Buying a Business After the Employment Rights Act 2025: The Hidden Employment Liabilities Acquirers Must Now Investigate

If you are buying a UK business in 2026 or 2027, the Employment Rights Act 2025 should now be a core part of employment due diligence. The Act changes the risk profile of business acquisitions by increasing potential exposure around unfair dismissal, fire and rehire, holiday records, collective redundancies, harassment, umbrella workers and post-completion integration.

Introduction

The Employment Rights Act 2025 (ERA 2025) has been widely discussed as a challenge for employers managing their own workforces. But there is a separate and commercially significant risk that has received far less attention: the risk facing anyone buying a business. When you acquire a company, you are not just buying its revenue, its contracts, or its assets. You are buying its employment practices and, critically, any non-compliance with the ERA 2025 that the seller has accumulated as the Act has come into force in stages throughout 2026 and into 2027.

That distinction matters enormously. Existing employment law guidance generally focuses on how to manage your own workforce going forward. The challenge for acquirers is different: it is about understanding someone else’s employment practices, identifying where they may have fallen short of obligations that did not exist two years ago, and making sure those failures do not become your financial problem after the deal completes.

This article explains the specific ERA 2025 changes that create hidden employment liabilities in business acquisitions, the commercial risks that flow from them, and the practical steps acquirers must take to protect themselves.

Why Standard Due Diligence Is No Longer Enough

Most acquisition due diligence processes follow a fairly consistent template. Lawyers request disclosure of existing employment tribunal claims, employment contracts, policies, and TUPE information where relevant. That framework was designed for the pre-ERA employment landscape, and it is now materially out of date.

The ERA 2025 has introduced new obligations, new enforcement mechanisms, and dramatically increased the financial consequences of getting things wrong, at every stage of a transaction. Many of these changes have already taken effect from 6 April 2026, including holiday record-keeping obligations and doubled collective redundancy protective awards. Others, including the reduction of the unfair dismissal qualifying period to six months and the removal of the compensation cap, take effect from 1 January 2027. A buyer completing a deal today is operating in the live environment of this new regime, whether they realise it or not.

The ERA 2025 represents the biggest change in employment law in decades and touches on every stage of an M&A transaction: from the scope and depth of due diligence, through the negotiation of warranties, indemnities and pricing, to the practical challenges of post-completion integration. Buyers and sellers who treat employment as a secondary workstream risk a very costly surprise.

What the Legal Issues Are

The deal structure determines how liability is inherited

Before addressing the specific ERA 2025 changes, it is important to understand how employment liabilities pass to a buyer depending on deal structure. In a share acquisition, all pre-existing employment liabilities, including ERA 2025 non-compliance, pass to the buyer automatically. In an asset purchase, TUPE will usually apply, meaning employees transfer with all associated liabilities. Either way, the buyer inherits the workforce’s employment history and the seller’s compliance failures.

Uncapped unfair dismissal: the end of certainty on quantum

The most significant change for acquirers to understand is the removal of the statutory compensation cap for unfair dismissal. From 1 January 2027, employees will gain the right to bring an unfair dismissal claim after just six months of continuous employment, and the cap on compensation, currently the lower of one year’s salary or £123,543, will be removed entirely. This changes the risk calculation for every acquisition.

Previously, buyers operated with a known ceiling for unfair dismissal exposure. That certainty is gone. For businesses with senior employees or high earners, the implications are stark:

• Small number of latent claims could represent substantial open-ended financial exposure;
• Buyers must ask detailed questions during due diligence about dismissals, processes followed, and earnings of individuals involved;
• There is no longer a cap to act as a ceiling on potential liability;
• Any employee hired on or after approximately the end of June 2026 will qualify for six-month protection from 1 January 2027;
• Target companies with high volumes of newer hires require careful scrutiny.

Employment tribunal time limits are being extended

From October 2026, tribunal claim time limits double from three to six months. This significantly extends the buyer’s exposure window:

• Claims may not crystallise for many months post-completion;
• Due diligence must look back further;
• Deferred consideration and escrow must reflect extended exposure.

Holiday record-keeping: a criminal obligation already in force

Since 6 April 2026, holiday record-keeping is not optional. It is a criminal offence:

• Employers must keep records demonstrating compliance with holiday entitlement, including leave taken and pay received;
• Records must be retained for at least six years;
• The Fair Work Agency has power to inspect workplaces, require production of evidence, and bring tribunal claims on behalf of workers;
• Many SME target companies have not yet implemented compliant systems;
• Buyers inherit both criminal liability exposure and regulatory enforcement risk.

Collective redundancy: doubled protective awards

From 6 April 2026, the financial consequences of getting redundancy consultation wrong have doubled:

• Maximum protective award increased from 90 to 180 days’ gross pay per affected employee;
• Obligation to consult arises where employer proposes 20+ dismissals at one establishment within 90 days;
• Any target company that has conducted restructuring in the past 12-24 months should be scrutinised for consultation compliance;
• Non-compliance liabilities sit inside the business in a share acquisition or travel with transferring employees in TUPE.

Fire and rehire: the post-completion integration trap

From 1 January 2027, dismissal for fire and rehire becomes automatically unfair with no qualifying period. This is a critical constraint on post-completion integration:

• Dismissal is automatically unfair where the reason is an employee’s refusal to accept changes to “restricted variations”;
• Restricted variations include changes to pay, working hours, shift patterns, time off, and pension rights;
• The only exception is genuine extreme financial difficulty approaching insolvency, not commercial desire to cut costs;
• Buyers planning workforce harmonisation must design integration strategies around genuine consent or ETO reasons, not fire and rehire;
• This planning must happen before deal signing, not after completion.

Umbrella companies and hidden supply chain liability

Since 6 April 2026, businesses contracting directly with umbrella companies have joint and several liability with that umbrella company:

• Joint liability applies to ensure PAYE and National Insurance are correctly operated on workers’ earnings;
• Where there is no agency in the supply chain, the end client bears liability directly;
• This applies regardless of whether the business was aware of any non-compliance;
• This liability applies specifically to umbrella-supplied workers; genuinely self-employed or third-party agency workers have different liability rules;
• Non-compliance by the umbrella company, past or present, can translate into a direct HMRC liability for the acquirer post-completion;
• This supply chain risk is entirely invisible unless proactively surfaced in due diligence.

Harassment: a higher standard and third-party liability

From October 2026, harassment liability expands significantly:

• The duty to prevent workplace sexual harassment rises from “reasonable steps” to “all reasonable steps”;
• Employers become liable for harassment by third parties, such as customers, suppliers and contractors, unless all reasonable steps were taken to prevent it;
• For customer-facing businesses, this creates material liability;
• Buyers should review the target’s harassment policies, training records, incident logs, and risk assessments;
• A business without updated practices carries significant latent exposure post-completion.

What the Commercial Risks Are

Valuation and pricing no longer rest on firm foundations

The removal of the compensation cap fundamentally changes employment risk valuation:

• Parties can no longer calculate based on a known ceiling for any employee cohort;
• Proper exposure analysis requires assessment of individual earnings, claim strength, and litigation defence costs;
• For highly paid workforces, stakes are substantially higher;
• This feeds directly into purchase price negotiations, earn-out and retention discussions, and specific indemnity levels.

Share purchase versus asset purchase: risk allocation is not symmetrical

Deal structure choice has direct implications:

• In a share purchase, all pre-completion employment liabilities sit inside the acquired company and cannot be excluded;
• They can only be managed through warranties and indemnities in the agreement;
• In an asset purchase where TUPE applies, the seller generally retains pre-transfer liabilities, but the buyer inherits transferring employees’ full ERA 2025-enhanced rights from day one;
• This choice must be made with employment law input, not as a corporate/tax afterthought.

The Fair Work Agency raises the enforcement temperature

The Fair Work Agency, established 7 April 2026, significantly raises enforcement risk:

• The Agency can inspect workplaces and require production of documents;
• It can issue notices of underpayment with 200% penalties on minimum wage breaches;
• It can bring tribunal claims on behalf of workers;
• It can recover its enforcement costs from employers;
• A target company with minimum wage, holiday pay, or statutory sick pay compliance issues faces not just individual claims but proactive regulatory enforcement.

Sector-specific risks are amplified

Certain sectors carry disproportionate ERA 2025 exposure:

• Hospitality, retail, and care: high zero-hours exposure; guaranteed hours obligations coming in 2027;
• Construction and logistics: worker classification risk; umbrella company PAYE joint liability;
• Professional services: high-earner uncapped unfair dismissal exposure;
• Technology scale-ups: significant cohort approaching six-month qualifying threshold.

What Acquirers Must Do

Bring employment specialists into the process from the outset

Employment due diligence should not be secondary. Given that ERA 2025 changes are already in force and others take effect imminently, employment law analysis must run in parallel with financial, legal, and commercial due diligence from day one. Employment specialists need to understand the deal structure so that risks identified during due diligence feed directly into warranty, indemnity and pricing discussions.

Build an ERA 2025-specific due diligence questionnaire

Standard due diligence lists need ERA 2025-specific updates. As a minimum, buyers should request disclosure of:

• All dismissals and grievances in the last 12 months, including processes followed and earnings of individuals involved, given the removal of the compensation cap and the extended tribunal time limits;
• Collective redundancy processes conducted in the last 24 months, including whether proper consultation obligations were met, given that the maximum protective award has now doubled to 180 days’ pay per affected employee;
• Holiday record-keeping procedures and whether records are being maintained in the mandatory format since 6 April 2026, with confirmation they are being retained for at least six years;
• Any umbrella company or agency worker arrangements, the identity of the umbrella company, and evidence of PAYE compliance, given the joint and several liability that has applied since 6 April 2026;
• Probation processes and whether they are structured to deal with the January 2027 six-month qualifying period for unfair dismissal, including whether the target’s processes would allow concerns to be identified and addressed within that window;
• Harassment policies, training records for both employees and managers, logs of any reported incidents, and completed workplace risk assessments, given the elevated standard and third-party liability coming into force from October 2026.

Use the TUPE Employee Liability Information as a floor, not a ceiling

Where TUPE applies, the seller must provide Employee Liability Information (ELI) at least 28 days before transfer, including employee details, employment terms, and disciplinary/grievance records from the previous two years. In the ERA 2025 environment, treat this as a starting point only. Request additional voluntary disclosure covering ERA 2025-specific compliance across all the risk areas identified above.

Update warranties and indemnities to reflect the new regime

Standard employment warranties predate the ERA 2025. Buyers should insist they be updated to specifically cover holiday record-keeping, umbrella company PAYE compliance, collective consultation processes, harassment policy adequacy, and probation process fitness for January 2027. Given the removal of the unfair dismissal compensation cap, buyers should push for specific indemnities on highest-risk areas and resist knowledge qualifiers for criminal liability obligations like holiday record-keeping.

Negotiate appropriate financial protections in the deal structure

The expanded liability window created by the ERA 2025 means that post-completion employment liabilities may take longer to surface and be larger. Buyers should negotiate employment-specific deferred consideration to ring-fence ERA-related risks: escrow arrangements, retention mechanisms, or earn-out adjustments by reference to employment matters. Sellers should expect this shift in negotiating stance.

Plan post-completion integration before signing

If the buyer plans a restructuring or workforce harmonisation upon acquisition, they should factor ERA 2025 constraints into integration strategy before deal signing. From January 2027, changing restricted contractual terms through fire and rehire will be automatically unfair regardless of length of service. Buyers should build strategies around genuine employee consent or, in TUPE contexts, economic, technical or organisational reasons. Post-completion executive changes will be more expensive and procedurally constrained as senior employees gain stronger leverage post-cap removal. Understand these deal dynamics before agreeing to the transaction.

Looking Ahead

The ERA 2025 continues to roll out through 2026 and beyond. Further reforms, including guaranteed hours obligations, TUPE changes, and potential single employment status legislation, are under active development and may affect future acquisition strategies.

Employment Tribunal case law remains extremely limited as of May 2026. The courts will not have adequate opportunity until well into 2027 to develop substantive precedent on key issues: what constitutes ‘restricted variations,’ how the six-month qualifying period applies to mixed-terms or part-time employment, and complex fire and rehire scenarios. Buyers should obtain advice that reflects the current law while remaining alert to rapid developments.

What is certain is the direction of this legislation. The ERA 2025 has materially increased the scope, cost, and duration of employment liabilities in every UK business. For anyone buying a business, employment due diligence is no longer a box-ticking exercise, it is one of the most commercially significant components of any transaction.

How the Jonathan Lea Network Can Help

At the Jonathan Lea Network, we advise buyers, investors, and corporate finance advisers on employment law in the context of business acquisitions. Our employment and corporate teams work together, so the risks identified in due diligence are understood in the context of the deal structure and feed directly into how the transaction is negotiated and documented.

We can assist with:

• ERA 2025-specific employment due diligence, covering all of the areas identified in this article and tailored to the target company’s sector and workforce profile;
• Drafting and reviewing employment warranties and indemnity provisions in share purchase agreements and business transfer agreements, updated for the current legal landscape;
• Advising on TUPE obligations in the ERA 2025 context, including reviewing Employee Liability Information adequacy and advising on pre-transfer consultation obligations;
• Structuring post-completion workforce integration strategies that comply with the new fire and rehire restrictions and the extended unfair dismissal regime;
• Acting for sellers in preparing their business for a sale, including reviewing and remediating ERA 2025 compliance before the due diligence process begins.

If you are involved in a business acquisition and want to understand the employment risk picture under the ERA 2025, we would be happy to help. We provide an indicative scope of work and fee estimate based on the information you share, and aim to respond within one working day.

Please note that this article is intended as a general overview and does not constitute legal advice. The law in this area is developing and individual circumstances vary. You should seek specific legal advice before taking any action in relation to a particular transaction.

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We provide enquiries with an indicative scope of work and fee estimate, based on the information you share. We aim to respond within one working day.

 

 

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.

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