Family businesses: is your approach to managing talent and culture at risk?

The UK Employment Rights Act 2025 is set to create the biggest shake up in decades to workplace relations. What is changing for family businesses and how can you prepare?

“The family-owned businesses we work with have real pride in the contribution they make to society, particularly through employment,” says Clare Stirzaker, Private Wealth Partner at Boodle Hatfield. “Many will feel that the changes soon coming into force under the Employment Rights Act 2025 are at odds with the culture and values they take pride in, such as providing employment for the long term and providing time for personnel at a senior level to fully embed within the unique ecosystem of a family business.”

“Business owners are already under pressure,” notes Clare, who advises some of the largest family businesses operating in the UK. Alongside global issues such as geopolitical uncertainty and rapid technological change, companies are grappling with inflation, a rise in employers’ national insurance and changes to inheritance tax laws. Now the Employment Rights Act, which will be implemented in stages over the next two years, starting this April, could leave many exposed to significant employment tribunal claims unless they take action.

“The Act will bring widespread change, but the main issue for employers to be aware of now is that employees will be able to claim unfair dismissal after six months of service,” says Joanne Leach, Senior Associate in Boodle Hatfield’s employment law team. “That is down from the current service requirement of two years, which is going to make everything much more onerous in terms of the immediacy and regularity with which businesses will need to assess the performance of new hires from July of this year, if they want to minimise the risk of claims from 1 January 2027.”

“Family businesses in particular may find it frustrating to take a more short-term approach to performance management,” says Clare, with business owners often making hiring and firing decisions personally. “This will make it particularly more challenging for families to bring people onboard at a senior level, where you would typically give a new hire at least two years to see how they are getting on. This could particularly stymie the evolution of a corporate governance framework where the involvement of senior, non-family members is often desirable and necessary, particularly to support succession planning.”

Where personnel issues do arise, family businesses are inclined to feel these more deeply and react to situations from a less detached standpoint, given their focus on trust and loyalty and the emotional connection they tend to have with the business. Joanne recalls a previous client who was so incensed by an employee’s rude behaviour to another family member that they fired them on the spot, without following the company’s disciplinary procedures. “I doubted at the time that a non-family member would have reacted that way.” When an unfair dismissal claim arrived, it was difficult to defend because records had not been properly kept of previous incidents.

“In relation to employees who have acquired unfair dismissal rights, you have to be able to show a paper trail – that you have given warnings and so on,” she explains. “Currently you have two years to decide if an employee is right for the business – now, the termination process needs to kick in quickly and in good time so that any necessary dismissals take effect before the employee acquires unfair dismissal rights six months in.”

The risk of a claim is also greater because the Act will remove the cap on awards in the employment tribunal. This means that high-level executives who would previously have been unlikely to fight a former employer for a maximum of £118,223 are more likely to bring a case – and when they do, their potential awards could be far more significant. Fixed-term contracts are also becoming more problematic, since those employees will acquire the same rights after six months of work too. The impact of these changes will be compounded by the tribunal limitation period doubling from three months to six. As a result, employers will likely see their insurance costs rise.

“Once the Act is in force, businesses will find that the cheapest risk control will be upon entry, not exit,” advises Joanne. “By that we mean ensuring through your recruitment process that you have the right person and don’t take any chances regarding their suitability. Once an employee has been onboarded, there needs to be almost immediate and consistent management of their performance and the way they interact with everyone in the business.”

It may also be wise to have a lawyer review existing contracts for new starters who start in July, to ensure that they include clear probation, performance and termination mechanisms. With new protections in the Act seeking to curb so-called ‘fire and rehire’ practices by making it automatically unfair to dismiss someone to impose contractual changes, carefully drafted variation clauses agreed with employees will also give you more flexibility to manage change.

The third line of defence – businesses changing their approach to performance management – is likely to be the most challenging. Clare, who is frequently consulted by family-owned businesses and family offices for advice on governance, believes many boards will need to spend some time looking at the likely impact of these changes on the business. “The whole new regime will need some quite careful attention, so it is important that leadership and HR teams understand the issues and know how to react and are able to guide their board in advance on key risk issues for the business. For example, if you have people on performance improvement plans, do we need to manage them out before the Act comes into force? At a time when families are also looking at how to manage economic and innovation challenges, financial and tax exposure, they mustn’t lose sight of this area as well and should ensure someone on the board or their relevant board committee has a proper eye on these changes and their likely impact.”

It can be especially helpful to have outsiders on boards when cultural change or painful decisions are needed. “The informality that characterises a lot of family businesses makes them special, but it can also exacerbate problems,” says Clare. “We do see businesses where trusted personnel have been in their role for decades, which means it can be very challenging to deal with performance issues, particularly if such persons feel ‘part of the family’ and there is a lot of trust and loyalty in place. However, the new Act will mean that additional care now needs to be taken to ensure length of service does not cloud judgement and prevent performance issues from being tackled professionally, taking account of the new unfair dismissal landscape and the financial and reputational risks that can arise.

“It is an urgent concern for businesses to understand they have to make that cultural shift in the way they deal with their staff and have documentation that is fit for purpose in place before the law changes,” says Joanne. “A good starting point is to discuss it with somebody outside the family, an adviser who can facilitate critical thinking around what that means for their particular business.

It is always hard to take time away from day-to-day challenges, but if you can give yourself an hour or so just to educate yourself, think critically about the issues for your business and plan for what you need to do next, that will be invaluable and save a lot of time, money and heartache in the long run.”

How family business can prepare

In an hour
Set aside time to understand what is changing under the Employment Rights Act and map your exposure. Identify key risks, and what you can do to mitigate potential negative impact. Planning is crucial.

In a month
Review recruitment processes (especially for senior roles), contract templates, the language used around probation, performance management and termination.

In the next quarter
Train managers and/or HR on early performance assessment and documentation. Stress-test governance: who makes decisions, who is accountable, who has the knowledge required and the ability to provide effective challenge?