According to the government’s impact assessment, the UK government’s latest Employment Rights Bill could cost businesses up to £5 billion annually.
The bill, set for its second reading in the Commons on Monday, October 21, proposes sweeping changes to protect workers, including banning exploitative zero-hours contracts and stopping “unscrupulous” fire-and-rehire practices.
The legislation also seeks to eliminate the two-year qualifying period for unfair dismissal protection, allowing workers to have that right from the first day of employment. In Labour’s view, this would benefit millions of employees across the UK by providing more robust job security. However, concerns about the potential impact on businesses, particularly smaller enterprises, have surfaced.
According to the government’s impact assessment, the proposed reforms will impose a “direct cost” on businesses, estimating this figure to be in the low billions but not exceeding £5 billion annually. The overall wage costs in the UK amounted to £1.3 trillion in 2023, in nominal terms.
Businesses Face Higher Costs
The assessment also reveals that smaller businesses will feel the burden of these reforms more and may struggle with administrative and compliance costs. While the bill intends to offer uniform protections to workers, this could result in a disproportionate financial impact on smaller companies.
“Not only would this be unfair on those workers that lose out,” the report states, “but it would provide a disincentive for those small businesses to grow.” Small enterprises, already facing the pressure of rising inflation and fluctuating demand, may be forced to make tough decisions.
Around 40% of businesses surveyed indicated they would respond to higher labor costs by increasing prices, while 17% would consider cutting jobs. Another third said they would absorb the costs through reduced profit margins. The assessment also warns that businesses might become more hesitant to hire new employees due to increased costs associated with protections from the first day of employment. This could offset productivity gains that might otherwise result from a better match between employees and employers.
New Protections Could Benefit Millions
On the other hand, the bill aims to protect approximately 2.4 million workers in the UK who are employed in irregular patterns, such as zero- or low-hours contracts or agency jobs.
Many of these workers, especially in the North and Midlands, face significant challenges due to last-minute changes in work schedules, which can lead to expensive childcare or transport costs — or worse, lost wages when work is canceled at short notice.
The government estimates that new protections could save workers up to £600 annually. Deputy Prime Minister Angela Rayner hailed the bill as “the biggest upgrade to rights at work in a generation,” asserting that it will benefit workers and the wider economy.
“We’re delivering real change for working people across the country while driving our mission for growth and making people better off. Successful firms already know that strong employee rights mean strong growth opportunities.”
Angela Rayner
Business groups like the Confederation of British Industry (CBI) have praised the bill’s intentions, with CBI leaders acknowledging the importance of improving employment standards.
John Dickie, chief executive of the business group BusinessLDN, added his support, saying, “Good businesses already have good working standards. That is why we support Labour’s objectives to increase living standards, make work pay, and drive up productivity.”
However, not everyone in the business world is happy with the proposed reforms. The Federation of Small Businesses (FSB) has been vocal in its criticism, describing the bill as rushed and poorly thought out.
“This legislation is a rushed job, clumsy, chaotic, and poorly planned — dropping 28 new measures onto small business employers all at once leaves them scrambling to make sense of it all,” said the FSB in a strongly worded statement.
As such, the debate is expected to intensify as the bill heads for its second reading. While it promises significant improvements for workers, particularly those in insecure jobs, the potential economic toll on businesses remains contentious.
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