Employment Rights Act's cost impact on businesses cut by 80%

The Employment Rights Act 2025 will cost businesses 80% less than previously estimated, according to updated impact assessments produced by the government.

New economic analysis of the reforms, which takes into account key concessions made by ministers to get the Act through Parliament, suggests the cost to business will now be £1bn per year - or 0.1% of the UK's total pay bill - once the Act is fully implemented.

This is a significant reduction on the £5bn cost estimated by the government when the Employment Rights Bill was introduced in October 2024.

The assessment sets out that the Employment Rights Act will deliver significant benefits for the country, including improved health, wellbeing and job satisfaction and fewer workplace disputes.

It also shows the Act will generate net increases to both GDP and employment. Likely benefits of the legislation are predicted by government to far outweigh the costs.

In November, the government scrapped its plan for a day-one right to protection from unfair dismissal, replacing it with a six-month qualifying period (down from the current two years).

However, it also made provisions to scrap the cap on compensatory awards (£118k or a year's pay) for unfair dismissal in the employment tribunal.

The impact assessment estimates these changes will cost businesses between £10 million and £100 million, but that the benefit to workers will be the same. It suggests the wider economic impact could increase the cost of hiring and firing, but that the net impact remains unclear due to "uncertainty on behavioural impacts".

The analysis states that the cost of removing the compensation cap for unfair dismissal is likely to be limited. In practice, it says few awards reach the cap. In 2023-24, the median award was £6,746. Fewer than 40 awards (around 6%) in 2023-24 for unfair dismissal were greater than £50,000.

"Employment tribunals will continue to calculate compensatory awards to reflect the losses that employees suffer because of being dismissed unfairly. Some high-paying sectors may be particularly affected," said the analysis.

Employment lawyers have claimed that removing the cap will attract unfair dismissal claims from highly-paid employees who would otherwise have had the £118k "priced in" to their severance packages.

'Massive underestimate'

Some believe the new impact assessment is optimistic. Kate Shoesmith, director of policy at the British Chambers of Commerce, said: "The revised impact figure of £1bn is likely to be a massive underestimate. We are sceptical that there is sufficient evidence to make a proper financial assessment of how much the Employment Rights Act will cost business.

"The impact figure doesn't adequately account for the harder-to-quantify costs. Those include staff time for understanding and implementing new processes or explaining these to colleagues.

"Concessions such as introducing the six-month qualifying period will reduce costs - but not on the scale this latest assessment suggests.

"We continue to hear from businesses every day who are deeply concerned about the cumulative financial impact of this legislation. Firms tell us it will have a direct impact on their ability to recruit, develop and harness a skilled workforce."

The new document states that the Employment Rights Act is set to benefit over 18 million people, or around 60% of workers. People in low-paid occupations, such as social care, hospitality and retail will benefit most.

Prospect general secretary Mike Clancy said: "This impact assessment is clear that the Employment Rights Act is good for workers, good for growth, and good for wider society.

"The sensible compromises agreed between government, businesses, and trade unions were intended to make this legislation more workable for all parties, while still delivering robust protections for workers, and this report clearly demonstrates the success of that approach.

"It is vital now that the remaining details are agreed according to the agreed timeline, so that workers can start to feel the benefits of this Act as soon as possible."

'Gains outstrip costs'

Previously published independent analysis for the TUC has suggested that, overall, the legislation will deliver an estimated £10bn boost to the country.

TUC general secretary Paul Nowak said: "Too often in this debate, the facts are ignored. But stronger rights at work are good for workers and employers - driving up labour market participation, improving health, raising productivity and boosting demand. The Employment Rights Act will deliver an estimated £10bn boost to the economy - gains that far outstrip any costs.

"Britain will now be brought into line with other countries where workers already have better protections. And crucially, the legislation will give working people the higher living standards and secure incomes that are needed to build a decent life.

"Good employers will also welcome these changes - the Act protects them from competitors whose business models are built on low-paid, insecure employment."