Employment reform is changing how scaling businesses hire

Employment law reform is often presented as a compliance exercise. Update the contracts. Review the policies. Train the managers. Prepare for the next commencement date.

Businesses continue to need to get the legal detail right. But the bigger picture is becoming harder to ignore. These changes are already influencing how leadership teams think about hiring, workforce planning and risk.

For scaling companies, the reforms under the new Employment Rights Act are landing at a pressured moment. Many UK businesses need to invest, recruit and grow, but hiring confidence is cautious. Employment costs are higher. AI is changing roles, skills and team structures quickly.

Employers aren’t simply asking, “What does the law require?” They’re weighing up whether permanent hiring now carries more cost, more process and more uncertainty than it did before.

That doesn’t mean employers should stop hiring. In many cases, they can’t afford to. But workforce decisions need to be more deliberate, better planned and easier to support if challenged.

Employers are thinking harder before they hire

Businesses in many cases are applying greater scrutiny before approving permanent roles, senior appointments or hires into commercially sensitive functions.

More leadership teams are asking whether a role is essential, whether the business can absorb the cost, whether an existing team can stretch further, whether AI can change the shape of the role, or whether temporary, interim or contractor support is a better option.

That caution is already visible in the market. Recent KPMG and REC data reported by The Times showed UK employers hiring part-time staff at the quickest rate in three years, while permanent hiring remained below the growth threshold.

For SMEs, caution can be sensible. A permanent hire can be a significant commitment, especially where margins are tight or demand is uncertain. But delay a critical hire and the pressure moves elsewhere: onto managers, delivery teams, client service, compliance or growth plans.

Cost pressure is changing the risk calculation

Employment reform is also landing in a cost-sensitive market. ONS business data from May 2026 found that 66% of businesses with 10 or more employees had seen staffing costs increase over the previous three months. When asked how they might respond to future employment cost rises, businesses pointed to price increases, margin pressure and, in some cases, reducing employee numbers.

For scaling businesses, those pressures are felt quickly. One senior hire can materially affect the cost base. One poor appointment can absorb months of management time. One unresolved performance issue can affect a whole team.

When employment rights expand and compensation risk changes, those decisions become board-level questions about margin, capacity, productivity and risk appetite. Businesses need enough structure, evidence and commercial rationale to make decisions with confidence.

Senior roles are coming under earlier review

One trend already attracting attention is around senior and high-earning roles.

Recent reports suggest some employers, particularly in finance and technology, are accelerating decisions on underperforming or high-earning employees before the unfair dismissal compensation cap is removed in January 2027. The current cap gives employers a degree of certainty when assessing litigation risk. Once it’s removed, potential exposure in some senior exits may be higher, even though compensation will still be based on actual and projected loss.

This isn’t a reason to rush dismissals. Rushed or poorly evidenced decisions may create the very risk employers are trying to avoid.

This should prompt a proper review of unresolved senior performance, role design and leadership structure. Has the role outgrown the person? Has the business changed around the role? Is AI altering what the position now needs to deliver?

Businesses should try to avoid drifting into 2027 with senior people issues that are already known, but still unresolved. That is where cost, uncertainty and disruption can build.

AI is raising the stakes

AI is adding pressure to an employment law landscape that is already shifting quickly.

For some employers, it’s influencing whether they replace a role like-for-like, redesign it, automate part of it or hire for different skills.

Better tools can help smaller teams do more and improve productivity, but they also can make people decisions more complex. A business may be hiring for a role that could look very different in 12 months’ time. It may need to restructure teams more often, assess performance against changing responsibilities, and think carefully about consultation, monitoring, fairness and skills development.

Probation is becoming a management test

The move to a six-month qualifying period for ordinary unfair dismissal from 1 January 2027 is one of the clearest examples of how reform is changing decisions now.

A person hired in summer or autumn 2026 may reach six months’ service when, or shortly after, the new rules take effect. Decisions about performance, suitability, dismissal or role changes may then be assessed in a different risk environment.

Probation now needs more structure and earlier management attention. That means clear expectations from the start, regular check-ins, early feedback where concerns arise and records that show clearly how decisions were reached.

Handled well, probation gives both sides clarity early, rather than leaving difficult decisions until the end of the period.

What should boards be doing?

The reforms should prompt a broader conversation about workforce strategy among boards and leadership teams, to ask:

• are we still confident in approving permanent hires in critical roles?
• are we using temporary, interim or contractor support for the right reasons?
• do we have unresolved senior performance or structure issues?
• are employment costs and risk being modelled realistically?
• could AI change the shape of key roles over the next 12 months?
• do our people processes still fit the size and complexity of the business?

Practical steps for scaling businesses

Growth, client delivery, innovation and operational resilience still depend on having the right people in the right roles.

Before the next wave of reform takes effect, employers should focus on six areas:

• define what success looks like at one, three and six months for key roles
• make probation reviews earlier, clearer and better recorded
• give managers practical guidance on feedback, performance concerns and decision-making
• review senior roles where performance, structure or cost concerns are already known
• assess whether contractor, interim, flexible resourcing and AI-led role changes are being used for the right reasons

The goal is to keep moving, but with decisions that are easier to explain, evidence and defend if challenged.

Our employment law solicitors help growing businesses make those decisions in a way that’s practical, commercial and workable. If you’re reviewing contracts, planning senior role changes, updating probation processes or thinking through workforce strategy, we can help you stay compliant without losing the agility your business needs to grow.