The Employment Rights Act 2025 (ERA) reforms change the risk profile for every acquisition, so it has never been more important for buyers to focus on employment due diligence and get the deal structure, business valuation and deferred consideration mechanisms right.

For sellers, awareness of, preparation for and compliance with ERA requirements is key to avoid any significant issues that could scupper a sale.

Whilst the ERA is coming into force in stages throughout 2026 and 2027, some changes are already in force and the reforms should be front and centre of mind for both parties as they negotiate the terms of the deal.

Due diligence

The overall impact of the ERA is that the scope of employment due diligence will expand and require greater time and focus. The ERA changes the risk profile and cost of employment claims, meaning buyers will need to pay closer attention to any underlying employment liabilities.  

In addition, the recent creation of the Fair Work Agency, consolidating enforcement agencies, is likely to lead to more proactive oversight, engagement and enforcement in areas such as minimum wage, holiday pay and statutory sick pay, which is another reason buyers should flush out all issues during the due diligence process.

Some key areas to watch out for during due diligence are as follows:

• Shorter qualifying period for unfair dismissal: Big news here! The current two years of continuous service required to bring an unfair dismissal claim will be reduced to six months from 1 January 2027. This means anyone with 6 months’ service on or after that date will be able to claim for unfair dismissal.
  
  Employers will have a maximum period of 6 months to assess employees before they obtain unfair dismissal rights. A seller will need to ensure, and buyers will need to assess during due diligence, the target company’s probationary periods and performance management and disciplinary processes are adequate to deal with the dismissal of new hires before they get qualifying service.
• No compensation cap: The cap on damages for unfair dismissal (currently a maximum of the lower of one year’s salary or £123,543) is removed from 1 January 2027. This changes the risk profile for buyers entirely, particularly for businesses with lots of high earners. Buyers should be asking more questions during their due diligence to discover any actual or potential unfair dismissal claims and assessing how that impacts the valuation of the target and structure of the deal.
• Tribunal claims – longer look-back: Buyers will also need to pay more attention to historic or ongoing grievance and disciplinary processes. Time limits for bringing claims are getting longer, increasing from 3 months to 6 months (expected in October 2026). Combined with the current delays in the Tribunal system which lead to late notifications of tribunal claims, buyers will generally have uncertainty over liabilities for a greater timeframe.
  
  Buyers should enquire about details of any dismissals or grievances looking back for at least a year, and again, the potential liabilities may impact discussions on the purchase price and the drafting of the warranties and indemnities in the acquisition agreement.  
• Harassment – a higher standard: Buyers should look carefully at any issues or grievances relating to harassment.  From October 2026, employers will have an obligation to take ‘all reasonable steps’ to prevent workplace sexual harassment (a higher standard compared to the current ‘reasonable steps’). Also from October 2026, employers will become liable for harassment (of any kind, not just sexual) of their staff by third parties (such as customers, suppliers and so on), again unless the employer took ‘all reasonable steps’ to prevent it.
  
  As part of their due diligence, buyers will want to understand the steps already taken by the business and whether this is an area of exposure. They should be looking for things like harassment policies, records of training for employees (and separate training for managers), logs recording any reported incidents and completed workplace risk assessments.
• Holiday records: Since 6 April 2026, employers have a new specific obligation to keep records demonstrating compliance with holiday entitlement (including the amount of leave and pay). Buyers should ensure that the seller has compliant records. Records must be kept for six years and failure to comply will be a criminal offence, attracting potentially unlimited fines.
• Minimum wage: Although the ERA does not change national minimum wage law, the creation of the Fair Work Agency does introduce new penalties. The Fair Work Agency will be able to issue penalties of 200% of the sum due, significantly increasing the costs of getting this wrong. With national minimum wage rates rising year-on-year, more workers will fall into the “danger zone” if their basic pay sits just above the national minimum wage level. Buyers should make sure that target companies have calculated statutory minimum payments correctly to avoid issues down the line.
• Zero hour workers: Where the target company engages zero or low hours workers (including agency workers), buyers should note the new rules which will require employers to make an offer of a guaranteed hours contract to qualifying workers, reflecting the hours regularly worked over a reference period. These changes are expected in 2027.
  
  There are still several areas of uncertainty and so the practical implications for those with a-typical workers remains to be seen. But there will undoubtedly be an administrative burden if acquiring a business reliant on these types of workers. In addition, new rights for reasonable notice of shifts and a payment for cancelled or changed shifts further add to the administrative tasks an employer must comply with. For some employers, these changes could require a creative overhaul to how they respond to seasonal demand for work, plugging skills shortages or covering for periods of leave. Buyers should be alert to any impact on the target’s business model and any risk to longer term viability.
• Understanding supply chains: Buyers should pay closer attention to understanding how agency workers are used throughout the target business and the supply chains in place. For example, umbrella companies are now regulated by the Fair Work Agency and the government is tackling tax non-compliance in this area. Since 6 April 2026, businesses contracting directly with an umbrella company have a joint and several liability with the umbrella to ensure that PAYE and NICs are being correctly operated on the earnings of workers supplied by that umbrella company.
• Redundancy – failure to consult: Buyers will also want to ensure that any previous redundancy consultations have been properly carried out, as the maximum protective award has been increased from 90 to 180 days’ pay per affected employee.
• Trade Unions: With new rights aimed at strengthening trade unions, buyers will want to have a deeper understanding of the collective issues impacting the target company.  The cumulative effect of the ERA reforms is to make trade union recognition easier to achieve and industrial action easier to organise and sustain.
  
  The changes will impact all businesses, even those who historically have not had any engagement with unions. From October 2026, trade unions will gain a right to request access to all workplaces to recruit and organise for collective bargaining purposes. This includes digital access. Employers will also need to inform all workers in writing that they can join a union. The penalties for not doing so are limited to two to four weeks’ pay capped at £2,800 – not huge, but it can add up for a large workforce.

Acquisition agreements

The ERA has ramifications for the acquisition agreement as both buyer and sellers will look to limit their future exposure to ERA-related liabilities. Some key areas that both parties will look to negotiate as a result of ERA reforms are:

• Warranties and indemnities: The ERA will necessitate a more forensic focus on employment compliance and buyers should review any standard employment warranties to ensure they are sufficiently broad to cover the new legislative landscape. The nature of the ERA changes mean that buyers are likely to want to push for specific indemnities to cover potential breaches, particularly given the expanded scope and cost of claims, especially if due diligence has uncovered anu issues.
• Knowledge and awareness qualifiers: Buyers are more likely to resist knowledge and awareness qualifiers for the many of the expanded employment warranties, particularly where the ERA imposes criminal liability (such as holiday record keeping).
• Limitations on claims: In the light of the ERA changes, the parties are likely to negotiate increased limitations on claims for employment warranties, including potentially longer time limits for claims (to cater for increased tribunal claim time limits and holiday record retention periods), higher financial caps or negotiation of certain warranties sitting outside of caps altogether to cater for the removal of the unfair dismissal claim compensation limits. Parties will no longer be able to do a rough calculation based on a known ceiling. Instead, they’ll need to take a closer look at everyone’s circumstances to better understand possible cost of dismissals. For businesses with very highly paid workers, the potential costs of defending or settling an unfair dismissal could be significantly higher.
• Pricing and deferred consideration: With the possibility of increased liabilities, buyers may push for a lower purchase price and/or negotiate deferral of payment via deferred consideration mechanisms, such as employment-specific escrow arrangements to ring fence funds for ERA-related risks, retention mechanisms to hold back specified portions of the purchase price for a defined period to cover risks, or earn-out arrangements allowing adjustments by reference to ERA-related matters post-completion. Sellers should be prepared for a shift in negotiating stance and proposals of deferred consideration mechanisms due to the ERA changes.

Post-completion integration  

Once the deal is done, a buyer will often shake-up the executive team and look to integrate the target business within its existing structure which might involve some cross-business redundancies and/or a harmonisation of employment terms. Buyers should note the ERA brings challenges to each of these areas.

Executive team changes

We anticipate that changing the leadership team will become more expensive. At the moment, exits are commonly done under a settlement agreement with an eye on the compensation cap for unfair dismissal claims. With that cap abandoned come January 2027, some senior staff will have stronger leverage to negotiate a higher pay-out.  

For those dismissals without a settlement agreement, a fair reason and a fair process will be required for those with 6 months’ service. Applying a fair process (e.g. a performance improvement procedure, which can last months) is often undesirable and uncommercial when dealing with senior employees. As part of the post-completion integration, a buyer may wish to spell out in the employment contracts and policies that a shorter process may apply for employees of a certain seniority in the case of poor performance. However, caution will still be required to ensure the process would still be considered fair.  

Hiring new senior employees will also require more caution. Buyers will need to set up appropriate probationary review periods and practices from the outset; there won’t be much time before 6 months’ service have passed and the person acquires unfair dismissal rights, so if they’re not the right fit, that needs to be decided early.

Redundancies

If redundancies are planned, buyers will also need to be alert to the additional threshold test being introduced for collective redundancies in 2027. Currently, collective consultation obligations are triggered if proposing 20 or more redundancies at one establishment within a period of 90 days. The government is consulting on an additional threshold test – with the preferred option being that a fixed number of proposed company-wide redundancies between 250 and 1,000 would trigger collective consultation. The new test will make collective consultation more challenging for multi-site employers.  

Harmonisation  

The broad rule is that changing an employee’s terms requires employee consent, save where TUPE is involved in which case it also requires ‘an economic, technical or organisational reason entailing changes in the workforce’.

Where employees refuse changes to their employment terms, there has long been a fall-back of ‘fire and rehire’. In other words, the employer dismisses the person on their current terms but offers them immediate re-engagement on new terms. While the rationale must be strong (and the approach raises questions in a TUPE context), at present this is a possible option for buyers as part of their post-completion integration.

However, the government will be restricting the use of 'fire and rehire' tactics.  From 1 January 2027, dismissals to impose changes to certain key contractual terms will be automatically unfair if the reason for dismissal is that the employee did not agree to the employer’s attempt to vary these terms, or because the employer intended to employ another person on varied terms to carry out substantially the same role.

There is only a very limited exception for employers in serious financial difficulties – i.e. there must be an existential threat to the business as a going concern before it can touch people’s terms in this way. We envisage this will very rarely be made out.

Further, employees will not need any qualifying service to bring a claim of automatic unfair dismissal in the case of a ‘fire and hire’ process, so even the newest staff will be protected.

Final thoughts

The ERA represents the biggest change in employment law in decades and has a significant impact on M&A. The reforms touch every stage of a transaction; from the scope and depth of due diligence, through the negotiation of warranties, indemnities and price, to the practical challenges of post-completion integration.  

Buyers and sellers should not treat employment considerations as a secondary workstream; the cost of getting things wrong is rising sharply, and the margin for error is narrowing.  

Early planning will be essential. Buyers should engage employment advisers at the outset of a transaction and sellers should proactively review their own compliance procedures ahead of any sale. Those who adapt quickly to the new regime will be better placed to manage risk, close deals efficiently and avoid costly surprises down the line.

For more information on the changes ERA will bring, see our dashboard. Our Employment and Corporate specialists can support you in navigating the ERA’s impact on any merger or acquisition.