Key takeaway

The UK business landscape is preparing for the upcoming changes as part of the Employment Rights Act 2025. While it has mainly focused on day-to-day worker protections, a particular legislative change is set to significantly impact the financial risk profile for family-run businesses.

What are the UK Employment Rights Act 2025 changes?

Set to come into effect from 1 January 2027, the UK government plans to completely remove the statutory cap on compensatory awards for unfair dismissal. Currently, this compensation is capped at the lower of a year’s salary of £118,223. Removing this restriction would allow employment tribunals to award unlimited compensation based on an employee’s actual financial losses. This change could significantly affect family businesses, as a dismissal that was not handled correctly could lead toa large financial penalty. Therefore, having formal governance structures in place becomes essential.

How are family businesses impacted by changes to the Employment Rights Act2025?

In family businesses, governance structures are often informal whereby they rely on trust and shared family values, rather than strict corporate rules. However, when disagreements rise, disputes can quickly turn personal. If, for instance, a conflict results in a family member being ousted from their employment role without a documented and legally fair process, the business could face uncapped financial exposure under the new Employment Rights Act framework. To reduce these commercial risks, these establishment of clear boundaries and formalised governance is becoming increasingly important safeguards, similar to methods used when managing family business succession.

Which governance documents do family businesses need to review ahead of changes to the Employment Rights Act 2025?

To reduce the risks that may emerge ahead of the 2027 rules taking effect, many owners and shareholders are currently taking steps to formalise their internal governance frameworks. The core documents typically reviewed include:

·      Director’s Service Agreements (Employment Contracts): Standard boilerplate contracts or “handshake agreements” often leave businesses at risk, therefore understanding why boilerplate clauses matter is essential. Robust service agreements, however, typically define a director’s duties, performance metrics, and the exact mechanisms for termination. This provides a clear legal case if a relationship breaks down.

·      Shareholders’ Agreements: When a family employee exits the business, they often remain active as a shareholder. Modern shareholder agreements typically have “good leaver/bad leaver” provisions to separate employment status from ownership rights.

·      Disciplinary and Grievance Policies: Informal approaches to performance management are starting to become documented procedures. Having a paper trail is often a company’s defence to justify a fair dismissal to an employment tribunal and defend themselves against an uncapped compensation claim.

How to resolve disputes outside employment tribunals?

As a public employment tribunal holds high financial and reputational risks, family disputes are often kept confidential. When tensions do arise, many businesses turn to Alternative Dispute Resolution (ADR) as the primary option through:

·      Mediation: This is the most frequently used option by family enterprises. An independent mediator is used to help de-escalate conflicts and facilitate a mutually agreed exit or restructuring. This helps to keep the dispute confidential and preserves the family business’ reputation as well as relationships within. For a detailed look at this process, see our analysis on the value of mediation when family and finances are at stake.

·      Arbitration and Negotiation: If mediation is unsuccessful, entering an arbitration or negotiating a settlement agreement can provide a clean break without the risks of tribunal litigation. There are typically four different ways of solving business disputes, and choosing the right one early is crucial for managing risk effectively.

What to consider when navigating the legislative transition of the UK Employment Rights Act 2025

Proactive businesses will generally focus on:

·      Assessing Existing Frameworks: By reviewing senior management employment contracts and shareholder agreements, businesses will be able to identify any potential exposure. This means ensuring that termination clauses are legally robust and leave provisions in shareholder agreements coincide with employment contracts. For family businesses, this could work to prevent a scenario where a dismissed family member can weaponise their remaining voting rights or shares to disrupt operations.

·      Formalising Performance Management: Companies are increasingly moving away from informal feedback to build defensible paper trails. This ensures that all employees will be subject to the same documented performance and disciplinary standards, and potential dismissals will not be based on personal disputes. This involves implementing KPIs, conducting regular formal performance appraisals, and adhering to grievance procedures.

·      Conflict Resolution: Many businesses are setting dispute resolution clauses in their governing documents in the case of conflicts arising. These provisions may call for confidential mediation as a first step before any litigation. They may also include specific deadlock-breaking mechanisms to resolve disputes quickly and keep family matters out of the public eye.

Please contact the Dispute Resolution team at Barnes Law for advice on updating your internal policies and mitigating future dispute risks within your family business.

Authored by Barnes Law Managing Partner, Yulia Barnes.

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