The UK’s latest compromise on workers’ rights will not fix its labour market problems

The UK’s autumn budget tried to appeal to both workers and employers. But the decision the very next day to soften a key plan to improve workers’ rights shows how difficult that balance has become.

Just hours after Chancellor Rachel Reeves delivered her budget, the government^[1] announced it would backtrack on a manifesto pledge to give all workers the right to claim unfair dismissal^[2] from day one of their employment.

Business groups had warned that the plan could discourage hiring^[3], particularly for smaller firms that depend on probation periods to assess staff. Critics, of course, call it a broken promise.

Other planned day-one rights – to sick pay and paternity leave – will still go ahead from next year. But the government argued that delaying protection from unfair dismissal until six months after someone starts a new job (it is currently two years) is a practical compromise.

The decision is supposed to be pro-business and pro-hiring. But while workers will now miss out on what would have been a major change to their rights as a new employee, the move is unlikely to be enough to encourage under-pressure firms to take on staff.

The fact is that this debate sits within a wider policy environment where employing people has become harder. Regardless of dismissal rights, rising labour costs, tight margins and increasingly complex rules mean many firms are hesitant to take on staff.

But this is not to say that watering down workers’ protections in a bid to help firms is the way forward. The standard employment relationship is still the main way workers access rights and social protection^[4], so its erosion raises serious concerns for working conditions and basic benefits.

When formal employment offers fewer protections, the gap between secure jobs and insecure arrangement narrows. If the government is suggesting that strengthening workers’ rights is negotiable, then in the eyes of an employer it may seem like less of a leap to opt for informal hiring models that deny workers certain protections.

For example, bogus self-employment^[5] (when workers are classified as “self-employed” or “subcontractors” even when their working conditions are effectively the same as regular employees) allows employers to shift legal and financial responsibilities on to workers. Protections like sick pay, redundancy rights and holiday pay disappear. The worker absorbs the risk as the employer cuts their costs.

Wider research on the informal economy^[6] shows how quickly these models spread once the rules allow it. In essence, rather than encouraging firms to hire on standard contracts, weaker protections normalise risk-shifting and accelerate the move towards arrangements that sit outside standard employment law.

In sectors such as hair and beauty^[7] and construction, workers are often told they are “independent” while being given fixed hours, fixed prices and strict instructions. They look like employees in every meaningful sense, but receive none of the protections.

The unfair dismissal U-turn could legitimise^[8] the drift towards these models. And at the same time, issues that the budget did not address – such as the VAT threshold and the rising cost of employment – leave many small business-to-consumer (those that sell their products or services direct to the public) deliberately choosing not to grow.

For example, when firms cross the VAT limit with a turnover of more than £90,000, this increases their costs sharply. As a result, adding even one or two employees to the staff can make the business unprofitable – far more so than the risk of taking on a staff member who might not work out and may have to be let go quickly.

As such, many firms deliberately cap their growth, restructure their operations or rely on “contractors” as the only affordable way to bring in extra capacity.

I’ve seen this repeatedly in my previous^[9] and ongoing research into the impact of regulations on small businesses in the UK service sector. Firms avoid formal employment not because they want to exploit people, but because the cost of compliance has become too high for them to absorb. Bogus self-employment becomes the only viable staffing model if they want to continue trading.

When this practice becomes widespread, responsible employers face a hard choice. Either they adopt the same practices to stay competitive or watch rivals undercut them. This is the classic race to the bottom. Rights fall away, protections shrink and low-quality employment becomes the baseline across the sector.

The government insists that new enforcement measures^[10] will prevent abuse but there is little evidence to suggest this will work. Enforcement capacity has been repeatedly cut and agencies such as HMRC, the Employment Agency Standards Inspectorate and the Health and Safety Executive struggle to investigate even straightforward cases. Ambiguous rules are easy to exploit and hard to police.