Outsourcing and the Employment Rights Act 2025: new risks, new constraints

The Employment Rights Act 2025 (ERA 2025) represents the most far‑reaching reform of UK employment law in a generation. Much of the commentary to date has focused on its impact on direct employment models. Less attention has been paid to the ERA 2025’s implications for outsourcing — yet several of its measures have the potential significantly to reshape outsourcing decisions and risk allocation.

While the prospect of increased employment costs resulting from ERA 2025 may prompt some organisations to revisit outsourcing as a means of achieving greater flexibility or cost control, the ERA 2025 also introduces new constraints and liabilities that parties to outsourcings will need to address.

Dismissals in an outsourcing context

Outsourcings often involve changes to the workforce, whether through staff transfers under TUPE or, in some cases, the dismissal of employees and their replacement with outsourced labour. From January 2027, ERA 2025 introduces a major new restriction in this area.

Where employees are dismissed in order to replace them with non‑employees (such as agency workers or independent contractors) to perform substantially the same duties, those dismissals will be deemed automatically unfair. Liability in connection with such dismissals will be uncapped, subject only to limited exceptions for genuine redundancy situations and severe financial distress. The provision was introduced in response to a number of recent high‑profile “fire and rehire” scenarios, and is clearly intended to deter substitution of employment with contingent labour.

For organisations contemplating outsourcing, this materially constrains workforce restructuring options and increases exposure where dismissals form part of the strategy. Commercial protections — including indemnities and clear apportionment of liability — are likely to take on increased importance, and of course will play through into the risk-reward balance of the outsourcing arrangement.

Outsourcings that engage TUPE should, in principle, fall outside this provision where employees transfer rather than being dismissed. However, ERA 2025 may still be relevant where employment contracts are varied as part of the transfer or where employees object to the transfer. Separately, the government has launched a call for evidence on TUPE reform, meaning further change in this area remains possible.

Action point: Outsourcing plans that assume workforce reduction or substitution should be stress‑tested early against the new automatic unfair dismissal regime.

Public sector outsourcings

ERA 2025 also paves the way for tighter regulation of public sector outsourcings from October 2026. New regulations will prevent less favourable treatment where transferred public sector staff and private sector workers work alongside one another on an outsourced public sector contract.

This approach echoes the former “two‑tier Code”, withdrawn in 2010, which sought to ensure fair treatment of transferred workers but was criticised for limiting market participation. While the detailed regulations have yet to be published, they are expected to apply to public services and back‑office functions previously delivered by contracting authorities (excluding utilities). Contracting authorities will be required to take “all reasonable steps” to comply and to have regard to a supporting Code of Practice.

The regulations are unlikely to apply retrospectively, but they may be significant in re‑tendering exercises and new procurements. 

Action point: Bidders for public sector work should anticipate enhanced employment protections and assess early how these affect pricing, workforce models and competitiveness.

Gender pay gap reporting and outsourcing transparency

ERA 2025 also increases transparency requirements around outsourcing arrangements. Rather than mandating the inclusion of outsourced workers in gender pay gap calculations (as originally proposed), ERA 2025 will require employers with 250 or more employees to identify their outsourced service providers within their annual gender pay gap reports.

While the implementation date is not yet confirmed, the policy intention is clear: increased visibility of supply chains, with indirect pressure on outsourcing decisions and provider selection.

Action point: In‑house teams should consider the reputational and ESG implications of outsourcing relationships alongside legal compliance.

Equal pay risk: a watching brief

Finally, although ERA 2025 does not itself reform equal pay law in the outsourcing context, this remains a live issue. The government has stated its intention to ‘ensure outsourcing can no longer be used by employers to avoid paying equal pay’, and a call for evidence in April 2025 explored how broader comparisons might be permitted in future.

Any extension of equal pay rights to allow comparisons between outsourced workers and client employees would represent a fundamental shift, potentially undermining the cost rationale for many outsourcing models.

Action point: While no immediate change has been enacted, organisations with significant outsourced workforces should monitor developments closely and factor potential reform into longer‑term strategy.

What does this all mean?

ERA 2025 does not make outsourcing unviable, but it does narrow the circumstances in which outsourcing can be used to manage workforce cost and risk. For in‑house legal teams, early involvement in outsourcing strategy, contract design and procurement will be essential to ensure that commercial objectives remain achievable within the new regulatory framework.

For further insights about the legal framework governing outsourcings, see our recently published Legal 500 Technology Outsourcing – Country Comparative Guides.