubled from 90 to 180 days' pay. Therefore, particular attention should be paid to any recent redundancy exercises undertaken by the target business prior to completion to assess any potential financial exposure.

Stage 2: Post-acquisition integration

During the post-acquisition phase, many PE firms may consider hiving up newly acquired businesses or harmonising terms and conditions across the Buyer's group. However, Buyers should be mindful of the following additional challenges which ERA 2025 introduces:

• Redundancies: ERA 2025 is due to introduce an additional collective consultation threshold test relating to company-wide redundancies. The new threshold is yet to be confirmed but is expected to be a single fixed number within a range of 250 to 1,000 proposed redundancies. The new threshold will be defined in regulations which are currently awaited.

As such, any redundancy processes planned should be managed carefully to ensure that collective consultation requirements are complied with, otherwise the business risks significant financial exposure given the increase to the maximum protective award to 180 days' pay.

• Fire and rehire: ERA 2025 introduces a new category of automatic unfair dismissal, making it unfair to "fire and rehire" an employee to change certain core contractual terms, for example, pay, working hours and holiday entitlement. The protection also extends to "fire and replace", where the dismissed employee is replaced by another person carrying out the same or substantially the same role on the varied terms. Buyers will therefore need to exercise particular caution if restructuring or other organisational change is proposed as part of its integration plan.

These changes also have much wider implications than just "fire and rehire", for example, a business proposing to replace a senior role with a lower-cost junior position will need to consider whether the proposal can properly be treated as a redundancy and how the new protections may apply. As a result, restructures, outsourcing arrangements and TUPE exercises will require careful legal analysis to ensure that they do not fall foul of these new rules and expose the business to uncapped automatic unfair dismissal claims. As there is no six-month service requirement for such claims, PE firms will need to factor this increased risk and potential financial exposure into any workforce planning.

Stage 3: Operational phase

Managing senior exits

As mentioned above, the qualifying period for unfair dismissal protection will be reduced from two years to six months and the statutory cap on compensation will be abolished. In combination, these reforms significantly increase potential exposure arising from hiring and dismissal decisions, requiring PE-backed businesses to adopt more rigorous people-management and succession-planning practices.

Senior executives will have more leverage to negotiate a higher settlement package, meaning that these types of exits are likely to be more expensive for the business. There are certain actions which PE firms should consider implementing to reduce this risk and potential financial exposure, including:

• adding a right in senior executives' contracts to apply a shorter process for any disciplinary or performance concerns. This contractual right could be added to the agreements which will be entered into on Completion. Ultimately, the "open narrative" regarding the reason for the senior executive's dismissal and the process are going to be important in minimising the scope for potential compensation;

• introducing an employee share scheme to give the certain employees employee shareholder status. Employees would have to subscribe for free shares in the company with a minimum value of £2,000 and, in return, the company can require them to give up the right to bring an ordinary dismissal claim. Although sweet equity would not fall within this scheme, if free shares are given that meet these requirements, other equity arrangements can be entered into without the risk of uncapped ordinary unfair dismissal claims on termination where other equity arrangements may come into play. However, this would need to be factored into negotiations with any senior executives from the outset; and

• requiring senior executives to sign a settlement agreement at the start of their employment, or when entering into a new contract on completion, waiving any future ordinary unfair dismissal claims. However, again, this is likely to result in quite difficult negotiations at the outset of the arrangement and the impact on ongoing relations would need to be carefully considered.

Zero-hours workers

For businesses that rely heavily on zero-hours or low-hours workers, the reforms under ERA 2025 will be significant.

Employers will be required to offer qualifying workers guaranteed hours reflecting their regular working pattern, provide reasonable notice of shifts and changes, and make payments where shifts are cancelled, curtailed or moved at short notice. The protections will also extend to agency workers, although much of the detail remains subject to secondary legislation. For businesses that rely heavily on flexible staffing models, these changes may increase staffing costs and administrative burdens and make it harder to flex workforce levels in response to fluctuating demand. Employers will therefore need to review how they use casual and low-hours workers and consider whether existing resourcing models remain commercially viable once the new regime takes effect – which is expected to be in 2027.

Stage 4: Getting exit ready

Potential buyers will be alive to all the changes under ERA 2025, and the risks associated with these. Therefore, in order to be exit ready, it is important that PE firms undertake an audit of the business to ensure that all the new ERA requirements are being complied with, particularly those obligations which, if breached, may incur criminal liability and therefore be a deal breaker.