Employment Rights Bill will cost businesses up to £5bn a year, government’s own analysis warns

Labour’s Employment Rights Bill will cost businesses up to £5bn a year, the government’s own impact assessment says.

The legislation, which returns to the Commons for its second reading on Monday, will include plans to ban exploitative zero-hours contracts and “unscrupulous” fire and rehire practices which it said will benefit millions of workers.

Under the new legislation, the existing two-year qualifying period for protections from unfair dismissal will be removed and workers will have the right from the first day in a job.

However, an impact assessment published by the government has warned that the policies will “impose a direct cost on business of low billion pounds per year (ie, less than £5bn annually)”.

Total wage costs in the UK were £1.3 trillion in 2023 in nominal terms.

The assessment cites official surveys suggesting that 40 per cent of businesses would respond to higher labour costs by increasing prices, while 17 per cent would cut jobs. Around a third would rely on profit margins to absorb the costs, the assessment said.

It also warns that costs will be “proportionately higher” for small and micro businesses as a result of admin costs and compliance burdens but says measures need to apply in the same way to avoid creating a “two-tier workforce” where some workers get access to rights and others do not.

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“Not only would this be unfair on those workers that lose out, but it would provide a disincentive for those small business to grow,” it adds.

The legislation could also “make employers less willing to hire workers”, something which could offset productivity gains achieved through more efficient employer and employee matching, the assessment warns.

“Likewise, more job switching could reduce incentives for employers to invest in firm-specific learning and development,” it adds.

However, the analysis says many of the policies within the Employment Rights Bill could help support economic growth, concluding it could have a “positive but small direct impact” on growth.

The bill would also benefit people in more deprived areas of the country by saving them up to £600 in lost income from the hidden costs of insecure work, the government said.

Around 2.4 million people in the UK work irregular patterns like zero or low-hours contracts or agency jobs, where insecure hours can mean forking out on expensive childcare or transport to cover last-minute shifts – or losing out altogether if work is changed or cancelled at short notice.

The government said that new protections like guaranteed hours and giving reasonable notice or compensation for lost work will help shift workers keep up to £600 a year, including workers in the North and Midlands where irregular work is highest.

Deputy prime minister Angela Rayner said the legislation will “deliver the biggest upgrade to rights at work in a generation and the growth our economy needs”.

She said: “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.

“This landmark legislation will extend the employment protections given by the best British companies to millions more workers.”

Business groups welcomed the bill when it was introduced, with the CBI praising the government for engaging with business and unions.

Meanwhile, John Dickie, chief executive of business group BusinessLDN, said: “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 through regulation to improve employer practice across the economy.”

But the Federation of Small Businesses was highly critical of the proposals, saying: “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.”