The Employment Rights Act 2025 is expected to bring significant changes to how organisations manage their people. Much of the discussion so far has focused on compliance, new rights, and the operational impact on employers.
For many small and medium-sized businesses, however, the biggest challenge may not be understanding the legislation itself. It may be understanding how to implement it without losing the culture that has helped the business succeed.
According to Karen Orr, Director of Peoplewise Solutions, the real impact of the legislation will come from how organisations respond to it.
As Karen explains:
“From my perspective, the biggest impact won’t just come from the new rights themselves. It will come from how small and medium-sized businesses respond to the increased risk, responsibility and administration. That response shapes the day-to-day feel of work, often in ways leaders don’t intend.”
James Leavesley, CEO and Founder of Cultiv8tiv, sat down with Karen to discuss how this is challenge is already beginning to be grappled with by SMEs.
The move towards more formal people management
One of the most immediate effects of the new legislation is likely to be an increase in structure. Many smaller businesses have traditionally operated with informal management styles. Decisions are often made quickly, relationships are close, and policies are applied with a degree of flexibility that would be difficult to replicate in larger organisations.
Karen believes the legislation will inevitably push organisations towards a more structured approach, as she explains:
“A lot of the changes will push SMEs towards more structured, documented people management. In principle, I welcome that. Employees should be able to rely on fair treatment, clear expectations and consistent decisions.”
The benefits of this approach are clear as consistency creates fairness, clear expectations reduce ambiguity and better documentation helps organisations make sound decisions and demonstrate compliance when required.
The challenge is that structure can sometimes feel very different from culture. For organisations that pride themselves on being agile, personal and relationship-driven, increased process can feel uncomfortable.
The risk of losing the “family feel”
Many smaller organisations describe themselves as having a family culture. This often means people know each other well, leaders are accessible, and decisions can be made quickly without layers of bureaucracy.
Karen believes these qualities can be hugely positive, but they can also create challenges:
“There is often closeness, loyalty and flexibility and a belief that people look out for each other. That can be one of the best parts of working in a smaller business, but it can also be where problems take root.”
The issue is that informality can sometimes create inconsistency as difficult conversations are delayed, performance concerns are not addressed early enough and different employees are treated differently because decisions are made on relationships rather than clear principles.
The Employment Rights Act 2025 may force organisations to address some of these issues.
Karen notes:
“As more formality is introduced, the workplace may shift away from ‘family’ and towards clearer boundaries. That can improve fairness but it can also feel unfamiliar or disappointing for teams who value informality.”
This creates an important balancing act for leaders and the goal is not to remove the human element from the workplace. The goal is to create enough structure to ensure fairness while preserving the relationships that make smaller businesses special.
When compliance becomes defensive
Another theme emerging from Karen’s work with SMEs is the risk of organisations responding from a position of fear. Many business owners are already managing tight margins, competing priorities, and increasing operational pressures. New employment legislation adds another layer of complexity.
Karen explains:
“When leaders feel the risk is higher, the instinct can be to become more cautious and more protective.”
This can show up in several ways, managers become hesitant to make decisions, conversations become more guarded, documentation increases and processes are introduced primarily to reduce risk rather than improve employee experience.
Karen describes the potential consequence:
“I expect to see that in more hesitation, delays, over-documenting and a sense that managers are trying to protect themselves rather than lead confidently.”
Ultimately the danger is that compliance starts driving culture rather than supporting it.
Employees can quickly sense when leadership behaviour changes. A workplace that once felt open and agile can begin to feel slower, more cautious and less trusting.
Why communication matters more than ever
For Karen, the difference between successful and unsuccessful implementation often comes down to communication and introducing new processes is not necessarily the problem, failing to explain them is.
She believes organisations need to be clear about why changes are happening and how they benefit both the business and its employees, as she explains:
“Leaders may need to say clearly that structure is not about mistrust; it is about making decisions fair, predictable and sustainable for the business.”
When employees understand the purpose behind change, structure can feel reassuring rather than restrictive. Without that context, even well-intentioned improvements can be interpreted negatively.
A more mature approach to management
Despite the challenges, Karen remains optimistic about the opportunity that the legislation creates. This is because at its core, the Act encourages organisations to strengthen the fundamentals of good people management.
Clear onboarding, consistent feedback, fair decision making, well-managed absence processes and better communication should all be outcomes of the Act coming in to legislation.
These elements are not simply compliance requirements, they are the foundations of healthy workplace cultures.
As Karen explains:
“Greater clarity and consistency can strengthen psychological safety in a very practical sense: people know where they stand.”
She goes on to add:
“If businesses keep changes proportionate and communicate them well, the Act can push workplaces in a healthier direction: clearer, fairer and less emotionally charged.”
What this means for SMEs
For many small businesses, the coming years will involve finding a new balance. The Employment Rights Act 2025 will require more structure, more consistency and more accountability, that much is unavoidable.
The challenge is ensuring those changes strengthen culture rather than undermine it. The organisations that navigate this successfully are unlikely to be those with the longest policies or the most complex procedures.
They will be the organisations that keep people at the centre of their decision making, communicate clearly, and introduce just enough structure to create fairness without losing the warmth, trust and common sense that make small businesses great places to work.
As Karen’s insight highlights, the future is not about choosing between culture and compliance, it is about finding a way for both to work together.