On Wednesday, the Government published its analysis of the zero hours measures in the Employment Rights Act 2025. The direct cost to employers, it estimates, will fall somewhere between £350 million and £2.9 billion a year, with an indicative central figure of £1.1 billion. Back in January, the Government’s analysis of the entire Act put the direct cost to business at around £1 billion a year. Just the zero hours measures are now expected to cost businesses more than the whole Act was supposed to.
Most entrepreneurs don’t use zero hours contracts. It is worth their attention anyway, because the uncertainty on display here is the same uncertainty they are hiring under.
Entrepreneurs are no doubt too busy building their businesses to pay it much heed, so as a reminder, the Act received Royal Assent in December with most of its substance deferred. Its provisions arrive in instalments — some immediately, then February, April, August and October of this year, then across 2027, with the detail emerging from a run of consultations still under way.
On 1 January 2027, the qualifying period for an ordinary unfair dismissal claim falls from two years to six months and the statutory caps on unfair dismissal compensation disappear entirely. The six-month rule applies to anyone who already has six months’ service on that date, which means anyone hired from around the end of June this year is included. Offers being made this month are offers into a regime that is not yet in force and whose surrounding detail is still being drafted.
There is a debate to be had about what these protections are worth to employees. There is no debate about this: they are not a free lunch.
When the Bill was announced, some argued it would cost the economy little and might even lift productivity. The Government still makes a version of that case, and its own new analysis shows how hard a case it is to make: the measures will raise administrative costs, reduce flexibility and make it harder for employers to respond to swings in demand. The analysis identifies 16- to 24-year-olds among the groups most affected, while arguing they also stand to gain most.
Which brings me back to something I wrote here in February, drawing on Pieter Garicano’s Why Europe doesn’t have a Tesla, which made the case that Europe’s labour laws go a long way to explaining its innovation gap with the US. Where dismissal is expensive, firms stop creating the jobs they might later have to discontinue, and the jobs most likely to be discontinued are the experimental ones.
A German restructuring runs to 31 months of salary per worker against seven in the US. The Danes, by contrast, let employers dismiss almost at will and catch workers with unemployment insurance covering up to 90% of prior income; the Austrians use portable severance accounts, funded by employers, that follow the worker between jobs. Both pair flexibility with a safety net, and both are among Europe’s more innovative economies.
Britain doesn’t have to choose between a safety net and a dynamic economy, I wrote then, but right now we’re getting the worst of both worlds. Six months on, with the expected costs rising, that looks truer than it did.