Workers’ rights reform set to slap British businesses with £5bn bill

British businesses are set to face around £5bn in additional costs annually as a result of the new workers’ rights legislation, with smaller businesses in hospitality and retail set to be hit the hardest.

As set out in a newly released economic analysis by the government, the new policies within the Employment Rights Bill will hit businesses’ pockets.

Earlier this month, Labour revealed their package of employment reform, which included 28 individual measures, including ending exploitative zero-hour contracts and banning fire and rehire tactics.

The report offered a breakdown of each of the new measures and their associated costs, with ending zero hour contracts likely to cost up to £1bn a year while reforms to day one employment rights come with a price tag of around £100m a year in new business costs.

The analysis highlighted that the additional costs will be proportionately higher for small and micro businesses, due to the fixed costs of admin and compliance burdens.

The report detailed that it expects that businesses will react to higher labour costs in a number of ways, including passing the costs onto the customers.

However, it added if businesses can’t pass on costs, then they may look to absorb those costs through activities such as cutting investment, reducing training expenditure, or reducing the number of employees.

Ben Smith, senior associate at GQ|Littler stated that “the direct cost of these regulations is significant.”

“Smaller companies and those running on tight margins are likely to find adapting to these new rules – and the associated costs – particularly tough,” he added.

Despite that, the impact assessment says that millions of low-paid workers will be better off, as it argued there will be “significant wider benefits to society, including positive impacts on health and wellbeing, equality, competition, participation”.

The analysis also noted that the workers’ rights package “could have wellbeing benefits of over £3bn a year”.

The impact assessment also suggested that repealing anti-trade union legislation could lead to better terms and conditions and less industrial action.

“However, if relations remain more fractious, there could be more working days lost from strike action,” the analysis added.

The impact report highlighted that the reforms will also increase the burden on the Employment Tribunal and courts by 15 per cent.

The Tribunal already handles a lot of cases. Emma Cocker, senior associate at Lawrence Stephens previously explained to City PM that “we already know that tribunal claims are up by around 7 per cent compared with 2022/23 with over 650,000 open cases.”

“There is a real risk without further investment that the Employment Tribunal will struggle to cope with the increased demand,” Smith added.

Opening the debate in the House of Commons, deputy prime minister Angela Rayner told MPs: “Over decades, the good secure jobs our parents and our grandparents could build a life on were replaced by low pay and insecure work – wages flatlined, in-work poverty grew, growth was strangled and the Tories left behind a battered economy which served no one.

“This Labour government led by working people for working people will start to turn the tide.”

Shadow business minister Kevin Hollinrake hit back, warning: “The very high costs of these measures will be borne by all companies, which will then be passed on in the form of higher prices, reduced wages and lost jobs.

“But it will fall most heavily on small businesses for whom these measures could be existential… these measures fall disproportionately hard on small businesses.”

He added: “Even a spurious case of unfair dismissal costs time and money… more small businesses saddled with such a cost would be sunk without trace. 

“The deterrent effect will be felt right across the economy by every existing and aspirant business person across this entire nation”.

And former City minister Andrew Griffith told CityAM: “This horror show of an impact assessment confirms in black and white what many businesses already knew.”

He added: “The trade union-inspired employment bill will impose an extra £4.5bn cost on business and is expected to increase the number of working days lost from strikes.

It’s something businesses can ill-afford as they brace for the additional impact of whatever’s coming in next week’s Budget.

Business secretary Jonathan Reynolds is set to tell the House, in his closing speech: “Make no mistake – a pro-worker economy is a pro-business economy. This legislation will deliver a new deal for working people. It will help fix our broken labour market. And it will tackle the poor pay, poor working conditions and poor job security that have been holding our economy back.

“The plan to make work pay was developed in partnership with both businesses and trade unions, and the government will continue to work closely with all stakeholders on how best to implement these commitments.”

Asked about the cost to firms, the Prime Minister’s official spokesman said: “What this Bill represents is an investment by businesses, by employers into their employees. For too long, poor productivity, insecure work and broken industrial relations have held back the economy.

“Last year we saw the highest number of working days lost to strikes since the 1980s, costing the economy billions of pounds.”

He added: “The impact assessment says it will have a positive impact on economic growth, but of course, this is not everything the government is doing to support economic growth in the economy.”

UNISON general secretary Christina McAnea welcomed the bill as an “opportunity to turn the tide on insecure employment and deliver the biggest boost to UK workplaces in a generation”.

While Richard Atkinson, president of the Law Society of England and Wales, warned that ministers must ensure “workers’ rights can be enforced through the employment tribunal system”, which he said was “facing immense pressure as backlogs continue to rise”.

He added: “Failure to address this gap will mean serious delays for both employees and employers, leaving them with uncertainty and aggravating disputes.”