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Britain’s Labour government was always going to struggle to balance its pledge to “make work pay” by improving workers’ rights with its overriding priority of boosting growth. Its October Budget, which heaped tax rises on to business, has made the clash even more acute. As the Financial Times has reported, the government is now seeking compromises on parts of its landmark employment rights bill. Yet what it has offered so far is fiddling around the edges. If Labour is to foster the economic dynamism the UK needs, it must go much further in adjusting the legislation to meet business concerns.
The bill gives workers protection against unfair dismissal from day one, with a probation period, and stronger rights on flexible working. It includes a clampdown on “exploitative” use of zero-hours contracts, and on fire and rehire tactics. The government’s own analysis estimates it will cost business £5bn a year to implement the package.
What has riled companies, however, is how Labour has combined these changes with Budget increases in payroll taxes — both raising the rate and slashing the threshold at which they kick in — and a big rise in the national minimum wage. This triple whammy will sharply lift the costs, in particular, of low-wage and entry-level jobs, creating a disincentive to hire and expand. Figures on Tuesday showed employers have cut staff numbers since the Budget.
Nudging companies to invest more in technology, as many now say they will, and rely less on low-wage workers is in theory no bad thing given the UK’s poor labour productivity. But the freed-up workers need to be recycled into new and productive jobs. If soaring costs are deterring businesses across the economy from hiring, that works against the government’s priority of creating both more, and more secure, employment.
Since Labour is unlikely to revisit its flagship Budget measures — the bigger worry for business — it will need to be doubly careful about how it rolls out new employment rights. That does not mean the reforms should be abandoned. Action is badly needed to curb abuses, reduce precarity and help people caring for family to work. But the government should adjust how it plans to implement the measures — or, if necessary, amend the legislation — to avoid penalising business.
On zero-hours contracts, the government should look again at how it can include agency workers in the new right to a guaranteed-hours contract, while still allowing employers enough flexibility. And it should ensure that the reference period over which workers’ regular hours are calculated takes account of seasonal fluctuations, to ensure it does not hamper, say, retailers staffing up temporarily in the holiday season.
Labour has already compromised on its original aim of granting protection for employees against unfair dismissal on day one — down from two years at present — by allowing a nine-month probation period with a “lighter-touch” dismissals process. But small businesses warn even this is an insufficient safeguard against vexatious claims that can be cripplingly expensive to defend. Better to set the unfair dismissals threshold at, say, six months, more in line with some European counterparts.
Making it harder for businesses to fire workers then rehire them on worse terms is justified. The proposals, though, are too tightly drawn, requiring companies to be almost insolvent before they can change contracts. The government should look again, too, at rule changes that could potentially hand too much power to trade unions in the workplace.
Being seen to dilute its rights package will irk Labour’s left wing and its union allies. But since its longer-term political prospects hinge on jump-starting growth, a bigger priority must be to start rebuilding the country’s distinctly battered business confidence.
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