The Employment Rights Bill

What the government’s impact assessment misses

By Matthew Lesh and Len Shackleton

The Government’s own impact assessment for its employment rights legislation estimates that the measures could cost businesses up to £5 billion annually.

To start, this is a substantial amount. Past economic studies and business surveys tell us that it will largely be passed onto consumers through higher prices, workers earning lower wages and/or job losses. The Institute for Fiscal Studies estimates that about 80% of extra costs are passed on in the form of lower wages than would otherwise have been paid. According to the Government’s impact assessment, the costs will also be ‘proportionately higher for small and micro businesses due to the fixed costs of admin and compliance burdens’.

But even the £5bn figure is likely to be a considerable underestimate. It almost entirely relates to increased administrative burdens, failing to calculate the significant impacts on business costs and hiring from making it more expensive to employ people.

There is no attempt, for example, to calculate how many fewer people will be hired due to limiting zero hour contracts and day-one rights to unfair dismissal protection. There is no assessment of the costs of more strike action as a result of repealing the measures that made it harder to strike in the Trade Union Act 2016. Indeed, it optimistically suggests that it could lead to greater industrial harmony. Nor is there an estimate for the increased liability against defending Employment Tribunal claims. The impact assessment throws up its hands and says ‘too hard to calculate’ when it comes to the actual impacts of the policies – making the entire exercise questionable.

Even when the impact assessment attempts to calculate costs, the results are scarcely believable. Just take the example of the new default right to flexible work. The Department for Business and Trade ignores the actual costs of changed working methods and concentrates solely on the administrative processes involved.

The high (91%) acceptance rate of requests for flexible working is often assumed to reflect low or non-existent costs to the employer. However, this may be misleading as it fails to account for the business costs of accommodating flexibility. Employers may often acquiesce if they feel that a rejected application could lead to an appeal followed by an employment tribunal – particularly if an applicant has a protected characteristic and might plausibly claim that a rejection is discriminatory. In the heavily unionised public sector, employers may be particularly wary of rejecting applications. However, even if such a threat is unlikely, managers may agree simply because they don’t want to damage relations with an employee, even if this creates difficulties.

When it comes to the administrative process, the Department’s analysts assume that there is a one-off process of familiarising with the rules, which involves just ten minutes of a manager’s time, apparently. The analysts assume that an ‘HR manager’, paid the absurdly precise and rather low figure of £31.83 per hour, would spend just half an hour considering a request – producing a ‘unit cost’ of processing an application of just £15.92. The cost is based on a similar estimate for leave applications.

This surely misunderstands the process of considering a request for flexible working, and probably considerably underestimates the time cost of an application. It seems implausible that an HR professional of middle rank (senior HR people are paid a great deal more) could take such a decision alone, without consulting line managers and others, including union representatives where appropriate. An instant decision could have considerable consequences, especially for smaller businesses.

The recent extension of the right to request to day-one applicants makes the decision process more difficult. Whereas previously managers considering a request would necessarily have had at least six months’ experience of the applicant’s performance and reliability, a decision on the application of a new starter at a job who immediately requested working from home or compressed hours would be problematic. An Oxford Economics study estimated that it takes between 10 and 60 weeks (depending on the sector, the size of firm and previous experience) for a new employee to reach optimal productivity. For much of that period, new employees are a net cost to an organisation as they have to pick up all sorts of information and experience during their early weeks and months and can add little to output. Without seeing how new starters shape up during this period, a decision to allow them to enjoy flexible working is a gamble which could prove very expensive. If, as is planned in the current proposed legislation, the Government makes unfair dismissal also a day-one right, reversing a flexible working arrangement would be difficult to achieve without creating a tribunal case.

Even if we assume that all such gambles are successful, there are some obvious cases where flexible working will inevitably increase employer costs. Take the case of a job share. Such an arrangement involves matching up two individuals with different experiences, temperaments and needs in such a way that the job is done consistently and without hold-ups. Colleagues need to know how responsibilities move seamlessly from one job-sharer to the other. Achieving such a satisfactory solution requires considerable effort on the part of the sharers’ line managers. But even having achieved this, there are extra costs involved in two people doing what would otherwise be done by one person. For example, each individual in the job-share will create separate payroll, training and appraisal costs.

‘Termtime only’ arrangements will create extra costs to cover for the periods of school holidays when the jobholder is not available. It is unlikely that a ‘holidays only’ post can be created to match up exactly, so either work gets delayed (or in public-facing roles, services are reduced) or else somebody else in the team has to cover. This may involve paying overtime, or knock-on effects in extra leave to compensate.

Again, in public-facing roles where a service has to be available five days a week, a compressed four-day week for some workers will mean that somebody else has to be hired to cover the ‘missing’ day, or else services have to be curtailed. Even in the most common form of flexible employment – working from home – there may be hidden costs in monitoring work standards, in getting rapid response to consumer queries and so on.

The point is not that we should discourage these types of flexible working, but that it is wishful thinking to assume that there are no costs to such arrangements. The impact assessment assumes away such costs by asserting that there are offsetting benefits. The ‘evidence’ cited is unconvincing. For instance, the Department for Business and Trade simply cites a CIPD study in which ‘almost two-fifths (38%) of organisations say that more home/hybrid working has increased their organisation’s productivity/efficiency’. This is a purely subjective response to a questionnaire. Quantified business benefits of home working are not produced.

The best the Government can say in favour of the employment rights measures is that they involve a transfer to employees – true for some, but most workers risk their real wages going down and prices going up. Some unlucky workers will find it harder to get jobs. The impact assessment leans heavily onto ‘health and wellbeing benefits from better quality work’, but does not even attempt to quote any impact figures to support that claim. This is pretty much the Government’s whole basis for saying that reforms will help boost productivity.

In any case, the impact assessment concludes that the legislation will have a net negative impact. It is pretty damning when even the Government’s skewed impact assessment cannot find that the legislation is a good idea.

This article originally appeared in CapX