How UK CFOs Should Budget for Employment Rights Act Costs

UK CFOs should model Employment Rights Act 2025 cost exposure now, before statutory sick pay reform takes effect on 6 April 2026.

The Act is the largest overhaul of UK employment law in a generation, and its financial impact is landing in phases through 2026 and into 2027. For finance functions, this is no longer an HR planning issue sitting outside the numbers — it is a direct line item that needs modelling, budgeting and board-level explanation, much like the late payment reforms CFOs have already had to absorb (see INFORMD’s guide to the UK late payment cap).

What Is Driving the Employment Rights Act Cost Increase?

According to the UK Government’s Employment Rights Act 2025 economic analysis, the reforms carry an estimated £1bn headline cost to business once fully implemented. But CIPD research suggests that figure understates what finance teams will actually feel. According to the CIPD’s Winter 2025/26 Labour Market Outlook, based on a survey of 2,082 UK employers, 74% expect their own employment costs to rise because of the Act, and 37% say they plan to hire fewer permanent staff as a direct result of reforms to unfair dismissal, statutory sick pay, zero-hours contracts and trade union rights.

The gap between the government’s headline number and the CIPD’s employer-reported expectation matters for CFOs specifically: it signals that administrative and behavioural costs — updated policies, manager training, slower hiring, higher conflict-resolution spend — sit outside the official costing and need to be captured separately in departmental budgets.

Executive Action:

• Separate the direct statutory cost of Employment Rights Act reforms from the administrative and behavioural costs in your FY26/27 budget model.
• Request a written cost breakdown from HR that distinguishes payroll impact from process and training spend.
• Flag the government-versus-employer cost gap to the audit or risk committee as a forecasting assumption, not a settled figure.

How Much Will Statutory Sick Pay Reform Cost Employers?

From 6 April 2026, the three-day waiting period for Statutory Sick Pay is abolished and the Lower Earnings Limit is removed entirely, extending SSP eligibility to an estimated 1.3 million previously excluded low-paid workers. The weekly rate becomes the lower of the standard prescribed rate or 80% of normal weekly earnings, so lower-paid staff do not receive more in sick pay than they would have earned working. Government analysis puts the additional employer cost at roughly £450 million a year across the economy, or approximately £15 per employee annually — but that average masks significant variance for employers with large lower-paid or high-absence workforces, such as retail, hospitality, logistics and care.

Executive Action:

• Pull 12 months of absence data segmented by pay band to estimate your organisation’s actual SSP exposure, not the national average.
• Confirm payroll software has been updated to remove the waiting-day and lower earnings limit rules ahead of 6 April 2026.
• Build SSP reform costs into workforce planning for the highest-exposure business units first.

How Should CFOs Model Unfair Dismissal Exposure Ahead of 2027?

From 1 January 2027, the qualifying period for unfair dismissal claims falls from two years to six months, and tribunals gain the power to award uncapped compensation in dismissal cases linked to the new rules. New hires taken on from 1 July 2026 fall inside this shortened window by the time the change takes effect, which means the financial planning problem starts now, not at the January 2027 deadline. Uncapped awards are a genuinely open-ended liability line that finance teams have not previously had to reserve against for standard dismissals, and legal and HR teams are already advising employers to shorten and tighten probation periods in response.

Executive Action:

• Ask legal and HR to quantify historic dismissal and tribunal costs as a baseline for post-2027 exposure modelling.
• Review whether employment practices liability insurance limits still match the shift to uncapped compensatory awards.
• Confirm probation periods and manager sign-off processes are tightened for anyone hired from 1 July 2026 onward.

What Should CFOs Budget For Beyond Direct Payroll Costs?

The CIPD’s Winter 2025/26 survey also found that more than half of employers (55%) expect workplace conflict to rise as the reforms bed in, alongside slower recruitment as employers become more cautious about permanent hires. For CFOs, this translates into higher spend on HR case management, external employment law advice, manager training and, in some sectors, a shift toward contractors or fixed-term roles to manage risk — a shift that carries its own cost and governance implications worth tracking alongside the workforce cost line, not separately from it.

Executive Action:

• Add a distinct “employment reform compliance” line to FY26/27 budgets rather than absorbing it into general HR overhead.
• Track any shift toward contractor or fixed-term hiring as a cost and risk indicator, not just a headcount metric.
• Benchmark external legal and case-management spend quarterly against pre-reform baselines to catch cost drift early.

How Should CFOs Brief the Board on Workforce Cost Risk?

Boards are used to seeing regulatory cost exposure framed in capital or compliance terms; Employment Rights Act costs need the same discipline. A credible board briefing separates the quantified statutory cost (SSP reform, payroll system changes) from the modelled but uncertain cost (tribunal exposure, conflict management, hiring slowdown), and states the assumptions behind each. This mirrors the approach CFOs have had to take on executive pay disclosure, where investors and boards now expect quantified rationale rather than narrative explanation (see INFORMD’s briefing on the 2026 executive pay reset). Use INFORMD’s capital approval assessment template to structure how workforce cost exposure competes with other capital priorities this planning cycle.

Executive Action:

• Present quantified and modelled cost categories separately in board papers, with the underlying assumptions stated explicitly.
• Schedule a standing quarterly update on Employment Rights Act cost tracking through the 2027 unfair dismissal transition.
• Use INFORMD’s executive self-assessment tools to pressure-test whether workforce cost governance is board-ready.

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