How ERA 2025 increases workforce risk, restructuring pressure and employment exposure in distressed business situations.
The Changing Employment Law Landscape for Insolvency Practitioners
The Employment Rights Act 2025 (ERA) represents the most significant shift in employment law in decades. For insolvency practitioners, these reforms arrive against a backdrop of financial fragility, operational pressure and increasing workforce uncertainty within distressed businesses.
The changes are being introduced in stages, with significant reforms commencing in April 2026, substantial further changes taking effect from October 2026 and additional measures continuing during 2027. Taken together, they increase financial exposure, strengthen procedural obligations and create greater scrutiny around workforce decision-making at precisely the point many businesses are least equipped to absorb additional risk and cost.
Given the phased introduction of the changes, businesses may move through several implementation dates whilst the insolvency practitioner is engaged in an advisory capacity or holding office. A workforce decision considered lawful at one stage may therefore attract materially different obligations later on as further reforms come into force. It is therefore important for insolvency practitioners to keep up to date with the changes as they are rolled out.
This is not simply a technical employment law update. The impact of the reforms will be felt in restructuring planning, staffing decisions, distressed transactions and trading administrations long before any issue reaches an Employment Tribunal. Employment liabilities are moving much closer to centre stage, with workforce considerations increasingly becoming part of early restructuring and rescue planning rather than matters addressed only once formal insolvency processes have begun.
The reforms also create clear tension between the realities of business rescue and an employment law landscape increasingly focused on stronger employee protection. Businesses in distress often require urgent workforce decisions, accelerated restructurings and rapid cost-saving measures. The direction of travel under the ERA, however, is towards greater consultation obligations, enhanced employee rights and increased financial consequences where workforce processes are mishandled.
Protective Awards, Consultation Risk and Practical Insolvency Pressures
Collective redundancy consultation is a sensitive and high-risk process. Insolvency practitioners acting on behalf of insolvent employers may become subject to collective consultation obligations where 20 or more redundancies are proposed within a 90-day period. From April 2026, the maximum protective award available in collective redundancy cases for failure to properly inform and consult doubled from 90 days’ pay to 180 days’ pay, significantly increasing the financial consequences of failure to do so.
The obligation to inform and consult may extend into compulsory liquidation scenarios. In the decision in Claes v Landsbanki Luxembourg SA (in liquidation), C-235/10 collective consultation obligations were held to still apply where the company was subject to a court process leading to winding-up dissolution. This reasoning could therefore potentially apply where a company is facing a winding-up petition, as employment contracts will ordinarily terminate automatically on the making of the order.
A limited “special circumstances” defence remains available where it is not reasonably practicable for an employer to comply fully with collective consultation obligations under section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA). These requirements include starting consultation in good time and allowing for the minimum consultation period before the first dismissal, consulting with a view to reaching agreement about avoiding dismissals, reducing the numbers affected and mitigating the consequences, as well as providing the required statutory information. However, that defence has historically been interpreted narrowly and insolvency itself is not a special circumstance.
The long-standing decision in Clarks of Hove v Bakers Union [1978] IRLR 366 is authority for tribunals drawing a distinction between a sudden and unforeseen financial collapse and the gradual deterioration over time (which is more commonly seen in distressed businesses). In the latter instance, a tribunal may conclude the circumstances were not “special”.
The Courts have also made clear that “special circumstances” must involve something genuinely uncommon or unexpected. The assessment is highly fact-sensitive and judged by reference to the circumstances actually facing the employer at the relevant time, rather than with hindsight. Importantly, the employer carries the burden of demonstrating both that genuine special circumstances existed and that all reasonable and practicable steps towards compliance were taken in the circumstances. This creates a potential conflict between an employer perhaps wanting to keep quiet for fear of staff desertion and the negative impact on the business at a time when the directors are trying to do everything to maximise the return to the company’s creditors.
More recently, the Carillion Services (in compulsory liquidation) and others v Benson and others EA-2021-000269-BA litigation reinforced the very high threshold required to establish “special circumstances”, even in the context of compulsory liquidation and acute financial crisis. The EAT held that the withdrawal of financial support and resulting collapse of the business did not, in itself, justify a complete failure to comply with collective consultation obligations. Importantly, the Tribunal also confirmed that the fact dismissals had become effectively unavoidable did not remove the obligation to consult about mitigating the consequences for affected employees wherever possible. In practice, the decision is a significant reminder that severe financial distress and operational impossibility will not necessarily prevent exposure where no meaningful consultation steps were taken.
Importantly, even where special circumstances genuinely exist, employers and insolvency practitioners must still take such steps towards compliance as are reasonably practicable in the circumstances. The defence is therefore far from absolute and still requires evidence of meaningful attempts to comply with consultation obligations wherever possible.
The decision in Shanahan Engineering Ltd v Unite the Union EAT/0411/09 demonstrated that a lack of time does not remove the obligation to consult altogether. In that case, the employer had only three days to react to a client instruction before dismissals took effect, making compliance with the usual 30-day consultation period impossible. Even so, the Tribunal still expected the employer to take such consultation steps as were reasonably practicable in the circumstances, including considering ways of mitigating the consequences for affected employees and providing information wherever possible.
That said, in AEI Cables Ltd v GMB and others EAT/0375/12 the Tribunal acknowledged that, while imminent insolvency will not automatically amount to “special circumstances”, it may still be relevant when Tribunals assess the level of any protective award. In that case, the employer had failed to carry out any consultation before implementing large-scale redundancies. However, the EAT accepted that consulting for the full statutory period would have required the company to continue trading while insolvent which would have been unlawful. Although the failure to consult remained a serious breach, the EAT held that it had been wrong for the Tribunal to impose the maximum protective award in those circumstances. The immediate threat of insolvency was instead treated as a relevant mitigating factor when assessing compensation.
To put it another way, doing nothing is often likely to be regarded as unreasonable, whereas doing something, no matter how small at least gives the Tribunal scope to assess the steps taken in the context of the company’s situation.
Depending on the circumstances, practical steps may include:
- urgent workforce meetings or townhall-style briefings;
- rapid written communications to staff;
- quickly arranging employee representatives where none are already in place;
- providing information about the proposed redundancies at speed;
- inviting questions and feedback where possible; and
- carefully documenting the commercial rationale and timing pressures driving decisions.
Even limited consultation efforts may help demonstrate that some meaningful attempt was made in exceptionally difficult circumstances. They may also assist in reducing the level of any protective award. This becomes increasingly important as the financial consequences of getting workforce processes wrong continue to increase.
Protective awards already represent substantial liabilities in insolvency situations and may directly affect returns to creditors. A protective award ranks for payment as a preferential liability. This could directly impact guarantors of the company’s debts by increased protective award liabilities reducing the pool of assets available to pay the debts of floating charge holders and unsecured creditors. Wider collective consultation obligations, combined with heightened procedural scrutiny, are likely to increase the focus on workforce consultation strategy much earlier in restructuring discussions.
This also raises an important practical issue in insolvency situations: employees may still require Employment Tribunal determinations before certain payments can be recovered through the National Insurance Fund (even though agreement may have been reached between the employees and the insolvency practitioner on the level of the claim). In particular, claims involving protective awards and unfair dismissal basic awards do not simply disappear because an employer has entered an insolvency process. The decision in Chaudhry v Paperchase Products (in administration) and Secretary of State for Business and Trade [2025] EAT 181 is a useful reminder of the continuing importance of Tribunal determinations in this area.
The case also highlighted the procedural tension created by the automatic stay on proceedings following administration. Employees must actively seek consent from the administrator, or permission from the insolvency court, to allow the Tribunal claims to proceed to judgment so that the statutory compensation can be fixed by the making of an award.
Importantly, the EAT directed that insolvency practitioners should generally consent to Tribunal proceedings continuing where the purpose is solely to enable employees to fix the level of awards in order to obtain payment from the National Insurance Fund, especially where the employees have given an undertaking to that end. The EAT said that in these circumstances, where the employees are forced to seek permission from the insolvency courts, it is likely that the costs of the employee’s application will be ordered to be paid by the insolvency practitioner. More broadly, the decision is a reminder that workforce disputes, consultation failures and dismissal claims may continue to generate administrative involvement and litigation issues long after the underlying insolvency event itself.
Insolvency practitioners and the directors being advised should not overlook the separate obligation to inform and consult in relation to TUPE transfers, particularly in distressed sale situations. Importantly, there are no specific insolvency carve-outs from TUPE information and consultation obligations. Although transferors may seek to rely on the argument that “special circumstances” made compliance not reasonably practicable, the available defence is also likely to be interpreted narrowly in practice. While the Government has not proposed increasing compensation for failures to inform and consult under TUPE in the same way as collective redundancy protective awards, those obligations remain important and may still generate liability where they are not addressed appropriately.
The Shift Away From “One Establishment” Redundancy Test
One of the most significant developments for insolvency practitioners under the ERA is a major shift from the legal position established in the Woolworths litigation (officially known as USDAW v WW Realisation 1 Ltd) & Ethel Austin Limited [2015] EUECJ C-80/14, ECJ. The Woolworths case arose following the collapse of the retailer, where it was argued that the obligation to collectively consult should apply across the employer’s business as a whole, rather than at individual store level. The European Court of Justice ultimately confirmed that the obligation applied where 20 or more redundancies were proposed “at one establishment”. In practical terms, this meant that smaller stores with fewer than 20 proposed redundancies fell outside the collective consultation regime. The government’s timeline update anticipates that the new collective redundancies threshold will come into force in 2027.
For insolvency practitioners dealing with accelerated restructurings, distressed sales and urgent workforce reductions, the combination of increased compensation exposure and greater procedural scrutiny creates a much more challenging risk landscape.
For many employers, particularly those operating across multiple sites, that decision significantly reduced the scope of collective consultation obligations where redundancies were spread across geographically separate locations.
Under the new ERA framework, however, the threshold is proposed to apply across the employing entity as a whole rather than site by site. This substantially increases the likelihood that collective consultation obligations will arise in sectors such as retail, hospitality, social care, logistics and education, where workforces are often dispersed across numerous locations.
The legislation is due to introduce a new organisation-wide threshold test for collective redundancy consultation to sit alongside the existing “one establishment” approach, with the detail to be set out in regulations. A Government consultation on how the new threshold should operate closed in May 2026. Proposals under consideration included either a single fixed threshold, potentially somewhere between 250 and 1,000 redundancies across the organisation as a whole, or a tiered approach linked to workforce size. Crucially, these two tests will operate as alternative triggers, meaning that an employer must comply with collective consultation obligations if either the single-site rule or the new company-wide threshold is met.
While the detail remains subject to further development and parliamentary approval, the direction of travel is nevertheless clear: collective consultation obligations are expected to apply more readily across dispersed workforces than under the current framework.
In distressed sale situations, this can create a difficult conflict between the need to move quickly to preserve value and the reality that meaningful workforce consultation rarely fits neatly within accelerated transaction timetables. Purchasers, lenders and insolvency practitioners are often operating under intense commercial pressure to secure continuity and avoid further deterioration, while collective consultation obligations may require a more measured process than the circumstances comfortably allow.
This creates an obvious tension for insolvency practitioners. Businesses in financial difficulty frequently require urgent workforce reductions to preserve cashflow or facilitate restructuring activity, yet the obligation to collectively consult rarely disappears simply because the employer has entered an insolvency process.
Earlier Unfair Dismissal Rights and Uncapped Compensation
From 1 January 2027, unfair dismissal rights will generally arise after six months’ service rather than two years. At the same time, the current statutory cap on compensatory awards for unfair dismissal is due to be removed.
At present, compensatory awards for unfair dismissal remain capped at the lower of one year’s gross pay or the statutory maximum, currently £123,543. However, for dismissals taking effect on or after 1 January 2027, that financial cap is expected to be abolished, creating the potential for uncapped compensation exposure.
Taken together, these changes materially alter the risk profile of workforce dismissals carried out during insolvency processes.
Many redundancies or workforce reductions implemented during administrations involve employees with relatively short service who may previously have lacked unfair dismissal protection altogether. Under the new regime, significantly more employees will potentially have the right to challenge dismissals.
At the same time, the removal of the compensation cap creates the possibility of substantially larger awards, particularly in relation to senior employees, specialist staff or individuals who may struggle to secure alternative employment quickly due to health issues, labour market conditions or the limited availability of comparable roles.
For insolvency practitioners operating in time-critical and financially fragile situations, this creates additional difficulty where dismissals occur rapidly, management information is incomplete and operational decisions are made under severe commercial pressure.
Importantly, the core principles of unfair dismissal remain unchanged. Employers will still generally need to establish a fair reason for dismissal and demonstrate that a fair and reasonable process was followed in the circumstances, including for redundancies. While Tribunals may recognise the operational realities facing distressed businesses, they are still likely to examine whether meaningful consultation, fair selection processes, appropriate communication and reasonable decision-making took place wherever practicable.
The combination of earlier unfair dismissal protection and the removal of the compensation cap means that the financial consequences of getting dismissals wrong are materially greater than under the current regime. Claims that may once have represented relatively modest exposure could now become substantially more valuable liabilities within the insolvency estate.
This further reinforces the importance of careful decision-making, clear documentation and retaining evidence explaining why particular processes could or could not reasonably be followed in the circumstances.
Fire and Rehire Restrictions and Restructuring Flexibility
During January 2027 significant restrictions are expected to be introduced to the practice of “fire and rehire” of staff. This includes both dismissing employees and offering re-engagement on revised contractual terms, and dismissing employees in order to replace them with others prepared to work on those varied terms.
The reforms follow growing political and public concern around high-profile dismissal and re-engagement exercises, particularly where employers were perceived to have taken a high-handed approach to workforce change or treated consultation as little more than a procedural obstacle. The fallout from the P&O Ferries dismissals is likely to remain an important backdrop to the legislation and the wider focus on stronger employee protections.
For distressed businesses, however, the practical position is often more complicated. Businesses facing severe financial pressure may urgently need changes to pay, hours, staffing structures, shift arrangements or wider contractual terms as part of stabilisation or rescue planning. Historically, dismissal and re-engagement has sometimes been viewed as a mechanism of last resort where agreement could not otherwise be secured.
Under the proposed regime, dismissals connected to contractual changes are expected to become automatically unfair except in limited cases involving genuine financial distress. This will apply changes to pay, hours, holidays, pensions, shift patterns or time off rights and other key terms to be set out in regulations. A narrow exception is expected to remain available where an employer can show that the dismissals were necessary to avoid business failure and that no reasonable alternative existed.
There nevertheless remains some uncertainty as to how far-reaching the new regime will prove in practice once fully implemented. What already appears clear, however, is that the financial distress exception is likely to be interpreted narrowly, with increasing emphasis placed on meaningful consultation, genuine engagement and whether reasonable alternatives were properly explored before dismissal.
Alongside the statutory changes, a strengthened Code of Practice on dismissal and re-engagement is also expected to apply. The current Code already places significant emphasis on consultation and consideration of alternatives before dismissal is contemplated, with Tribunals able to increase compensation by up to 25% for unreasonable non-compliance.
More broadly, the direction of travel is clear. Employers and insolvency practitioners are likely to face increasing scrutiny where contractual changes are imposed without meaningful workforce engagement and consultation. Even where contracts contain variation clauses, the focus is increasingly likely to be on process, fairness and genuine agreement rather than contractual drafting alone.
The decision in Re Carluccio’s Ltd (in administration) [2020] EWHC 886 (Ch) also serves as a useful reminder that consensual contractual change may still form part of genuine rescue efforts in trading administrations. During the Covid pandemic, the administrators sought employee agreement to temporary revised terms in order to continue employment and access furlough arrangements while assessing the future viability of the business. The High Court confirmed that administrators could seek agreement to temporary contractual variations during the initial 14-day period following appointment without automatically adopting the employment contracts for administration purposes. However, once contracts are adopted, ongoing wage liabilities may rank as administration expenses, creating significant commercial pressure around workforce decision-making during trading administrations.
There also remains some limited flexibility under the TUPE insolvency regime to agree contractual changes designed to safeguard employment and support business survival in genuine rescue situations. In certain insolvency processes, TUPE permits agreed contractual variations where they are intended to preserve employment opportunities and support the survival of the undertaking. However, the process remains relatively structured and constrained, usually requiring agreement with appropriate employee representatives and a clear rescue rationale. The emphasis remains firmly on negotiated agreement and preservation of employment, rather than unilateral workforce change.
The interaction between increasingly restrictive “fire and rehire” rules and the more limited flexibility available under the TUPE insolvency framework is therefore likely to become an ever more important feature of restructuring and rescue planning. If this is being considered then specific legal advice should be sought before taking any steps.
Greater Enforcement Risk Through the Fair Work Agency
The introduction of the Fair Work Agency (FWA) marks a shift away from purely complaint-led enforcement towards more active scrutiny of employer compliance.
Since April 2026, the FWA has acted as a central enforcement body for key employment rights, including national minimum wage, statutory sick pay and holiday pay compliance.
For insolvency practitioners, this introduces another layer of regulatory pressure during periods of distressed trading or administration as it introduces another body with which the insolvency practitioner may need to engage.
At the same time, where businesses continue trading during administration, decisions taken during the insolvency period itself may also come under scrutiny.
The new record-keeping obligations are particularly important. Employers are now expected to maintain and retain records explaining holiday entitlement, holiday taken and how holiday pay has been calculated. IPs often inherit inaccurate payroll arrangements, defective holiday pay calculations, incomplete working time records or wider historic compliance failures from the pre-insolvency period. That may create practical challenges for insolvency practitioners engaging with the FWA especially where systems are fragmented, records are incomplete or key payroll personnel have already left the business.
Importantly, the FWA may investigate and bring claims without any employee complaint being raised. This increases the likelihood that historic compliance issues surface during insolvency processes, particularly where businesses have experienced poor HR governance prior to collapse.
Longer Tribunal Time Limits and Evidential Pressures
Employment Tribunal time limits will extend from three months to six months for employment claims. This change is due to be implemented no earlier than October 2026.
While this may initially appear procedural, it has significant practical implications for insolvency practitioners as it means that there might be more instances of having to deal with claims by employees following the ending of their employment. The practical difficulty of the extension of the claims period will mean that memories fade and assistance is less available as HR personnel and payroll staff, managers and decision-makers have moved on leaving the insolvency practitioner reliant on available documentation, which may not be complete.
In many cases, the greatest risk is not necessarily unfairness itself, but informality and the absence of a clear paper trail capable of explaining decision-making retrospectively.
Zero and Low-hours Reforms
The Employment Rights Act 2025 does not prohibit zero-hours contracts altogether. However, reforms expected during 2027 are intended to reduce one-sided flexibility and increase protections for workers engaged on zero-hours and low-hours arrangements.
Qualifying workers are expected to gain rights to guaranteed hours reflecting the hours they regularly work in practice, alongside rights relating to reasonable notice of shifts, shift cancellation and compensation for late shift changes. Current proposals suggest that guaranteed hours may be assessed by reference to a 12-week reference period, although aspects of the regime remain subject to consultation and further regulations.
These reforms are likely to be particularly relevant in sectors that regularly experience insolvency activity, including hospitality, retail, care and logistics, where staffing models often depend upon flexible working arrangements and fluctuating demand.
For insolvency practitioners attempting to trade businesses through administration or stabilise operations during restructuring, workforce flexibility may be commercially critical. Additional guaranteed hours obligations, cancellation payments and increased administrative requirements may reduce the ability to adjust staffing arrangements quickly during periods of uncertain trading and cashflow pressure.
The position may become even more complex where staff work across multiple sites, different business units or varying contractual arrangements within the same organisation. In practice, employers and insolvency practitioners may increasingly need to examine whether historic working arrangements accurately reflect the hours employees regularly work in reality.
The detail of the new regime is still developing. A Government consultation launched in June 2026 is considering a number of practical aspects of the reforms, including qualifying thresholds, reference periods for calculating guaranteed hours and possible exceptions to the new regime. The Government has nevertheless indicated that the intention is not to ban zero-hours arrangements entirely, but to reduce perceived imbalance while still preserving some operational flexibility for employers.
Trade Union Reforms and Workforce Relations
The wider package of ERA reforms is also expected to strengthen trade union rights and visibility during 2026 and 2027, including easier recognition processes, broader workplace access rights and a new duty on employers to inform workers of their right to join a trade union.
The full practical impact of these reforms remains uncertain. However, insolvency practitioners involved in restructurings, collective consultation exercises and workforce change programmes may increasingly encounter workforces that are more aware of trade union rights and more willing to engage collective representation where concerns arise. In some sectors, businesses that have historically operated without recognised unions may also see increased organising activity and greater union involvement during periods of financial distress and restructuring.
Key Takeaways for Insolvency Practitioners
The Employment Rights Act 2025 materially increases the employment risks associated with restructurings, trading administrations and distressed business situations.
For insolvency practitioners, the practical message is clear: workforce issues can no longer be treated as secondary to the restructuring itself. They are now more firmly embedded and subject to greater scrutiny. Collective consultation, dismissal processes, workforce flexibility and employment liabilities are increasingly capable of affecting transaction timelines, creditor outcomes and wider restructuring strategy.
The reforms also reinforce the importance of early planning, clear communication and contemporaneous documentation. Even in highly pressured situations, Tribunals are still likely to expect employers and insolvency practitioners to take reasonable and meaningful steps towards compliance wherever possible.
More broadly, the direction of travel is unmistakable. Employment and insolvency considerations are becoming increasingly intertwined, particularly where businesses are continuing to trade, pursuing distressed sales or attempting business rescue.
Ultimately, how employers manage people, process and communication during a crisis will increasingly shape not only legal exposure, but the credibility, pace and success of the restructuring itself.
Our Employment and Insolvency teams regularly advise insolvency practitioners, directors and businesses on workforce issues arising in distressed and insolvency situations, including collective consultation, TUPE, trading administrations, restructuring exercises and Employment Tribunal risk. If you would like to discuss any of the issues raised in this article, please contact a member of the team.
This article was jointly written by Laura McFadyen, partner in our Employment team and Andrew Knox, partner in our Corporate team.