Five employment law mistakes SMEs are making in 2026

For many SMEs, keeping up with employment law is becoming more challenging. Recent reforms under the Employment Rights Act 2025 have introduced new obligations on employers, meaning those who rely – often unwittingly – on outdated policies could face tribunal claims, penalties and reputational damage. 

But what are the five common mistakes many employers are making? And what can you do to avoid them?  

 

1. Failing to keep adequate holiday pay records

One of the biggest employment law changes affecting employers in 2026 is the introduction of a legal duty to maintain detailed records of statutory annual leave and holiday pay from 6th April 2026. Employers must be able to demonstrate compliance with holiday entitlement, holiday taken, holiday carried over, holiday pay calculations and payments made in lieu of untaken leave. Generally speaking, relevant records must be retained for six years. 

Many SMEs still rely on informal spreadsheets, manager-held records or payroll systems that were never designed to provide robust evidence of compliance for legal purposes. This creates the potential for significant problems, particularly where workers have variable hours, overtime or commission that could affect holiday pay calculations. 

What to do 

• Review your current holiday recording system to make sure it is fit for purpose. 
• Record all holiday entitlement, leave taken, carry-over and holiday pay calculations centrally. 
• Check that your payroll records can be used to show how holiday pay has been calculated. 
• Look at your data retention policies and update them so they mention the need to preserve records for at least six years. 
• As mentioned above, irregular-hours and part-year workers can complicate holiday pay calculations so pay particular attention to them. 

 

 2. Treating family leave as a “policy issue” rather than a legal right

Many SMEs have not fully updated their policies to reflect recent family-friendly employment reforms. Since April 2025, eligible parents have been entitled to Neonatal Care Leave and, where qualifying conditions are met, Statutory Neonatal Care Pay when a baby requires extended neonatal treatment. The entitlement can provide up to 12 weeks’ additional leave on top of existing parental rights. 

Reforms introduced in April 2026 removed qualifying service requirements for statutory paternity leave and unpaid parental leave, meaning these rights are now available from day one of employment. SMEs that continue using outdated policies risk inadvertently denying employees their statutory rights. 

What to do 

• Review all your family leave policies at least annually and more often if something changes. 
• Train your managers on neonatal care leave, paternity leave and parental leave rights. 
• Remove outdated service qualification references where legislation no longer requires them. 
• Create clear guidance for your managers on how to handle leave requests consistently. 
• Make sure your HR systems are able to accurately record different types of family leave. 

 

 3. Not updating Statutory Sick Pay (SSP) processes after the 2026 reforms

There was a significant change to the way SSP operates on 6th April 2026. The three waiting days have been removed and employees who are eligible can now receive SSP from the first day of sickness absence.  

The Lower Earnings Limit for eligibility has also been abolished, meaning that entitlement is now extended to many lower-paid workers who were previously excluded.  

SSP is now paid at 80% of average weekly earnings or the statutory weekly rate, whichever is lower. 

Many smaller employers may well have overlooked the need to update absence policies, payroll systems and manager training materials, inadvertently creating a situation that could lead to compliance risks and payroll errors. 

What to do 

• Look at your sickness absence and SSP policies as soon as possible and change them where necessary to ensure they are legally compliant. Consult an employment law expert if you are in any doubt about what needs to be done.  
• Confirm that any payroll software you use reflects the new day-one SSP entitlement. 
• Identify the workers who may now qualify for SSP. 
• Draft and implement training to ensure your managers are aware of the new rules and how they operate. 
• Keep accurate sickness records from day one of the absence. 
• Taking a reactive instead of preventative approach to sexual harassment

Since 26th October 2024, there has been a positive legal duty for employers to take reasonable steps to prevent sexual harassment in the workplace. The duty is proactive, meaning businesses must assess risks and implement preventative measures before problems arise. 

Many SMEs are still behind the times when it comes to proactivity. They operate a complaint-led approach, only taking action when they become aware of an incident. It is unlikely that this will be enough to satisfy the new preventative duty. Guidance from the Equality and Human Rights Commission (EHRC) and ACAS puts an emphasis on risk assessments, staff engagement, training and monitoring. Where employers fail to meet the duty, the employment tribunal can increase compensation awards in successful sexual harassment claims by up to 25%.  

The change in legislation means that the EHRC has the power to take enforcement action where there is evidence that an organisation has not taken reasonable steps to prevent sexual harassment. It is also worth noting that such enforcement action does not necessarily need an incident of sexual harassment to have taken place. 

 

What to do 

• Carry out a risk assessment for workplace sexual harassment. 
• Take a look at your anti-harassment policies, refresh them in the light of the latest legal requirements and relaunch them so that all employees – and third parties – know what is  required of them.  
• Implement regular training for your employees and managers. 
• Examine and assess the risks involving customers, clients and third parties. 
• Monitor reporting trends and employee feedback to get a reliable picture of where policies are working – and where they are not. 
• Foster an environment where harassment can be reported as a problem. For some businesses, it is ignored and treated as just part of the culture: “it has always been that way”. 

 

 5. Assuming compliance is an HR problem

A mistake SMEs seem to repeatedly make is treating employment law compliance as just something for the HR team to worry about.  

The Employment Rights Act 2025 introduced reforms that have implications across leadership, finance, payroll, operations and line management. Holiday pay records involve payroll teams. SSP reforms affect finance and workforce planning. Family leave management requires line manager understanding. Harassment prevention demands organisational culture change. 

If a business fails to adopt a whole-organisation approach, it will discover the gaps only when faced with a grievance, tribunal claim or regulatory investigation – by which point it will be too late. 

What to do 

• Make sure someone at senior level is assigned accountability for employment law compliance. 
• Schedule employment law audits at least once a year, if not more often. 
• When compliance reviews take place, involve payroll, finance and operational leaders. 
• Set up and implement regular management training on the law about employment rights. 
• Whenever there is a significant legal change, such as the Employment Rights Act, which is being implemented in stages, take a fresh look at policies and procedures.