Angela Rayner’s ambitious overhaul of workers’ rights could burden UK employers with nearly £5 billion in additional costs each year, according to an impact assessment published by the government.

The reforms, proposed in the Employment Rights Bill, could result in businesses raising prices, cutting back on wages, or reducing investment as they grapple with a significant increase in operating expenses.

The government’s analysis estimates the annual cost to businesses at £4.5 billion, but it warned that the total impact could rise to £5 billion. This comes as companies already face a looming tax increase, with Chancellor Rachel Reeves expected to raise employer National Insurance Contributions (NICs) in the upcoming Autumn Budget.

Business groups have criticised the scale of the proposed changes, warning that they could deter investment and harm growth. In a meeting with Kevin Hollinrake, the shadow business secretary, leaders from major organisations including the Confederation of British Industry (CBI) and the British Chambers of Commerce expressed concern over the potential economic impact. One attendee described the government’s approach as using “a sledgehammer to crack a nut.”

Sweeping changes to workers’ rights

Rayner’s proposed Employment Rights Bill aims to end exploitative zero-hours contracts, give workers the ability to take employers to a tribunal from their first day on the job, and extend statutory sick pay. The deputy prime minister has hailed the package as “the biggest upgrade to rights at work for a generation.”

However, the government’s analysis suggests these changes come with substantial costs. The bill is expected to cost businesses £1 billion annually for ending zero-hours contracts, £1 billion for compensating workers for shifts cancelled at short notice, and up to £1 billion for expanding access to statutory sick pay.

Critics argue that the most expensive measures in the bill may have unclear benefits for society. The analysis noted that policies such as the right to guaranteed hours could impose significant costs on businesses while delivering only “uncertain” advantages.

Sectoral impact and business concerns

The costs of the reforms are expected to hit certain sectors harder than others. Businesses in lower-paid industries, such as retail, hospitality, and social care, are likely to bear the brunt of the additional financial burden. According to the analysis, the new measures could increase the total wage bill for UK businesses by 0.4%.

Kate Nicholls, CEO of UK Hospitality, warned of the potential consequences for the industry. “With more than half of our operating costs already taken up by employment and wage costs, any addition to that will have a net impact – both on prices to the consumer and on job opportunities for employees,” she said.

Smaller businesses are particularly vulnerable, as they may struggle to absorb the fixed costs associated with the new regulations. According to a survey conducted by the Office for National Statistics (ONS), two-fifths of businesses plan to raise prices in response to higher labour costs, while 17% anticipate cutting staff.

Broader economic effects

While Rayner’s reforms aim to raise living standards, the government’s impact assessment concluded that the bill would only deliver a “small” positive effect on economic growth. The report highlighted that while some businesses may benefit from having more productive and secure workers, others may reduce investment or cut jobs to cope with rising costs.

Industry leaders, including Steve Alton, CEO of the British Institute of Innkeeping, have called on the chancellor to provide support for affected sectors in next week’s budget. Alton warned that the new employment costs would be “unaffordable” for many businesses without additional relief, particularly in the hospitality sector, which has already faced significant pressures from inflation and high operating costs.

Sir Tim Martin, founder of JD Wetherspoon, criticised the increasing levels of regulation and taxation on businesses, arguing that excessive regulation stifles investment and prosperity. “There appears to be a belief that you can regulate your way to prosperity. This belief will almost certainly lead to less investment and less prosperity,” he said.

Balancing workers’ rights with business costs

Despite the concerns, Rayner remains committed to her reforms, stating that millions of workers will benefit from stronger employment protections. “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,” she said.

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Rayner’s workers’ rights overhaul could cost employers up to £5bn annually, government warns