Employment Rights Act 2025: The £1 Billion Bill for UK Businesses

The UK's employment landscape is set for a significant overhaul with the enactment of the Employment Rights Act 2025 (ERA 25) on December 18, 2025. Heralded by the Government as a modernising force for worker protections and a catalyst for economic growth, the comprehensive legislation introduces sweeping changes.

Whilst promising a fairer, more inclusive labour market, the Act also requires a substantial financial commitment from UK businesses, with government assessments estimating an annual cost of £1 billion.

Need help? Our experts are on-hand 24/7, 365 days a year to support you. Simply call 01455 858 132.

• Key drivers of increased costs
• Potential impact on hiring and the economy
• Get expert support

The Government's impact assessment paints a picture of widespread positive change. The ERA 25 aims to extend employment rights to a broader spectrum of workers, enhancing job security, elevating living standards, particularly for the lowest paid.

Over half of the UK's workforce is projected to benefit from these new protections. Beyond individual worker welfare, the reforms are anticipated to:

• Foster improved job satisfaction levels.
• Improve health and wellbeing, reducing costly work-related stress and mental health challenges.
• Contribute a modest but positive 0.04% to GDP growth.
• Improve the UK's international standing in employment protections.
• Promote fairness across demographics, including pregnant women, young workers, and disabled individuals.

The overarching goal is to address longstanding issues of poor working conditions, insecure jobs, and inequalities that have historically hindered productivity.

The financial burden on employers

Despite the anticipated social benefits, the financial implications for employers are considerable. The Government's detailed economic analysis projects a direct cost to businesses of approximately £1 billion annually once the Act is fully implemented. This figure, derived from comprehensive modelling, represents a central estimate of the new financial burdens.

Whilst this constitutes a modest increase of around 0.1% on total employment costs across the economy, its impact will not be evenly distributed. The impact assessment describes this £1 billion cost as a "transfer from businesses to their workers." This means that, whilst employers will incur higher expenses initially, these are largely intended to translate into improved conditions, greater security, and enhanced protections for employees, which benefit businesses in the long run.

Need help navigating the complexities of the new Employment Rights Act 2025? Our experts are on-hand 24/7, 365 days a year to support you.

For same-day Employment Rights Act assistance, call 01455 858 132.

Key drivers of increased costs

Several key provisions within the ERA 25 contribute directly to this increased expenditure:

1. Unfair Dismissal Reforms

A significant change is the reduction of the qualifying period for unfair dismissal claims from two years to six months. The Act also removes caps on unfair dismissal awards, meaning businesses could face substantially higher payouts in successful claims.

2. Protections for agency workers

Agency workers will benefit from enhanced employment protections, increasing potential liability risks for businesses utilising flexible workforces.

3. Enhanced rights

Improvements around redundancy, sick leave, and trade union recognition will necessitate revised policies, potentially higher payouts, and increased engagement with employee representatives.

4. Administrative and compliance burdens

The implementation of these new rights will inevitably lead to increased administrative overheads for businesses, particularly for small and micro enterprises. These smaller entities often bear a disproportionately higher cost due to the fixed nature of compliance requirements.

5. Impact on specific business models

Businesses that heavily rely on flexible contracts or employ a large proportion of low-paid workers are likely to experience more significant adjustments and cost increases, particularly in the short term, as they adapt to the new regulatory environment.

Potential impact on hiring and the economy

Whilst the Government maintains that the risks to hiring and overall employment are "relatively low" and that the benefits to society of the Act are expected to outweigh the initial cost to businesses, concerns from the business community are emerging.

The immediate impact of a £1 billion annual cost, coupled with the increased complexity and risk associated with employment, could lead to a more cautious approach to hiring in the coming months.

Businesses, especially those operating on tight margins or in competitive sectors, may become hesitant to expand their workforce if the cost of employment rises significantly for them. The removal of caps on unfair dismissal awards and the shorter qualifying period could make employers more risk-averse, potentially leading to a slowdown in recruitment for entry-level or less secure positions.

For small and medium-sized enterprises (SMEs), the disproportionate administrative burden could divert resources from growth and innovation towards compliance, indirectly impacting job creation. Whilst the long-term goal is a more productive and equitable economy, the short-to-medium term could see businesses prioritising efficiency and cost control over aggressive hiring strategies as they navigate the new landscape.

Get expert support

The Employment Rights Act 2025 represents a pivotal moment for UK employment law, promising significant benefits for workers and the broader economy. However, because of these advancements, Government analysis shows the reforms are expected to cost businesses an additional £1 billion per year once fully implemented (a substantial reduction from initial estimates of up to £5 billion, thanks to key concessions).

Because of this increased cost and added complexity in employing and managing staff—through new compliance requirements, administrative burdens, and potential risks of disputes or tribunal claims—many businesses face unnecessary expenses if they try to handle these changes alone.

Need help preparing for the Employment Rights Act 2025? Our experts are on-hand 24/7, 365 days a year to support you.

Don't tackle these changes alone and risk incurring avoidable costs or compliance issues. Instead, visit our payback calculator and discover the real time and cost savings by partnering with Croner to stay fully compliant with the Employment Rights Act and all HR & safety matters.

For same-day Employment Rights Act assistance, call 01455 858 132.

.