Britain's fiscal watchdog has warned that Labour's overhaul of workers' rights will have a “negative economic impact”, saying the cost to businesses will far outstrip any boost to workers' productivity.
The warning comes in the Office for Budget Responsibility's economic and fiscal outlook, published alongside the Budget. The OBR's first assessment of the Employment Rights Act covers a package that has reduced the qualifying period for unfair dismissal to six months, removed the compensation cap, and strengthened trade union rights. The new laws are set to be rolled out over the next two years, with third-party harassment protection, which makes businesses directly liable for harassment staff experience from third parties, taking effect on Friday.
“Our analysis suggests that the ERA will likely have a negative economic impact from negative impacts on businesses,” the OBR said. It said that while the new rights might make workers slightly more productive, extra labour costs, lost operational flexibility, and general uncertainty for businesses would drag down the economy more than productivity gains would lift it. The report added that there was still “uncertainty about the final policy design of the zero-hour contract-related measures”. Under the changes, Labour has proposed giving far greater powers to workers on zero-hour contracts.
The OBR also noted that the final version of the act was substantially less damaging to businesses than the original ideas proposed in 2024. Part of the initial bill was watered down after ministers pushed for “day one” rights, under which workers could claim unfair dismissal from their first day. The House of Lords instead set a limit of six months, but Labour added a last-minute amendment removing the compensation cap of £123,543 or one year's salary.
Lawyers told City AM the change is already being felt across the City and is triggering exits from senior roles, and that the new law has burdened the already backlogged Employment Tribunal system as workers challenge claims.
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- SupportedThe OBR warned that Labour’s workers’ rights overhaul would have a negative economic impact.City AM: “Britain’s fiscal watchdog has warned Labour’s overhaul of workers’ rights will have a “negative economic impact””
- SupportedThe OBR said costs to businesses would outweigh any productivity gains for workers.City AM: “the cost to businesses will far outstrip any boost to workers’ productivity.”
- SupportedThe Employment Rights Act changes are beginning to roll out.City AM: “The new laws are set to be rolled out over the next two years, with third-party harassment protection, which makes businesses directly liable for harassment staff experience from third parties, coming into effect on Friday.”
- SupportedThe OBR’s first assessment covered the Employment Rights Act’s economic impact.City AM: “In its first assessment of the act’s economic impact, the Office for Budget Responsibility (OBR) said”
- SupportedThe Act reduced the qualifying period for unfair dismissal to six months, removed the compensation cap and strengthened trade union rights.City AM: “The government’s sweeping employment reforms in its landmark Employment Rights Act (ERA) have reduced the qualifying period for unfair dismissal to six months, removed the compensation cap, and strengthened trade union rights.”
- SupportedThird-party harassment protection makes businesses directly liable for harassment staff experience from third parties and takes effect on Friday.City AM: “third-party harassment protection, which makes businesses directly liable for harassment staff experience from third parties, coming into effect on Friday.”
- SupportedThe OBR said workers might become slightly more productive, but labour costs, lost flexibility and uncertainty would outweigh the gains.City AM: “while the new rights might make workers slightly more productive, extra labour costs, lost operational flexibility, and general uncertainty for businesses will drag down the economy more than productivity gains will lift it.”
- SupportedThe OBR said the final design of the zero-hour-contract measures remained uncertain.City AM: “The report added there was also still “uncertainty about the final policy design of the zero-hour contract-related measures”.”
- SupportedLabour has proposed giving workers on zero-hour contracts far greater powers.City AM: “Under the changes, Labour has proposed giving far greater powers to workers on zero-hour contracts.”
- SupportedThe final version of the Act was substantially less damaging to businesses than the original ideas proposed in 2024.City AM: “the final version of the ERA was substantially less damaging to businesses than the original ideas proposed back in 2024.”
- SupportedThe initial bill was watered down after ministers pushed for day-one unfair-dismissal rights; the House of Lords set a six-month limit.City AM: “Part of the initial Bill was ‘watered down’ after ministers had pushed for ‘day one’ rights, which would have given workers the opportunity to claim unfair dismissal from day one of their employment. The House of Lords eventually okayed the plans after instead setting a limit of six months.”
- SupportedLabour added a last-minute amendment removing the unfair-dismissal compensation cap of £123,543 or one year’s salary.City AM: “Labour added a last-minute amendment to appease its supporters that removed the compensation cap for unfair dismissal of £123,543 or one year’s salary.”