The Employment Rights Act 2025

Employment Rights Act 2025 represents a major change in UK employment law. Most headlines focus on stronger employee rights. But there’s another side to the story:

What does this mean for directors personally?

Alongside the Act, the new Fair Work Agency is intended to bring together key state enforcement functions, which could increase scrutiny in some areas of employment compliance.

This isn’t just HR reform. It’s a leadership risk issue.

What’s actually changed?

The Act introduces major reforms, including:

• A planned reduction in the qualifying period for ordinary unfair dismissal from two years to six months, and removal of the compensatory cap, with these changes intended to take effect from 1 January 2027.
• Removing the compensation cap on unfair dismissal awards
• Expanding protections in several areas, including family-related rights and aspects of industrial relations.
• Increasing procedural and consultation obligations in some circumstances, including parts of the redundancy framework.

At the same time, the Fair Work Agency should bring enforcement of certain employment rights under one roof, with powers to investigate and issue civil penalties in defined areas.

In simple terms:

• More employees may be able to bring claims, with potentially higher financial consequences in some cases.
• Enforcement is also expected to become more centralised over time.
• With potentially higher financial consequences.
• And enforcement becomes more centralised and proactive.

💡 Did you know?

If you’re personally named in an employment-related claim, you may need separate legal representation from an early stage.

Directors & Officers (D&O) insurance is designed to protect you as an individual decision-maker, not just the business.

And even if the claim doesn’t succeed, defence costs can still be substantial.

The question isn’t whether you expect a dispute. It’s whether you’re personally protected if one happens.

Why this isn’t just an HR issue

Employment disputes don’t always stop at “the company”.

Directors and senior managers can, in some circumstances, be named personally in claims or related allegations involving:

• Alleged unfair dismissal decision-making
• Redundancy consultation failures
• Whistleblowing
• Failure to make reasonable adjustments
• Mismanagement of grievances

When leadership decisions are challenged, it becomes a personal exposure issue. As access to certain claims broadens, individual decision-makers may face greater scrutiny.

Where D&O insurance fits

Directors & Officers (D&O) insurance is designed to protect individual directors and senior managers against claims arising from alleged wrongful acts in the course of managing the business.

Depending on the wording, that can include:

• Legal defence costs
• Investigation costs
• Certain employment-related management claims
• Settlements or damages (where legally insurable)

Even if a claim does not succeed, defence costs could escalate quickly.

As the legal threshold for bringing employment claims lowers, defence activity is likely to increase. That’s the shift.

Imagine this: An employee with 7 months’ service is dismissed due to performance concerns.

Under the new regime, they might be eligible to bring an unfair dismissal claim. They may allege procedural failures and, depending on the circumstances and the legal basis of the claim, seek to involve individual decision-makers.

Even if the business successfully defends the case, legal representation is required from day one.

That is where D&O insurance may respond, depending on the policy wording and the nature of the allegation.

Without it, a director may need to rely more heavily on the company’s willingness and financial ability to indemnify them.

Why SMEs should pay attention

We asked Risk Management specialists Angel Risk Management what their view of the upcoming changes to Employment Rights means for SME’s;

While the headlines rightly focus on enhanced employee rights, what often gets overlooked, and what this article brilliantly highlights, is the personal risk this new legislation introduces for individual leaders. This isn’t just an HR issue; it’s a fundamental shift in leadership accountability!

Here’s why I think this is so vital:

Increased Vulnerability: The planned reduction in the unfair dismissal qualifying period to just six months, combined with the removal of the compensation cap, is a game-changer. It means more employees will likely be eligible to bring claims, and the financial stakes could be significantly higher.

Centralised Enforcement: The new Fair Work Agency consolidating enforcement functions means a more proactive and centralised approach to compliance. This will undoubtedly increase scrutiny on how employment rights are managed within organisations.

Personal Exposure is Real: The point about directors and senior managers being personally named in claims is something we cannot ignore. Allegations related to unfair dismissal decisions, redundancy failures, whistleblowing, or grievance mismanagement can quickly escalate from a company issue to a personal liability. Even if the claim doesn’t succeed, the legal defence costs can be substantial.

The D&O Safety Net: This is where Management Liability (D&O) insurance becomes an absolutely essential safeguard. It’s designed to protect you, the individual decision-maker, against claims arising from alleged wrongful acts in your management role. It covers those crucial legal defence and investigation costs, and potentially settlements, which can be a huge relief in a stressful situation.

SMEs, Take Note! For smaller and medium-sized enterprises, this is even more critical. Unlike larger corporations with extensive in-house legal and HR teams, SMEs often have more hands-on directors and sometimes less formal processes. This increased scrutiny under the new Act could expose them to greater personal risk.

Large corporations often have:

• In-house legal teams
• Dedicated HR departments
• Structured governance processes

Most SMEs don’t.

• In smaller businesses, directors are hands-on.
• Decisions are faster.
• Processes can be informal.

Under a stricter legal framework and a more visible enforcement environment, informal processes may be more vulnerable to challenge.

That increases personal exposure.

The key question

If your leadership decisions are challenged, are you personally protected? D&O isn’t about expecting to do something wrong. It’s about recognising that disputes happen, and that the cost of defending them is rising.

If you’d like a straightforward conversation about whether your current D&O cover reflects the new legal environment, call 020 3883 7976.

Clarity now is far easier than defence later.

This content is for general information only and is not intended to provide advice or a personal recommendation. Insurance cover is subject to the terms, conditions, and exclusions of the policy. Always consider your individual circumstances and seek professional advice before arranging insurance. External websites are not under our control and we are not responsible for their content.