The UK’s Employment Rights Act 2025 is likely to have a negative impact on the economy, with increased business costs, uncertainty and reduced labour-market flexibility expected to outweigh potential productivity benefits, the Office for Budget Responsibility (OBR) has warned.
In its October 2026 Economic and Fiscal Outlook, published alongside the Budget, the independent fiscal watchdog assessed the legislation’s potential effect on economic output for the first time.
The findings have prompted the Recruitment and Employment Confederation (REC) to call on the government to reconsider parts of the reforms, particularly proposals requiring employers to offer guaranteed hours to qualifying workers.
However, the OBR stressed that the economic impact remains highly uncertain. It found insufficient evidence that the negative effect would exceed its 0.1% potential-output threshold for making an explicit adjustment to its forecasts.
OBR identifies potential pressure on businesses
The OBR said the Employment Rights Act could affect businesses through increased uncertainty, reduced flexibility and higher labour-related costs. It expects these pressures to outweigh any potential gains in worker productivity.
The watchdog also noted that the likely negative impact of the final legislation is substantially smaller than that associated with the original proposals put forward in 2024.
However, uncertainty remains around the final design of measures relating to zero-hours contracts. The OBR said it would continue reviewing the potential economic effects as further evidence becomes available.
The assessment also considered the wider labour-market environment, including higher employer National Insurance contributions and increases to the National Living Wage.
Recruiters call for rethink of guaranteed-hours proposals
The REC, which represents recruitment agencies and employment businesses, said the OBR's findings reinforced concerns about the combined costs facing employers.
Its director of campaigns, Shazia Ejaz, argued that the guaranteed-hours proposals could create additional complexity for businesses that rely on temporary and flexible staffing arrangements.
The REC is particularly concerned about how the requirements could affect employment agencies and organisations whose staffing needs change with demand.
Ejaz urged ministers to work with the recruitment industry on a compromise that protects workers while preserving flexible employment opportunities.
The REC's position reflects concerns from the recruitment sector; the OBR's report does not itself recommend abandoning the guaranteed-hours reforms.
Employer National Insurance costs remain under scrutiny
The OBR also examined the effects of the increase in employer National Insurance contributions announced in the 2024 Budget.
It found that employment had fallen more sharply in lower-paid sectors, consistent with its assessment that businesses in these industries were particularly exposed to the reduction in the secondary earnings threshold and its interaction with increases to the National Living Wage.
However, the watchdog cautioned that it was too early to draw firm conclusions about the scale of the National Insurance changes, as other economic developments were also affecting employment.
HM Revenue and Customs is expected to complete a fuller evaluation of the changes in 2027.
The REC criticised the government's decision not to reverse the employer National Insurance increases in the latest Budget, arguing that reducing employment costs could help support recruitment.
Economic impact remains uncertain
Although the OBR expects the Employment Rights Act to weigh on potential economic output, it has not incorporated a specific reduction into its central forecast.
Its assessment reflects the difficulty of measuring the combined effects of employment regulation, business costs and changes in labour-market flexibility.
For employers and recruiters, the findings highlight the importance of understanding how the remaining reforms may affect workforce planning, temporary staffing and recruitment costs as implementation arrangements develop.
The debate now centres on whether the government can strengthen employment protections while maintaining the flexibility businesses need to recruit and manage changing workforce demands.
