Employment Rights Bill: How could it impact small and micro businesses?

Government analysis of the potential economic impact of its shake-up of employment rights says it could cost businesses up to £5bn a year in total costs, with small companies facing proportionately higher costs.

The Employment Rights Bill includes 28 individual reforms, including workers having the right to sick, parental leave, bereavement leave and protection from unfair dismissal from the first day of a job. It also proposes ending zero hours contracts (unless employees want to work under them), and extra protections for pregnant women and new mothers.

Cost of Employment Rights Bill for small businesses

The economic analysis says the total business costs for complying and administering the new rules will be up to £5bn a year, which it described as a "modest" increase of around 1.5% on total employment costs.

The costs of mediation and legal action are predicted to increase by around 15%, which would mean an extra 20,000 additional complaints to the Acas mediation and arbitration service, 4,750 more employment tribunal cases and 875 additional cases which may require a full hearing.

The document says "costs will be proportionately higher for small and micro businesses due to the fixed costs of admin and compliance burdens".

Business groups, including Enterprise Nation, have argued for small businesses to be exempt from some measures, but the analysis says:

"Most measures need to apply in the same way to all businesses as we cannot create a "two-tier" workforce (i.e. where some workers get access to rights and others do not). Not only would this be unfair on those workers that lose out, but it would provide a disincentive for those small business to grow."

The following are graphics from the economic analysis document.

Impact on small and micro businesses of high impact policy measures:

Impact on small and micro businesses of "medium cost to business" policy measures:

Impact on small and micro businesses of "small cost to business" policy measures:

How businesses might respond to increased costs

The government said evidence shows that most businesses absorb increased labour costs, but it highlighted an Office of National Statistics survey which showed that in businesses with 10 or more employees, the two most common ways they would respond to higher labour costs are to increase prices (40%), or to absorb within profit margins (31% of businesses).

Other responses included reducing the number of employees (17%), limiting overtime hours (10%) or reducing wages for other employees (9%).

Supporting economic growth

The report says that "many of the policies within the Employment Rights Bill could help support the government's mission for growth," with "a positive but small direct impact on economic growth", with the changes helping "to raise living standards across the country and create opportunities for all."

It also says it could deliver up to £600 income savings for workers in the lowest paid, insecure jobs.

Wellbeing and productivity

The analysis argues that the Bill would have have "wellbeing benefits" of over £3bn a year for businesses and the economy. This includes improved health of employees, which it says could benefit employers given that 17.1m working days were lost due to stress, depression or anxiety in 2022/2023, equivalent to over £5bn of lost output.

The analysis adds:

"Where greater worker wellbeing increases productivity, this will offset some of the direct costs imposed on employers. Likewise, workers who have extra pay due to reforms to SSP (statutory sick pay) or feel more confident in their finances due to better income security may spend more, which again would be good for business.

"Workers who are more secure in their jobs might also be more productive, or with greater protections from day one be more willing to seek a higher paid, more productive job, which would ultimately benefit business through a more prosperous economy."

The government's view

Deputy prime minister Angela Rayner 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.

"We said we would get on and deliver the biggest upgrade to rights at work in a generation and the growth our economy needs -- and that is exactly what we are doing."

Business secretary Jonathan Reynolds said:

"From our very first day in office, this government has moved to restore security for working people.

"That principle runs throughout this legislation and ensuring that employee rights are fit for a modern economy, empower working people, and contribute to our central mission of economic growth.

"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."

Enterprise Nation's view

Emma Jones, founder of Enterprise Nation, said:

"Small businesses are the backbone of our economy, yet they face unprecedented challenges. While we support enhancing workers' rights, the proposed reforms, though well-intentioned, could significantly burden start-ups and micro-enterprises operating with limited resources.

“Measures such as mandating sick pay from day one and altering probation periods may increase uncertainty and administrative costs for small businesses, potentially discouraging them from hiring new staff to grow their business.

"Small companies should also be exempt from proposed fines for failure to comply with the new rules, and given ample time, support and flexibility to help them meet the requirements.

"Proposals to boost worker protection must be balanced against the unique needs of start-ups and micro businesses. We urge the government to directly consult small businesses to understand the practical implications of these proposals.

"Doing so would help achieve the government's desired outcomes without inadvertently pressuring the very enterprises they aim to support."

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