Did you know that SMEs make up over 99% of UK businesses? They’re the backbone of our economy, yet too many operate without one of the most important levers for sustainable growth: effective HR operations.

Too often, HR is treated as a back-office chore — something to deal with only when problems arise. But HR, when done right, is a powerful driver of compliance, culture, and growth. For SMEs especially, it can be the difference between building a thriving business or facing costly setbacks.

A Real-World Warning

One SME client had poured five years of effort into building his business, but with no HR systems in place. When a pregnancy discrimination claim was brought against him, he had “no leg to stand on.” He told me plainly:

“If this ends up as a big claim, I might even have to close the business down. I don’t have the cash to defend it, or to pay the compensation.”

That’s how serious the risks are when HR is overlooked. For many SMEs, one claim could threaten the very survival of the business.

1. Staying Compliant with UK Employment Law

UK employment law is already complex, and the Employment Rights Bill 2025 is about to make it even more so. Reforms include:

• Unfair dismissal rights potentially becoming a day-one right (we are waiting for confirmation on whether it will be a Day 1 right or employees will have to have 6 months' service, but there will be no more two-year qualifying period).
• Statutory sick pay reforms.
• Stronger flexible working rights.

For SMEs, this means that the margin for error is shrinking fast. Even well-meaning decisions can trigger tribunal claims if not handled correctly. Non-compliance doesn’t just carry financial penalties, it risks reputational damage and drains leadership time.

A well-structured HR function keeps you ahead of these changes, ensuring policies and practices are not only legally compliant but also fair and trusted by your workforce.

2. Hiring the Right People (and Avoiding the Risks)

Recruitment isn’t about plugging gaps, it’s about building the right team while staying on the right side of the law. A poorly managed process risks costly turnover, poor cultural fit, and exposure to legal claims.

Remember: discrimination claims in recruitment can be brought from day one. That risk exists regardless of the Employment Rights Bill, and tribunals do see these cases. For SMEs without dedicated HR support, even one misstep in recruitment advertising, interview questions, or decision-making can have lasting consequences.

HR operations provide structure and fairness, from compliant job ads through to onboarding, protecting your business while strengthening your employer brand.

3. Driving Engagement, Productivity… and Handling Exits

It’s simple: engaged employees perform better. Disengaged employees cost UK businesses billions every year in lost productivity. For SMEs, even one or two disengaged staff can make a huge dent in performance.

HR operations create systems for performance management, feedback, training, and recognition, all of which lift engagement and keep people motivated. But when things do go wrong, it’s equally important to handle exits properly.

Dismissing employees is never straightforward and with unfair dismissal soon to be a day-one right, getting it wrong will be even riskier.

This is where workplace investigations become critical. Fair dismissals depend on robust, objective investigations, yet many SMEs have no idea where to start when allegations arise. With the new unfair dismissal rules, investigations aren’t just “good practice” — they’re essential for legal protection.

Equally, dismissals and investigations often fall to line managers, who may not have the skills or confidence to handle them correctly. That’s why training line managers to spot issues early, follow fair process, and avoid costly mistakes is one of the smartest investments an SME can make.

On top of that, reforms to settlement agreements mean that employers will no longer be able to prevent employees from speaking out about allegations of work-related harassment or discrimination, even if a settlement is reached. That makes it even more important to get processes right, rather than relying on paying people off later.

4. Supporting Growth and Navigating Change

Growth and change are part of every SME journey but they’re also the moments when HR risks are at their highest.

Whether it’s scaling the team, restructuring, or moving into new markets, HR operations provide the scaffolding that ensures people feel supported and risks are managed. Recent and upcoming changes make this even more important:

• Trade union reforms.
• Changes to redundancy consultation rules and increased penalties for non-compliance.

Handled badly, these shifts can spark claims, disputes, or reputational fallout. Handled well, they’re an opportunity to show integrity, strengthen culture, and futureproof your business.

The Bottom Line for SMEs

Cutting corners on HR might feel like a cost-saving, but the risks — including tribunal claims, reputational damage and lost productivity — can cripple an SME. The Employment Rights Bill 2025 is only going to raise the stakes.

At Impact Lawyers and Business Services, we bring together employment law expertise, HR insight, and commercial experience. We don’t just help you stay compliant, we help you build workplaces that people want to be part of, while protecting your business from costly mistakes.

If you’re an SME leader wondering whether you can afford HR support, the real question is: can you afford not to? Let’s talk about how we can make HR your superpower.