UK workers’ rights reforms to cost businesses £5bn a year

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Labour’s package of workplace reforms will cost UK businesses up to £5bn as companies get to grips with the new rules, the government said in an analysis of its employment rights bill. 

The extra costs are expected to be about 0.4 per cent of Britain’s total pay bill of £1.3tn, although certain sectors of the economy will be hit harder.

The employment bill is the vehicle for some of Labour’s most contentious policies, designed to boost workers’ rights. They include a ban on “exploitative” zero-hours contracts, day-one rights against unfair dismissal and new rights for unions to access workplaces. 

Most of the costs would represent “a transfer from businesses to their workers”, according to an assessment document released on Monday. “At this stage we believe the direct cost to business would be in the low billions of pounds per year.”

The assessment found that much of the almost £5bn bill would be due to “employers familiarising themselves with new legislation, administrative and compliance costs”.

The changes will be more disruptive for companies that rely on flexible contracts in low-paying sectors, the assessment found. They will be proportionately higher for smaller and smaller businesses because of the “fixed costs of admin and compliance burdens”, the government found. 

The corresponding benefits to workers will be largest for those working in low-paid sectors on insecure terms.

The changes are set to pile additional requirements on to businesses that are already braced for an increase in employers’ national insurance contributions to be announced by chancellor Rachel Reeves in next week’s Budget.

Ministers have repeatedly said that the employment rights bill will have a “positive direct impact on economic growth” by creating a happier, more productive workforce.

But the government’s own economic assessment warned that the changes, if poorly handled, could backfire on workers if they led to employers cutting hiring or squeezing wages to absorb the extra costs.

It concluded that the net effect on the economy would be minimal: “We conclude the package could have a direct and positive impact on economic growth, but we expect this to be small,” it said. 

However, it did predict that the package would help to raise living standards across the country by boosting protections and the quality of work for low-paid workers, especially in the more deprived areas of the UK.

The government has set out about 70 policies in its broad “Making Work Pay” package of policies, although only 28 of them are in the employment rights bill. Many of the measures are subject to consultation and will not come into force for at least another two years.

The impact assessment suggests the policies with the highest costs to business will be improving access to statutory sick pay by removing the lower earnings limit, banning zero-hours contracts, making employers give notice of changes to cancelled shifts, and bringing in unfair dismissal rights.

The change to sick pay would result in businesses paying — and therefore workers gaining — an additional £400mn, it found.

The other measures would also each represent a transfer from employers to workers of several hundred million pounds.

It said that establishing fair pay agreements in adult social care could potentially have a “very large cost” of more than £1bn a year but said any estimate was premature and would be subject to policy design.

On Monday, with the bill going through its second reading in the House of Commons, the government also issued several six-week consultations on aspects of the legislation, including on sick pay, industrial relations and zero-hours contracts.