Firms Fear “Chilling Effect” From Labour’s Employment Shake-Up

Business groups and commentators have issued stark warnings to the Labour government over its proposed Employment Rights Bill, suggesting the plan could stifle growth, increase costs for firms and even lead to job losses.

The FT reports that the five largest UK business groups issued an open letter to the House of Lords, urging amendments to the Employment Rights Bill — including the British Chambers of Commerce, the Confederation of British Industry, the Institute of Directors and Make UK. The letter cautions that Labour’s reform package could have a “chilling effect” on hiring and impose heavy burdens on small and medium-sized enterprises.

Key Concerns from Business

• Unfair dismissal from day one: One of the most contentious proposals would allow employees to bring unfair dismissal claims from their first day on the job. Businesses warn this could encourage frivolous claims and make employers more cautious about hiring.

• Zero-hours clampdown: By curbing flexible contracts and requiring guaranteed hours, firms may lose agility to scale their workforce in response to demand.

• Union powers and industrial relations: Critics fear that expanded rights for unions — such as easing recognition or collective bargaining — could spark more industrial disputes.

• Regulatory complexity and compliance costs: Smaller firms, in particular, warn that the regulatory burden will fall disproportionately on them, hampering their ability to grow or even remain viable.

Some business leaders argue that unless changes are made, the UK risks undercutting investor confidence and undermining the recovery in a fragile post-pandemic economy.

The Government’s Position

Labour officials maintain that the reforms are central to the party’s promise to strengthen workers’ rights and reduce workplace inequality. Deputy Prime Minister Angela Rayner has repeatedly affirmed that the rights package is “ringfenced” against dilution despite business pressure.

Meanwhile, government estimates suggest the reforms could cost businesses around £5 billion annually, with potential implications for jobs and growth.

Labour is expected to face intense scrutiny as the Bill proceeds through the House of Lords, with peers already considering amendments to soften some measures.

Reaction from Unions

Trade unions have pushed back on calls to water down the Bill. Unite’s leader, Sharon Graham, warned against diluting the reforms promised to voters, emphasising that weakening protections would betray trust.

The TUC and other union voices argue that stronger worker protections are essential to boosting productivity, stabilising the labour market and rebalancing power relationships in the workplace.

Ultimately, Labour’s workers’ rights agenda is now in a delicate balancing act — attempting to deliver long-promised protections while avoiding damage to economic competitiveness. The debate that lies ahead in Parliament will test whether the party can deliver on both fronts.