Mandatory flexible working is a stealth tax on jobs and wages, warns new IEA report

• Governments are constantly tempted to push flexible working because it allows them to support a popular social change without having to pay for it themselves.   

• The new, stronger “right to request” flexible working in the Employment Rights Act will be much harder for managers to resist, and even dealing with such requests will impose costs on companies. 

• While private businesses may be able to control some of these costs, the widespread strengthening of flexible working rights is likely to damage productivity, slow growth, and undermine wages and employment 

• This will be all the more true if unions or workplace rules stop wages adjusting, for example to reflect whether particular jobs can in practice be done remotely.  This is likely to be a particular problem in the public sector, reinforcing its existing poor productivity record.   

Flexible working has risen exponentially since Covid, and should be supported where it is genuinely voluntary between employers and staff. However, Government attempts to effectively mandate flexible working risk imposing a “stealth tax” on jobs, wages and productivity, according to a new discussion paper from the Institute of Economic Affairs. 

The discussion paper, Is Flexible Working? by Professor J.R. Shackleton and Annabel Denham, argues that while flexible working can be beneficial in some circumstances, its economic costs are rarely assessed properly and are frequently ignored in policymaking. The new Employment Rights Act strengthens the ‘right to request' flexible working, making it very difficult for employers to resist and effectively making flexible working the default. 

Introducing the report, Lord Frost, Director General of the IEA, said: 

“The government always likes to legislate popular measures while asking others to pay for them.  If flexible working is in all parties' interests, then nothing stops it happening now.  If it isn't, but is effectively compelled by the government anyway, then it becomes a new stealth tax.  The costs it imposes will show up as lower pay, fewer jobs, higher prices, or reduced investment – and eventually in lower productivity and prosperity for everyone.” 

Evidence has shown home working can lead to a range of mental and physical health problems, which in turn are implicated in post-Covid withdrawals from the workforce. Other research suggests that pay structures are disturbed: in one study workers in jobs where they could work from home experienced between 2 and 7% lower wage growth post-pandemic than those who could not work remotely. Other costs can extend to reduced output, coordination problems, weaker supervision and lost training opportunities and vary enormously across roles, firms and sectors. 

There are undoubtedly benefits to some workers from flexible working, but the authors warn that government is fundamentally incapable of weighing the trade-offs. No central authority can know how working from home, compressed hours or four-day weeks affect productivity in millions of individual workplaces. Yet recent employment legislation increasingly assumes these arrangements are broadly costless, shifting decisions away from employers and towards regulators and employment tribunals. 

Under the new Employment Rights Act, employers face greater legal risk when refusing flexible working requests, even where such arrangements would harm performance. The report argues this will pressure firms into accepting inefficient practices, with the resulting costs quietly passed on through slower wage growth, reduced hiring and higher consumer prices - a stealth tax borne by workers and the public. 

The paper also highlights that mandated flexibility disproportionately benefits higher-paid, professional and public sector workers, while the costs are spread across the wider economy, including employees and consumers who see no direct benefit. 

Rather than attempting to mandate how work is organised, the authors argue that flexibility should be determined through voluntary agreement at the firm level. Where flexible working genuinely improves productivity or retention, employers already have strong incentives to offer it - without the need for legislation. 

Professor J.R. Shackleton, co-author of the report and Editorial and Research Fellow at the Institute of Economic Affairs, said: 

“Flexible working is rarely a free good. The costs are real, highly specific and often hidden - and government simply cannot measure them. When politicians mandate arrangements which are not freely chosen, the bill is paid elsewhere in the economy, amounting to a stealth tax on working people and taxpayers.” 

Annabel Denham, co-author of the report and Senior Political Commentator at The Telegraph added: 

“It is a folly to assume that Ministers and civil servants can know the best working arrangements for every active employer and employee in the country. Imposing one-size-fits-all rules and rights on them then is misguided, and will likely lead to higher costs, weaker productivity and fewer opportunities for workers.”