The Business
HR & Employment

Legal Review 2024: Employment reform and the law of unintended consequences 

Rachel Reeves’s Budget increase in the rate of employers' national insurance made the headlines. Picture: Shutterstock

Recent government policy announcements, from Rachel Reeves’s maiden Budget speech as the UK’s first female Chancellor of the Exchequer to Deputy Prime Minister Angela Rayner’s introduction of legislation for a new Employment Rights Bill, paint a bold picture of Labour’s strategy for restoring the public finances and overhauling employment law in the UK. 

Given Reeves’s degree in philosophy, politics and economics from Oxford, she must surely be aware, however, of the musings of 17th-century philosophers Adam Smith and John Locke around the unintended consequences of government policy. 

Nowhere is this better exemplified than in the recent employment reforms contained in the Budget, the draft employment bill or Work and Pensions Secretary Liz Kendall’s new ‘Get Britain Working’ strategy. 

In their plan to ‘Make Work Pay’, Labour aspires to make working more attractive to the nine million people who are currently economically inactive, and to try and change the prospects for the long-term sickness absence of more than 2.8m of the population. 

The UK’s productivity levels, in the bottom half of the OECD table, have undoubtably been held back in recent years by absenteeism within the workplace. 

In addition, ending zero hours contracts, delivering a fair wage, and providing security of tenure in employment are key parts of the new legislation. 

These combined aims of increasing economic activity, prioritising fairness, equality and wellbeing, ending the one-sided flexibility in the gig economy and giving fair pay for a day’s work are all laudable in their own right. 

However, when we examine the economic levers their proposals use, we can see that the methodology could easily lead to unintended consequences for growth, job security and the economy as a whole. 

For example, the increase in the rate of employer national insurance (NI) contributions to 15 per cent grabbed the headlines on Budget day and there is no doubt that the lowering of the Class 1 NI threshold to £5,000 will cause many small employers’ payroll costs to soar to a level where there is simply no profit margin, with the inevitable closures. 

Increases to the national living wage and minimum wage will impact SMEs and particularly start-ups in retail and hospitality, with anyone working fulltime over the age of 21 requiring a salary of at least £23,800 – a level untenable for many in that industry. 

Meanwhile, the end to ‘fire and re-hire’ could prompt more employers to go for redundancies rather than maintain posts, counter to the intended aim of increasing job security for employees. 

The end to ‘fire and re-hire’ could prompt more employers to go for redundancies rather than maintain posts

The picture is especially interesting in the temporary workers sector. Currently, umbrella companies provide staffing for many of the UK’s major banks and financial institutions, with an estimated 750,000 working through an intermediary where bespoke payroll schemes are operated. The government has vowed to pursue the umbrella companies for alleged noncompliant tax schemes and will push the legal duty to correctly deduct tax back on to the employment agencies, or directly to the end hirer. 

We are hearing from clients that this is simply not sustainable, given the complicated payroll and compliance requirements involved. 

Added to the fact that the new proposals to give workers compensation for missed shifts will also be met by the agencies, the supply of agency and temporary workers may well dry up, with the knock-on effect of actually reducing flexibility in the workplace and increasing the skill shortage which companies are desperate to plug. 

Adam Smith may not have coined the idiom “be careful what you wish for”, but it is certainly an oft-repeated saying that the new government would do well to heed in relation to its employment reforms.

Robert Holland is Partner and Head of Employment Law at Aberdein Considine.

Partner Content in association with Aberdein Considine.

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