Employment Rights Bill a stealth tax on workers, warns new IEA report

• Mandated employment benefits function as a 'stealth payroll tax' that ultimately reduce workers' wages, not employers' profits

• £5bn cost of new mandates in the Employment Rights Bill will be passed on to employees through smaller pay rises over time

• New union powers could revive 1970s-style militancy, and the whole package will reduce economic growth 

The Employment Rights Bill returning to parliament today (Monday 14th July) will impose a £5 billion stealth tax on British workers, according to a new report published by the Institute of Economic Affairs. The analysis warns that employment mandates, sold as helping workers, really function like hidden taxes that reduce their wages over time. 

Professor J.R. Shackleton, the report's author, argues that politicians exploit public misunderstanding about who really pays for employment rights. They often only benefit certain groups, but the costs are passed back to all employees through lower wage increases than they would otherwise receive. 

The Employment Rights Bill's measures – including day-one unfair dismissal rights, restrictions on zero-hours contracts, and enhanced union powers – will also make employers more risk-averse in hiring decisions. This will put a brake on the growth the government seeks to achieve. 

The report, Liberating the Labour Market, reveals how Britain's labour market freedom score has already plummeted from 81% on the Heritage Foundation's Economic Freedom Index 20 years ago to just 63% today, undermining what was previously a key competitive advantage for the UK economy. 

In addition, Shackleton warns that new union powers could trigger a return to 1970s-style industrial militancy, allowing unions to "put the public through the wringer" and "extort more pay from the government – which means, of course, the taxpayer." The Bill makes strike ballots easier to organise and extends strike mandates to a full year without re-voting. 

To prevent this scenario, the report suggests Britain could eventually have to follow international examples by banning strikes in essential services. Germany bans civil servants, university staff and many teachers from striking, while the US prohibits all federal employees from taking industrial action. 

Other key reform options to liberalise the labour market include: 

• Scrapping the failed apprenticeship levy system – The tax has reduced rather than increased apprenticeship numbers since 2017, with many businesses unable to access funds due to bureaucratic complexity 

• A comprehensive review of occupational licensing, currently covering 20% of jobs – Government certification is now required for estate agents, private detectives and social workers, often reflecting successful lobbying rather than genuine public protection needs 

• Refocusing discrimination law on direct discrimination only – Abandon complex "equal value" comparisons that force employers to pay warehouse workers the same as retail staff, and end mandatory pay gap reporting that leads to counterproductive hiring decisions 

• Introducing no-fault dismissal with guaranteed compensation – Replace the current complex tribunal system, currently involving 25,000 unfair dismissal claims a year, with a simpler approach where employees receive predetermined compensation without lengthy legal processes, giving both sides greater certainty 

• Reforming university funding to link institutions' income to graduate employment outcomes – Universities should bear some financial risk if their graduates struggle in the job market, incentivising institutions to focus on employability rather than just recruitment numbers 

Professor Shackleton, Editorial and Research Fellow at the Institute of Economic Affairs and Professor of Economics at the University of Buckingham, said: 

"Politicians love to announce new employment 'rights' because they think employers pay the bill – but that's an illusion. Every mandate, from parental leave to holiday entitlements, acts like a stealth tax that gets passed back to workers through smaller pay rises than they would otherwise receive. The only difference is that no money is raised for the Exchequer. 

“The Employment Rights Bill will make this much worse, imposing billions in hidden costs that workers will ultimately bear themselves. The Government is not protecting workers – it is harming them and undermining its own alleged number one priority to boost economic growth." 

Read the full publication: Liberating the Labour Market: How reforming employment regulation can boost British growth here