Small and medium-sized enterprises (SMEs) have voiced growing concerns over the government’s sweeping Employment Rights Bill, warning that the reforms could place a disproportionate strain on firms already grappling with rising costs and a challenging economic climate.
The legislation, billed as the most significant upgrade to workplace protections in a generation, is due for its third reading at the House of Lords on Wednesday.
Ministers have argued that it will modernise the UK’s labour market; however, HR specialists have said the details of the Bill risk overwhelming smaller firms with red tape, potentially discouraging recruitment.
A ‘perfect storm’ for SMEs
The Bill includes measures to extend unfair dismissal rights to the ‘day one’ of employment, curb ‘fire and rehire’ practices, expand redundancy consultation rules, and tighten obligations around zero-hours contracts.
It also introduces new enforcement powers via a Fair Work Agency and bolsters rights to flexible working, sick pay and bereavement leave.
While business groups acknowledge the need to strengthen workplace standards, some warn that the cumulative effect could weigh heavily on SMEs.
“British businesses face a perfect storm: rising costs, a challenging economic climate, and now a wave of new legislation”, Phil Coxon, managing director at Breathe HR, told City AM. “For small and scaling businesses, [the Bill] brings administrative, legal, and financial changes which will be challenging to implement”.
Natalie Ellis, managing director at Rebox HR, also cautioned that the cost of compliance “could push some viable small businesses over the edge”.
She argued that government support, in the form of toolkits, template policies, and subsidised consultancy, would be “invaluable” for SMEs navigating the transition.
However, concerns are not limited to cost. Analysts have noted that the reforms could create new legal risks for employers, particularly around probationary periods.
“No recruitment process is foolproof”, warned Rob Birley, co-founder of Cornerstone Resources HR Consultancy. “We expect to see claims increase once the Bill passes Parliament”.
Rising costs
Government analysis last October suggested the measures would add around £5bn in costs for employers; however, with the additional new amendment, that cost has increased even higher.
The new amendments, including a ban on non-disclosure agreements (NDAs) in harassment and discrimination cases and the extension of unpaid bereavement leave to early pregnancy loss, are forecast to add at least £80m annually.
“This is already the most expensive and complex piece of employment legislation in a generation”, explained TWM Solicitors partner Anthony Wilcox. “Businesses are rightly very concerned both by the cost of this legislation and the amount of new red tape it will smother them with”.
The British Retail Consortium has separately warned that more than half of retailers expect to cut staff numbers in response to the Bill, with as many as seven in ten predicting a negative impact on operations.
Balancing act
The government has defended the legislation as a key plank of its “plan to make work pay”, designed to raise living standards and create a “fair and level playing field”.
A spokesperson said: “This government is delivering the biggest upgrade to workers’ rights in a generation… We will continue to work closely with employers to ensure new laws work for them, while our small business strategy is also taking action to give them the tools they need to grow”.
However, questions remain over whether the reforms strike the right balance between protecting workers and sustaining jobs.
Analysts suggest that uncertainty could dampen the hiring appetite among SMEs, which account for three-fifths of the UK’s private sector employment.
“SMEs underestimate how significant the changes will be”, warned Lisa Murphy, chief executive of Limelite HR. “These once-in-a-generation reforms will affect every aspect of employing people and are likely to increase an already litigious environment for businesses”.
Others argue the changes will ultimately prove beneficial if implemented well.
“The upheaval will be worthwhile in principle as it creates fairer workplaces and reduces exploitation”, said Ellis. “But for small businesses already operating on razor-thin margins with severely strained budgets, the transition will be genuinely challenging”.