The cost to UK businesses of Labour’s flagship overhaul of workers’ rights has been cut by billions of pounds after ministers significantly watered down the legislation, according to the government’s own updated analysis.
A revised Whitehall impact assessment published on Wednesday estimates that the Employment Rights Bill will now cost employers around £1bn, a sharp reduction from earlier projections that put the figure as high as £5bn.
The government said the lower estimate reflects a series of late-stage concessions, including phasing in reforms over several years and changes made as policy design and evidence evolved since the original assessment was published in October 2024.
The legislation, which finally passed last month after a prolonged battle in the House of Lords, includes reforms such as tighter rules on zero-hours contracts, enhanced sick pay and changes to parental leave. However, one of Labour’s most contentious manifesto pledges – giving workers day-one rights to claim unfair dismissal – was dropped at the eleventh hour.
Instead, ministers introduced a six-month qualifying period, a move that helped break the parliamentary deadlock but angered some Labour backbenchers and trade unions. Sharon Graham, general secretary of Unite, previously described the final legislation as “a shell of its former self”.
The concession followed negotiations involving six of the UK’s largest business groups and trade unions, but has not fully satisfied employer groups. Kate Shoesmith, director of policy at the British Chambers of Commerce, said the revised £1bn estimate was “likely to be a massive underestimate”.
She warned that the government’s figures failed to capture harder-to-quantify costs, including management time spent understanding the new rules, training staff and implementing revised processes. While the six-month unfair dismissal threshold would reduce costs, she said, it was “unlikely to do so on the scale suggested”.
The government has acknowledged that employers will face higher costs, particularly from changes to statutory sick pay, paternity leave and additional administrative burdens. However, it argued that the impact would be modest when set against the wider economy.
“To contextualise the size of this impact, total employment costs in the UK were £1.4tn in nominal terms in 2024,” the assessment said. “This means the estimated increase represents around 0.1% of the UK’s total pay bill.”
The revised analysis also increases the number of workers expected to benefit from the reforms to around 18 million, up from a previous estimate of 15 million. The largest gains are expected among lower-paid workers in sectors such as social care, hospitality and retail.
Paul Nowak, general secretary of the Trades Union Congress, said the changes would bring the UK closer to international norms. “Crucially, the legislation will give working people the higher living standards and secure incomes needed to build a decent life,” he said.
The assessment concludes that the reforms could raise employment by around 0.1%, improve job quality and productivity, and deliver a small positive boost to economic growth. A government source said the updated figures show the benefits of the reforms outweigh the costs, particularly for younger workers and women.
